Filed: December 8, 2016 Opinion by: Judge Audrey J.S. Carrion Holding: The Wittman standard of awarding attorneys’ fees is not met in a cash-stock merger suit alleging inadequate information in the registration statement because (1) directors do not ...

Dexter v. ZAIS Financial Corp. (Cir. Ct. Balto. City) and more

Dexter v. ZAIS Financial Corp. (Cir. Ct. Balto. City)

Filed: December 8, 2016

Opinion by: Judge Audrey J.S. Carrion


The Wittman standard of awarding attorneys’ fees is not met in a cash-stock merger suit alleging inadequate information in the registration statement because (1) directors do not owe shareholders a common law duty of candor in that type of transaction, and therefore the claim cannot be “meritorious” when filed, and (2) the corporate benefit was not casually related to the suit when the information in published disclosures was in accordance with previous public filings filed before the suit.


On April 7, 2016, a merger agreement was announced between ZAIS, the Defendant, and another party, the Second Defendant, in which shareholders could elect to receive all cash or all stock.  The Second Defendant would be merged into a subsidiary of Defendant, ZAIS would issue its shares to the Second Defendant’s shareholders, and ZAIS would make a pre-merger tender offer to its shareholders who would not like to own shares in the resulting company.

The registration statement was filed on May 10 and amended on June 20 and August 5, 19 and 26, 2016 (the “August Registration Statement”).   On August 24, 2016, Dexter, the Plaintiff, an individual shareholder of Defendant, filed a complaint alleging inadequate information about the shareholder vote.  Plaintiff argued that details about the final exchange ratio, the per share tender offer price and conflicts of interest were missing from the registration statement.

Dexter then filed a Motion for Preliminary Injunction.  On September 12, 2016, ZAIS filed supplemental disclosures with the SEC.  On September 19, 2016, Dexter withdrew the Injunction Motion as moot and it was granted.  On September 30, 2016, Dexter filed a request for attorneys’ fees.  Defendants argue that the supplemental disclosures were disclosed not due to Plaintiff’s demand letter, but rather in accordance with the registration statement.


The “corporate benefit” doctrine is an exception to the American Rule, which states that litigants bear the cost of their own attorneys’ fees and expenses.  In re First Interstate Bancorp, 756 A.2d 357, 756 A.2d 353, 357 (Del. Ch. 1999).  It should be noted that attorneys’ fees can be awarded even when a defendant moots a claim by satisfying a plaintiff’s demands.  Tandycrafts v. Initio Partners, 562 A.2d 1162, 1164 (Del. 1966) citing Chrysler Corp. v. Dann, 223 A.2 384, 386 (Del. 1966).

The Court required the Plaintiff to satisfy the three conditions of the Wittmanstandard: the suit was meritorious when filed; the action producing the corporate benefit was taken by the Defendant prior to a judicial resolution; and the resulting corporate benefit was causally related to the lawsuit.  Wittman v. Crooke, 120 Md. app. 369, 379, 707 A.2d 422, 426 (1998).

1. The Suit was not meritorious when filed.

A suit is “meritorious” when it can “withstand a motion to dismiss on the pleadings.”  The Court held that Plaintiff’s claim that the Defendant’s directors breached the duty of candor and the Second Defendants aided and abetted that breach could not have been meritorious.

The Court disagreed with Plaintiff that Shenker applied to this case.  The transaction in Shenker v. Laureate Education, Inc., 411 Md. 317, 338, 983 A.2d 408, 420 (2009), involved a cash-out merger after the decision to sell the corporation had already been made and that Court “determined the common law duties are triggered when the decision is made to sell the corporation, the sale of the corporation is a foregone conclusion, or the sale involved an inevitable or highly likely change-of-control situation.”

In this case, the Court agreed with Defendant that Revlon duties do not apply in a cash-stock election merger, similar to this merger.  Therefore, individual shareholders like the Plaintiff may not bring direct claims against the directors for a breach of common law duties.  ZAIS also referred to Sutton v. FedFirst Financial Corp., 226 Md. App. 46, 85, 126 A.3d 765, 788 (2015), which involved a stock-for-stock transaction, and the Court of Special Appeals did not apply Revlon.

