Filed: April 30, 2014
Opinion by: Douglas R. M. Zanarian
(1) When a minority stockholder petitions a court for dissolution pursuant to Md. Code Ann., Corps. & Ass’ns § 3-413 (the “dissolution statute”), such stockholder’s rights will be informed by any existing stockholder agreement and, where there is no evidence of a deadlock of the board of directors or that the company is likely to become insolvent, the court has discretion under the statute to order alternatives to the extraordinary remedy of dissolution.
(2) The dissolution statute does not provide for personal liability, even if fraud is proven.
(3) The proper remedy when a court finds an officer or director has breached his or her fiduciary duties to the company by diverting money from the company for personal use is an order directing such officer or director to repay such money to the company, not an order requiring the company to declare equivalent distributions for all stockholders.
(4) An award of attorneys’ fees and expenses is only appropriate if the injured company has recovered a common fund.
(5) It is the trial court’s role to determine a party’s credibility and whether evidence is sufficient to support the existence of an oral contract.
Facts: Plaintiff became a minority stockholder of Quotient, Inc. (“Quotient”), a close corporation organized under Maryland law, in 2001. Plaintiff executed a shareholder agreement with the other stockholders of Quotient – the defendants, the Lares (a husband and wife collectively owning 55% of the stock in Quotient). In addition to being a director and officer of Quotient, Plaintiff was also an employee pursuant to an oral agreement with Mr. Lare, which Plaintiff alleged included that he would receive a salary equal to that of the Lares combined. In addition to certain “perks” (e.g., company credit cards for gas, meals and entertainment and a corporate fitness trainer), paid for by Quotient and received by Plaintiff and the Lares, the Lares began paying household employees from Quotient’s payroll account in 2006, advanced interest-free loans from Quotient to two companies in which the Lares had an interest and took a loan from Quotient for renovations to the Lares’ personal home. The relationship between Plaintiff and the Lares began to sour and in 2010 Mr. Lare terminated Plaintiff’s employment with Quotient after Plaintiff refused to voluntarily resign and sell his shares in Quotient. Plaintiff remained an officer and director of Quotient for six months after termination, however, and continued to receive distributions as a stockholder. Plaintiff filed suit against the Lares seeking relief pursuant to Maryland’s dissolution statute and asserted derivate claims on behalf of Quotient for imposition of a constructive trust, breach of fiduciary duty, and constructive fraud and a direct claim for breach of contract.
The trial court ruled in favor of Plaintiff as to his petition for dissolution; however, the trial court refused to dissolve Quotient and instead ordered Quotient to pay Plaintiff $167,638 in damages. The trial court also ruled in favor of Plaintiff as to his claim for breach of fiduciary duty and ordered that the misappropriated funds be treated as a distribution from Quotient and ordered Quotient to pay Plaintiff a proportionate amount, including attorney’s fees, but ruled in favor of the Lares as to Plaintiff’s claim for constructive fraud. The trial court ruled in favor of Plaintiff as to his claim for breach of contract and ordered Quotient to pay Plaintiff $81,818.18 in unpaid distributions, but refused to find an oral equal-compensation contract existed. Both parties appealed.
Analysis: The Court affirmed the holding of the trial court, including the trial court’s refusal to dissolve Quotient; however, it found that the trial court erred in how it allocated the damages.
Although the Court upheld the trial court’s finding, not contested on appeal, that Mr. Lare’s behavior met the standard for oppressive conduct, particularly his threat and ultimate firing of Plaintiff for refusing to voluntarily resign and sell his shares in Quotient, the Court also upheld the trial court’s conclusion that dissolution was not the only available remedy. The Court noted that it was Plaintiff’s status as a stockholder of Quotient, as defined by the shareholder agreement, that defined and bound the rights he was entitled to vindicate under the dissolution statute and the appropriate remedies. Unlike in Edenbaum v. Shcwarcz-Osztreicherne, 165 Md. App. 233 (2005), the Court noted that the shareholder agreement did not mention Plaintiff’s employment rights, thus the shareholder agreement did not give Plaintiff a reasonable expectation of employment or provide an enforceable to such. Instead, the Court found that Plaintiff was entitled to participate in distributions and the affairs and decisions of Quotient consistent with his status as a stockholder. Although Mr. Lare’s actions frustrated such rights, Plaintiff had resigned from Quotient’s board of directors and thus there was no evidence of a deadlock justifying dissolution, nor was there any evidence to suggest that, despite the use by the Lares of Quotient’s funds for personal expenses, Quotient was likely to become insolvent. Therefore, the extreme remedy of dissolution was inappropriate.
