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Fourth Circuit Affirms Maryland Federal District Court’s Dismissal of Breach of Contract Action and Rejects Parol Evidence as Viable Theory for Recovery Under Facts

1899 Holdings, LLC v. 1899 Limited Liability Company
Case No. 13-1166, (April 24, 2014)
by Jhanelle A. Graham, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In 1899 Holdings, LLC v. 1899 Limited Liability Company, the Fourth Circuit considered whether Appellants, 1899 Holdings, LLC; Keyser Development Corp., Keysco Realty Corp., Queen Anne Belvedere Revitalization L.P., and Nineteen/Twenty-One West Preston, LLC (collectively, “Appellants”), adequately alleged claims for breach of contract and other state law causes of action against several of their co-participants in a project to restore and redevelop Baltimore’s Northern District Police Station. Finding that Appellants had failed to state any viable claims, the Honorable Circuit Judge Diaz affirmed the district court’s dismissal of their complaint.

By way of background, in 2001, Stanley Keyser and Wendy Blair formed a Maryland limited liability company called 1899 LLC. Initially, 1899 LLC had two (2) members: Keyser Development Corp., controlled by Keyser, and W.L. Blair Development LLC, controlled by Blair. Through 1899 LLC, Keyser and Blair planned to purchase Baltimore’s Northern District Police Station and convert it into a commercial development. The project quickly ran into obstacles which increased development costs beyond what Keyser and Blair had anticipated. To ensure adequate financing in the face of these problems, Keyser, along with several entities controlled by or affiliated with him (collectively, the “Keyser entities”), began contributing funds to 1899 LLC. These investments continued for several years, and by 2008, Keyser and the Keyser entities had contributed at least $3 million. In 2005, to secure still additional financing for the project, Keyser negotiated an agreement with John Bowman, Jr., the president of an investment firm called Tax Credit Capital, LLC. Keyser and Bowman eventually agreed that Small Deal Fund L.P.—an entity affiliated with Bowman—would invest $1.9 million in the project in exchange for 99.9% of the operating profits, as well as the tax credits the project would generate. To facilitate this investment, Small Deal and 1899 LLC executed an Operating Agreement, dated January 31, 2006, through which the two (2) firms became the sole members of 1899 LLC. The two (2) previous members withdrew.

Several of the Operating Agreement’s provisions were particularly relevant. First, the Agreement designated Holdings as “Managing Member” and Small Deal as “Investor Member.” Second, the Operating Agreement specified that any financing Holdings provided to 1899 LLC would “be treated as a Capital Contribution,” rather than as a loan, with the sole exception that Holdings was permitted “to make short term loans to 1899 LLC prior to Construction Completion and such loans [would] not be treated as a Capital Contribution” as long as they were repaid within 120 days (or 180 days upon substantial completion of the project). Third, the Operating Agreement gave Small Deal the power to remove Holdings as Managing Member under certain circumstances. Specifically, as relevant here, Small Deal could remove Holdings if it violated (and failed to cure within thirty (30) days) any provision of the Operating Agreement, provided that its conduct had a “material adverse effect on 1899 LLC or any of its Members.” An “uncured violation” of Holdings’ duty to “provide funds” would be “deemed to have a material adverse effect.” The Agreement also had a standard merger clause.

In September 2008, to address the project’s ongoing financial difficulties, Holdings and Small Deal executed an Amendment to the Operating Agreement. Among other changes, the Amendment provided that Small Deal and another entity, the Maryland Historic Tax Credit Fund, L.P., would contribute additional capital to the project. Shortly after Holdings and Small Deal executed the Amendment, Small Deal accused Holdings of breaching its funding obligation under the Operating Agreement. In a letter to Holdings, dated November 13, 2008, Small Deal threatened to remove Holdings as Managing Member, noting the existence of “no fewer than 17 liens and lawsuits directly affecting 1899 LLC.” In response, Holdings acknowledged that it was “unable to cause 1899 LLC to timely pay operating expenses, or payments on 1899 LLC’s loans.” Citing various forms of alleged misconduct by Small Deal and Raleigh, however, Holdings denied that Small Deal had authority to remove it as Managing Member. Undeterred, Small Deal formally removed Holdings on December 15, 2008. 1899 Special Member LLC—an entity appointed by Small Deal—automatically replaced Holdings, and sometime after Holdings’ removal, 1899 LLC completed the project.

