Maryland Business Litigation Lawyer Blog

Being appointed an agent under a financial power of attorney, or as a Court-appointed guardian, comes with a significant delegation of authority.  However, it is important to know that such delegation of power is not without limits.  For example, an agent can only exercise powers specifically granted under the power of attorney document.  And, in the case of a guardianship, the guardian is obligated to periodically account for the Court of their efforts on behalf of the ward.  And, of course, a fiduciary under either scenario cannot abuse their power or use their power unlawfully.

Recently, the Court of Appeals issued an opinion that provides yet more useful guidance for fiduciaries.  In United Bank v. Richard Buckingham, et al., the Court answered the following two certified questions from the United States District Court for the District of Maryland: (1) whether changing beneficiaries on a life insurance policy constitutes a conveyance under the Maryland Uniform Fraudulent Conveyance Act; and (2) whether a guardian of property has the authority to change beneficiaries for a life insurance policy of the ward.

The Court answered the first question in the affirmative, explaining that a change in life insurance beneficiary made with intent to hinder, delay, or defraud creditors is subject to the Maryland Uniform Fraudulent Conveyance Act.  The court then answered the second question in the negative, noting that a guardian of property clearly does not have the authority to change the beneficiary of a life insurance policy on the life of a ward, citing the provisions of Section 15-102(t) of Maryland’s Estates and Trusts Article.  Instead, the Court found that a fiduciary may only change the beneficiary of a life insurance policy following application to and approval of a court of equity.

After the enactment of the Tax Cuts and Jobs Act in 2017, the limitation on an individual’s ability to itemize tax deductions resulted in higher income tax for many Maryland business owners.  On May 8, 2020, Maryland enacted legislation allowing pass through entities (primarily LLCs, partnerships and S corporations) to elect to pay tax on a member’s distributive share at the entity level.  As a result, the taxable gross income of individuals receiving distributive shares of the entities net income is less.  In addition, the election creates a federal income tax deduction for the business that is not subject to the $10,000 itemized deduction limit established by the Tax Cuts and Jobs Act.

Single member LLC’s, partnerships and S corporations are the most likely beneficiaries of the pass-through election and they should carefully consider their options.  C corporations and Schedule C taxpayers that are ineligible for taxation at the entity level should seek counsel to determine if restructuring may be beneficial.

Silverman Thompson regularly counsels Maryland businesses, including corporations, partnerships, and limited liability companies.  If you would like further information about entity formation and structuring options, please contact Elizabeth Fitch at efitch@silvermanthompson.com or at (410) 385-2225.  If you would like to learn more about Silverman Thompson’s business practice, please contact its chair, Bill Sinclair, at bsinclair@silvermanthompson.com or at (410) 385-9116.

WeWork.  WeLitigate.

We Holdings LLC and We Company (collectively “WeWork”) is a privately held company that leases office space on a short-term basis.  Following a failed IPO in 2019, the company was faced with a liquidity crisis.  In response, the board of directors formed a special committee (the “Special Committee”) to evaluate strategic alternatives to the IPO and to negotiate a potential transaction to save the company.  The Special Committee was comprised of two directors.  Together, the two Special Committee members and entities affiliated with them held over 34 million shares of WeWork.

On October 22, 2019, the Special Committee entered into a Master Transaction Agreement with Softbank Group (“SBG”) which contemplated a tender offer, equity financing, and debt financing.  On November 22, 2019, SBG made a tender offer to purchase shares from WeWork.  Issues arose shortly thereafter and on April 1, 2020, SBG terminated the tender offer.  On April 7, 2020, at the direction of the Special Committee, WeWork filed suit against SBG.  WeWork’s co-founder, Adam Neumann, also filed suit.  The suits were consolidated by the Court of Chancery of the State of Delaware (the “Court”) into In re WeWork Litigation (“WeWork”).

The Statutory Right to Purchase Shareholder Stock in the Dissolution of a Close Corporation

In Bartenfelder v. Bartenfelder, 248 Md. App. 213 (2020), the Court of Special Appeals considered whether a complaint by a stockholder in a close corporation seeking the appointment of a receiver triggers the right of another stockholder to purchase the complainant’s stock in the company under § 4-603(a) of the Corporations and Associations Article (“CA”) of the Maryland Code.  The Court held that “in the absence of a petition for dissolution, the request for a receiver does not trigger the statutory purchase right.”  Id. at 219.  In other words, the purchase right in CA § 4-603(a) applies only in the context of a dissolution proceeding.

The Facts and Procedural History

WEIRD SCIENCE:  MARYLAND’S NEW TEST FOR THE ADMISSIBILITY OF EXPERT TESTIMONY.

           For more than forty years, Frye-Reed endured as Maryland’s test for the admissibility of expert testimony based on novel scientific principles or techniques.  Named after its near century-old progenitor, Frye v. United States, 293 F. 1013 (D.C. Cir. 1923), and the Maryland case that adopted it, Reed v. State, 283 Md. 374 (1978), the test asks whether the scientific principle or technique at issue is “generally accepted” in the relevant scientific community.  Before the Supreme Court’s decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), the Frye test was the predominant standard for the admissibility of scientific evidence in state and federal courts.  Daubert, however, held that Frye was superseded by Federal Rule of Evidence 702.  The Supreme Court interpreted Rule 702 as providing for a “flexible” inquiry focused on the reliability of evidence, under which “general acceptance” is only of several relevant factors.  Id. at 594–95.  In years following Daubert, the majority of states followed the federal courts and replaced the Frye test with Daubert.  Maryland was one of the few hold outs, but no longer.

1. Out with the old . . .

On July 14, 2020, the Maryland Court of Appeals issued its opinion in Plank v. Cherneski, (Misc. No. 3, Sept. Term 2019) (July 14, 2020), which finally harmonized Maryland case law as to the existence of a standalone “breach of fiduciary duty” claim. The Court held that such a claim exists under Maryland law and that its elements are: “(1) the existence of a fiduciary relationship; (2) breach of the duty owed by the fiduciary to the beneficiary; and (3) harm to the beneficiary.” The Court stressed that the nature of the fiduciary relationship and available remedies are fact specific and considered on a case-by case basis. “If a plaintiff describes a fiduciary relationship, identifies a breach, and requests a remedy recognized by statute, contract, or common law applicable to the specific type of fiduciary relationship and the specific breach alleged, a court should permit the count to proceed.” The remedy available depends on the specific fiduciary relationship at issue.

Running Down a Dream: The Facts and Procedural History

In Plank, the defendant James Cherneski was “a former professional soccer player who invented and patented a non-slip athletic sock.” In April 2011, together with Sanford Fisher and Jeff Ring, Mr. Cherneski established Trusox, LLC to produce and distribute the patented sock. In October 2013, the plaintiff William H. Plank, II acquired a 20% membership interest in Trusox by investing $1.5 million in the company, leaving Cherneski with a 65% membership interest, and Fisher and Ring each owning 7.5% of the company. In late 2015, minority members of the company became dissatisfied with Cherneski’s management of Trusox, and in June 2016, “Messrs. Fisher and Plank, filed an action against Mr. Cherneski and Trusox, alleging, among other things, that Mr. Cherneski was violating the Operating Agreement, had engaged in unlawful conduct related to investors and employees, and had breached contractual and fiduciary duties.” The complaint alleged nine causes of action, one of which, as relevant hereto, was breach of fiduciary duty.