Court Declines to Impute Minimum Contacts of Subsidiary to Parent Corporation under Maryland Long Arm Statute in National Fire & Marine Ins. Co. v. Advanced Lighting Technologies, LLC (U.S.D.C. Md.) and more

Filed: September 20, 2023

Opinion by: J. Rubin

Holding: the Court held that the relationship between the subsidiary and parent corporation, which included filing consolidated tax returns, having the same directors elected to both boards, and a trademark license issued by the parent to the subsidiary, was insufficient to establish personal jurisdiction over the parent corporation under Maryland’s long-arm statute.

Facts: The Plaintiff, National Fire & Marine Insurance Company, as subrogee of Manticorp LLC, brought this action following a fire at a commercial property leased by Manticorp. The Plaintiff alleged that the fire was caused by defective lighting products supplied by Advanced Lighting and Venture Lighting International Inc., which are associated entities. The complaint set forth various counts including Products Liability, Negligence, and Breach of Implied Warranties.

Advanced Lighting, however, contested the court's personal jurisdiction over it, citing insufficient minimum contacts with the State of Maryland. Following limited discovery on the matter, Judge Rubin concluded that the Plaintiff failed to establish grounds for jurisdiction under Maryland's long-arm statute. The court found that National Fire's allegations, even if true, were insufficient to impute Venture Lighting's Maryland contacts to Advanced Lighting for jurisdictional purposes.

Plaintiff had alleged that Advanced Lighting should be treated as the alter ego of its subsidiary, Venture Lighting, because: (1) Venture Lighting is a wholly owned subsidiary of Advanced Lighting; (2) Venture Lighting and Advanced Lighting have common ownership; (3) Advanced Lighting sets sales and earning goals for Venture Lighting; (4) Advanced Lighting consolidates financial statements and submits a single tax return for itself and its subsidiaries; and (5) Advanced Lighting does not have formal arrangements with Venture Lighting.

Analysis:

The Court began its analysis with the Maryland long-arm statute, which provides authority for a Maryland-based court to exercise jurisdiction over a non-resident defendant that directly conducts activities, such as providing services, selling goods, or causes tortious injury, in Maryland, or does so through an agent. Md. Code Ann. Cts. & Jud. Proc. §§ 6-103; Mylan Labs, Inc. v. Akzo, N.V., 2 F.3d  56 (4^th cir. 1993). The plaintiff alleged that Advanced Lighting could be imputed the minimum contacts of its subsidiary, Venture Lighting International Inc., essentially arguing that the subsidiary was an “alter ego” of the parent corporation for purposes of the long arm statute.

The Court next examined Mylan Laboratories case that establishes that under Maryland law, a parent corporation can be treated as an alter ego of a subsidiary under the “agency” test, if the parent corporation “exerts considerable control over the activities of the subsidiary.” The Mylan court discussed several factors in determining whether the parent exercises such control, such as whether significant decisions of the subsidiary must be approved by the parent, whether the two have separate books and records, employ separate accounting procedures, and hold separate directors’ meetings, along with the level of interdependence of the two corporations, and whether the parent corporation knew or should have known that its conduct would have some impact in Maryland. Mylan Labs, Inc., 2. F.3d at 61-62.

In the present case, the Court concluded that the parent could not be treated as the alter ego of its subsidiary, reasoning that on balance, the evidence adduced by the parties did not suggest that Advanced Lighting exerts considerable control over the subsidiary corporation, or that Venture Lighting’s significant decisions are subject to the parent’s approval. The Court reasoned that filing consolidated tax returns, being a 100% owned subsidiary where both boards are comprised of the same directors, and having a trademark license issued by the parent to the subsidiary for a product sold by the subsidiary was insufficient to impute the contacts with Maryland of the subsidiary to the parent for purposes of personal jurisdiction.

As a result, the Court granted Advanced Lighting’s motion to dismiss for lack of personal jurisdiction.

Full opinion here.

    

Filed: February 7, 2023

Opinion by: Friedman, J.

