ELLEN LIPTON HOLLANDER, District Judge.
This case involves a breach of contract claim arising under the Court's admiralty jurisdiction. Baltimore Line Handling Company ("Baltimore Line"), plaintiff, has sued Shannon Brophy, defendant, seeking $119,475 allegedly due and owing for "line handling services" provided by Baltimore Line to Ms. Brophy at the Piney Point marine terminal from 2006 to 2009. See Complaint (ECF 1).
Now pending before this Court is Baltimore Line's Motion for Entry of Default Judgment ("Default Motion") (ECF 11). By Order entered March 17, 2010 (ECF 10), the Court (Quarles, J.)
In addition, Baltimore Line has filed a "Motion for Sanctions and Order Compelling Discovery" ("Sanctions Motion") (ECF 21). It concerns a deposition of Ms. Brophy on December 20, 2010, at which she appeared without counsel and refused to answer any questions.
Both the Default Motion and the Sanctions Motion are ripe for decision, and no hearing is necessary. See Local Rule 105.6. For the reasons that follow, the Court overrules Baltimore Line's Objection/Response; adopts Judge Gauvey's Report; denies the Default Motion, without prejudice; and, as to the Sanctions Motion, grants it in part and denies it in part.
Under the Magistrate Judges Act, 28 U.S.C. § 636, a district judge may designate a magistrate judge to conduct hearings (if necessary) and report proposed findings of fact and recommendations for action on a dispositive motion. See 28 U.S.C. § 636(b)(1)(B); Fed.R.Civ.P. 72(b); see also Local Rule 301.5.b. A motion for default judgment is a dispositive motion for purposes of the Magistrate Judges Act. See Callier v. Gray, 167 F.3d 977, 980-82 (6th Cir.1999).
A party who is aggrieved by a magistrate judge's report and recommendation as to a dispositive motion must file "specific written objections to the proposed findings and recommendations" within fourteen days. Fed.R.Civ.P. 72(b)(2). The district judge must then "determine de novo any part of the magistrate judge's disposition that has been properly objected to." Fed.R.Civ.P. 72(b)(3). But, the Court "need only conduct a de novo review of those portions of the Magistrate Judge's Report and Recommendation to which objection is made." Chavis v. Smith, 834 F.Supp. 153, 154 (D.Md.1993). As to those portions of the report for which there is no objection, the district court "must `only
Baltimore Line is located in Baltimore County, Maryland. It "provides marine line handling services," by which it supplies "trained linehandlers" who "assist with the berthing and un-berthing of the vessels" by "manag[ing] the lines to and from the vessels." Complaint ¶¶ 2, 5. According to the Complaint, Ms. Brophy and her late father, Kevin Brophy, "conducted and managed terminal operations at Piney Point, Maryland, including the berthing, loading, and unloading of vessels, doing business as `Patriot Line and Security Line LLC.'" Id. ¶ 4.
Baltimore Line alleged that from 2006 to 2009, the Brophys "contracted with Baltimore Line[ ] to manage the lines to and from the vessels, arriving and departing" at the Piney Point terminal. Id. ¶ 5. According to plaintiff, the Brophys would invoice the owners or operators of the vessels for the line handling services provided by Baltimore Line, and Baltimore Line in turn "would regularly invoice Shannon Brophy and/or Kevin Brophy d/b/a `Patriiot [sic] Lines,'" for its services. Id. ¶¶ 5-6. However, Baltimore Line claimed that the Brophys did not remit payment to Baltimore Line for invoiced services performed from 2006 to 2009, totaling $119,475. Baltimore Line seeks a money judgment against Ms. Brophy, individually, for $119,475, plus prejudgment interest and costs. Id. ¶¶ 6-9.
Notably, Baltimore Line sued the Brophys in their individual capacities, but did not sue the Brophys' businesses, "Patriot Line and Security Line LLC," ("Patriot Lines") or Vessel Operations, Inc. ("Vessel Operations").
As an exhibit to its Default Motion, Baltimore Line submitted an affidavit of its President, Shawn Ciociola ("First Affidavit" or "1st Aff.") (ECF 11, Ex. 2). In relevant part, Ms. Ciociola averred that "Shannon Brophy and her late father, Kevin Brophy, through their marine businesses `Patriot Lines' and/or `Vessel Operations' contracted with Baltimore Line to manage lines to and from vessels arriving and departing Piney Point." 1st Aff. ¶ 3 (emphasis added). Ms. Ciociola posited: "Upon information and belief, `Patriot Lines' and `Vessel Operations' are merely alter egos of the Brophys." Id. ¶ 8. According to Ms. Ciociola, "Baltimore Line regularly sent invoices to the Brophys d/b/a `Patriot Lines and/or `Vessel Operations,'" and the Brophys, "d/b/a `Patriot Lines' and/or `Vessel Operations,'" passed those charges along to the vessels being serviced and "collected charges for Baltimore Line's services on behalf of and as fiduciaries for Baltimore Line." However, the affiant averred that the Brophys failed
As an attachment to the First Affidavit, plaintiff provided a summary of 96 unpaid invoices, ranging in amount from $1,000 to $2,350, for a total of $119,475. (ECF 11, Ex. 3). The earliest invoice was dated September 13, 2006, and the latest was dated August 9, 2009. Id. Each invoice was "due" thirty days after the invoice date. Id. The summary did not state to whom the invoices were addressed.
By Letter Order entered May 18, 2010 (ECF 12), Judge Gauvey directed plaintiff to provide "the contract to which [Baltimore Line] refer[s] in paragraph 3 of the [First] Ciociola affidavit and paragraphs 1 and 8 of the complaint," as well as eight individually identified invoices. Judge Gauvey also stated:
In response, Baltimore Line submitted the requested invoices (ECF 13, Ex. 2), as well as another affidavit of Ms. Ciociola ("Second Affidavit" or "2d Aff.") (ECF 13, Ex. 1). The Second Affidavit explained that the agreements at issue were oral, as is "common and standard in this industry," and that "there were no written contracts." 2d Aff. ¶ 14. "The terms of the oral agreements," according to Ms. Ciociola, "were that Baltimore Line would provide line handling services to vessels at Piney Point when asked to do so by the Brophys, and then submit its invoices to the Brophys, d/b/a `Vessel Operations' and/or `Patriot Lines' for payment." Id. ¶ 15.
