COVID-19 pandemic presents issues of contract interpretation—how have Maryland appellate courts recently handled those issues?

By Brad McCullough

The COVID-19 pandemic has affected every facet of our lives and has raised many legal issues. Every day, lawyers’ e-mail inboxes are bombarded with messages touting webinars and publications addressing those issues. Does your insurance policy cover business disruption caused by the pandemic? Does the pandemic implicate the force majeure provision in a contract? Is a party’s performance of a contract excused by principles of impossibility, impracticability, or frustration of purpose? Those are hot legal issues at the moment, but ultimately those issues will be resolved by application of fundamental legal principles. Foremost among those principles are rules of contract interpretation. Whether a particular force majeure provision in a contract covers pandemics, or whether a specific insurance policy covers losses arising from a disruption of business caused by the pandemic, are questions that will be answered by interpreting the specific contractual provisions in play. Similarly, whether the purpose of a contract has been frustrated, or its performance made impossible, will hinge on the intent and expectations of the parties, as reflected by the terms of their contract. How do Maryland’s appellate courts address those issues? Two recent decisions, one by the Court of Appeals and another by the Court of Special appeals, provide some insight.

Late last year, the Court of Appeals decided a case I discussed in a January 23, 2020 post, “Choosing the appropriate standard of review, defining ambiguity, and interpreting a promissory—Credible Behavioral Health, Inc. v. Johnson, 466 Md. 380 (2019).” In Credible Behavioral Health, the Court reminded that unambiguous contracts must be interpreted objectively, based on what a reasonable person would think the contractual language means, not subjectively, based on what a contracting party might later claim to have been its actual subjective intent. In ascertaining that objective intent, courts consider the contract’s plain language in context, taking into account the contract’s entire text, its character and purpose, the parties’ circumstances when they executed the contract, and the language’s ordinary and accepted meaning. 466 Md. at 394. The Court urged a “common sense approach to contract interpretation,” explaining that language in a contract is ambiguous only if it is susceptible of more than one reasonable interpretation Id. at 399. The Court drove home the need to read a contract in a common-sense manner, giving purpose to all its provisions, and reading those provisions harmoniously. Consequently, the Court rejected an effort to review one provision out of context, and in a manner that ignored the plain language of the contract’s other provision, all in an effort to create an ambiguity where one truly and reasonably did not exist.[1]

Four and a half months later, the Court of Special Appeals quoted Credible Behavioral Health, 466 Md. at 397, in rejecting a reading of a contractual provision that would “jettison” the substance of that provision. Impac Mtg. Holdings, Inc. v. Timm, No. 2119, Sept. Term, 2018, 2020 WL 1550710, *14 (Md. Ct. Spec. App. April 1, 2020) (internal quotation marks omitted). Writing for the Court, Judge Douglas Nazarian summarized the crux of the case: “This complex litigation turns on the meaning of one complex sentence.” Id. at *1. That complex litigation arose from a real estate investment trust’s attempt to amend Supplementary Articles to its charter. Those Supplementary Articles had created “Series B” and “Series C” classes of preferred stock. The pivotal sentence in the Series B Articles provided:

So long as any shares of Series B Preferred Stock remain outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of the Series B Preferred Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting (voting separately as a class with all series of Parity Preferred that the Corporation may issue upon which like voting rights have been conferred and are exercisable), … (ii) amend, alter or repeal any of the provisions of the Charter, so as to materially and adversely affect any preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, or terms or conditions of redemption of the Series B Preferred Stock or the holders thereof ….

Id. at *12 (emphasis supplied by the Court). The Series C Articles have a counterpart provision that “is identical except that it substitutes Series C for Series B in each relevant spot.” Id. at *2, n. 2.

When the vote was held, “just over two-thirds of the Series B and Series C stockholders, collectively” approved the amendment. Id. at *1. “But the two-thirds threshold wasn’t met for each class on its own—just under two-thirds of the Class B shareholders” approved the amendment. Id. The REIT thought the amendments were approved and filed the amendments with the SEC. Disgruntled Class B shareholders thought otherwise and made their own filing: a six-count class action complaint in the Circuit Court for Baltimore City. The core of that case was Count I, where the plaintiffs alleged that the REIT “breached the Series B Articles by amending them without the consent of two-thirds of Series B shareholders.” Id. at *2. The plaintiffs “asserted that the voting rights provision in the Articles required a two-thirds vote of each class counted separately.” Id. The REIT argued that the votes of the two classes of shareholders should be counted collectively.