Holding: A dismissed permissive counter-claim cannot be barred by the doctrine of res judicata when subsequently filed by the former defendant in a subsequent lawsuit against the former plaintiff.

Facts: The dispute originated when homeowners James Summers and Dr. Steven Snyder contracted Beltway Builders, Inc. for home remodeling. A disagreement arose over the performance, leading Beltway to sue for breach of contract and unjust enrichment, while the homeowners filed a late counterclaim for breach of contract. Beltway then filed a motion to strike the counterclaim. The homeowners, therefore, filed the instant, separate suit against Beltway. The homeowners prevailed in the original lawsuit filed by Beltway, and Beltway defended the subsequent lawsuit on the grounds of res judicata.

Analysis: The doctrine of res judicata bars re-litigating civil claims after such claims have had their day in court and a final judgment on the merits has been entered by the court. Under Maryland law, the elements of res judicata are: (1) that the parties in the present litigation are the same or are in privity with the parties to the earlier litigation; (2) that the claim presented in the current action is identical to the one determined or which could have been brought in the prior litigation; and (3) that there was a final judgment on the merits in the prior litigation. Spangler v. McQuitty, 449 Md. 33, 65 (2016). Under Rowland, however, courts will not find that a party's claims are barred by res judicata when that party still has the right to bring them as an independent suit. Rowland, 320 Md. at 232-33.

The circuit court had dismissed the homeowners' separate lawsuit, filed later, based on the doctrine of res judicata, deciding that the homeowners should have initially brought their claims as counterclaims in Beltway's lawsuit. However, the Appellate Court held that under Maryland Rule 2-331(a), counterclaims are permissive, not mandatory. Citing Rowland v. Harrison and other sources, the court underscored that Maryland law does not force defending parties into a 'use it or lose it' situation regarding counterclaims.

Consequently, the appellate court found that the lower court's dismissal based on res judicata was erroneous, as it conflicted with the flexible nature of Maryland’s counterclaim rules. The judgment was reversed, and the case was remanded.

For the full opinion, please refer to the PDF document linked here.

Tim Faith is a practicing business law and estates planning attorney, and also an associate professor at The Community College of Baltimore County, where he teaches business law, legal writing, and torts.

Tim also serves as the chair of the Maryland Business Law Developments blog, a service of the Business Law Section of the MSBA.

    

 Tapestry, Inc. v. Factory Mutual Insurance Company (Supreme Court of Maryland)

Filed: December 15, 2022

Opinion by: Chief Justice M. Fader

Holding: The Supreme Court of Maryland held that a retailer’s all-risk property insurance policy, that provided coverage for all risks of physical loss or damage to the insured premises, did not cover the retailer’s losses due to the COVID-19 Pandemic as insured premises did not suffer any tangible, concrete, and material harm. The Supreme Court of Maryland answered the certified question of law for the United States District Court for the District of Maryland.

Facts: Tapestry, Inc. is a retailer operating stores nationwide, including 15 stores in Maryland.  Tapestry obtained two “all-risk” commercial property insurance policies from Factory Mutual Insurance Company (“FM”) during the COVID-19 Pandemic.  The insurance policies insured the property against all risks of physical loss or damage.  The policies did not define “physical loss or damage.” Tapestry provided a coverage notice to FM citing the COVID-19 Pandemic.  FM denied coverage as Tapestry could not show that the presence of COVID-19 causes physical loss or damage.  Tapestry filed suit in the Circuit Court for Baltimore County.  FM removed the case to the United States District Court for the District of Maryland.  In its complaint, Tapestry sought a declaratory judgment that the two policies issued by FM covered the losses it had suffered, and that FM was responsible for paying Tapestry’s claim. Tapestry also sough an award of damages for FM’s breach of contract in denying coverage under the two policies.  FM moved to dismiss the complaint. Tapestry filed an opposition to the motion to dismiss and a motion to certify a question of law to the Supreme Court of Maryland. The United States District Court for the District of Maryland granted the motion to certify the question of law and issued the Certification Order.