Further, Ms. Ciociola averred, id. ¶¶ 3-6:
According to Ms. Ciociola, Baltimore Line began its business relationship with the Brophys, "d/b/a `Vessel Operations,'" in September 2006. Id. ¶ 8. In October
After filing the supplemental information requested by Judge Gauvey, Baltimore Line filed a Memorandum of Law in Support of Its Motion for Default Judgment ("Memorandum") (ECF 14), to address the concerns that Judge Gauvey expressed in her Letter Order. In brief, Baltimore Line contended that, as a result of Ms. Brophy's default, all of the factual allegations of its Complaint were deemed admitted. Id. at 1-2. According to Baltimore Line, those uncontested allegations included the fact that it entered into oral contracts with the Brophys as individuals, and that the Brophys, as individuals, breached the agreements. Id. at 2. Moreover, to the extent that its agreements were with either or both of the business entities operated by the Brophys, Baltimore Line contended that the Brophys themselves were also parties to the oral agreements. Id. at 3. Citing Allen v. Dackman, 413 Md. 132, 152-54, 991 A.2d 1216, 1228-29 (2010), in which the Maryland Court of Appeals held that a member of a limited liability company ("LLC") may be personally liable for a tort committed by the LLC member in the LLC's name, Baltimore Line argued that "LLC members can also be held personally liable when they are a party to a contract." Memorandum at 3. In the alternative, Baltimore Line urged Judge Gauvey to "pierce the corporate veil" of the Brophys' business enterprises. Id. at 3-7.
As noted, Judge Gauvey issued her Report on October 4, 2010, recommending the denial of the Default Motion. She declined to extend Allen beyond the context of the state tort and statutory law in which it was decided. She also concluded that Baltimore Line had not demonstrated that it was appropriate to pierce the corporate veil of the Brophys' businesses.
Federal courts are courts of limited jurisdiction and "may not exercise jurisdiction absent a statutory basis." Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 552, 125 S.Ct. 2611, 162 L.Ed.2d 502 (2005). This Court has an independent obligation to verify the existence of subject matter jurisdiction. Sucampo Pharmaceuticals, Inc. v. Astellas Pharma, Inc., 471 F.3d 544, 548 (4th Cir. 2006). Under the "well-pleaded complaint" rule, the facts showing the existence of subject matter jurisdiction "must be affirmatively alleged in the complaint." Pinkley, Inc. v. City of Frederick, 191 F.3d 394, 399 (4th Cir.1999) (citing McNutt v. Gen'l Motors Acceptance Corp., 298 U.S. 178, 56 S.Ct. 780, 80 L.Ed. 1135 (1936)). cert, denied, 528 U.S. 1155, 120 S.Ct. 1161, 145 L.Ed.2d 1072 (2008).
To be sure, "[n]ot every contract that somehow relates to a ship or its business is considered maritime. To come within the federal court's admiralty and maritime jurisdiction, `such contracts must pertain directly to and be necessary for commerce or navigation upon navigable waters.'" Nehring v. Steamship M/V Point Vail, 901 F.2d 1044, 1048 (11th Cir. 1990) (citation omitted). As the Fourth Circuit recognized in Alford v. Appalachian Power Co., 951 F.2d 30, 32 (4th Cir.1991), "navigable waters" in the context of admiralty jurisdiction are waterways that are "capable of use for transportation between the states or with foreign nations." Conversely, a "body of water that is confined within a state and does not form part of an interstate waterway is not an admiralty concern." Id. Thus, while a contract need not actually be made or performed on navigable waters to be "maritime," it must have a sufficient connection to commerce on navigable waters to come within admiralty jurisdiction.
In considering jurisdiction, "lower courts should look to the subject matter of the. . . contract and determine whether the services performed under the contract are maritime in nature." Exxon Corp. v. Central Gulf Lines, Inc., 500 U.S. 603, 612, 111 S.Ct. 2071, 114 L.Ed.2d 649 (1991). In other words, maritime contract jurisdiction is "conceptual rather than spatial," Norfolk, 543 U.S. at 23, 125 S.Ct. 385, in that it is governed by "whether [the contract at issue] has `reference to maritime service or maritime transactions,'" rather than "simply [whether] the place of the contract's formation or performance" is on land or sea. Id. at 24, 125 S.Ct. 385.
According to the Complaint, the contracts at issue here were for "line handling services." Although I am unaware of another case specifically considering whether a line handling contract is maritime, line handling appears to fit comfortably within the class of direct, nautical services to vessels that have been held to support maritime contract jurisdiction, such as "[a] stevedoring contract; a contract to supply marine fuel; a contract for lease of cargo shipping containers; . . . for removing ballast; for lockage in a river; for wharfage;
Baltimore Line does not explicitly plead that the marine activity at the Piney Point terminal that was the subject of the alleged agreements was carried out in furtherance of commerce on "navigable waters," i.e., interstate or international waterways. However, the Court takes judicial notice that Piney Point, Maryland is situated on the Chesapeake Bay, at the mouth of the Potomac River, and that both the Chesapeake and the Potomac are navigable bodies of water in use in interstate commerce. See United States v. Johnson, 726 F.2d 1018, 1021 (4th Cir. 1984) (geographical information that is "`generally known within the territorial jurisdiction of the trial court'" is "especially appropriate for judicial notice") (citations omitted); see also Arizona v. California, 283 U.S. 423, 452, 51 S.Ct. 522, 75 L.Ed. 1154 (1931) ("[A] court may take judicial notice that a river within its jurisdiction is navigable."). Accordingly, I am satisfied that the Court possesses subject matter jurisdiction here.
Ordinarily, "[w]ith admiralty jurisdiction comes the application of substantive admiralty law." East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 864, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986). The body of substantive admiralty law "is an amalgam of traditional common-law rules, modifications of those rules, and newly created rules," id. at 864-65, 106 S.Ct. 2295, developed in service of the overriding principles of "harmony and uniformity" that form a primary rationale for federal admiralty jurisdiction. Parker v. Motor Boat Sales, Inc., 314 U.S. 244, 248, 62 S.Ct. 221, 86 L.Ed. 184 (1941). "But it does not follow . . . that every term in every maritime contract can only be controlled by some federally defined admiralty rule." Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U.S. 310, 313, 75 S.Ct. 368, 99 L.Ed. 337 (1955). "Uniformity is required only when the essential features of an exclusive federal jurisdiction are involved." Just v. Chambers, 312 U.S. 383, 392, 61 S.Ct. 687, 85 L.Ed. 903 (1941).
In Kossick v. United Fruit Co., 365 U.S. 731, 81 S.Ct. 886, 6 L.Ed.2d 56 (1961), the Supreme Court made clear that state law may govern in an admiralty case if "the alleged contract, though maritime, is `maritime and local,' in the sense that the application of state law would not disturb the uniformity of maritime law." Id. at 738, 81 S.Ct. 886 (citations omitted). See Norfolk, 543 U.S. at 22-23, 125 S.Ct. 385 (applying Kossick); McMellon v. United States, 338 F.3d 287, 303 (4th Cir.2003) (stating that
In this case, all of the parties are Maryland citizens; the business entities at issue were all created under Maryland law; and all of the alleged events, including the rendering of line handling services and the alleged agreements, took place in Maryland. Moreover, as discussed, infra, the relevant principles for decision primarily concern the law of corporations and business associations, which are generally creatures of state law; "there is no body of federal law of corporations." FEC v. Nat'l Right to Work Cmte., 459 U.S. 197, 204, 103 S.Ct. 552, 74 L.Ed.2d 364 (1982). Accordingly, in resolving whether plaintiff has alleged facts to support a breach of contract claim against Ms. Brophy, personally, the Court will apply the law of Maryland.