2. The corporate benefit was not causally related to the Suit.

The September 12 Supplemental Disclosures were made in accordance with the August Registration Statement, which included a prospectus with a calculation of the exchange ratio, that was to be publicly announced at least five days before the shareholder meetings.

The Court found that the benefit to the Defendant’s shareholders – the disclosure of the Exchange Ratio and Tender Offer price – was not caused by the Plaintiff’s lawsuit; it was “mere happenstance” (Wittman).

The full opinion is available in PDF.

Murray v. Midland Funding, LLC (Ct. Spec. Appeals)

Filed: April 26, 2017

Opinion By: Friedman

Holding: The applicable statute of limitations limits the timeliness of legal claims, and the doctrine of laches limits the timeliness of equitable claims, but either or both sets of principles may limit the timeliness of declaratory relief from a court.

Facts: The Plaintiff had been sued by the Defendant on a debt, resulting in a judgment in favor of the Defendant.  Subsequently, in 2010, the Maryland State Collection Agency Licensing Board held that companies like Defendant are debt collectors and must be licensed to operate in Maryland.  The Court of Appeals held in Finch v. LVNV Funding, 212 Md. App. 748 (2013), that judgments obtained by such unlicensed debt collectors are void.  The Plaintiff brought a purported class action on behalf of herself and other debtors seeking various relief against Defendant for judgments obtained by the Defendant while it was unlicensed.

Analysis: The Court discussed the rules that bar stale claims.  For legal claims, the time limitations are determined by the applicable statute of limitations.  Under Maryland law, Courts & Judicial Proceedings Article § 5-101 may apply the three year limitation period for monetary claims against debt collectors that attempt to enforce void judgments against a debtor.  However, the Court held that this was not a bar to Plaintiff's equitable claims advanced and dismissed by the trial court.

For equitable relief, such as injunctive relief, the doctrine of laches determines whether a plaintiff's claim is time barred.  "There is no firm time limit for laches: rather a judge sitting in equity considers plaintiff's delay in asserting the claim and its causes and weighs that against the prejudice to the defendant caused by the late assertion of the equitable claim."  As to the Plaintiff's count for injunctive relief against the Defendant, the Court held that the trial court's dismissal of this count had to be reversed, and the above laches doctrine would need to be applied to her demand.

However, declaratory judgments sit in a hybrid category when analyzing whether such a claim is time-barred.  The Court notes that when a plaintiff merely seeks a court declaration that a judgment obtained by an unlicensed debt collector is void, there is no time limit on when such an action may be filed.  But, when the declaratory judgment count includes other relief, the applicable time limit on each of those claims must be calculated based on whether the relief is legal or equitable in nature.  As a result, the Court reversed the trial court's dismissal of her declaratory judgment claim so that the trial court could determine what relief, if any, was sought by the Plaintiff ancillary to a declaration that Defendant's judgment was void.

The full opinion is available in PDF.


Frank R. Nerenhausen v. Washco Management Corp. (U.S.D.C.)

Filed: April 18, 2017

Opinion by: James K. Bredar, United States District Judge




            The United States District Court for the District of Maryland granted landlord Defendants, Washco Management Corp., summary judgment when tenant Plaintiffs attempted to collect damages for an injury occurring in the leased premises after Plaintiff entered into a lease agreement waiving Plaintiff’s rights to all legal claims resulting from Defendants’ negligence.


            In April of 2013, Plaintiffs moved into a furnished townhouse, owned and managed by Defendants. On September 4, 2013, Plaintiffs signed a lease with Defendants, which was in force at the time of the critical events of this case. That lease contained an exculpatory clause purporting to disclaim Defendants’ liability for “any damage, loss, or injury to persons occurring in, on, or about the apartment or the Premises.”
            In compliance with the terms of the parties’ agreement, Plaintiffs’ townhouse was fully furnished. The furnishings included a coffee table with a metal frame and a top constructed from non-tempered glass. The table was located in the townhouse’s first floor family room.
            On January 4, 2014, as Plaintiff Frank Nerenhausen sat on the edge of the coffee table to tie his shoe, the glass top shattered. Broken glass punctured Mr. Nerenhausen’s right buttock, lacerating his pudendal artery and resulting in nerve damage.


