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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.

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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.

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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”).

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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

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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 . . .
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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.

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Marketing entrepreneurs’ greatest strengths are their creativity and vision. It is this vision that drives many to take the leap to start their own agency/consultancy or join a start-up venture to market an exciting new product. Unfortunately, most marketers are not well-versed in the intricate legal issues involved with starting a business. This can lead to a variety of problems, especially as the venture begins to become successful.  A common misconception is that good legal advice is often too expensive for the early stages of a business venture. This is not the case – provided the right counsel is selected. To ensure the success of any new venture, marketers should take steps to avoid the following common pitfalls:

  1. Delaying discussion of legal issues until past the start-up phase. It’s all too common (and tempting) to ignore legal issues involved with starting a business. The instinct is to wait until your company receives additional funding or has a problem to hire an attorney. But having legal counsel during the start-up is essential to preventing large and costly problems that could ultimately derail your business.
  2. Initial business formation. Entrepreneurs are often not aware of the different tax filing categories. LLC, S-corporation and C-corporation are the most common, but there are others. Each has a different structure and design, with different tax consequences. As the company founder, you should sit down with an attorney to determine which structure is best for your business. Failure to do so may result in higher taxes and expose you to additional liabilities. Choosing the correct structure can result in significant savings, a more robust investment platform and a more secure future.
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In the midst of the Great Depression, Congress enacted two laws to shore up practices that were considered to have led in part to the Market Crash of 1929: the Securities Act of 1933 (“1933 Act”), which governs initial securities offerings; and the Securities and Exchange Act of 1934 (“1934 Act”), which governs all subsequent trading. The 1933 Act permits both state and federal courts to hear claims brought under that Act, and bars defendants from removing such claims to federal court. The 1934 Act, however, grants federal court exclusive jurisdiction to hear claims brought under that Act.

In 1995, Congress passed the Private Securities Litigation Reform Act (“Reform Act”) to curb apparent abuses of plaintiff’s use of the class action vehicle in litigation involving nationally traded securities. The Reform Act included substantive reforms in both state and federal court, and procedural reforms only in federal court. The Reform Act fell prey to the law of unintended consequences, and, following its passage, plaintiffs began circumventing the obstacles imposed by the Reform Act by filing securities class actions in state court. To prevent the run-around of the Reform Act, Congress responded in 1998 with the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). In relevant part, SLUSA provided an exception to the 1933 Act’s general rule that state and federal courts exercise concurrent jurisdiction over claims brought under that Act. Following the passage of SLUSA, a split developed between state and federal courts as to whether SLUSA deprived state courts of subject matter jurisdiction over cases involving “covered class actions” (actions in which damage are sought on behalf of 50 of more people) asserting only 1933 Act claims.

On March 20, 2018, in Cyan v. Beaver County Employees Retirement Fund, No. 15-1439, the Supreme Court resolved the split and issued a unanimous opinion authored by Justice Kagan. The Cyan case arose out of the purchase of shares of stock in Cyan, a telecommunications company, by three pension funds and one individual in an initial public offering. After the stock declined in value, the plaintiffs brought a damages class action in California Superior Court against Cyan. The allegations stemmed from material misstatements contained Cyan’s offering documents. The plaintiffs alleged that Cyan violated the 1933 Act, but did not allege any violations of California state law claims. Cyan moved to dismiss the case alleging that SLUSA stripped state courts of subject matter jurisdiction over class actions arising solely under the 1933 Act. The California Superior Court denied the dismissal, and the state appellate courts denied review of that ruling. The Supreme Court granted certiorari to resolve the split among state and federal courts. The Supreme Court also addressed a related removal question raised by the federal government as amicus curiae.

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Ned Parent, a member of STSW’s Business Litigation Group, published an article in the September 2017 issue of the Maryland State Bar Association’s “Bar Bulletin” publication.  Mr. Parent’s article discussed the “undue influence” standard used in Caveat proceedings (the formal term used for proceedings challenging the validity of a Will).  Specifically, the article discussed the challenges in successfully proving undue influence in such proceedings, and suggested possible solutions to address those challenges.  A link to this article may be found here:

http://www.msba.org/Bar_Bulletin/2017/10_-_October/Estate_and_Trust__Fighting_the_Ticking_Clock__Undue_Influence_in_Caveat_Proceedings.aspx

Mr. Parent leads STSW’s fiduciary litigation practice, handling disputes related to estates, trusts, and guardianships.  If you have any questions about this article, or would like to discuss a potential matter related to an estates and trusts dispute, Mr. Parent may be reached at nparent@silvermanthompson.com or at (443) 909-7500.

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Concern regarding “waste, fraud and abuse” in government spending is everywhere these days, it seems.  Even in 2017, it is a solidly bi-partisan concern.  A quick internet search reveals that think tanks from the progressive Center for American Progress to the libertarian Cato Institute have published on the topic, and politicians as ideologically diverse as Rep. Elijah Cummings (D-Md.) and Rep. Paul Gosar (R-Az.) host pages on the official House of Representatives domain, house.gov, addressing wasteful or fraudulent government spending.

It may be more accurate to call the issue “non-partisan” rather than “bi-partisan” – relatively apolitical groups like AARP have weighed in, as has nearly every federal executive agency, including the Office of Personal Management, the Government Accountability Office, and the Department of Health and Human Services (which oversees Medicare and Medicaid – more about those two programs in a future post).

Even the Pentagon, long the butt of many anecdotes about $30,000 toilet seats and the like, apocryphal or not, maintains a suite of online resources dedicated to informing and empowering the public regarding safeguards against waste fraud and abuse.  In fact, the Office of Inspector General for the Department of Defense provides definitions, drawn from several sources, that defense what each of these terms – waste, fraud, and abuse – is understood to mean:

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