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Maryland District Court Applies Lex Loci Contractus and Lex Loci Delicti to Breach of Contract and Tort Dispute to Issue Favorable Judgment for Defendant-Corporation

MEE Direct LLC, et al. v. Tran Source Logistics, Inc., et al.
Case No. JKB-13-455 (February 3, 2014)
by Jhanelle A. Graham, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In Publish America, LLP v. Stern, the United States District Court for the District of Maryland was asked to rule on the defendants’ motion for partial summary judgment and the plaintiffs’ cross motion for summary judgment in a breach of contract and tort action. Plaintiffs MEE Direct, LLC (“MEE Direct”) and MEE Apparel, LLC (“MEE Apparel”) (collectively, “MEE”), brought this suit against Tran Source Logistics, Inc. (“Tran”) and Howard Cates (“Cates”), on four (4) grounds: (1) breach of contract against Tran; (2) unjust enrichment against Tran and Cates, (3) piercing the corporate veil against Cates; and (4) breach of fiduciary duty against Tran and Cates. The Honorable District Judge James K. Bredar granted the defendants’ motion, and granted in part but denied in part MEE’s motion.

By way of background, MEE Direct and MEE Apparel were limited liability companies engaged in, respectively, the retail and wholesale sale of Marc Ecko-branded clothing. MEE Direct was organized under the laws of Delaware, and its sole member was Holton99, LLC, a limited liability company organized under the laws of New Jersey. MEE Apparel was organized under the laws of New Jersey and shared MEE Direct’s ownership structure. Tran was a Maryland corporation that provides transportation management services. Cates was the president of Tran and a citizen of Pennsylvania.

The dispute arose out of a contract (“the Agreement”) that MEE entered into with Tran on June 29, 2009. According to the Agreement, MEE retained Tran to provide certain transportation services—namely, collecting, reviewing, and auditing the invoices received from MEE’s freight carriers, such as Federal Express, Argix, and UPS—in return for monthly payments. The Agreement also provided that Tran would make payments to freight carriers on Plaintiffs’ behalf “[a]fter receipt of funds sent or transferred to” Tran by Plaintiffs. By 2011, Tran had failed to make payments of approximately $368,000 to Plaintiffs’ freight carriers; rather, Tran used the funds transferred by MEE for “general corporate purposes,” such as paying other customers’ vendors and paying payroll, corporate debt, and other corporate expenses. In 2007, when Cates took over Tran as its President and sole shareholder, Tran had a deficit of $800,000. Even loans by Tran’s outgoing President in the amount of approximately $100,000 to $150,000 were insufficient to cover the amounts Tran owed to freight carriers. As a result, Tran was unable to pay all of its bills on time and began paying bills according to the “urgency of the situation,” as funds came in from clients. Cates, however, never disclosed Tran’s dire financial status to MEE. Instead, Cates hoped that Tran could use fees paid by Plaintiffs for invoice auditing and other transportation services in order to pay Plaintiffs’ freight carrier bills.

On August 13, 2012, MEE filed a lawsuit in the Supreme Court of New York for the County of New York, but the case was subsequently removed to the United States District Court for the Southern District of New York. On December 26, 2012, it was transferred to the Maryland district court pursuant to 28 U.S.C. § 1406. The district court was tasked with determining: (1) Defendant Cates’s motion for partial summary judgment with regard to Count II-Unjust Enrichment, Count III—Piercing the Corporate Veil, and Count IV—Breach of Fiduciary Duty; and (2) MEE’s cross-motion for summary judgment on all counts.

First, the district court observed that it would apply Maryland law in reviewing the motion to dismiss, because the diversity action was transferred from the United States District Court for the Southern District of New York pursuant to 28 U.S.C. § 1406. As a result, the Court had authority to apply Maryland choice-of-law rules. GBJ Corp. v. E. Ohio Paving Co., 139 F.3d 1080, 1084 (6th Cir. 1998) (When a case is transferred on . . . [the] basis [of 28 U.S.C. § 1406], the choice-of-law rules of the transferee court apply.”); Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). The court also noted that the action involved causes of action both in contract and in tort. With regard to the causes of action in contract, where a contract has no forum selection clause, the court stated that Maryland’s choice-of-law rule is one of lex loci contractus. That is, Maryland courts “hold that while the law of the forum governs the remedy for breach of contract, the law of the place of contracting governs questions regarding the nature, validity and construction of a contract unless such law would violate a strong public policy of Maryland.” Guinness v. Ward, 955 F.2d 875, 893 n.13 (4th Cir. 1992). Further, the court explained that the “place of contracting” is the place where the last act necessary for the contract’s formation is performed. Grain Dealers Mut. Ins. Co. v. Van Buskirk, 215 A.2d 467 (1965). In this case, the place of contracting was Maryland, and, therefore, the Court applied the substantive law of Maryland with regard to the causes of action in contract. Next, the court addressed the causes of action in tort, opining that the Maryland choice-of-law rule is that of lex loci delicti. See Hauch v. Connor, 453 A. 2d 1207 (1983) (“The rule of lex loci delicti is well established in Maryland.”). The court observed that the alleged torts occurred in Maryland, where Tran was incorporated and operated; therefore the substantive law of Maryland applied to the causes of action in tort.

