Filed: June 5, 2019 Opinion by: Judge Anne K. Albright Facts: The defendant, an insurance company, allegedly failed to satisfy its contractual obligation to indemnify the plaintiff for property damage, business interruption, and other losses sustained ...

RCPR Acquisition Holdings, LLC v. Zurich American Insurance Company (Cir. Ct. Mont. Co.) and more


RCPR Acquisition Holdings, LLC v. Zurich American Insurance Company (Cir. Ct. Mont. Co.)

Filed: June 5, 2019

Opinion by: Judge Anne K. Albright

Facts: The defendant, an insurance company, allegedly failed to satisfy its contractual obligation to indemnify the plaintiff for property damage, business interruption, and other losses sustained as a result of Hurricane Maria. The plaintiff sought declaratory relief under §§ 3-406 and 3-1701(d) of the Courts and Judicial Proceedings ("CJP") Article, alleging that the defendant was both obligated to indemnify the plaintiff for the full amount of its losses and the defendant failed to act in good faith by refusing to pay coverage. The defendant then filed a motion to bifurcate.

Analysis: Sections 3-1701(d) and (e) of the CJP Article provide that coverage and bad faith are to be heard in an action and by a trier of fact. Specifically, § 13-1701(e) provides that ". . . Notwithstanding any other provision of law, if the trier of fact in an action under this section finds in favor of the insured and finds that the insurer failed to act in good faith, the insured may recover from the insurer . . . [actual and other damages]." Pointing to appellate Maryland precedence, the court determined that the trier of fact in an action meant one jury, not two, and an award of actual (and other damages) for bad faith could only follow from a finding of coverage and bad faith by that one trier of fact. As such, the need for one trier of fact complicated the defendant's request for bifurcation. The court noted that if the plaintiff prevailed on its claims, the jury would have to return to court in the future to hear the other claims after discovery. While such an arrangement is possible in theory, it is also inconvenient. The court acknowledged the prejudice the defendant may face by having to defend all claims concurrently, but found that the defendant did little to show why options less onerous than bifurcation, i.e. jury instructions and a special verdict sheet, would not ameliorate said prejudice. Further, even if § 3-1701 permitted bifurcation with two juries, the overlap in the plaintiff's three claims was too substantial to conclude that bifurcation would promote convenience.  Presumably, collateral estoppel might reduce some of this duplication, but identifying the factual issues to which collateral estoppel might apply was not a straightforward analysis. Therefore, bifurcation was not appropriate.

The full opinion is available in PDF.

     
 


Under Armour, Inc. v. Battle Fashions, Inc. (Maryland U.S.D.C.)


Filed: July 18, 2019

Opinion by: Richard D. Bennett

Summary: Under Armour, Inc. (“Under Armour”) filed a lawsuit seeking, among other things, a declaration that its use of certain phrases in connection with its products does not infringe upon a registered trademark owned by defendant Kelsey Battle (“Battle”).  Battle, a resident of North Carolina, moved to dismiss the action for lack of personal jurisdiction.  After holding an evidentiary hearing, the court dismissed the action for lack of personal jurisdiction and transferred the matter to the Eastern District of North Carolina.

Analysis:  The court initially denied Battle’s motion to dismiss, holding that the requisite preliminary prima facie showing of personal jurisdiction had been made.  However, after holding a pre-trial evidentiary hearing, the court found that personal jurisdiction over Battle had not been established by the requisite preponderance of the evidence.  The court began its analysis of personal jurisdiction by noting that two conditions must be satisfied in order to exercise personal jurisdiction over a non-resident: (1) the exercise of jurisdiction must be authorized under Maryland’s long-arm statute [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)]; and (2) the exercise of jurisdiction must comport with the due process requirements of the Fourteenth Amendment of the Constitution.  As to that two-pronged analysis, the court noted that Maryland courts “have consistently held that the state’s long-arm statute is coextensive with the limits of personal jurisdiction set out by the Due Process Clause of the Constitution,” but that courts must address both prongs of the analyses.

As to the first prong of the analysis, the court noted that “a plaintiff must specifically identify a provision in the Maryland long-arm statute that authorizes jurisdiction”.  Here, Under Armour argued the existence of personal jurisdiction over Battle based on his transacting business in Maryland [Md. Code Ann., Cts. & Jud. Procs. § 6-103(b)(1)].  Noting that “Maryland courts have construed the phrase ‘transacting business’ narrowly, requiring, for example, significant negotiations or intentional advertising and selling in the forum state”, the court found that a small number of sales by Battle to Maryland consumers, two cease and desist letters sent by Battle to Under Armour in Maryland, and three letters sent by Battle to parties outside of Maryland in order to “put pressure” on Under Armour were insufficient to establish personal jurisdiction under Maryland’s long-arm statute.