The interplay between the italicized clause and underlined parenthetical clause in the disputed provision lies at the heart of the controversy. The circuit court found the provision susceptible of more than one interpretation and thus ambiguous, noting that “Defendants urge a reading of section 6(d) under which the parenthetical class voting provision modifies the requirement for a minimum of two-thirds of the Preferred B shares. Under this reading, the Articles Supplementary could be understood to require a vote of two-thirds of the entire class.” Id. at *13. The court noted that “the language of section 6(d) can also be reasonably interpreted to require approval specifically by two-thirds of each class, regardless of the class voting requirement.” Id. Later in the proceedings, the circuit court re-iterated its view that the provision “is ambiguous because of the conflict between the first clause and the later parenthetical.” Id. While the “first clause expressly requires the consent of two-thirds of the holders of Series B shares,” the parenthetical clause “apparently qualifies the first phrase by stating that the Series B shares vote together with other party shares as a class.” Id. at 14. The circuit court then reviewed extrinsic evidence regarding the parties’ intent, “but found it did not resolve the ambiguity, and ultimately resorted to the rule of construction that resolves ambiguities against the drafter of the contract, contra proferentem.” Id. (citation omitted). Thus, the circuit court ultimately sided with the plaintiffs, and “construed the language to mean that the consent of two-thirds of the Series B Preferred Stock was required to affect an amendment to the charter provisions for that class of stock.” Id.

The Court of Special Appeals agreed with that result, but not the analysis that led to it, deciding, “as a threshold matter, that the circuit court erred as a matter of law in finding the language of the voting-rights provision ambiguous.” Id. at *8. The Court found the language “unambiguous, and that its unambiguous meaning compelled summary judgment in favor of [the plaintiffs] on Count I.” Id. In reaching that conclusion, the Court did not “see the conflict between the first and second clauses.” Id. at *14. The Court said that written words in a contract “must be accorded their customary, ordinary, and accepted meaning.” Id. (internal quotation marks omitted) (citation omitted). And the language in the first clause is unambiguous. It “means that [the REIT] can’t take the actions that follow without the vote or consent . . . of the Class B shareholders.” Id. Indeed, the wording of that clause “precludes any conclusion that a vote garnering fewer than two-thirds of the Class B shares can succeed.” As the Court pointed out, the plaintiffs, the defendants, “and the circuit court all seem to agree with this analysis as well.” Id.

The dispute arose from “the second clause and its interaction with the first.” Id. The Court said that the second clause “means unambiguously that the Class B shareholders vote separately as a class with all of the other series of preferred stock.” Id. The Court further explained:

Yes, the parenthetical as a whole—“voting separately as a class with all series of Parity Preferred that the Corporation may issue upon which like voting rights have been conferred and are exercisable”—indicates that all of the classes will vote at the same time. But nothing in that language even purports to pool the Class B votes with the Class C votes, or anyone else’s, in determining whether the class has consented to the amendments. If anything, the reference to the Class Bs “voting separately as a class” only bolsters the first clause in requiring a two-thirds vote of just the Class B shares. And to us, that ends the inquiry. Any other reading would “jettison[ ]” the substance of the provision. Credible Behavioral Health, Inc. v. Johnson, 466 Md. 380, 397, 220 A.3d 303 (2019) (observing that “contract interpretation requires that effect be given to each clause to avoid an interpretation which casts out or disregards a meaningful part of the language of the writing unless no other course can be sensibly and reasonably followed”) (cleaned up).

Id. (emphasis added).

Reading the plain language of the provisions in context, and reading the provisions in harmony with each other, led the Court to conclude there was no ambiguity. “The Articles certainly could have been drafted more artfully, but they mean what they say: Series B and C shareholders vote, by class, at the same time, and their votes on proposed amendments are counted separately.” Id. at *15. Thus, the Court reached “the same conclusion as the circuit court, albeit by a different path.” Id.

There are a number of key points to be taken away from the decisions in Credible Behavioral Health and Impac. First, provisions in a contract must be read harmoniously, giving effect to each part. Second, a contract must be read in way that is consistent with its purpose and context. Third, it must be read in a common-sense manner. And finally, a court will not interpret a contract in a way that ignores or “jettisons” a pivotal provision that is itself unambiguous. In short, where a pivotal provision of a contract is clear on its face, courts will not countenance a forced interpretation of another arguably ambiguous provision of that contract in an effort to create an ambiguity where one doesn’t truly and reasonably exist.

 

 

[1] Credible Behavioral Health had a tuition loan program for its employees, and the repayment obligation was governed by how long an employee stayed employed by the company after finishing his or her education. For example, if the employee stayed with the company for more than three years after receiving a degree, the employee owed the company nothing. Credible Behavioral Health loaned Johnson money for tuition, but fired him before he earned a degree. Johnson argued that the promissory note for the loan required repayment only if the employee quit his or her job, while the company argued that the note, read as a whole, showed that the parties intended the loan to be repaid if employment terminated within the relevant time period—regardless of whether an employee was fired or quit. The Court of Appeals agreed with the company, holding that its interpretation was “the only reasonable interpretation of the two competing interpretations advanced.” 466 Md. at 399. That interpretation fulfilled the Court’s “common sense approach to contract interpretation,” and harmonized the various provisions of the promissory note in a manner consistent with the context of the note “and the underlying intent of the parties.” Id.

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