The Court also held that the Lares could not be personally liable under the dissolution statute, even if their actions constituted fraud, because the purpose of that statute is to vindicate the reasonable expectations of minority stockholders, in such capacity, against oppression by majority stockholders. Plaintiff’s injury as a minority stockholder was lost distributions, and thus, Plaintiff was made whole by accounting to determine how much money the Lares diverted from Quotient and an order to pay distributions to Quotient stockholders based on the amounts diverted.
The Court also agreed that the Lares had breached their fiduciary duties as directors and officers of Quotient by diverting money from Quotient for personal use; however, the Court held that the trial court erred in ordering a distribution to all stockholders as a remedy. The Court noted that it was Quotient, not Plaintiff, who was harmed because it was Quotient’s money that was taken by the Lares and, thus, distributions would not make Quotient whole but would instead take more money from Quotient. The Court held that the appropriate remedy would have been ordering the Lares to repay Quotient for the money taken. Because such payment would result in a recovery by Quotient of a common fund, the Court noted that an award by the trial court on remand of attorneys’ fees and expenses would be appropriate under the common fund doctrine.
Despite holding that the Lares had breached their fiduciary duties to Quotient, the Court affirmed the trial court’s ruling in favor of the Lares as to Plaintiff’s claim for constructive fraud. Although constructive fraud usually arises from a breach of fiduciary duty, the Court noted that they are not equivalent and that “a director can breach fiduciary duties without committing fraud.” The Court found that, although the Lares had used bad judgment in using funds from Quotient for their personal expenses, they had not engaged in a long course of illegal or fraudulent conduct, especially since all of the transactions were recorded on the books of Quotient and Plaintiff had access to such books. For the same reason, the Court found that the Lares did not act with malice.
Finally, the Court found that the trial court committed no error in refusing to find that an oral equal-compensation contract existed between Plaintiff and Quotient. Although Plaintiff and his wife testified to the oral equal-compensation agreement and evidence showed that Plaintiff was paid a salary equal to the Lares for four years, there was also evidence that, for multiple years in the beginning and towards the end of his employment, the salaries of Plaintiff and the Lares differed significantly. The Court noted that it was the trial court that heard the evidence and it was not for the Court to determine on appeal whether the trial court gave appropriate weight to the parties’ credibility.
The full opinion is available in PDF.
Filed: April 30, 2015
Opinion by: James K. Bredar
Holding: A basic ordering agreement that provides a framework for future contracts but fails to include mutuality of obligation is not by itself an enforceable contract.
Facts: Contractor and subcontractor entered into a basic ordering agreement, wherein defendant “agreed to provide certain services, pursuant to task orders.” Plaintiff issued various task orders, including three specific task orders mentioned in the complaint. Plaintiff brought suit alleging it incurred significant costs because of defendant’s refusal to perform and its breach of the basic ordering agreement.
Defendant argued the basic ordering agreement was not an enforceable contract and, therefore, the claim of breach of contract failed to state a claim for relief. Defendant conceded that the task orders were binding and legally enforceable contracts, but noted that plaintiff did not rely on breach of the task orders for its breach of contract claims.
Analysis: The “meager case law available” provides that a basic ordering agreement “is not an enforceable contract, despite its use of terms typically used in the language of contracts.” The court likened a basic ordering agreement, which only provides the framework for future contracts, to an agreement to agree because “contractual obligations will arise only after an order is placed.” Under such an agreement “no obligations are assumed by either party until orders are given by the [plaintiff] and accepted by the [defendant].”