As to the second prong of the personal jurisdiction analysis, the court noted that the Fourteenth Amendment requires that a defendant have certain minimum contacts with the jurisdiction “such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”  Acknowledging that there was no basis to assert “general” or “all-purpose” jurisdiction over Battle, the court focused its analysis on “specific” jurisdiction, which requires that the action “arise out of or relate to the defendant’s contracts with the forum.”  Here, the controversy did not relate to marketing or selling infringing products in the forum but instead related to the activities of Battle in enforcing his trademark.  Accordingly, the court’s analysis focused on whether the two cease and desist letters sent to Maryland and the three letters sent to parties outside of Maryland were sufficient to establish specific jurisdiction over Battle in Maryland.  As to the letters sent to Under Armour in Maryland, the court held that “cease-and-desist letters alone are insufficient to confer specific personal jurisdiction.”  The court then noted that “enforcement activities taking place outside the forum state do not give rise to personal jurisdiction in the forum.”  Based on that premise, the court held that the three letters sent to parties outside of Maryland did not give rise to personal jurisdiction over Battle because those letters “did not threaten litigation, had no effect on Under Armour’s business, and did not result in any damage to Under Armour’s business relationships.”

The full opinion is available in PDF.

     
 


Steele v. Diamond Farm Homes Corp. (Ct. of Appeals)

Filed: June 26, 2019

Opinion by: Judge Michele D. Hotten

Holding:
The Court of Appeals held that a homeowner's assertion of an offset against a homeowner's association's ("Association") claim for nonpayment of dues was rooted in the premise that the Association lacked the power or capacity to raise assessment dues in a manner that conflicted with an express provision in the Association’s Declaration of Covenants, Conditions and Restrictions. The Court held that the assertion the Association lacked power or capacity fell under the guidelines for bringing ultra vires claims pursuant to Md. Code Ann., Corps. & Ass'ns § 1-403. Because the statute has specific criteria for bringing ultra vires claims that the homeowner failed to observe, the Court held that Petitioner’s defense of an offset was precluded.

Facts:
The Petitioner owned a home in the Diamond Farm development of Montgomery County, which was managed by a homeowners association (“Association”). In accordance with the Association’s Declaration of Covenants, Conditions and Restrictions (“Declaration”), the Association must obtain at least two-thirds of the total votes of all classes of members voting in person or by proxy to increase annual assessments. Through a letter, the Petitioner discovered that assessment increases in 2007, 2011, and 2014 did not receive the requisite two-thirds vote for approval. As a result, the Petitioner calculated her over-payment in assessment dues, determined that she was entitled to an offset, and ceased making payments. The Association noted the Petitioner's payment delinquency in October 2016 and brought suit against her regarding the unpaid assessments and attorney’s fees. Thereafter, the District Court entered judgment in the Petitioner's favor because the Association had failed to establish the amount of dues owed. The Association subsequently noted a de novo appeal to the Circuit Court for Montgomery County, which ruled in favor of the Association. The Petitioner appealed and the Court of Appeals granted certiorari. The Court reviewed whether the Petitioner's defense for non-payment of dues was invalid due to a statute restricting the use of the ultra vires defense or laches. [The court's consideration of of attorney's fees and the doctrine of equitable estoppel is omitted.]

Analysis:
The Court analyzed the ultra vires statute, Md. Code Ann., Corps. & Ass’ns. § 1-403. Ultra vires acts are those that exceed the express or implied powers of a corporation, and shareholders may challenge ultra vires acts to preclude corporations' unchecked powers. Section 1-403 specifies that: "(a) Unless a lack of power or capacity is asserted in a proceeding described in this section, an act of a corporation or a transfer of real or personal property by or to the corporation is not invalid or unenforceable solely because the corporation lacked the power or capacity to take the action . . . (b)(1) Lack of corporate power or capacity may be asserted by a stockholder in a proceeding to enjoin the corporation from doing an act or from transferring or acquiring real or personal property." The plain language of the statute required the Petitioner to raise an argument regarding lack of power or capacity “in a proceeding to enjoin the corporation,” which she failed to do so.

After noting the Association as a corporation, the Court analyzed the situations in which a corporation’s actions are considered ultra vires and whether the Association’s declaration operated as a document establishing a corporation’s power and capacity, such that exceeding the scope of a declaration constitutes an ultra vires action. The Court referenced the Court of Special Appeals precedence explaining that “[a]n ultra vires act ‘is one not within the express or implied powers of the corporation as fixed by its charter, the statutes, or the common law.’” So far, Maryland case law has not considered whether a declaration can operate as one of the documents under which a corporation can exceed its powers.

