E-Alert Case Updates

Fourth Circuit Affirms Maryland District Court’s Holding That Maryland Tort Claims Act Provides Immunity From Suit Against State Official in His Personal Capacity

Jeremy Marks v. Thomas Dann
United States Court of Appeals for the Fourth Circuit, No. 14-1150 (4th Cir. January 21, 2015)
by Jhanelle A. Graham, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.ca4.uscourts.gov/Opinions/Unpublished/132491.U.pdf

In Jeremy Marks v. Thomas Dann, the Fourth Circuit was asked to determine whether the actions of a State official who entered a business arrangement with Maxtena, Inc. (“Maxtena”), a Maryland-based manufacturer, fell within either the “malice” or the “scope-of-duty” exception to the Maryland Tort Claims Act (“MTCA”), Md. Code Ann., Cts. & Jud. Proc. § 5-522 (West 2000). Upon reviewing the facts of the case, the Fourth Circuit affirmed the district court’s decision and dismissed the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure, holding that under the MTCA, the plaintiff’s remedy for alleged misconduct was against the State, not against the State official in his personal capacity.

Maxtena, Inc. (“Maxtena”) was a manufacturer of custom antenna solutions. Since 2011, Maxtena’s co-founders were engaged in serial litigation over the ownership stake held by Jeremy Marks (“Marks”), a co-founder and former officer and employee of the company. In the complaint that underlies this case, Plaintiff-Appellant Marks alleged that his former colleagues entered into a sweetheart deal with the Maryland Venture Fund (“MVF”), a Maryland state agency responsible for investing in early-stage technology companies, to dilute his stake in the company at an artificially low valuation. In addition to Maxtena’s board members, Marks named as a defendant Thomas Dann (“Dann”), the MVF’s managing director. Marks alleged that Dann colluded with Maxtena’s board members, breaching his own fiduciary duties to Maxtena and aiding and abetting the others. The district court dismissed Marks’s claims against Dann, holding that Dann was entitled to immunity from personal liability under the MTCA, Md. Code Ann., Cts. & Jud. Proc. § 5-522 (West 2000). The MTCA couples a waiver of the State’s sovereign immunity from civil suits in state court with protection for state officials who act without malice and within the scope of their official duties. The district court found that Marks’s complaint failed to plausibly allege that Dann’s actions came within either the “malice” or the “scope-of-duty” exception to the MTCA and dismissed the complaint as against Dann under Rule 12(b)(6) of the Federal Rules of Civil Procedure.

By way of brief background, Marks left his position at Maxtena in July, 2010. About one (1) year after what Marks alleged was his “ouster,” Maxtena filed suit against Marks in the district court, alleging that Marks had surreptitiously founded a competing venture while still employed at Maxtena. Maxtena v. Marks, Civ. A. No. 8:11-cv-9450-DKC (D. Md. Apr. 13, 2011). In the Maxtena litigation, Maxtena sought to enforce contractual provisions that it claimed entitled it to repurchase Marks’s 34% stake in the company for a nominal sum. Maxtena and Marks agreed that they would mediate the Maxtena litigation, after first engaging in financial and valuation discovery intended to facilitate settlement discussions. It was through that discovery that Marks became aware of negotiations between Maxtena and the MVF regarding a potential early-stage investment by the MVF in Maxtena (the “MVF Transaction”).

Marks filed his complaint on February 1, 2013, alleging that the MVF Transaction was an elaborate “scheme” intended to dilute his stake in the company and provide Maxtena with an artificially low valuation to anchor the ongoing settlement discussions in the Maxtena litigation. Count I of the complaint alleged that the members of the Maxtena board negotiated for themselves, rather than Maxtena, in breach of their fiduciary duties. Counts II and III of the complaint alleged the causes of action against Dann that were the subject of Marks’s appeal. In Count II, Marks contended that after becoming a member of the Maxtena board, Dann breached his fiduciary duties by approving the expanded stock options pool; and in Count III, he asserted that Dann aided and abetted the other Maxtena board members’ breach of their fiduciary duties when he “sold” them a transaction intended to provide the MVF with a stake in Maxtena for an “exceptionally low price,” at both Marks’s and Maxtena’s expense.