(1)  Validity of the Exculpatory Clause under Maryland law

Relying on relevant case law and long-standing Maryland statute, the Court finds the well-established freedom to contract validates this lease agreement’s exculpatory clause.

The Court identifies two circumstances under which this exculpatory clause would have been invalid: (a) if the language of the clause was ambiguous; or (b) if the clause waived Plaintiffs’ claims with respect to liability for occurrences “on or about the leased premises or any elevators, stairways, hallways, or other appurtenances used in connection with them.” On the contrary, the Court suggests that exculpatory clauses waiving liability occurring within premises that are “within the exclusive control of the tenant” shall remain valid.

Because the language of the exculpatory clause at issue is unambiguous, and the injury suffered by Plaintiff was within an area exclusively controlled by the tenant Plaintiffs, the Court finds no reason to invalidate the lease agreement’s exculpatory clause.

The Court further articulates the meaning of what constitutes “exclusive control of the tenant,” pointing to Shell Oil Co, which states a landlord’s mere ability to enter the premises fails to render the premises not under exclusive control of the tenant. In other words, even though a landlord may enter the premises, barring other circumstances, the tenant still maintains exclusive control of the premises. Similarly, here, the landlord Defendants’ ability to enter the premises for a “reasonable business purpose” did not give reason to find Plaintiff was not in exclusive control of the premises.

Plaintiffs further allege they had no control over the selection and purchase of the table that gave rise to the injury, suggesting Plaintiffs did not have exclusive control over the premises. However, the Court notes that Plaintiffs cite no relevant law supporting this position. Consequently, Plaintiffs’ theory is dismissed.

(2)  Effect of Exculpatory Clause on Plaintiff’s Negligence Claim

The Court finds the exculpatory clause at issue successfully waived Plaintiffs’ negligence claim, as the language of the clause clearly and unequivocally indicates Plaintiff and Defendants’ intent to do so.

In Maryland, “contracts will not be construed to indemnify a person against his own negligence unless an intention to do so is expressed in those very words or in other unequivocal terms.” (Aldoo v. H.T. Brown Real Estate, Inc., 686 A.2d 298, 302 (Md. 1996)). Furthermore, an enforceable exculpatory clause need not use the word “negligence” or any particular “magic words,” but must “clearly and specifically indicate the intent to release the defendant from liability for personal injury caused by the defendant’s negligence. (Id. at 304).

In the case at bar, although the exculpatory clause does not use the word “negligence,” Plaintiff nonetheless agreed to absolve Defendants from liability for any injury “occurring in, on or about the apartment of the premises.” Furthermore, Plaintiff agreed to absolve Defendants from “any liability or claim to the fullest extent permitted by law.” The Court concludes the only reasonable interpretation of this clause is that the parties intended to exculpate Defendants from all claims to the extent permitted by applicable law, which would include exculpation from claims of negligence. Accordingly, the Court finds the exculpatory clause effectively and unequivocally disclaims Defendants’ liability for their potentially negligent action with respect to the glass table that was instrumental in Mr. Nerenhausen’s injury.

The opinion is available in PDF.  

Under Armour, Inc. v. Ziger/Snead, LLP (Ct. of Special Appeals)

Filed:  April 27, 2017

Opinion by:
  Alan M. Wilner

Holding:  An award of losses in the amount of the value of time spent by principals and employees in performing litigation-related activities was proper, given an expense-shifting provision negotiated separately by sophisticated parties calling expressly for reimbursement in the event of losses.

Facts:  Appellant Under Armour, Inc. (“Owner”) engaged Appellee Ziger/Snead, LLP (“Architect”) to provide design and management services related to a construction project.  After a contract dispute arose, Owner withheld approximately $55,000.  In the Circuit Court for Baltimore City, Architect sued for the sum plus accrued fees while Owner counterclaimed for losses and damages suffered as a result of allegedly substandard work and inadequate management.

After the jury found in favor of Architect and awarded nearly $60,000, Architect filed a motion pursuant to the contract’s expense-shifting clause seeking nearly $300,000 in attorney fees, costs, expenses, and losses.  The court generally agreed and entered final judgment in the amounts of $182,735, $155, $42,830, and $62,190 respectively.  Owner paid all but the $62,190 awarded for losses and appealed the basis for such an award.