Upon a showing that a party against whom judgment is sought has failed to plead or otherwise defend, the clerk must enter the party's default. Fed.R.Civ.P. 55(a). After the clerk has entered a default, the plaintiff may seek a default judgment. See Fed.R.Civ.P. 55(b). Entry of default judgment "is left to the discretion of the court." S.E.C. v. Lawbaugh, 359 F.Supp.2d 418, 421 (D.Md.2005). To be sure, it is the "`strong policy'" of the Fourth Circuit to decide cases on their merits. Id. (citation omitted). But, default judgment may be proper if "the adversary process has been halted because of an essentially unresponsive party." Id.
Upon default, the well-pleaded factual allegations of the complaint regarding liability are deemed admitted, in contrast to the allegations regarding damages. Id. at 422; see Fed.R.Civ.P. 8(b)(6) (a defaulting party is deemed to admit factual allegations of the plaintiff's complaint, "other than [those] relating to the amount of damages"). Although a defaulting party "`admits the plaintiff's well-pleaded allegations of fact'" as to liability, the party in default is "`not held . . . to admit conclusions of law'" or allegations regarding liability that are not "well-pleaded." Ryan v. Homecomings Fin. Network, 253 F.3d 778, 780 (4th Cir.2001) (citation omitted). Thus, "`a default is not treated as an absolute confession by the defendant of his liability and of the plaintiff's right to recover.'" Id. (citation omitted). See also 10A WRIGHT, MILLER & KANE, FEDERAL PRACTICE & PROCEDURE, § 2688, at 60-61 (3d ed. 1998) ("WRIGHT, MILLER") ("[L]iability is not deemed established simply because of the default, and the court, in its discretion, may require some proof of the facts that must be established in order to determine liability.").
A plaintiff's allegations regarding liability are not regarded as well-pleaded (and thus not admitted) if the allegations are "`made indefinite or erroneous by other allegations in the same complaint,'" or the allegations "`are contrary to uncontroverted material in the file of the case.'" Id., § 2688, at 62 (quoting Trans World Airlines, Inc. v. Hughes, 449 F.2d 51, 63 (2d Cir.1971), rev'd on other grounds, 409 U.S. 363, 93 S.Ct. 647, 34 L.Ed.2d 577 (1973)). See Danning v. Levine, 572 F.2d 1386, 1388 (9th Cir.1978). Put another way, the papers of record cannot support a default judgment if "they disclose on their face a fact that would defeat the [plaintiff's] claim." Nishimatsu Const. Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975).
When reviewing a motion for default judgment, "it remains for the court to consider whether the unchallenged facts constitute a legitimate cause of action. . . ."
As to damages, when the "plaintiff's claim is for a sum certain or a sum that can be made certain by computation," the clerk must enter a default judgment on the plaintiff's affidavit. Fed.R.Civ.P. 55(b)(1).
Federal Rule of Civil Procedure 55(b)(2) is also relevant. It provides, in part:
When damages are contested by the defendant, the court ordinarily must hold a hearing to establish the amount of damages. See, e.g., Ins. Servs. of Beaufort, Inc. v. Aetna Cas. & Surety Co., 966 F.2d 847, 853 (4th Cir.1992). Although "[p]roceeding without a hearing is the exception," the court may award damages without a hearing if "the record supports the damages requested," such as through comprehensive, detailed, and uncontroverted exhibit and affidavit evidence establishing the amount of damages. Monge v. Portofino Ristorante, 751 F.Supp.2d 789, 794 (D.Md.2010) (citing, inter alia, Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir.1992); Virgin Records Am., Inc. v. Lacey, 510 F.Supp.2d 588, 593 (S.D.Ala. 2007); U2 Home Entm't, Inc. v. Fu Shun Wang, 482 F.Supp.2d 314, 318 (E.D.N.Y. 2007)). See Stephenson v. El-Batrawi, 524 F.3d 907, 917 n. 11 (8th Cir.2008) ("Foregoing an evidentiary hearing may constitute abuse of discretion when the existing record is insufficient to make necessary findings in support of a default judgment."); see also 10A WRIGHT, MILLER, § 2688, at 57-58 & 63-70.
In its Objection/Response, Baltimore Line contends that Judge Gauvey "rewrites several of the factual allegations" in its Complaint, so as to "make[ ] it appear that Baltimore Line[ ] has alleged wrongdoing by one or more corporate entities, while only seeking damages from the individuals behind those entities." Objection/Response at 1. Plaintiff strenuously insists that it "has always alleged that it contracted with the Brophys individually, that the Brophys['] terminal operations were managed individually, that Baltimore Line[ ] invoiced the Brophys individually, and that the Brophys were individually liable for Baltimore Lines' [sic] damages." Id. (emphasis in original).
Upon de novo review of the record, I agree with Judge Gauvey that the Complaint, and the exhibits submitted in support of the Default Motion, do not support Baltimore Line's claim that it contracted with Ms. Brophy, individually. To the contrary,
The Complaint suggests on its face that plaintiff contracted with a business organization. As noted, Baltimore Line explicitly alleged in the Complaint that the Brophys "conducted and managed terminal operations at Piney Point ... doing business as `Patriot Line and Security Line, LLC.'" Complaint ¶ 4 (emphasis added). Although plaintiff also alleged that "[t]his was a `doing business as' name of these defendants, and not a Maryland corporation in good standing," id., plaintiff's president affirmatively alleged in the First Affidavit that the Brophys contracted with Baltimore Line "through their marine businesses." 1st Aff. ¶ 3 (emphasis added).
In the Second Affidavit, plaintiff's president averred that the Brophys conducted business at Piney Point through "Vessel Operations, Inc." from September 2006, see 2d Aff. ¶ 8, until October 2007, when "the Brophys began doing business as `Patriot Lines' and/or `Patriot Line and Security Line LLC.'" Id. ¶ 12. Ms. Ciociola confirmed that "Vessel Operations, Inc. is a corporation in good standing in Maryland." Id. ¶ 4. Moreover, she stated that "`Patriot Lines and Security, LLC' was registered in 2007" with the State of Maryland as an LLC, and that "its status was forfeited in October, 2009." Id. ¶ 5. Notably, the date of the last invoice for which plaintiff claims non-payment was August 9, 2009 (due September 8, 2009)—before the forfeiture of Patriot Lines' LLC status. (ECF 11-3).