In their amended complaint in the United States District Court for the District of Maryland, Appellants first alleged that, prior to Holdings’ removal as Managing Member, Bowman—on behalf of Small Deal—orally “agreed with Stanley Keyser that the outlays that had been made and would be made by [Keyser and the Keyser entities] . . . would be considered loans to 1899 LLC and not capital contributions.” The complaint alleged that, by failing to repay the loans which were due immediately upon completion of the project, 1899 LLC breached the terms of the oral agreement. In the alternative, the complaint sought return of the funds via claims for unjust enrichment. 1899 LLC, Small Deal, and Special Member, LLC, filed a motion to dismiss, which the Maryland federal district court granted. See 1899 Holdings, LLC v. 1889 Ltd. Liab. Co., No. CCB-12-297, 2013 WL 142303 (D. Md. Jan. 8, 2013). Taking judicial notice of state court documents indicating the entry of judgments on liens against the project, the district court determined that Holdings had violated its duty “to cause completion of the project free from liens.” Accordingly, the court held that “removal of Holdings as Managing Member complied with . . . the Operating Agreement.”

On appeal, the Fourth Circuit stated that, in a contract dispute, “the construction of ambiguous contract provisions is a factual determination that precludes dismissal on a motion for failure to state a claim.” Martin Marietta Corp. v. Int’l Telecomms. Satellite Org., 991 F.2d 94, 97 (4th Cir. 1992). Under Maryland law, the parol evidence rule “bars the admission of prior or contemporaneous agreements or negotiations to vary or contradict a written contractual term.” Calomiris v. Woods, 727 A.2d 358, 363 (Md. 1999). With respect to Appellants’ oral evidence claim, the appellate court highlighted that at the hearing on Appellants’ motion to dismiss in district court, the district court remarked that the conversations relating to the alleged loan agreement took place “sometime in the spring and summer of 2008, after the [Operating Agreement], but prior to the [Amendment].” In its order dismissing Plaintiffs’ claims, the district court treated this statement as an admission. In the lower court’s view, Plaintiffs had “concede[d] that the alleged agreement . . . preceded the written Amendment,” and the Fourth Circuit concurred. The Fourth Circuit stated, “[A] lawyer’s statements may constitute a binding admission of a party” if the statements are “‘deliberate, clear, and unambiguous.’” Fraternal Order of Police Lodge No. 89 v. Prince George’s Cnty., 608 F.3d 183, 190 (4th Cir. 2010). The appellate court found both that the statement was sufficiently clear and that the district court correctly interpreted it. Consequently, the appellate court held that the court’s treatment of Appellants’ counsel’s statement as an admission was not an abuse of discretion, and Appellants were bound by the admission on appeal.

Second, the Fourth Circuit noted that even if the alleged loans were potentially consistent with the Warranty Clause of the Agreement, they were nevertheless inconsistent with other provisions of the Operating Agreement. The Operating Agreement also contained a merger clause, and the Amendment ratified the original Agreement. Therefore, the Fourth Circuit concluded that the oral communications on which Appellants relied contradicted the parties’ subsequent written agreement. As the parol evidence rule thus barred introduction of those communications as evidence, the Fourth Circuit held that the district court did not err in dismissing Plaintiffs’ loan-related contract claims.

Third, with respect to Holdings’ claim for breach of contract based on its removal as Managing Member of 1899 LLC, the Fourth Circuit determined that Holdings’ arguments misapprehended the contractual hook on which its removal was justified. Under the Agreement, it was not the existence of the liens themselves that justified Holdings’ removal, but rather what the liens signified: that Holdings was not meeting its contractual obligation to cover shortfalls in funding. The appellate court perceived no ambiguity in the contract language and concluded that Holdings’ removal by Small Deal was authorized by the terms of the Operating Agreement.

For all these reasons, the Fourth Circuit affirmed the district court’s judgment to dismiss the Appellants’ Complaint.