With respect to the losses claim, evidence presented below consisted of time tracking records and hourly rates charged by Architect’s employees in performing the kind of work the firm was engaged to perform.  Architect therefore sought not “lost profits” on new business but the value of the time its principals and employees were not able to devote to the pursuit of providing professional services to its other active clients.

Owner did not contest Architect’s accounting, but generally appealed that the court should not have awarded anything for “losses,” arguing (1) that the expense-shifting clause was not sufficiently specific to permit a claim for time spent by principals and employees performing litigation-related tasks, and (2) in any event the hourly rates were an inappropriate measure because Architect’s employees would have been paid regardless of whether they had been engaged in litigation-related activities or their usual work.

  The court began by dispensing with Architect’s initial position that the appeal concerned whether it had actually suffered losses, a question of fact which would necessitate a “clearly erroneous” standard of review.  Instead finding that the principal matter was one of contract construction and thus a question of law – whether the losses suffered were compensable under the contract’s expense-shifting provision – the court continued with its de novo review.

Focusing next on the contract itself, the court noted that the expense-shifting provision had been separately negotiated along with other provisions as an addendum to a standard form contract drafted by the American Institute of Architects.  The provision was not a mere general contract damages breach clause, but came into play only where the prevailing party had “[employed] counsel or an agency to enforce [the] Agreement,” and expressly provided for reimbursement of attorney’s fees, costs, expenses, and losses.  Although the contract failed to define losses, the court deemed the absence of such a definition within a document negotiated by sophisticated organizations not to be fatal.  Instead the court looked to intent and determined the lack of specificity to be precisely the point: avoiding the need to spell out each and every kind of loss that might accrue from breach.

So: did losses include diverted employee time to tasks that litigants typically undertake without compensation?  Finding support from a sundry list of cases decided in various states and Circuits, the court was persuaded that the issue was not whether employees would have in any event been compensated for their time, or whether the complaining party had incurred additional expenses or lost profits, but whether a breach had deprived the complaining party of services it had compensated its employees for providing.

Examining the record, the court noted unchallenged evidence of more than 300 hours spent in activities such as investigating facts, conducting discovery requests, preparing for and attending mediation, preparing for and attending depositions, and preparing for and attending trials.  Diversion of that many hours at hourly rates ranging $100 to $200 per hour from income-generating work to defend a meritless lawsuit for wrongfully-withheld fees constituted losses under the contract.  Accordingly, the court found no error in the lower court’s decision to award $62,190 in losses.

The full opinion is available in PDF.


Charles and Margaret Levin Family Limited Partnership v. Greenberg Family Limited Partnership (Cir. Ct. Mont. Cnty)

Filed:  December 27, 2016

Opinion by:  Ronald B. Rubin

Holding:  Judicial dissolution is an inappropriate remedy for deadlock over the identity of a managing member of an LLC where an LLC’s members have (1) a reasonable exit mechanism to receive fair value for their interest and (2) the Operating Agreement provides an alternative dispute resolution mechanism such as arbitration.

Facts:  Plaintiff and Defendant, each a family limited partnership involved in a series of commercial real estate transactions since the late 1980’s, jointly operated a lucrative office and retail complex.  Originally a general partnership, the joint venture’s organizational structure in 1999 converted to an LLC whose members were Plaintiff and Defendant, each with a 50% stake.

The Operating Agreement provided that Defendant would be the managing member with an initial 5-year term, followed by one or more successive 3-year terms if members unanimously consented to each successive term.  Expiration of the initial term was met with acquiescence by both parties, and Defendant continued to serve as managing member of the LLC.

By 2013, operation of Plaintiff’s family business had passed through several hands and a separation of interests was proposed.  Negotiations were contentious and unsuccessful.  By late 2014, Plaintiff accused Defendant of material breach of the operating agreement, alleging improper authorization of an increased property management fee and exceeding its term as managing member without consent.  At a members’ meeting, Defendant agreed not to increase the management fee, but refused to step aside as managing member.