To be sure, Ms. Ciociola also alleged in the Second Affidavit that "Baltimore Line always understood—as confirmed by the Brophys['] conduct and the invoicing to the Brophys—that both `Vessel Operations' and `Patriot Lines' were merely `doing business as' names for the Brophys." 2d Aff. ¶ 6. But, she did not allege what "conduct" of the Brophys led Baltimore Line to that understanding, and, simply put, plaintiff's "understanding" does not make it so. To the contrary, the Second Affidavit made clear that the Brophys' businesses were not mere "d/b/a names," but were, at the relevant times, business entities in good standing with the State of Maryland.
As Judge Gauvey's Report explains, both corporations and LLCs are instrumentalities of business that afford significant protection from individual liability under Maryland law. See Md. Code (2006 Repl. Vol., 2009 Supp.), § 5-417 of the Courts & Judicial Proceedings Article (limitation of liability for directors of corporations); Md. Code (2007 Repl. Vol., 2009 Supp.), § 4A-301 of the Corporations & Associations Article (absent statutory exceptions, a member of an LLC is not "personally liable for the obligations of the limited liability company, whether arising in contract, tort or otherwise, solely by reason of being a member of the limited liability company"). Indeed, Maryland law "is in accord with the general rule that in the absence of statute except where fraud is involved a corporate officer is not personally liable on a corporate contract with a third person." A.B. Corp. v. Futrovsky, 259 Md. 65, 79, 267 A.2d 130, 137 (1970).
Only three contentions of the Complaint and supporting affidavits purport to provide a basis for the claim that Baltimore Line contracted with Ms. Brophy individually. All three contentions are insufficient, in my view. First, the Complaint contends that Patriot Lines was a "`doing business as' name of [the Brophys], and not a Maryland corporation in good standing." Complaint ¶ 4. But, as the Second Affidavit made clear, the two business entities the Brophys operated, Vessel Operations and Patriot Lines, were registered and in good standing with the State of Maryland at the relevant times.
Second, Ms. Ciociola averred in the First Affidavit, "[u]pon information and belief," that "`Patriot Lines' and `Vessel Operations' are merely alter egos of the Brophys." 1st Aff. ¶ 8. An allegation made "on information and belief" does "not serve as a reliable foundation upon which to predicate a final judgment." Oceanic Trading Corp. v. Vessel Diana, 423 F.2d 1, 4-5 (2d Cir. 1970) (vacating default judgment that was based on factual assertions made "on information and belief"); cf. Malina v. Baltimore Gas & Elec. Co., 18 F.Supp.2d 596, 604 n. 4 (D.Md.1998) (holding that affidavits based upon information and belief are insufficient to support or oppose summary judgment).
Finally, the Second Affidavit states that "Baltimore Line always dealt with one of the Brophys personally," and that "Baltimore
The larger problem, common to all of the foregoing contentions, is that none of them is "well-pleaded," as that term is understood after the Supreme Court's recent decisions in Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-57, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Although no opinion of the Fourth Circuit has yet applied the Iqbal/Twombly pleading standard in the context of default judgment, several recent unreported district court opinions, including two within this circuit, have found Iqbal relevant to the default judgment inquiry. See, e.g., Osprey Special Risks Ltd. v. Ocean Ins. Mgmt., Inc., No. 8:10-cv-862-T-30AEP, 2011 WL 32422, at *2 (M.D.Fla. Jan. 5, 2011) (Iqbal standard "applies equally to a motion for entry of default judgment"); Wynne v. Birach, No. 1:09cv15, 2009 WL 3672119, at *2 n. 6 (E.D.Va. Nov. 3, 2009) (default judgment standard is "similar to that applied to a motion to dismiss" under Iqbal); Bogopa Serv. Corp. v. Shulga, Civ. No. 3:08cv365, 2009 WL 1628881, at *1-2 (W.D.N.C. June 10, 2009) (opining that the standard for grant of default judgment "is the same" as the Iqbal standard, and rejecting claim for personal liability of corporate officer where complaint contained no "factual allegations as to what [officer] has done or on what basis he would be personally liable for ... corporate [service mark] infringement").
To the extent that Iqbal and Twombly are instructive in this case, plaintiff's allegations as to Ms. Brophy's individual liability fall below the pleading threshold those cases establish. Under Iqbal, a complaint fails to state a claim entitling the pleader to relief if the complaint offers only "`labels and conclusions'" or "`naked assertion[s]' devoid of `further factual enhancement.'" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555-57, 127 S.Ct. 1955). As the Fourth Circuit has recognized, "`the court need not accept the legal conclusions drawn from the facts, and [] need not accept as true unwarranted inferences, unreasonable conclusions, or arguments.'" Monroe v. City of Charlottesville, 579 F.3d 380, 385-86 (4th Cir.2009) (citation omitted); cert. denied, ___ U.S. ___, 130 S.Ct. 1740, 176 L.Ed.2d 214 (2010); accord Simmons v. United Mortg. & Loan Investment, LLC, 634 F.3d 754, 768 (4th Cir.2011). Indeed, "where the well-pleaded facts do not permit the court to infer more than the mere possibility of
Here, Baltimore Line's bare assertions that the business entities were "alter egos" of the Brophys, and that it "understood" that it was dealing with the Brophys personally, are simply opinions and conclusions masquerading as factual allegations. The record lacks any specific allegations of fact that "show" why those conclusions are warranted.
Moreover, the facts, as alleged, indicate that Baltimore Line was doing business with the corporate entities, and not with the Brophys as individuals. In particular, Baltimore Line's invoices were addressed primarily to the business entities; in its Memorandum, plaintiff stated that the invoices were addressed to the business entities "per the Brophys' instructions"; and, on the occasions when Baltimore Line's invoices were paid, "the Brophys paid from an account in the name of `Patriot Line and Security Line LLC.'" Memorandum at 5.