Second, the court delved into the substantive issues. Despite noting that, in his deposition, Cates testified that MEE was sometimes tardy in transferring funds to Tran and that this made it difficult for Tran to pay invoices on time, the court also stated that MEE did not claim that Tran breached the Agreement by making late payments to Plaintiffs’ freight carriers. Rather, MEE claimed that Tran failed to pay Plaintiffs’ freight carriers $368,000 even after Plaintiffs had transferred the funds to Tran. Therefore, the district court entered judgment for MEE as to Count I in the amount of $368,000. With respect to MEE’s unjust enrichment claim, the district court began by noting that “generally, quasi-contract claims such as quantum meruit and unjust enrichment cannot be asserted when an express contract defining the rights and remedies of the parties exists.” Count Com’rs of Caroline County v. J. Roland Dashiell & Sons, Inc., 747 A.2d 600, 610 (Md. 2000). Thus, the unjust enrichment claim against Tran failed because there was an express contract between MEE and Tran. By contrast, Cates himself was not a party to the Agreement between Plaintiffs and Tran, so the court proceeded with its analysis of unjust enrichment as against Cates.

The district court articulated that, in Maryland, unjust enrichment has three (3) elements: “(1) a benefit conferred upon the defendant by the plaintiff; (2) an appreciation or knowledge by the defendant of the benefit; and (3) the acceptance or retention by the defendant of the benefit under such circumstances as to make it inequitable for the defendant to retain the benefit without the payment.” Berry & Gould, P.A. v. Berry, 757 A.2d 108, 113 (Md. 2000). Here, however, the court determined that Cates did not receive any benefit directly from MEE, because the $368,000 at issue was paid directly to Tran. Therefore, the Court did not find that (1) a benefit was conferred upon Cates by MEE; or (2) that the acceptance or retention by Cates of payments he received from Tran were made under such circumstances as to make it inequitable for Cates to retain them. On these grounds, the Court granted judgment for Cates as to Count II.

With respect to Count III, which alleged that Cates used Tran’s corporate form in order to perpetrate fraud upon MEE and that Tran’s corporate form should therefore be disregarded, the Court found no genuine dispute as to any material fact and that Cates was entitled to judgment as a matter of law. The court reasoned that, in Maryland, “the corporate entity will be disregarded only when necessary to prevent fraud or to enforce a paramount equity.” Stein v. Smith, 751 A.2d 504, 510 (Md. 2000). The court further observed that neither Tran nor Cates made any false representations to MEE, and although neither Tran nor Cates informed MEE about their dire financial situation prior to signing the Agreement, MEE never inquired. In the absence of fundamental unfairness, the Court finds no such fundamental unfairness and without evidence that Cates had been treating the corporation’s property as his own, the district court granted summary judgment in favor of Cates as to Count III.

Finally, the court addressed Count IV, which alleged that Tran and Cates breached the fiduciary duties they had toward MEE. Again, the Court found that there was no genuine dispute as to any material fact and that Cates was entitled to judgment with regard to Count III as a matter of law. The court first noted that the elements of breach of fiduciary duty in Maryland are not clearly established, but where a party alleges that another has breached a fiduciary duty, “[c]ounsel are required to identify the particular fiduciary relationship involved, identify how it was breached, consider the remedies available, and select those remedies appropriate to the client's problem. Whether the cause or causes of action selected carry the right to a jury trial will have to be determined by an historical analysis.” Kann v. Kann, 690 A.2d 509, 521 (Md. 1997). The district court determined that the Agreement did not provide that Tran and Cates were to hold MEE’s funds in trust, nor did it even provide that MEE’s funds were to be kept in a segregated account. Thus, the court concluded that the parties did not enter into a relationship which imposes a fiduciary duty as a matter of law, and granted summary judgment in favor of Cates as to Count IV.