eNotes: Liability – December 2023 – Maryland

SIGNIFICANT CASE SUMMARIES

Maryland Case Summary

Baltimore Cotton Duck, LLC v. Ins. Comm’r of the State of Md.
Maryland Appellate Court
No. 951, September Term, 2022.

Decided: October 25, 2023

The Appellate Court of Maryland holds that Baltimore Cotton Duck had not entered into the amendment of the lease under duress and that the authority granted by the Maryland Insurance Code to rehabilitators to revoke or cancel contracts is constitutional. The Court also affirmed Lower Court’s decision that Baltimore Cotton Duck was required to repay Evergreen’s security deposit and to pay $8,000 for furniture Evergreen left on the premises.

Background

This appeal arose out of delinquency proceedings in the Circuit Court of Baltimore City, filed by the Maryland Insurance Administration against Evergreen Health, Inc. Evergreen, while still in business, leased a commercial space from Baltimore Cotton Duck (“BCD”). Originally, Evergreen was paying approximately $40,000 a month in rent to BCD and occupying two of BCD’s buildings on the property. On July 31, 2017, the Insurance Commissioner applied to the Circuit Court of Baltimore City for an Order appointing Risk & Regulatory Consulting, LLC (“RRC”) as the receiver for Evergreen. This request was granted and an Order of Rehabilitation by Consent was issued by the Circuit Court that same day. Notices of the Rehabilitation Order were sent to all creditors, including BCD. On September 1, 2017, the Circuit Court issued an Order authorizing liquidation of Evergreen.

RRC reached out to BCD in September 2017, to amend the lease in light of the liquidation proceedings and RRC’s power under the Rehabilitation Order to revoke or modify any contracts to which Evergreen was a party. Both parties agreed to amend the lease which reduced Evergreen’s rent to $10,000 per month for three months and then $5,000 per month. In December of 2019, BCD wrote the Circuit Court that Evergreen owed BCD $1,700,000 in back rent and that amendment of the lease was made under economic duress, that RRC did not receive proper notice, and that RRC’s powers under the Rehabilitation Order were unconstitutional. An evidentiary hearing was held and on July 16, 2022, the Circuit Court issued an Order which stated that the insurance receivership statute was constitutional, that no duress occurred, that BCD received proper notice, and that BCD owed RRC both the security deposit and the furniture cost.

Holding

The Appellate Court of Maryland affirmed. The Appellate Court held that BCD had actual notice of the delinquency proceedings and had received the Rehabilitation Order the day after it was issued. The amendment to the lease was held to have given sufficient consideration as the alternative for BCD was to receive no rent at all. The Court found no sign of economic duress as BCD drafted the amended lease themselves and admitted in the hearing to having made a business decision to get something instead of nothing. The Court also held that the authority of receivers (such as RRC) to disavow or amend existing contracts for impaired insurers is constitutional, as it serves to protect the interest of policyholders and the general public.

Questions about this case can be directed to Lucas Duty at (443)-641-0572 or lduty@tthlaw.com.