Analysis: The Supreme Court of Maryland interpreted “physical loss or damage” by analyzing the plain meaning of and interpreting the phrase in the context of the two policies.  Tapestry argued that the plain meaning of “physical loss or damage” embraces the functional loss of use of the property. Tapestry argued that the two policies use of “loss” and “damage” implied that they have different meanings and both could not require physical damage to property. The Supreme Court of Maryland disagreed, believing that the term involved tangible, concrete, and material harm to the property.  The Supreme Court of Maryland believed Tapestry’s interpretation of a functional loss renders “physical loss or damage” meaningless in the policies, including the Time Element coverage and the Interruption by Communicable Disease, both of which clearly require tangible, concrete, and material harm to the property. The Time Element coverage must be the result of “physical loss or damage” that results from a covered cause, not a functional loss.  The Interruption by Communicable Disease does not require “physical loss or damage” as it is triggered by the restriction on access to the premises, undermining Tapestry interpretation of a functional loss requirement. Assuming what is known about the Coronavirus, the Supreme Court of Maryland concluded that the presence of Coronavirus in the air and on the surfaces of Tapestry’s properties did not cause “physical loss or damage” as is required under the policies.  The Supreme Court of Maryland further interpreted recent insurance claims as a result of the COVID-19 Pandemic including, GPL Enterprise LLC v. Certain Underwriters at Lloyd’s, 254 Md. App. 638 (2022), addressing similar arguments made by Tapestry, to conclude that physical loss or damage “requires tangible, concrete, and material harm” to the property.  The Supreme Court of Maryland answered the certified question of law that the Coronavirus cannot cause “physical loss or damage” without tangible, concrete, and material harm to the property or deprivation of possession of the property. 

The full opinion is available in PDF.

    

 Filed: September 28, 2022

Opinion by: J. Beachley

Holding: The court held that a trial court that compels arbitration retains jurisdiction after an arbitrator has entered an award over the case, even if a party voluntarily dismisses the case pending before the trial court. 

Facts: Appellants, Gwendolyn and Leeroy Nesbitt, filed a class action lawsuit against Appellee Mid-Atlantic Builders of Davenport, Inc., in the circuit court for Prince George’s County, alleging violations of certain statutory disclosure requirements related to water and sewer assessments in the sale of residential real property. The circuit court stayed the case pending arbitration based on the terms of the sales agreement that contained an arbitration provision, and after an adverse ruling against the Nesbitts by the arbitrator, Appellants filed a Notice of Dismissal with the circuit court. However, the circuit court struck the Notice, confirmed the arbitration award, and awarded attorney’s fees to the Respondents, resulting in an appeal by the Appellants.

Analysis: The Court found that while a plaintiff retains the absolute right to voluntarily dismiss a case at any time before the adverse party files an answer under Md. Rule 2-506(a), there was no Maryland case on point as to how to proceed where a trial court has compelled arbitration, and the Notice is filed after an award was made by the arbitrator. The Court found the reasoning of the 11^th Circuit persuasive that while a plaintiff could dismiss its own claims in the stayed proceeding that ordered arbitration, the trial court retains jurisdiction over the case to confirm or vacate the resulting arbitration award. PTA-FLA, Inc. v. ZTE USA, Inc., 844 F.3d 1299 (11^th Cir. 2016). In the event the defendant had filed a motion to confirm the arbitration, the trial court retained jurisdiction over this collateral claim, even when the plaintiff filed a Notice of Dismissal. Id. at 1308.

In the present case, the Court found that Maryland Rule 2-506(a) was substantively similar to its federal claim dismissal rule in Federal Rule 41(a)(1). In addition, the Court found that the Maryland Uniform Arbitration Act provides post-arbitration award procedures for the trial court that originally stayed to compel arbitration, including jurisdiction to modify, correct, vacate, or confirm the arbitration award. Md. Courts & Jud. Proc. Code Ann. § 3-201, et seq. (2020). The Court interpreted the Maryland dismissal and post-arbitration award procedures to conclude that the circuit court retained jurisdiction over a collateral claim, such as the defendant’s motion to confirm the arbitrator’s award, based on the 11^th Circuit’s interpretation of similar federal statutes, thereby affirming the trial court’s order.

