E-Alert Case Updates

Asset Purchaser’s Actions Subjected Itself to Garnishment Following Lawsuit by Purchased Company’s Former Employee

Dr. Jani Associates, LLC v. Daniel S. Smithpeter, M.D.
(October 14, 2016) Court of Special Appeals of Maryland
by Matthew J. McCloskey, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.courts.state.md.us/appellate/unreportedopinions/2016/2014s14.pdf

In a recent opinion, the Court of Special Appeals of Maryland held that: (1) the agent of a company which sold its assets was not personally liable for breach of the contract of sale; and (2) the purchasing company’s own actions proximately caused its assets to be subject to garnishment after a lawsuit by the purchased company’s former employee.

In 1998, Defendant formed a professional corporation, Daniel S. Smithpeter, M.D., P.C. (“Smithpeter, P.C.”), to provide mental health services to communities on Maryland’s eastern shore. Plaintiff, a limited liability company, was formed in 2003 to provide medical services in Wicomico County. In 2012, Plaintiff purchased all assets of Defendant’s professional corporation. The agreement was signed on April 10, 2012 and stated that the contract took effect on April 11, 2012, but the signature page reflects that the seller did not sign the contract until April 12, 2012. Pertinently, the contract provided that Defendant knew of no threatened lawsuits against Smithpeter, P.C. at the time of the sale. Plaintiff later changed the name of Smithpeter, P.C. and changed its resident agent. Thereafter, on April 16, 2012, Plaintiff opened a bank account at M&T Bank with Smithpeter, P.C.’s tax identification number.

Unbeknownst to Plaintiff, Defendant had previously been made aware that one of his former employees intended to file a lawsuit against Smithpeter, P.C. related to an employment dispute. Shortly after purchasing the assets of Smithpeter, P.C., Plaintiff was served with a lawsuit by the former employee. After Plaintiff failed to respond to the lawsuit, a default judgment was entered in the former employee’s favor. The former employee subsequently served a writ of garnishment on M&T Bank for “any accounts” held in the name of Smithpeter, P.C. Because Plaintiff had opened a bank account with Smithpeter, P.C.’s former tax identification number, the Circuit Court for Wicomico County determined that Plaintiff’s bank account was subject to the former employee’s garnishment.

After losing the assets in the M&T Bank account, Plaintiff sued Defendant individually for both breach of contract and intentional misrepresentation due to Defendant’s failure to disclose that a former employee intended to sue Smithpeter, P.C. Defendant moved to dismiss, arguing that: (1) he could not be personally liable for breach of contract because he was not a party to the contract of sale for Smithpeter, P.C.; and (2) all of Plaintiff’s alleged damages were due to Plaintiff’s failure to appropriately handle the lawsuit. The Circuit Court granted Defendant’s motion. Plaintiff appealed.

Judge Meredith, writing for the Court of Special Appeals, affirmed. Regarding Plaintiff’s claim for breach of contract, the Court noted that Defendant signed the contract only as an agent of Smithpeter, P.C. Because Defendant “signed solely in a representative capacity as an agent for a disclosed principal,” he “incurred no personal liability in doing so.” Accordingly, Plaintiff had failed to state a claim against Defendant for breach of contract.

Regarding Plaintiff’s claim for intentional misrepresentation, the Court noted that it was uncontroverted that Defendant knew of the threatened lawsuit at the time of the sale of Smithpeter, P.C. and failed to disclose that fact to Plaintiff. Nevertheless, to state a claim for intentional misrepresentation, Plaintiff was required to allege that “the fact misrepresented was the proximate cause of the injury.” Lustine Chevrolet v. Cadeaux, 19 Md. App. 30, 35 (1973). The Court concluded that no “reasoning jury could rationally conclude that appellant’s loss of [] funds was directly caused by” Defendant’s failure to disclose the threatened lawsuit. Indeed, Plaintiff was served with the lawsuit and failed to respond, causing the entry of the default judgment. Defendant played no part in that failure.

Furthermore, the Court noted that Plaintiff took numerous actions that rendered its account subject to the former employee’s garnishment. Specifically, although the contract was simply an asset sale, Plaintiff exerted total control over Smithpeter, P.C. by: (1) filing articles of amendment to Smithpeter, P.C. indicating that it had become a part of Plaintiff’s group of practices; (2) changing the resident agent of Smithpeter, P.C.; (3) changing the name of Smithpeter, P.C.; and (4) opening a bank account with Smithpeter, P.C.’s former tax identification number According to the Court, these actions “created the opportunity for [the former employee] to garnish funds [Plaintiff] had placed in the M&T Bank account.” Accordingly, under the facts alleged in the complaint, the Court determined that no reasonable jury could find that Plaintiff’s loss was proximately caused by Defendant’s non-disclosure.