Kreter v. HealthStar Communications, Inc. (Ct. of Special Appeals)

Decided January 2, 2007-Opinion by Judge Sally D. Adkins.

This case deals with the validity and enforceability of an indemnification agreement indemnifying an indemnitee against its own fraud. Under existing Maryland law, there is a presumption against enforcement of an agreement to indemnify a person against his own negligence unless the intent to do so is expressed in unequivocal terms (the "Presumption"). In this case, the Court, after examining the history and rationales for the Presumption, held that it was inapplicable to the indemnification agreement which is the subject of this decision.

The relevant facts are as follows: Kreter was an officer, director, and controlling stockholder of two closely-held corporations, and her husband was an officer, director, and minority stockholder of the corporations. Several months after Kreter and her husband separated, she fired him, and several months later she began negotiating the sale of all of the stock in the two corporations to HealthStar.

Kreter, her estranged husband, and several other minority stockholders ultimately approved the sale of the stock to HealthStar for $20,000,000, but unbeknownst to Kreter's husband and the other minority stockholders, Kreter had entered into a separate employment contract pursuant to which HealthStar agreed to pay Kreter an additional $1,000,000.

Foreseeing the possibility that Kreter's husband might sue, Kreter and HealthStar entered into an agreement pursuant to which Kreter agreed to indemnify HealthStar for any damages or costs, including defense costs, arising out of any such lawsuit.

Kreter's husband sued both Kreter and HealthStar for fraud, but his claim against Kreter was held to be barred under the doctrine of res judicata due to the judgment entered in their divorce. He ultimately prevailed in his claim against HealthStar, which then sought to recover its damages and attorney's fees from Kreter. When Kreter refused to honor her obligations under the indemnity agreement, HealthStar commenced an action seeking a declaratory judgment that the agreement was valid and enforceable.

The circuit court ruled that the agreement was valid and enforceable, and Kreter appealed.

In affirming the circuit court's decision, the Court of Special Appeals examined the history and rationale for the Presumption. One rationale for the Presumption is that it is designed to protect the "unwary and uninformed promissor." A second rationale is to avoid encouraging indemnitees to engage in negligent conduct.

The Court rejected the first rationale not only because Kreter was a sophisticated businessperson, but also because she was represented by counsel. The Court rejected the second rationale, because, unlike the typical exculpatory agreement which is designed to protect a party against its future wrongful conduct, the wrongful conduct had already occurred, therefore enforcement of the agreement would not tend to encourage wrongful conduct.

The full opinion is available in WordPerfect and PDF.

Max's of Camden Yards, LLC v. A.C. Beverage (Ct. of Special Appeals)

Decided December 26, 2006 -- Opinion by Judge James R. Eyler.

Plaintiff in underlying case (Burger) brought suit for injuries he sustained when he drank beer that had been drawn through "tainted" lines at a bar. The plaintiff sued the party responsible for maintaining the lines (A.C. Beverage) and the owner of the bar (Max's). A.C. Beverage settled the case, and obtained a release for both Max's and itself. Nevertheless, Max's subsequently brought suit against A.C. Beverage seeking indemnification for the legal fees and other costs it had expended in defending the suit brought by Burger as well as in bringing the instant suit. Finally, Max's sought a declaratory judgment that A.C. Beverage would be responsible for any other injuries suffered by other patrons as a result of the tainted beer lines.

Held: Maryland recognizes the distinction between "active" and "passive" negligence. A party liable for "active" negligence cannot obtain tort indemnification regardless of whether the other party was also guilty of "active" negligence.

Maryland does recognize that, when an innocent party is forced into litigation with a third party by the wrongful conduct of another, the innocent party can recover fees and costs incurred in defending itself from the culpable party.

Despite general rule to the contrary, it is "highly doubtful" whether, and if so to what extent, Maryland would allow fees and costs as part of an indemnification claim based on the "active-passive" distinction. Generally, an alleged tortfeasor has no duty to defend another alleged tortfeasor.

Even assuming Maryland would allow costs and fees as compensable element under indemnity action based on "active-passive" distinction, they are not compensable under the facts of this case. When the implied indemnity claim is for counsel fees and costs, fees are unrecoverable when the tort plaintiff’s complaint alleged primary or active negligence, in whole or in part, against the alleged tortfeasor seeking indemnity, and the underlying case was dismissed prior to any factual findings.

Note: The Court explicitly confined its decision to the facts in this case and declined to issue any "general" rules. Thus, this decision is strictly limited to the facts of this case. For example, the outcome might have been different if the case had been tried and there were a finding of fact that Max's was only passively negligent.

The Court also declined to award the fees and costs of the present action. This would have been true even if the Court had allowed fees and expenses in the underlying case.

Finally, the Court determined that the request for declaratory judgment as to future actions did not present an actual and justiciable case in controversy. "One thing is clear, however: 'In a declaratory judgment proceeding, the court will not decide future rights in anticipation of an event which may never happen, but will wait until the event actually takes place, unless special circumstances appear which warrant an immediate decision.'"

This case is available in WPD and PDF formats.