Full opinion here.

    

 Filed: December 1, 2022

Opinion by: J. Watts

Holding: The court held that the question of whether an arbitration agreement existed between Respondents and Petitioner factoring companies that purchased certain structured settlement agreements concerning lead paint poisoning was not a question to be decided by the arbitrator.

Facts: Structured settlement agreements are regulated by statute under Maryland law and generally require that such agreements are approved by a court after the payee receives independent advice as to the arrangement. Md. Courts & Jud. Proc. Code Ann. §§ 5-1101 – 5-1112. The Court noted that this statute had been amended several times since 2000, generally increasing the scrutiny to which such agreements are subjected by courts.

Respondents, Crystal Linton and Dimeca D. Johnson, were both lead paint tort plaintiffs who had each obtained structured settlements, and who signed agreements transferring the rights in these agreements to Petitioner Access Funding LLC and Assoc, LLC, in exchange for discounted lump sum cash payments. These agreements contained broad, mandatory arbitration clauses, including a provision that required that the validity of the arbitration agreement “shall be resolved by mandatory binding arbitration.”

After substantial litigation, including class certification and attempted settlement of the class action suit by the parties, the circuit court ordered the case to be arbitrated, over the objection of Respondents. 

Analysis: The Court’s analysis begins with the strong presumption that written arbitration agreements are generally enforceable under federal and state law, and that the Maryland Uniform Arbitration Act (“MUAA”) “’strictly confines the function of the court in suits to compel arbitration to the resolution of a single issue – is there an agreement to arbitrate the subject matter of a particular dispute.’” Md. Courts & Jud. Proc. Code Ann. §§ 3-201 to 3-234; Gold Coast Mall Inc. v. Larmar Corp., 298 Md. 96 (1983).

In the present case, however, the Court found that the circuit court erred when that court decided that the issue of whether the arbitration agreement was valid was itself subject to arbitration. Instead, the Court found that the Respondents’ complaint contained allegations that the arbitration agreement was obtained by fraud and deceit, and that the court reviewing the structured settlement agreement would not have approved of the agreement had it been aware of the relationship between Smith (the purportedly independent attorney hired to advise Respondents under the state law) and one of the Petitioner factoring companies. 

The Court distinguishes two cases raised by Petitioners: Prima Paint and Holmes. In Prima Paint, the US Supreme Court held that absent an allegation that the arbitration provision within an agreement (rather than the agreement as a whole) was procured through fraud, an otherwise broad arbitration clause would require that an arbitrator rather than a federal court would decide the issue of fraud in the inducement to enter into the overall agreement. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). The Court’s gloss of Holmes v. Coverall N. Am. Inc., 336 Md. 534 (1994) is that where a trial court finds the arbitration clause itself to be valid, the remainder of the question of validity of the entire agreement is a matter for the arbitrator rather than the court. 

The Court, however, distinguishes the present case by holding that the Respondent’s complaint specifically alleges that Petitioner’s use of Smith as counsel was intended to prevent Respondents from understanding the arbitration provision, thereby engaging in fraud in the inducement to that severable clause, and the enforceability of the arbitration clause was conditioned on the closing of the transaction, which itself was conditioned on entry of an order of approval by a court of competent jurisdiction as required by Maryland law. If such order was obtained by an “extrinsic” fraud, such as that the attorney purportedly representing Respondents was part of a scheme with Petitioners to prevent Respondents from understanding the arbitration agreement contained within the structured settlement contract, then such arbitration agreement is subject to collateral attack, which ultimately must be decided by a court rather than an arbitrator under MUAA.

As a result, the Court affirmed the reversal of the circuit court’s order compelling arbitration.

Full opinion here.