Thus, the Court next considered the functionality of the Association’s declaration. The Court found that the Association’s declaration prescribed its capacity and certain powers—the central concern regarding whether to apply the ultra vires statute. The Court also considered the Association’s articles of incorporation, which is synonymous with a charter and is subject to the ultra vires statute. The Association’s articles of incorporation specified that: “The purpose[] for which the corporation is formed [is] . . . [t]o enforce any and all covenants, restrictions and agreements[.]” Those covenants, restrictions and agreements were explicitly outlined in the Association’s declaration, such that the declaration operated as a key governing document outlining the Association’s powers and capacity.

After its review of the declaration of the Association and its interaction with the Association’s articles of incorporation, the Court was persuaded that both documents prescribed the parameters of the Association’s authority and power. Therefore, the Petitioner's argument had to follow the procedural guidelines specified in the ultra vires statute. Here, the ultra vires statute did not provide the Petitioner with a defense under the circumstances because she did not first pursue a derivative action, and the court found she may not defend on the basis of the ultra vires statute.

The full opinion is available in PDF.

     
 


ConAgra Foods RDM v. Comptroller


ConAgra Foods RDM v. Comptroller (Ct. of Special Appeals)

Filed: June 27, 2019

Opinion by: Judges Woodward, Arthur and Leahy

Holding:

Foreign intellectual property holding company subsidiaries of corporations doing business in Maryland have no economic substance and are taxable separately from the parent.

Facts:

ConAgra is a processed food conglomerate that sold products in Maryland from 1996 through 2003, filed tax returns in Maryland and paid income tax.  One of its subsidiaries, Brands, was formed for the sole purpose of serving as an intellectual property holding company.  Brands licensed the trademarks to ConAgra and received royalties, and paid royalties back to the parent.

In 2007, the Comptroller of Maryland issued a Notice and Demand to File Maryland Corporation Income Tax Returns for 1996 through 2003 as well as a Notice of Assessment totaling $2,768,588 in back taxes, interest and penalties.  The Maryland Tax Court upheld the Comptroller’s assessment because Brands lacked “economic substance” as a separate business entity, which satisfied the U.S. Constitution requirements of “minimum contacts” and “nexus”. 

Analysis:

To meet U.S. Constitutional standards, the government’s tax collection procedures must provide taxpayers with “fair warning” to satisfy the Due Process Clause of the U.S. Constitution.  Under the Mobil Oil standard there must be a minimal connection between the interstate activities and the taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise.  Mobil Oil Corp. v. Comm’r of Taxes of Vermont, 445 U.S. 425 (1980).  The Commerce Clause is designed to prevent States from engaging in economic discrimination, and requires that a tax (1) apply to an activity with a substantial nexus with the taxing State, (2) be fairly apportioned, (3) not discriminate against interstate commerce, and (4) be fairly related to the services the State provides.  Philadelphia v. New Jersey, 437 U.S. 617.

These criteria have been implemented by the Court of Special Appeals in several cases, and the Court agreed with the Maryland Tax Court in this case after reviewing the standards from Gore Enter. Holdings, Inc. v. Comptroller, 437 Md. 492 (2013) and Comptroller v. SYL, Inc., 375 Md. 78 (2003) as well as Comptroller v. Armco Exp. Sales Corp., 82 Md. App. 429 (1990).  In Gore, Gore assigned all of its patents and certain other assets to the wholly owned subsidiary in exchange for the subsidiary’s entire stock.  The four factors in Gore that helped the Court determine if the wholly owned foreign subsidiary lacked economic substance and was consequently subject to income tax in Maryland were:  1. How dependent the subsidiary is on the parent for its income; 2. Whether there is a circular flow of money between the two companies; 3. How much the subsidiary relies on the parent for its core functions and services;  4. Whether the subsidiary engages in substantive activity that is in any meaningful way separate from the parent.  Also, in SYL, the Court of Appeals adopted the Armco reasoning and found that sheltering income from state taxation was the predominant reason for the creation of SYL.

Here, Brands was dependent on ConAgra for the “vast majority” of its income, there was a circular flow of money between the companies, Brands relied on the parent for its core functions, and it did not have any meaningful substantive activity separate from ConAgra.

Separately, the Court also approved the State’s blended apportionment formula to determine Brands’ taxable income as an altered formula is permitted by Tax General Article 10-402(d) to clearly reflect income.  Here, the popular 3-factor apportionment formula based on property, payroll and sales would have yielded an apportionment factor of zero.  The blended formula accounted for ConAgra taking deductions for the royalty expenses.

The full opinion is available PDF.
     
 

Mas Associates, LLC, et al. v. Harry S. Korotki (Ct. of Appeals)

Filed: August 8, 2019

Opinion by: J. Adkins

Holding: The evidence cannot sustain the simultaneous intent to form both an LLC and a partnership where the parties engaged in negotiations to become members of an existing LLC and never abandoned that intention; they governed the entity and made capital contributions to it consistent with the terms of the existing LLC operating agreement; and in the interim period before becoming members, they agreed to be employees rather than partners, and treated payments made to them as salary rather than shared profits.