Nishimatsu, supra, 515 F.2d 1200, a leading default judgment case, is factually similar to the case at bar. In Nishimatsu, two firms, South East Construction Company ("Secon") and Nishimatsu, made a contract for the provision of engineering studies. Id. at 1203. An individual named Jack Baize signed the contract on behalf of Secon. Id. Nishimatsu sued Baize individually for a breach of the contract, and obtained a default judgment against him. Id. The Fifth Circuit reversed. The appellate court observed that Baize had signed the contract by writing Secon's name, followed by "By: Jack D. Baize." Id. at 1205 (alterations omitted). According to the Fifth Circuit, the allegation of Nishimatsu's complaint that both Baize and Secon were parties to the contract was "contradicted and controlled by the contract showing that Baize signed only as an agent." Id. at 1206. Applying Texas law, the Nishimatsu Court reasoned that, "if an agent signs a contract for a disclosed principal, he does not intend to make himself a party to the instrument,"
Similarly, in Marshall v. Baggett, 616 F.3d 849 (8th Cir.2010), the Eighth Circuit reversed a default judgment entered against an individual, where, as in Nishimatsu, the individual defendant had executed the contract at issue in the name of the company, "by" the individual. Id. at 851. In that case, the plaintiffs styled their complaint as a suit against the defendant, "`Theresa Baggett d/b/a Baggett Masonry, Inc.,'" and alleged that "Ms. Baggett `is an individual and operates a construction company doing business in the State of Nebraska.'" Id. (quoting complaint). In reversing the default judgment, the appellate court explained that the plaintiffs'"use of the `d/b/a' styling in the caption of the complaint and the allegation that Ms. Baggett `is an individual and operates a construction company ...' do not equate to an allegation" that the company was a dissolved entity. Id. at 855. Rather, the record as to default judgment "demonstrate[d] that Ms. Baggett signed in an official capacity on behalf of the corporation," and therefore the plaintiffs were required to "counter that fact with a factual assertion as to why Ms.
In sum, the Eighth Circuit held, id. at 853-54:
To be sure, both Nishimatsu and Marshall involved written contracts. And, in each case, the particular contract made clear that the defendant had executed the document in a representative capacity. In contrast, this case concerns a series of oral agreements. However, as discussed, supra, the facts that are extant from the record, including Baltimore Line's awareness of the corporate names of the Brophys' businesses; its addressing of its invoices to those businesses, at the Brophys' instructions; and the Brophys' payment of invoices from a corporate account, are indicative of corporate, rather than personal, liability. Notably absent is any allegation by Baltimore Line of even a single statement made by either Ms. Brophy or her father that points to the opposite conclusion.
This case is also similar to Wolfe v. Lamar & Wallace, Inc., 261 Md. 174, 274 A.2d 121 (1971), albeit in a different procedural posture. In Wolfe, the Maryland Court of Appeals reversed a grant of summary judgment in favor of a plaintiff company seeking payment for construction materials it had supplied to the two defendants, individuals named Wolfe and Ginsburg. Id. at 175-76, 274 A.2d at 122. In opposition to the plaintiff's motion for summary judgment, the defendants had filed an affidavit, in which they averred that, at all relevant times, they "`did business as Wolfe-Ginsburg Const., Inc., a Maryland corporation'"; that the construction sites where the plaintiff delivered materials to the defendants "`were marked with a sign "Wolfe-Ginsburg Const., Inc.," which ... was located in a conspicuous place [and] was constructive notice that defendants were operating as a corporation and not as individuals and was further actual notice to the Plaintiff'"; and that partial payment for the materials the plaintiff had supplied had been made through a corporate account. Id. at 176-77, 274 A.2d at 122-23. The Court of Appeals held that these allegations established "a genuine dispute in respect of a fact which is not only material but which seems to go to the very heart of the matter": whether the defendants were personally liable for the debt at issue. Id. at 178, 274 A.2d at 123.
In Maryland, courts will disregard the corporate form only "`where it is necessary to prevent fraud or enforce a paramount equity.'" Starfish Condominium Ass'n v. Yorkridge Serv. Corp., 295 Md. 693, 714, 458 A.2d 805, 816 (1983) (quoting Bart Arconti & Sons v. Ames-Ennis, 275 Md. 295, 310, 340 A.2d 225, 234 (1975)). For the reasons stated at length in Judge Gauvey's Report, see Report at 6-17, plaintiff has not alleged facts at this juncture that are sufficient to justify piercing the veils of the business entities.
Accordingly, the Court will overrule plaintiff's Objections/Response (ECF 19), adopt Magistrate Judge Gauvey's Report and Recommendations (ECF 17), and deny, without prejudice, plaintiff's motion for entry of default judgment (ECF 11).
Baltimore Line filed its Sanctions Motion (ECF 21) on December 22, 2010. According to the Sanctions Motion and its accompanying exhibits, on November 26, 2010, Baltimore Line served on Ms. Brophy a notice and subpoena to attend, answer questions, and produce documents at a deposition to be held on Monday, December 20, 2010. Sanctions Motion at 2. On Friday, December 17, 2010, Ms. Brophy telephoned plaintiff's counsel to inquire whether the deposition could be postponed. Id. at 2-3. Plaintiff's attorney asked Ms. Brophy whether she was represented by counsel, and she gave the names of a "family attorney" and a "bankruptcy attorney." Id. at 3. Plaintiff's counsel contacted both attorneys, each of whom informed counsel that, although Ms. Brophy had consulted with them about the possibility of representation, she had not retained either attorney
On December 20, 2010, Ms. Brophy appeared at the deposition without an attorney and refused to answer any questions propounded by plaintiff's counsel. Id. Plaintiff's counsel informed Ms. Brophy that her refusal to answer would lead to a motion for sanctions and an order compelling her to answer. Id. After the deposition concluded, plaintiff's counsel contacted Ms. Brophy's family attorney, whom she had mentioned by name at the deposition, and confirmed that he had not been retained by Ms. Brophy. Id.; see also Tr. of Deposition at 4 (ECF 21, Ex. 3).
In its Sanctions Motion, plaintiff asks the Court to sanction Ms. Brophy by awarding plaintiff $182.50 in deposition transcription expenses and $750 in attorney's fees. Baltimore Line also requests that the Court order Ms. Brophy to attend a rescheduled deposition, "fully respond to each of Baltimore Lines' [sic] deposition questions," and produce all of the documents identified in Baltimore Line's subpoena.
Federal Rule of Civil Procedure 37(a) governs motions for discovery sanctions and orders compelling discovery. Under Rule 37(a)(3)(B)(i), such a motion is appropriate where a deponent fails to answer questions asked at a deposition. However, pursuant to Local Rule 104.4, "[u]nless otherwise ordered by the Court or agreed upon by the parties, ... discovery shall not commence and disclosures need not be made until a scheduling order is entered." To date, no scheduling order has been entered in this case. Therefore, Baltimore Line's attempt to depose Ms. Brophy was premature and in violation of the local rule. See, e.g., Madison v. Harford County, 268 F.R.D. 563, 565 (D.Md.2010); Kemp v. Harris, 263 F.R.D. 293, 294-95 (D.Md.2009); Brownscombe v. Dept. of Campus Parking, 203 F.Supp.2d 479, 485 (D.Md.2002).