The court reviewed the language of the basic ordering agreement in question, concluded it lacked mutuality of obligation and found it to be unenforceable. However, as both parties agreed the task orders were enforceable contracts, the court redefined plaintiff’s count as claiming breach of contract as to those task orders.
The full opinion is available in PDF.
Filed: March 24, 2015
Opinion by: Catherine D. Blake
(1) A corporate entity, in acquiring the assets of a predecessor, cannot be held liable solely based on continued use of a predecessor’s trade name, sale of a predecessor’s products, and retention of some of a predecessor’s accounts and employees.
(2) When a party does not allege facts to show that a corporate parent used its subsidiary “as a mere shield for the perpetration of fraud,” that party does not state a claim against the parent for the subsidiary’s obligations.
(3) A party may state a claim for breach of contract without alleging perfect performance of its own obligations under the contract.
(4) Maryland law does not recognize an independent cause of action for breach of the implied covenant of good faith and fair dealings.
(5) A party may obtain restitution on the theory of unjust enrichment, despite the existence of an express contract, when the party breaches the express contract.
Parent Defendant ("Parent") was the corporate parent of two subsidiaries, Subsidiary 1 and Subsidiary 2. Additionally, four divisions of Parent were unincorporated until they formed LLCs in February 2014.
Plaintiff, an advertising and public relations agency, was hired by Subsidiary 1, a consumer electronics vendor, to provide marketing services. In 2011, Subsidiary 1 agreed to pay Plaintiff $12,500 each month for 83 hours of work per month. In 2012, Subsidiary 2 hired Plaintiff under a similar agreement. Plaintiff performed work beyond the monthly retainer for both entities and was paid additional fees accordingly.
Subsidiary 1 later retained Plaintiff to perform advertising and marketing services for a new line of products on the terms outlined in the 2011 contract. In 2013, Plaintiff worked 3,000 more hours than the 83 hours per month contemplated in the 2011 contract. Despite this additional work, Plaintiff was paid monthly fees in 2013 based on the budgeted 83 hours per month. Based on the experience of its leadership, Subsidiary 1 knew based on the nature of the requested work that it would require substantially more than 83 hours each month.
In June 2013, Plaintiff’s Executive Vice President (the “VP”) met with three executives of Parent to discuss compensation for Plaintiff’s work in excess of the monthly budget. The executives assured the VP that Plaintiff would be paid in full for the additional hours. In August 2013, one of Parent's executives again told the VP that Plaintiff would be paid in full, and Plaintiff continued to perform more work until the Parent's executives informed the VP in January 2014 that Plaintiff’s services would no longer be needed. Plaintiff was never paid for the 3,000 hours of additional work performed in 2013.
In February 2014, four LLCs (the “LLC defendants”) were formed from the four unincorporated divisions of Parent. Subsidiary 1 also merged into Subsidiary 2.
In September 2014, Plaintiff sued Parent, Subsidiary 1, Subsidiary 2 and the four LLCs alleging, inter alia
, breach of contract, breach of the covenant of good faith and fair dealings, and unjust enrichment. All defendants moved to dismiss.
(1) The court first considered whether Plaintiff stated a claim against the LLC defendants. Under the general rule of corporate successor liability, a corporate entity acquiring assets from another entity does not acquire the liabilities of its predecessor. An exception is where the successor entity is a “mere continuation or reincarnation” of the predecessor entity. The exception applies where there is continuity among directors and management, common shareholder interest, and, in some cases, inadequate consideration in the transaction. Use of the predecessor’s trade name, sale of a predecessor’s products, and retention of the predecessor’s accounts and employees will not alone suffice. Because the contracts predated the existence of the LLC defendants, and Plaintiff only alleged the latter three factors, Plaintiff failed to state a claim against the LLC defendants.
(2) Next, the court considered Plaintiff’s claims against Parent. In general, a parent corporation is not liable for the obligations of its subsidiaries. The “corporate veil” may be pierced only in circumstances when it is necessary to prevent fraud or enforce a paramount equity, i.e.
