Recent Court Decision Finds that Directors of a Maryland Corporation can be Sued in Maryland, with no other Connections to the State

Date: May 30, 2012

TAKE AWAY:  A recent case may cause people to think twice before agreeing to serve on the board of a Maryland corporation. 

DISCUSSION:  In Oliver v. Crump, No. ELH-11-1925 (D. Md. Sept. 15, 2011), the U.S. District Court for the District of Maryland  ruled that the directors of a Maryland corporation could be sued in a Maryland court, based solely on their serving as directors of a corporation domiciled in the State. Arguably, the opinion could apply to the directors of non-profit entities domiciled in Maryland, who, like the directors of a for-profit corporation, assume fiduciary obligations to an organization by accepting a position on its board of directors. Furthermore, if the Oliver court’s reasoning is adopted by courts in other jurisdictions, directors of organizations incorporated elsewhere -- Washington, D.C., for instance -- could be sued in that jurisdiction, without having any connection to that forum, other than serving on the board of an entity incorporated there. 

In Oliver, the plaintiffs -- shareholders of the Maryland corporation for which the defendants served as directors -- sued the directors, essentially claiming that they breached their fiduciary duties to the company. The directors, who at all relevant times were residents of Delaware, argued that it was unfair and unconstitutional for them to be required to defend against the claims in Maryland, stressing that none of the alleged wrongdoing actually occurred in Maryland and that they did not have any other connection to the State, besides their merely serving as directors of the corporation.  The U.S. District Court rejected the directors’ argument, reasoning that, because the business was incorporated in Maryland, the harm caused by their alleged misconduct occurred in Maryland.  The District Court further explained that, by accepting directorship of a Maryland corporation, a director submits to the jurisdiction of Maryland courts with respect to lawsuits based on his or her breach of fiduciary duties to the corporation.

Nevertheless, it is highly significant that the lawsuit in Oliver arose out of the defendant directors’ alleged breach of their fiduciary duties to a corporation incorporated in Maryland.  To be sure, nothing about the case suggests that a director of a Maryland corporation -- with no other ties to the State -- could be required to defend a lawsuit in the State, where the conduct giving rise to lawsuit is not related to his or her role with the corporation.  For example, a director of a Maryland corporation, who has never set foot in the State, still probably could not be sued in Maryland for a car accident that occurred in another state.  In other words, serving as a director of a Maryland corporation does not automatically submit one to the jurisdiction of the Maryland courts for any and all lawsuits -- just lawsuits arising out of alleged harm to the corporation.  It also should be noted that the court in Oliver emphasized that requiring the defendant directors, who were residents of Delaware, to litigate the case in Maryland did not impose an unreasonable hardship on them, in light of the geographical proximity of the two states.  Thus, the court’s analysis leaves open the possibility that a Maryland court might not be able to obtain jurisdiction over the director of a Maryland corporation, who resides, for example, on the west coast or in another country.  In such a case, the court might find that requiring the director to traverse such a long distance to defend against a lawsuit would be so unreasonable as to be unconstitutional. 

Although the scope and full implications of the Oliver case will likely be clarified over time, in the meantime, it is advisable to consult with an attorney when considering accepting a position on the board of directors of an entity incorporated in a state different from the one where you reside.  Doing so will help avoid unanticipated and major inconveniences.