Nevertheless, Ms. Brophy's conduct was also improper. The proper response to an improper deposition subpoena is not simply to refuse to answer. After first attempting in good faith to resolve the dispute without court action, see Local Rule 104.7, the named deponent has several options: she may file a motion for a protective order, see Fed R. Civ. P. 26(c); move to quash the subpoena, see Fed. R.Civ.P. 45(c)(3); or move to terminate or limit the deposition, see Fed.R.Civ.P. 30(d)(3). See Mezu v. Morgan State Univ., 269 F.R.D. 565, 581-85 (D.Md.2010) (discussing proper resolution of deposition disputes); Madison, 268 F.R.D. at 565 (explaining that proper response to a premature discovery request is to respond in the form of an objection or to move for a protective order). Defendant did none of the above.
In light of plaintiff's violation of Local Rule 104.4 in prematurely scheduling the original deposition, the Court will not assess attorney's fees against defendant for her refusal to answer. But, given defendant's improper conduct, the Court will assess the transcription costs to Ms. Brophy as a discovery sanction. See Fed. R.Civ.P. 37(a)(5)(C).
A separate Order and a Scheduling Order implementing the foregoing rulings follow.
For the reasons set forth in the accompanying Memorandum, it is this 2nd day of February, 2011, by the United States District Court for the District of Maryland, ORDERED, that:
SUSAN K. GAUVEY, United States Magistrate Judge.
By Order dated March 17, 2010, the Honorable William D. Quarles, Jr. referred this case to the undersigned for reviewing a default judgment and/or making recommendations concerning damages. Pursuant to the Order of Reference, the undersigned makes the following recommendations as to governing law and the pending motion.
Plaintiff Baltimore Line Handling Company ("Baltimore Lines") brought an admiralty claim against Ms. Shannon Brophy and her father Mr. Kevin Brophy ("the Brophys") under 28 U.S.C. § 1333. (Paper No. 1 ¶ 1). Plaintiff alleged that the Brophys failed to pay for vessel line handling services the parties contracted to have performed. (Id.). The Brophys were properly served but did not answer the complaint or otherwise participate in the ensuing litigation. Mr. Brophy has since passed away. (Paper No. 14 at 5). The Court entered default as to Shannon Brophy (Paper No. 8). Presently before the Court is plaintiff's motion for default judgment against Ms. Brophy. (Paper No. 11).
As discussed more fully below, in determining whether to grant default judgment, courts accept as true all well-pleaded factual allegations in plaintiff's complaint and any attached affidavits except those pertaining to damages. See, e.g., Monge v. Portofino Ristorante, 751 F.Supp.2d 789, 794 (D.Md.2010).
Since at least 2006, the Brophys were sole shareholders of Vessel Operations, Inc. and, later, Patriot Lines and Security, LLC, which managed terminal operations at Piney Point, Maryland. (Paper No. 1 ¶ 4). Vessel Operations, Inc. is a registered Maryland corporation in good standing. (Paper No. 14, Ex. B ¶ 4). Patriot Line and Security, LLC is a registered entity forfeited by the State of Maryland in October 2009 "for failure to file property return for 2008." (Paper No. 14, Ex. C). During the parties' course of dealings, the Brophys, "doing business as" their corporate entities, would
(Id. ¶ 5). Vessel Operations, Inc. and Patriot Lines and Security, LLC would, in turn, charge their customers for the cost of services provided by plaintiff. But these charges were not remitted to plaintiff. (Id. ¶ 6).
Plaintiff regularly generated invoices for the services it provided. These were addressed to "Vessel Operations ATT. Kevin Brophy" or "Patriot Lines ATT. Shannon Brophy." (Paper No. 13, attachment 2 at 1-8). However, as is custom in the line-handling industry, the contracts were oral. (Paper No. 14 at 2). Throughout their course of dealings, plaintiff believed that it was contracting with the individual Brophys "doing business as" their corporate entities, (Paper No. 1 ¶ 3; Paper No. 13 at 1; Paper No. 14, Ex. B ¶ 6). And, the oral contracts between the parties, "based on Baltimore Line's understanding, committed the Brophys to the agreements' terms." (Paper No. 14 at 2).
"An allegation—other than one relating to the amount of damages—is admitted if a responsive pleading is required and the allegation is not denied." F.R. CIV. P. 8(b)(6). Thus, in reviewing motions for default judgment, courts "accept[] as true the factual allegations in [] complaint[s] as to liability." Agora Fin., LLC v. Samler, 725 F.Supp.2d 491, 494 (D.Md. 2010) (citing Ryan v. Homecomings Fin. Network, 253 F.3d 778, 780-81 (4th Cir. 2001)). However, defendant's failure to participate in the litigation does not require the Court to accept plaintiff's legal conclusions. Cragin v. Lovell, 109 U.S. 194, 199, 3 S.Ct. 132, 27 L.Ed. 903 (1883) (holding that "a mere conclusion of law ... is not admitted by demurrer or default"). Moreover, "[i]t ... remains for the court to determine whether these unchallenged factual allegations constitute a legitimate cause of action." Id. (citing Ryan, supra; 10A Wright, Miller & Kane, Federal Practice and Procedure § 2688 (3d ed. Supp. 2010) ("[L]iability is not deemed established simply because of the default ... and the court, in its discretion, may require some proof of the facts that must be
In support of its motion for default judgment, plaintiff urges this Court to ignore the corporate entities' shields of limited liability by rendering a novel interpretation of the Maryland statute governing the liability of individual LLC members. (Id. at 3). Alternatively, plaintiff contends that, even if limited liability does apply, this Court should exercise its equity power to pierce the corporate veil of Vessel Operations, Inc. and Patriot Lines and Security, LLC. (Id. at 3-8). The Court declines to recommend either.
Maryland statutory law provides that an LLC member is not "personally liable for the obligations of the limited liability company, whether arising in contract, tort, or otherwise, solely by reason of being a member." Md. Code Ann., Corporations and Ass'ns, § 4A-301. State courts however, have held that LLC members may be held personally liable in certain circumstances. See Allen v. Dackman, 413 Md. 132, 991 A.2d 1216 (2010) (agreeing with other jurisdictions that, like corporate officers, LLC members may be held liable for torts they personally commit, inspire, or participate in through their partnerships). Pointing to judicial interpretations of similar statutes enacted by other states, the Allen court reasoned that the use of the term "solely" in the Maryland statute suggests that limited liability may not apply when an LLC member has been personally implicated in a tort involving the partnership. Id. at 1229.
Plaintiff urges the Court to extend the holding of Allen such that "LLC members [are] also [] held personally liable when they are party to a contract." (Paper No. 14 at 3). While tortious conduct and contractual breaches are analogous in some ways, two major arguments weigh against making such an extension.