Facts:

In 2009, Appellee and two defendants, one of whom was a member of the Appellant LLC, began discussing the possibility of merging their companies to increase profitability. The parties held discussions about what form the merger would take and eventually agreed to dissolve the other companies and join the Appellant LLC.

The parties agreed during a business planning meeting that the parties should own Appellant LLC at approximately a third each (plus a minority) and, to achieve this, planned a transfer of interests under the Appellant LLC's existing 2004 operating agreement. They also agreed during the meeting to divide their affairs into an interim and post-interim period. During the interim period, the parties agreed that they would be employees who would receive compensation equal to one-third of the profits. Appellee and the non-owner defendant would also liquidate their companies and surrender their licenses. The parties' attorneys circulated a draft interim agreement and a draft operating agreement, which were extensively negotiated but never signed. For years, the parties engaged in the business and eventually began turning a profit. Other relevant details are discussed in the analysis section.

In 2011, Appellee resigned from his position and attempted to negotiate his departure. The defendants refused to meet with him, and Appellee filed a claim in the Circuit Court for Baltimore County. Among other claims, he pleaded for a determination of the buyout price of his partnership interest. The trial court found in favor of Appellee on all but one of his claims. The trial court found that a partnership had existed because the parties made management decisions together and contributed money equally during the course of the business and awarded damages accordingly. The question presented here is whether competent material evidence exists in the record to support the trial court’s conclusion that the parties intended to form a partnership.

Analysis:

In Ramone v. Lang, No. Civ.A. 1592-N, 2006 WL 905347 (Del. Ch. Apr. 3, 2006), the Ramone court held that there was no partnership between two parties who had discussed buying a swimming center by forming an LLC. When negotiations failed, and one party went on to form an LLC with other individuals, the other party claimed they had formed a partnership in the course of their negotiations. The Ramone court held that the failure to form an LLC without more did not make them partners given the reality that they had never agreed on their obligations to one another.

The Court also cited other case law and sources for the proposition that “it would be inequitable to construe arms-length negotiations between sophisticated parties to form an LLC concurrently as intent to form a partnership when those negotiations fail.” See Grunstein v. Silva, C.A. No. 3932-VCN, 2011 WL 378782 (Del. Ch. Jan. 31, 2011); Christine Hurt, D. Gordon Smith, Alan R. Bromberg & Larry E. Ribstein, on Partnership sec. 204[B]; and Garner v. Garner, 31 Md. App. 641 (1976). The Court concluded that these principles are applicable here.

Here, the parties’ initial goal, which remained consistent throughout the negotiations, was to each obtain a membership interest in the Appellant LLC. To govern their relations until they could reach that goal, the parties entered an interim agreement whereby they would be employees and not partners. Critically, the parties never abandoned their efforts to become members of the Appellant LLC.

As for other factors that courts commonly look toward to evaluate partnership intent, the Court also found in favor of the Appellants. In terms of the management and control factor, the Court held that the parties were acting in accordance with the terms of the existing 2004 operating agreement and that their joint decision-making is consistent with the typical duties of an LLC manager. Also, casual use of the word “partner” is not determinative, particularly when the parties did business under the registered tradename of the Appellant LLC.

As for the capital contributions factor, the parties made payments first to another member of the Appellant LLC who then transferred them to the Appellant LLC because such was the procedure demanded under the existing 2004 operating agreement. Such elaborate steps would have been unnecessary if the parties intended to contribute to a partnership. Finally, the Revised Uniform Partnership Act prohibits blurring the lines between partnerships and other entities. To treat the contribution to an LLC as a contribution to a partnership would be to treat the entities as one in the same in contravention of the express terms of the law.

As for the sharing of profits and losses factor, the Court cited Ingram v. Deere, 288 S.W.3d 898-99 in support of the contention that salary can be a share of gross revenue. Here, the payments to the parties were denoted as salary on the payroll journal, their wages were calculated on W-2 forms--which included typical wage withholdings--they reported wages on their Form 1040 tax returns, and no one filed a K-1 schedule reporting profits. The business paperwork also reflected their titles as managers and officers. Also, Appellee never intended to be equally liable for the debts of the alleged partnership, as evidenced by his unwillingness to be held jointly and severally liable for loans or execute any indemnity agreements to that effect.

As a result, the Court of Appeals reversed the lower court, determining that the trial court was clearly erroneous in finding an intention to form a partnership by the parties to the litigation.

The full opinion is available in PDF.

     
 

More Recent Articles

You Might Like

Safely Unsubscribe ArchivesPreferencesContactSubscribePrivacy