, when the parent uses the subsidiary as a “mere shield” to commit fraud. Plaintiff never contracted directly with Parent, but instead it contracted with Subsidiary 1 and Subsidiary 2. Because Plaintiff did not allege facts to support Parent’s use of its subsidiaries to perpetuate fraud, Plaintiff failed to state any cause of action against Parent.
(3) The court then turned to Plaintiff’s contract claim against Subsidiary 2. To state a claim for breach of contract under Maryland law, a plaintiff must only show (1) the existence of a contractual obligation owed by defendant to the plaintiff and (2) a material breach of that obligation by the defendant. A plaintiff is not required to show that it complied with every procedural obligation described in the agreement. Here, Plaintiff did not allege that it had obtained approval for additional work or that timely billed for the work, but these omissions were not fatal to the claim. Plaintiff met its burden by alleging that (1) Subsidiary 2 was contractually obligated to pay for additional services beyond those contemplated in the 83 hour budget and (2) Subsidiary 2 failed to pay Plaintiff in breach of that obligation.
(4) The court dismissed Plaintiff’s claim of breach of the covenant of good faith and fair dealings, noting that Maryland does not recognize this as an independent cause of action.
(5) Lastly, the court addressed Plaintiff’s unjust enrichment claim. In Maryland, a claim of unjust enrichment may not be brought where the subject of the claim is covered by an express contract. An exception to this rule occurs when there has been a breach of contract, in which case a party may obtain restitution on the theory of unjust enrichment. If a jury finds that Plaintiff did not substantially perform under the agreement, thereby rejecting Plaintiff’s contract claim, then Plaintiff may still recover for unjust enrichment. Both the contract and unjust enrichment claims may stand as alternative, inconsistent theories of liability.
The opinion is available in PDF
Filed: April 10, 2015
Opinion by: Richard D. Bennett
Holdings: The Court denied Defendant Loan Servicer’s motion to dismiss Plaintiff’s claims for violations of three statutes: 1) the Fair Debt Collection Practices Act (“FDCPA”); 2) the Maryland Consumer Debt Collection Act (“MCDCA”); 3) and the Maryland Consumer Protection Act (“MCPA”).
While Defendant Loan Servicer’s communication to collect Plaintiff’s non-existent mortgage debt was time barred under the FDCPA, the Defendant’s more recent false representation regarding the non-existent debt was not time barred. The Court held Plaintiff sufficiently pled that Defendant Loan Servicer possessed the requisite knowledge to violate the MCDCA. The Court also held Defendant Loan Servicer’s alleged false reporting of delinquencies plausibly harmed Plaintiff’s credit score and caused him stress and anxiety. Further, the Court held that Plaintiff sufficiently pled a violation of the MCPA.
Facts: Plaintiff defaulted on a loan from Defendant Bank to purchase property (the “Loan”). To avoid foreclosure, Plaintiff agreed to a Deed in Lieu of Foreclosure transaction (“DIL”) conveying the property to Defendant Bank. Plaintiff fulfilled all of the requisite steps to complete the DIL. Shortly thereafter, however, Defendant Bank sent Plaintiff a letter stating his loan would be serviced by Defendant Loan Servicer and Defendant Bank sent Plaintiff another letter stating it was unable to offer Plaintiff a DIL.
Then, Defendant Loan Servicer sent Plaintiff a letter stating it had taken over loan servicing for Plaintiff’s property and sent Plaintiff a monthly payment notice demanding $55,190.29 for the current payment, past due payment, and late charges/fees. In response, Plaintiff sent a letter to Defendant Loan Servicer stating that he successfully completed a DIL with Defendant Bank and requested that it cease and desist making debt collection phone calls to him. Defendant Loan Servicer nevertheless continued to demand payment. Plaintiff’s credit reports showed the DIL terminated the Loan, but that Plaintiff had a deficiency with Defendant Loan Servicer.
Defendant Loan Servicer filed a Motion to Dismiss in response to Plaintiff’s claims under the FDCPA, MCDCA, and MCPA.