Pursuant to the Operating Agreement, Plaintiff in 2014 filed a demand for arbitration to remove Defendant as managing member.  Defendant filed a complaint in circuit court seeking a declaratory judgment that the matter was not subject to arbitration.  Each party then withdrew their demands and attempted to negotiate a resolution.  Negotiations ultimately failed, and Plaintiff filed the instant suit in mid-2015.

Plaintiff sought relief in the form of a declaration that Defendant’s term as managing member had expired, and judicial dissolution of the LLC.  Defendant generally denied the allegations, sought a declaration that Defendant could remain as managing member, and requested that judicial dissolution be found an inappropriate remedy in such a dispute.

In March 2016, the court denied cross-motions for summary judgment and set a trial date for November.  By June, Plaintiff filed an amended complaint alleging the parties were deadlocked, and moved for a preliminary injunction for Defendant’s removal as managing member.  Plaintiff again requested judicial dissolution, but alternately requested appointment of a special fiscal agent.

At a preliminary injunction hearing in July, the court granted the motion in part, ordering removal of Defendant as managing member, but denied the request for judicial dissolution.  At the hearing, the court learned that the property management firm, although an affiliate of Defendant, had run day-to-day operations for over fifteen years without serious complaint.  The court found the parties’ unaddressed disagreements to be premised on the unsuccessful attempts to wind up the business, and allowed the property management firm to carry on in conformity with the Operating Agreement despite absence of a managing member.

In October, Defendant moved again for summary judgment, arguing that its removal as managing member rendered the complaint moot, and that any remaining operational or management disputes could be resolved by pursuing arbitration according to the Operating Agreement.  The court denied the motion in favor of full examination of the parties’ relationship, motive, and intent.

Analysis:  The court began by evaluating Plaintiff’s contention that judicial dissolution was the only remedy in light of the fact that without a managing member, the LLC could neither operate generally, nor operate in conformity with its Operating Agreement.  Examining the Operating Agreement, the court found several sections reserving sole authority to bind the LLC to the Managing Member or its specially authorized agents.  Further, the Operating Agreement plainly stated that mere status as a member did not vest with capacity to bind the LLC.  Noting that the practice of stockholders running a corporation might vitiate the protections of the corporate shield, the court concluded that leaving Plaintiff and Defendant as mere members would be improper.  Nor was the property management firm an appropriate substitute for a Managing Member.

The court went on to cite Maryland statutory law, noting that while judicial dissolution is appropriate only when “it is not reasonably practicable to carry on the business in conformity with the articles of organization or the operating agreement,” the statute failed to adequately define the phrase.  Md. Code Ann. Corps & Assn’s Art. §4A-903 (2015).  Nor had Maryland courts definitely construed the statutory language.  The court therefore looked to extent to which deadlock frustrated the purpose to which the LLC was created.  Finding Defendant, as prior Managing Member, had not abused its authority, unjustly enriched itself, or harmed Plaintiff’s economic interests, the court determined the business purpose of the LLC to have been faithfully fulfilled.

The court countenanced that judicial dissolution might have been appropriate but for the fact that the Operating Agreement specifically provided for arbitration as a dispute resolution mechanism.  Although Defendant reversed its initial pre-trial position that appointment of a managing member was not a proper subject of arbitration, Plaintiff failed to argue that Defendant was judicially estopped from taking this position.  Regardless, the court stated that because both parties’  2014 filings had been withdrawn voluntarily prior to the instant suit, judicial estoppel would not have precluded Defendant from taking such a stance.

Finding no ambiguity in the Operating Agreement’s dispute resolution mechanism, the court deemed judicial dissolution to be unnecessary.  The court went on to comment that the Operating Agreement also provided a reasonable exit mechanism in a dissenting member’s ability to exit and receive the fair value of its interest.  Subject to a right of first refusal with notification requirements, Plaintiff could have solicited offers for its interest, but failed to do so.  Further, Defendant in 2015 offered 50% of the appraised value of the joint venture.  Finding the price to be a premium over fair market value (given the limited marketability and/or lack of controlling interest), the court was satisfied in denying the request for judicial dissolution, finding arbitration to be a fair and equitable result.

The full opinion is available in PDF.


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