The Maryland federal district court granted Dann’s motion to dismiss on July 24, 2013. Marks v. Dann, Civ. A. No. 8:13-cv-00347-DKC (D. Md. July 24, 2013). In a detailed memorandum opinion, the district court held that Marks’s claims against Dann were barred by the MTCA because the complaint did not plausibly allege that Dann’s actions fell within either of the statutory exceptions upon which Marks relied. Canvassing extensive Maryland case law defining “malice” for purposes of the MTCA, the district court found that even crediting Marks’s allegation that Dann took advantage of the Maxtena board’s conflict to gain a “substantial ownership interest in Maxtena for MVF at an exceptionally low price,” Marks had not provided any facts in support of his theory that Dann did so because of an improper motive, rather than to advance MVF’s legitimate commercial interests. The district court also rejected Marks’s alternative theory that Dann’s actions were beyond the scope of his role at MVF, an argument the court found completely lacking in factual support and contradicted by the complaint’s allegations that Dann acted to secure a stake in Maxtena for MVF at a below-market price. Marks did not seek reconsideration of the district court’s decision or leave to amend; rather, he moved for certification of the district court’s dismissal as a final and appealable order under Rule 54(b) of the Federal Rules of Civil Procedure. The district court granted the motion, and Marks appealed timely.

Like the district court, the Fourth Circuit agreed with Dann. That is, read in the light most favorable to Marks, the Fourth Circuit determined that the allegations in the complaint: (1) fell short of what was required to show malice or conduct outside the scope of public duties under Maryland law; (2) that there was nothing improper about his desire to achieve the best possible economic outcome for the MVF; and (3) that there is no support in the complaint for Marks’s theory that he colluded with the Maxtena board to purposefully harm Marks.

The appellate court explained that Maryland case law expressly provides that inferring § 5-522(b) malice from circumstantial evidence can be especially difficult in the commercial context, where behavior that might be consistent with an intent to harm or some other improper motive is often at least equally consistent with permissible financial self-interest. See Postelle v. McWhite, 694 A.2d 529, 534 (Md. Ct. Spec. App. 1997). Thus, there must be more to support the inference than the allegation that a plaintiff has suffered economic injury as a result of actions by a state official that advance the economic interests of his or her state employer, because allegations as consistent with the regular course of commercial dealings as they are with malicious intent do not, on their own, “nudge[] [a claim] across the line from conceivable to plausible.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007); see also Postelle, 694 A.2d 534–36. According to the appellate court, there was nothing in the complaint from which it could infer, even circumstantially, that Dann’s conduct was driven by something other than ordinary economic concerns—an effort to get a good deal for MVF.

First, the Fourth Circuit noted that Marks provided only one (1) piece of direct evidence to support his allegations, which purported to show the requisite malice. The evidence provided was a series of emails in which Dann suggested that structuring the transaction as an equity investment might “facilitate resolution of the rogue shareholder issue.” Similar to the district court, the Fourth Circuit did not find that an awareness of the Maxtena litigation or interest in its settlement demonstrated that Dann was motivated by anything other than a desire to protect MVF’s investment in Maxtena, nor did the appellate court believe that Dann’s characterization of Marks as a “rogue shareholder,” read in context, was anything more than a factual description of Marks’s status in the ongoing Maxtena litigation. Even giving Marks the benefit of the doubt, therefore, the court concluded that this stray reference alone was not enough to create a plausible inference of personal animus.

Second, and equally important, the appellate court determined that the complaint lacked any circumstantial evidence of malice. In the commercial context, economically pointless or gratuitous conduct by a State official may give rise to an inference of malice under the MTCA, because it suggests that the official was motivated by something other than the state’s financial interests. See Postelle, 694 A.2d at 18. Here, however, the court found that there was no allegation or indication that Dann sought or agreed to terms unrelated to the economics of the MVF Transaction. Further, the appellate court determined: (1) that Marks did not allege that Dann agreed to terms that were out of the ordinary for transactions of this type; (2) that there was no evidence that Dann’s stance in the negotiations was inconsistent with the MVF’s commercial interests; and (3) that there was no evidence that Dann conceded more than was necessary to complete the transaction.

For these reasons, the Fourth Circuit held that the case was ordinary, not exceptional, under the MTCA—i.e., broad State-official immunity protected Dann from suit in his personal capacity. The appellate court did not consider the merits of the district court’s futility determination, but held only that the lower court did not abuse its discretion by failing to provide for amendment in the absence of a motion to amend and in dismissing Marks’s claims against Dann with prejudice.