First, the Allen decision was rendered by Maryland's highest court interpreting a Maryland statute. This Court is reluctant to adopt a novel interpretation of a state statute with wide-ranging implications for the personal liability of LLC members across the state. Second, and perhaps more importantly, Allen involved an alleged violation by defendant LLC members of the Baltimore City Housing Code. Allen, 413 Md. at 136-137, 991 A.2d at 1218. The Allen court, therefore, drew additional authority from a provision of the Code which provided that "[w]henever a corporation shall violate any provision of this Code, such violation shall be deemed to be also that of the individual directors, officers, or agents of such corporation who shall have authorized, ordered, or done any of the acts." Id. In this case, there is no similar supplemental authority to suggest that any Maryland lawmaking body intended for LLC members to be personally liable for contractual breaches in general or specifically with respect to the marine line handling business.
Therefore, this Court cannot ignore the limited liability shields of defendant's corporate entities in order to allow plaintiff to recover damages from defendant.
Plaintiff argues that if, as this Court has found, "Brophy were somehow entitled to the limited liability protection afforded to corporate officers ... this Court should nevertheless pierce the corporate veil and hold Brophy personally liable." (Paper No. 14 at 4). To support this line of reasoning, plaintiff relies on its president's affidavit to the effect that
(Paper No. 14, Ex. B at 2). Plaintiff argues that the affidavit "paints a picture of Vessel Operations and Patriot Lines as closely-held companies with two known owner-employees: Kevin Brophy (now deceased) and Shannon Brophy" and "indicates that both companies were merely `doing business as' names for the Brophys, not actual corporate entities existing independently from the Brophys' personal endeavors." (Paper No. 14 at 5). While assuming as true plaintiff's allegations as to its state of mind when dealing with the Brophys, the Court notes that the invoices generated by plaintiff were addressed directly to the corporate entities, with the shareholder names listed under the corporate names. (Paper No. 13, attachment 2 at 1-8). This suggests that plaintiff was aware of the corporate forms during the parties' course of dealings.
Moreover, it does not necessarily follow from the statements in the affidavit and plaintiff's well-pleaded allegations in its complaint that "the Brophys were parties to the agreements," or that, therefore, "they are personally liable for the debts incurred." (Paper No. 14 at 6). Assuming that the corporate entities under the Brophys' control were nothing but mere facades or "alter egos" does not automatically empower this Court to pierce the corporate veil. When a person or entity exercises such extensive control over a corporate entity so as to make the latter a mere instrumentality of the former, courts have the power to disregard the corporate fiction to deal with the underlying reality by applying the so-called "alter ego" doctrine. Dixon v. Process Corporation, 38 Md.App. at 653, 382 A.2d at 898-899 (1978). But "whether a court is to equitably exercise the `alter ego' doctrine as to a particular entity must be determined in accordance with the law of the forum state." Wilshire Credit Corp. v. Karlin, 988 F.Supp. 570, 574 (D.Md.1997) (citations omitted).
In Maryland, a corporation and its stockholders—or even a single stockholder—are wholly separate entities. Their liabilities are thus also separate. DeWitt Truck Brokers, Inc. v. W. Ray Flemming Co., 540 F.2d 681, 683 (4th Cir.1976). The fiction of the wholly separate corporate form is jealously guarded by courts in Maryland, where, as a matter of public policy, the "[p]ower to pierce the corporate veil is to be exercised `reluctantly' and `cautiously.'" Id. (quoting Pardo v. Wilson Line of Washington, Inc., 414 F.2d 1145, 1149 (C.A.D.C.1969); Country Maid, Inc. v. Haseotes, 299 F.Supp. 633, 637 (E.D.Pa.1969)).
Under Maryland law, a court may pierce the corporate veil only to prevent fraud or enforce a paramount equity. See, e.g., Bart Arconti & Sons, Inc. v. Ames-Ennis, Inc., 275 Md. 295, 310, 340 A.2d 225, 234 (1975); Starfish Condominium Ass'n v. Yorkridge Service Corp., Inc., 295 Md. 693, 458 A.2d 805 (1983); Residential Warranty Corp. v. Bancroft Homes Greenspring Valley, Inc., 126 Md.App. 294, 728 A.2d 783 (1999); Dixon v. The Process Corp., 38 Md.App. 644, 656, 382 A.2d 893, 900 (1978) ("We make it clear that the rule of law in this State is that no matter how flimsily woven is the corporate curtain, it may not be flung aside except to prevent fraud or endorse [enforce] a paramount equity.") (citing Bart Arconti, supra). The alter ego doctrine, then, is not a separate basis for piercing the veil, but is rather subsumed "in the notion of paramount
Courts have described as "herculean" the challenge facing a party seeking to pierce the corporate veil on these grounds. Dixon, 38 Md.App. at 645, 382 A.2d at 894 (1978) (stating that since "[a] commercial corporation is a legal entity conceived by the mind of man and legitimated by statute for the avowed purpose of achieving maximum profit with a minimum exposure to liability[, ...] woe onto the creditor who seeks to rip away the corporate fagade"); see also Residential Warranty Corp., 126 Md.App. at 309, 728 A.2d at 790-791 (noting that "Maryland is more restrictive than other jurisdictions in allowing a plaintiff to pierce a corporation's veil").
Maryland courts require parties seeking to pierce the corporate veil by alleging fraud to meet a higher standard and make a more vigorous factual showing than do other jurisdictions. Plaintiffs alleging fraud cannot rely on a preponderance of the evidence but must rather "present[] clear and convincing evidence." Residential Warranty Corp., 126 Md.App. at 308, 728 A.2d at 790 (citing Dixon, 38 Md.App. at 656, 382 A.2d at 900 (concluding that "the law of Maryland mandates that proof of fraud in a civil action, either in law or in equity, must be clear and convincing") (citations and internal quotation marks omitted)); see also Starfish Condominium, 295 Md. at 714, 458 A.2d at 805 (requiring "the one charging fraud to establish by clear, specific facts, acts that in law constitute fraud"). To find that the corporate cloak has been used to perpetuate fraud, Maryland courts have looked for "deliberate intention and purpose of cheating and defrauding ... the other party to the contract" on the part of corporate officers. Colandrea v. Colandrea, 42 Md.App. 421, 432, 401 A.2d 480, 486 (1979).
Colandrea is instructive as to the specific acts and degree of fraudulent intent Maryland courts require to pierce the corporate veil. There, a husband and former shareholder in a corporation brought suit against the corporation, his ex-wife (the remaining shareholder), and her newly formed corporate entities in order to enforce payment of certain promissory notes made to him in the name of the marital corporation. Id. at 422, 401 A.2d at 481. In allowing the ex-husband to pierce the corporate veil, the Court of Special Appeals found clear and convincing evidence of fraudulent intent in the record, which showed that the ex-wife fraudulently conveyed the assets of the former, marital corporation—all while profiting from its established business under the auspices of her newly formed entities. Id. at 425, 401 A.2d at 483. These "corporate machinations," the Colandrea court concluded, were designed to accomplish but one goal: to allow the ex-wife to "continue the profitable business of [the marital corporation] without its attendant obligations to [her ex-husband]." Id.
