Chesapeake Construction Corp. v. Rodman

McWilliams, J., delivered the opinion of the Court. Chesapeake Construction Corporation (Chesapeake) is a Delaware corporation; its avowed purpose is the development of real property. In June 1967 Samuel J. Rod-man (Samuel) owned 75 of the 100 shares of its stock. He was also its president and one of its directors.

Karl Rodman (Karl), Samuel’s brother, owned the remaining 25 shares. He was its secretary and treasurer and a director. The record is silent as to the existence of any other directors at that time. Early in June 1967 Samuel and Bella, his wife, conveyed a 123 acre Prince George’s County tract, known as “Tantallon Hills Subdivision,” ⁵³³ to Chesapeake for a consideration of $1,100,000 evidenced by a purchase money mortgage for $1,000,000 and an unsecured note for $100,000.

The board of directors did not authorize the purchase either by resolution or otherwise. Karl did not learn of the transaction until after Samuel’s death on 10 December 1967. Samuel executed the mortgage and Bella, neither an officer nor a director at the time, attested the corporate seal. Corporate funds in the amount of $6,838 were expended for recording, stamps and transfer taxes.

On 29 March 1968 Bella, as surviving tenant by the entireties, sold the $1,000,000 mortgage to Tantallon Country Club, Inc. (Tantallon) for $675,000. Chesapeake then conveyed the 123 acres to Tantallon in order to obtain the release of the mortgage. In May Bella and Morris Rodman, Samuel’s executor (Morris), gave Tantallon a quitclaim deed. An appraisal obtained by Karl, and not challenged by any of the parties, indicates the fair market value of the property in June 1967 to have been $614,147.

On 8 April 1968 Karl made formal demand upon Chesapeake, Bella and Morris to declare the transaction void ab initio and to recover for Chesapeake all expenses sustained in connection therewith. Both Bella and Morris had become directors of Chesapeake but one cannot tell from the record how or when this was accomplished. A meeting of the directors was held in New York on 19 April. Karl offered a resolution calling upon the officers to “take all necessary action to void the sale” and to recover “all costs, losses, and expenses” incurred as a result thereof.

Karl voted in favor of the resolution, Bella abstained, Morris voted against it and announced its defeat. Karl filed his bill of complaint against Chesapeake, Bella, Morris and Tantallon on 13 May 1968. Bella, Morris and Tantallon answered but no answer appears to have been filed on behalf of Chesapeake. The case came on for argument on Karl’s motion for summary judgment before Powers, J., on 17 February 1969.

All parties agreed that Tantallon was an innocent purchaser and it ⁵³⁴ was stipulated that, whatever the outcome, the decree should contain a provision declaring Tantallon to be vested with title to the property. Counsel for Bella and Morris conceded his inability to make a proffer of any facts tending to establish the fairness of the sale to Chesapeake. He insists, however, that Bella was entitled to the payment of the $100,000 note. Judge Powers, after hearing argument, declared the deed, the mortgage and the unsecured note to be null and void ab initio.

Also he ordered Bella and Morris to pay to Chesapeake the sum of $6,838; Tantallon was declared to be vested with title to the property. Judge Powers, in his concise memorandum, relied upon Cumberland Coal and Iron Co. v. Parish, 42 Md. 598 (1875). We agree that it is generally applicable to the facts in the case before us. Judge Alvey (later Chief Judge) said, for the Court: “The affairs of corporations are generally intrusted to the exclusive management and control of the board of directors; and there is an inherent obligation, implied in the acceptance of such trust, not only that they will use their best efforts to promote the interest of the shareholders, but that they will in no manner use their positions to advance their own individual interest as distinguished from that of the corporation, or acquire interests that may conflict with the fair and proper discharge of their duty.

The corporation is entitled to the supervision of all the directors, in respect to all the transactions in which it may be concerned; and if one of the directors is allowed to place himself in the position of having his conduct and accounts made the subject of supervision and scrutiny, he, of course, cannot act, in regard to those matters, both for himself and the corporation; and the consequence is, that the corporation is deprived of the