MD waived immunity for claims by Baltimore business, high court rules

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The state of Maryland has waived sovereign immunity for claims by a Baltimore check-cashing business seeking payment on “substitute” checks issued by the state, the Maryland Supreme Court held Friday.

In a 6-1 decision with Chief Justice Matthew Fader writing for the majority, the Maryland Supreme Court affirmed the ruling of the Baltimore City Circuit Court by concluding that a check is a formal contract and the state of Maryland’s waiver of sovereign immunity applies to such contracts.

According to the opinion, Badlia Brothers, LLC cashed 15 checks issued by the state of Maryland that the state had already paid before Badlia presented them for payment to the state’s bank. Badlia accepted the checks — including some “substitute” checks, or digital reproductions of an original paper check — without knowing the state had already made payment and then presented them for payment. As a result, the state of Maryland refused to honor the checks.

After the district court found the state is entitled to qualified immunity and subsequently dismissed the cases, the Baltimore City Circuit Court reversed and held that a check is a contract, and therefore the state had waived sovereign immunity. The high court agreed.

“Unless stated otherwise or absent any applicable exception, an inherent term of a check is that it may be enforced by a holder in due course,” Fader wrote. “Accordingly, the State has waived its sovereign immunity for claims by a holder in due course seeking payment on an authorized State-issued check.”

Allen Honick, counsel for Badlia Brothers, said the ruling is a case of first impression in the U.S.

“This decision is a win for anyone who deals with state-issued checks, from vendors to everyday citizens,” Honick said Monday. “It is a humbling privilege to have shaped this historic precedent in Maryland, especially given that no court had ever tackled this issue before.”

A spokesperson for the Maryland Office of the Attorney General declined to comment.

The state of Maryland argued that a check is a contract between its maker and its original payee, but is not a contract between its maker and a holder in due course, or an individual who receives a check in good faith.

“Were we to accept the State’s position, all checks it issues would effectively cease to be negotiable instruments, as no subsequent holder could legally enforce them against their maker,” Fader wrote.

In a dissenting opinion, Justice Shirley Watts wrote that the state’s sovereign immunity was not waived, and that the statute governing sovereign immunity is unambiguous and does not apply to actions by holders in due course seeking payment of checks issued by the state.

According to the opinion, by the time of the district court’s judgment, only 10 of the 15 checks issued by the state of Maryland remained at issue, totaling just over $17,000.