Arconti, the decision plaintiff relies on for piercing the corporate veil, shows Maryland courts' strong reluctance to do so except in the most obvious cases of fraud. There, the record showed that, in order to avoid certain contractual obligations, defendant officers controlling three corporations had deliberately used two of their entities "to keep the ... business of [the third entity] but without leaving any real asset [of the third entity] in that corporation." 275 Md. at 309, 340 A.2d at 233. Nevertheless, the Court of Appeals reversed the lower court decision to pierce the corporate veil, finding no Maryland
Here, plaintiff argues that piercing the veil is appropriate to prevent alleged fraud perpetuated by defendant using corporate entities under her complete control. (Paper No. 14 at 6). Specifically, plaintiff points to the forfeiture of Patriot Lines' Maryland corporate status (Paper No. 14, Ex. C) not long after plaintiff submitted its final invoice. (Id.). Plaintiff argues that defendant's failure to renew her LLC's corporate status reflected her "fraudulent intention[ ] ... to shield herself from personal liability for the debts Patriot Lines incurred while it was an active Maryland corporation." (Id.). But while it certainly could suggest that defendant was using the corporate entities under her control to evade her legal and contractual obligations, this sequence of events, on its own, does not add up to a clear and convincing case of fraud. Mere evasion of a legal or contractual obligation is not tantamount to fraud. See Arconti, supra. Accepting as true all of plaintiff's factual allegations and all affidavit statements, the Court finds that plaintiff has not made out a clear and convincing case of misrepresentation, as did the plaintiff in Colandrea. Nor do plaintiff's well-pleaded allegations and affidavit statements support a clear and convincing finding of a "deliberate intention" on defendant's part of cheating or defrauding plaintiff. Therefore, the undersigned declines to recommend exercise of the Court's discretionary power to pierce the corporate veil on the basis of fraud.
The Maryland Court of Appeals has expressly declared that the corporate veil shall be pierced when necessary to enforce a paramount equity. Arconti, 275 Md. at 310, 340 A.2d at 234. However, it has yet to do so. Residential Warranty Corp., 126 Md.App. at 307, 728 A.2d at 789 ("Despite the proclamation that a court may pierce the corporate veil to enforce a paramount equity, arguments that have urged a piercing of the veil for reasons other than fraud have failed in Maryland Courts.") (citing Travel Committee, Inc. v. Pan American World Airways, Inc., 91 Md.App. 123, 156, 603 A.2d 1301, 1317 (1992)). Indeed, the Maryland Court of Appeals has yet to define what constitutes a paramount equity or to identify one which outweighs the public policy interest in limited corporate liability. Travel Committee, 91 Md.App. at 158, 603 A.2d at 1318 ("Notwithstanding its hint that enforcing a paramount equity might suffice as a reason for piercing the corporate veil, the Court of Appeals to date has not elaborated upon the meaning of this phrase or applied it in any case of which we are aware."); see also Michael Epperson & Joan M. Canny, The Capital Shareholder's Ultimate Calamity: Pierced Corporate Veils and Shareholder Liability in the District of Columbia, Maryland, and Virginia, 37 Cath. U.L. Rev. 605, 621 (1988) (noting that "[i]n practice, ... [Maryland] courts simply have not found an equitable interest more important than the state's interest in limited shareholder liability").
Maryland courts "accord the corporate form an extraordinary measure of deference." 37 Cath. U.L. Rev. at 621. This explains why the Court of Appeals, for example, refused—in the absence of clear and convincing showing of fraud—to pierce the corporate veil of a federal savings and loan association to hold it liable for a subsidiary's sale of residential units in clear violation of certain statutory warranties. Starfish Condominium, 295 Md. 693, 458 A.2d 805. Whatever equities weighed in favor of piercing the veil in Starfish did not exceed those "ordinary to expectation
Hildreth is also indicative of the Maryland Court of Appeal's unwillingness to find the requisite paramount equity. There, a Maryland construction equipment lessor brought suit to enforce the terms of the lease against the sole shareholder of the lessee, a New Jersey corporation unregistered in Maryland but operating under a name identical to that used by a registered Maryland corporation. Hildreth, 378 Md. at 728-29, 838 A.2d at 1206-07. The lessor sought to hold the defendant shareholder individually liable since, during the parties' negotiations, he "neither said nor was asked where [his] company was incorporated." Id. at 729, 838 A.2d at 1207. The Maryland Court of Appeals however, ruled that the shareholder could not be held personally liable, even though, as the courts below had found, he was the sole shareholder; he "was `personally involved' in the business transaction"; he continued to do business in Maryland under a name he knew to be registered by a domestic corporation; his doing so was contrary to public policy; and his actions suggested a clear intent to evade legal obligations. Id. at 733-34, 838 A.2d at 1209. Absent a showing of fraud, "those circumstances, individually or in combination, [did] not suffice" to invoke a paramount equity. Id. at 734, 838 A.2d at 1209.
Here, relying on its president's affidavit, plaintiff alleges that "stock ownership [in Patriot Lines and Vessel Operations] was restricted to the Brophys and that the two companies existed as a `facade for the [Brophys'] operations.'" (Paper No. 14 at 5). But even assuming that not a single corporate formality was adhered to may not be enough to create a paramount equity favoring plaintiff. See 37 CATH. U.L. REV. at 621 (concluding that, in Maryland, "neither an utter disregard for corporate formalities nor the use of the corporate form by an individual as a shield from liability will lead to piercing the corporate veil unless accompanied by actual common law fraud"). Plaintiff urges the Court to pierce the corporate veil since "it is extremely unlikely that [it] can recover from either corporate entity." It also argues that "it is extremely likely that plaintiff will never receive payment for the services it performed—a paramount inequity." (Paper No. 14 at 7). But as the Arconti, Hildreth, Starfish, and Dixon line of cases shows, Maryland courts would be highly unlikely to find a paramount inequity in one business's inability to recover damages in a contractual dispute with another. Plaintiff thus finds itself in an unenviable position, but the inequities it has suffered do not rise above those "ordinary to an expectation of limited liability." See Starfish, supra. Therefore, the undersigned declines to recommend a finding of paramount equity and a piercing of the corporate veil on this ground.
While this result may seem harsh and manifestly unfair, the governing law compels it. Thus in light of the foregoing, the undersigned recommends that the plaintiff's motion for default judgment be denied.
Date: 10/4/10