Analysis: FDCPA: The FDCPA requires that a plaintiff bring a claim within one year from the date on which a violation occurs (15 U.S.C.A. 1692k(d)). Defendant Loan Servicer’s communication to collect Plaintiff’s non-existent debt occurred more than one year before suit was filed. However, Defendant Loan Servicer’s false delinquency report to the credit bureaus and Plaintiff’s accessing of his credit reports occurred within one year before filing suit. Thus, the Court determined that Plaintiff’s FDCPA claim was not barred by the FDCPA’s one-year statute of limitations.
MCDCA: Liability arises under Md. Code Ann., Com. Law § 14-202(8) when a defendant acted “with actual knowledge or reckless disregard as to the falsity of the information . . .” Plaintiff’s allegation that he provided the DIL and other documentation to Defendant Loan Servicer was sufficient to plead that Defendant had “actual knowledge.” Plaintiff alleged he sent a message to Defendant Loan Servicer indicating the Loan had been satisfied with title transferring by the DIL, that it failed to investigate Plaintiff’s response, and it failed to consider information readily available in Plaintiff’s credit history. The Court ruled that this was sufficient to plead Defendant Loan Servicer acted with “reckless disregard.” The Court further stated that, although Plaintiff bears the burden to prove Defendant Loan Servicer’s actions proximately caused his damages, it is plausible its action caused the harm to Plaintiff’s credit score as well as stress and anxiety.
MCPA: The Court determined that because Plaintiff sufficiently alleged a violation of the MCDCA and a violation of the MCDCA is a per se violation of the MCPA, Plaintiff sufficiently pled a violation of the MCPA.
The full opinion is available in PDF.
Filed: March 30, 2015
Opinion by: Robert N. McDonald
Holding: Where the first permittee is not present in the vehicle, omnibus coverage does not extend to a second permittee if that driver deviates from an authorized purpose.
Facts: The named insured owned the vehicle, which was covered by Defendant’s insurance policy. Defendant’s policy contained an omnibus clause which provided coverage to (1) relatives by blood, marriage, or adoption, and (2) drivers given permission by the named insured.
Named insured had granted the first permittee unrestricted use of the car, but had forbidden the second permittee from driving the car for any reason. Despite the named insured’s wishes, first permittee directed the second permittee to use the car to pick up the first permittee's children from school. Instead of taking a direct route to the school, the second permittee first drove to a nearby gas station and subsequently collided with a car driven by Plaintiffs.
Plaintiffs filed a tort action against the second permittee, the named insured, Plaintiff’s insurer and Defendant insurer. Writ of certiorari was granted to reconsider whether omnibus coverage extended to second permittee’s use of the car without the presence of the first permittee and outside the scope of authorized use.
Analysis: Because the first permittee was undisputedly not present in the car when the accident occurred, the court’s analysis turned on the circumstances under which the second permittee operated the vehicle. The court highlighted jurisprudence showing the disjunctive nature of the test for second permittees as illustrated by Kornke, Federal Insurance Co., and Bond:
“The general rule that a permittee may not allow a third party to use the named insured’s car has generally been held not to preclude recovery under an omnibus clause where (1) the original permittee is riding in the car with the second permittee at the time of the accident, or (2) the second permittee, in using the vehicle, is serving some purpose of the original permittee.”
The court noted the existence of two alternative situations. In one, where the first permittee was a passenger of the vehicle, authorization of the driver’s actions could be presumed. Even if the first permittee was not actively directing the car’s operation, mere presence of the first permittee indicated operation for his benefit. But in the second situation, where the first permittee was absent, the court required clear evidence that the driver operated the vehicle for the benefit of the first permittee in order for the second permittee to retain omnibus coverage.
The court determined that the first permittee became entitled to omnibus coverage as a blood relative regardless of any implied or express consent. Accordingly, the first permittee possessed unrestricted authority to delegate permission to the second permittee. But because the second permittee lacked the discretion to use the vehicle as he pleased, his departure from the assigned task excluded him from omnibus coverage.
The full opinion is available in PDF