E-Alert Case Updates

Maryland Federal District Court Lacks Diversity Jurisdiction Where Now-Defunct Corporation was Incorporated in Maryland at the Time of Suit and is Maryland Citizen

Baltimore City Board of School Commissioners v. Warren-Ehret Company Of Maryland, Inc. et al.
United States District Court for the District of Maryland, Civil Action No. ELH-14-02306 (D. Md. Nov. 14, 2014)
by Jhanelle A. Graham, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.mdd.uscourts.gov/Opinions/Opinions/14-cv-2306-Balto%20City%20v%20Warren-Ehret%20Company.pdf

In Baltimore City Board of School Commissioners v. Warren-Ehret Company Of Maryland, Inc. et al., the United States District Court for the District of Maryland was asked to determine whether diversity jurisdiction existed in a breach of contract dispute that was initially filed in the Circuit Court for Baltimore City, and then removed to federal court. After reviewing the facts of the case as well as relevant case law and statutes, the Honorable Ellen Lipton Hollander held that the district court lacked diversity jurisdiction, and remanded the case to the Circuit Court for Baltimore City.

In or about April 2014, the Baltimore City Board of School Commissioners (“BCBSC”) filed suit in the Circuit Court for Baltimore City against Warren-Ehret Company of Maryland, Inc. (“Warren-Ehret”) and Westfield Insurance Company (“Westfield”), alleging breach of contract against Warren-Ehret, a Maryland corporation (Count I), and breach of contract against Westfield, an Ohio corporation (Count II).

The suit arose from a contract between Warren-Ehret and BCBSC, entered on or about April 27, 2010, by which Warren-Ehret was to replace the roof at Harlem Park Middle School in Baltimore (the “Contract”). In support of its contractual undertaking, Warren-Ehret secured a performance and payment bond issued by Westfield on behalf of Warren-Ehret and for the benefit of BCBSC. Under the terms of the Bond, Westfield, as Surety, became bound to pay BCBSC up to the amount of the bond ($1,959,580) in the event of any defaults, breaches, and/or failures by Warren-Ehret under the Contract. Further, under the terms of the Contract, Warren-Ehret was obligated to substantially complete its work by May 28, 2011. According to BCBSC, Warren-Ehret defaulted under the Contract. Therefore, BCBSC terminated the Contract, effective August 16, 2011. As of the termination date, BCBSC had allegedly paid Warren-Ehret $1,808,346.46; was holding $95,176.24 as retainage; and $56,085.30 remained due under the Contract.

According to BCBSC, the work was left unfinished by Warren-Ehret. BCBSC retained Cam Construction Co., Inc. to complete the work at a cost of almost $800,000. Additionally, because of alleged defects in the work of Warren-Ehret, Cam Construction had to perform remedial work at a cost of over $250,000. The work on the school roof was not completed until December 2012. Based on these allegations, BCBSC demanded payment from Westfield under the Bond, in the amount of $903,049.86, due to Warren-Ehret’s default and alleged breach of contract. Westfield, however, did not pay, and BCBSC sued Warren-Ehret and Westfield in the Baltimore City Circuit Court. On July 18, 2014, Westfield timely removed the case to federal court on grounds of diversity of citizenship, pursuant to 28 U.S.C. § 1332.

In Maryland federal district court, Westfield argued that diversity jurisdiction existed because Warren-Ehret ceased all operations in the summer of 2011 and was not in good standing with the Maryland State Department of Assessments and Taxation (“SDAT”). As further proof that Warren-Ehret was not a viable Maryland Corporation, Westfield alleged that Warren-Ehret had no intention of reviving its operations. BCBSC, however, disputed diversity jurisdiction and sought a remand to the Circuit Court for Baltimore City. According to BCBSC, the parties were not completely diverse and Warren-Ehret was a viable Maryland corporation, subject to suit under the Corporations and Associations Article of the Maryland Annotated Code, section 2-103(2) (authorizing Maryland corporations to sue and be sued). Specifically, BCBSC insisted that even if Warren-Ehret was not in good standing with the SDAT, its corporate charter had not been forfeited and thus Warren-Ehret remained “a viable Maryland corporation in legal existence, and, as such, there is not, and never was, diversity of citizenship. . . .” Alternatively, BCBSC argued that even if Warren-Ehret’s charter were forfeited, BCBSC would have been entitled to sue the Director-Trustees of the corporation, pursuant to § 3-515 of the Corporations and Associations Article.

The Maryland district court began its analysis by stating that a federal district court may only adjudicate a case if it possesses the “power authorized by Constitution and statute.” Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 552 (2005). In other words, “[a] court is to presume … that a case lies outside its limited jurisdiction unless and until jurisdiction has been shown to be proper.” United States v. Poole, 531 F.3d 263, 274 (4th Cir. 2008). The district court expressed skepticism at Westfield’s argument that Warren-Ehret was joined for the purpose of defeating diversity jurisdiction, despite the fact that Warren-Ehret was the contractor whose work was at issue. Given the allegations in the suit, the district court determined that it was not a case in which an unscrupulous plaintiff improperly joined a non-diverse party in a fraudulent attempt to avoid a federal forum, and concluded that joinder was proper. Specifically, the district court observed that both the federal and Maryland joinder rules permit joinder of defendants if “any right to relief is asserted against them . . . arising out of the same transaction [or] occurrence,” and “any question of law or fact common to all defendants will arise in the action.” FED. R. CIV. P. 20; see MD. RULE 3-212. As the Maryland Court of Appeals opined, “‘The core purpose of the rule is to permit a single trial of claims having a similar foundation or similar issues.’” Kennedy v. Lasting Paints, Inc., 404 Md. 427, 444, 947 A.2d 503, 513 (2008). Consequently, the district court determined that both prongs of the joinder inquiry were easily satisfied here, and noted that if plaintiff had not sued Warren-Ehret, plaintiff might have failed to join an indispensable party. See Fed. R. Civ. P. 19.

With respect to diversity jurisdiction, the district court reasoned that whether or not Warren-Ehret was active, it was undisputed that Warren-Ehret was incorporated in the State of Maryland. Even if Warren-Ehret was now a defunct corporation, as Westfield claimed, Maryland precedent suggested that, at the very least, Warren-Ehret is a citizen of the State of its incorporation for diversity purposes. Further, there was no indication that Warren-Ehret’s charter had been forfeited as of the date when suit was filed. Thus, the district court held that Warren-Ehret remained a viable Maryland corporation for diversity purposes when the suit was filed, and the district court lacked diversity jurisdiction. Accordingly, the case was remanded to the Baltimore City Circuit Court.