David Reus Permanent Loan & Savings Co. v. Conrad

Jones, J., delivered the opinion of the Court. The appellant in this case is a corporation of the class known as “Building or Homestead Associations,” organized under the general incorporation law for the purpose, as expressed in its articles of incorporation in evidence, of “advancing money for the purchase of houses and lands and for the improvement of premises, dwelling houses, &c., and also to advance money on approved security by mortgage to members and others.” The charter bears date the 13th of February, 1872, and provides for the management of the affairs of the corporation by a board of nine directors. Peter T. Miller was one of the incorporators and subsequently became one of the directors and the president of the board. He was the original defendant in the case below, but having died during its pendency, his administrator became the party defendant below and is the appellee here.

The case originated in a bill in equity filed, on the 10th of January, 1903, in the Circuit Court of Baltimore City by the appellant against the said Miller to obtain from him an account of, and payment over to the appellant, of certain monies which, it was alleged, had been intrusted to him for investment; and which had been lost to the appellant by reason of his acceptance, as security for the same, of a mortgage upon property the title to which he knew to be defective. The bill is voluminous but the material averments may be briefly stated. After alleging that the duties of the president of the-appellant consisted of “a general superintendence and control over all the affairs of the corporation; the. execution of all orders of the board of directors which may be committed to him; and the carrying into effect all measures which the board ²²⁶ of directors may adopt in the management of the affairs ofsaid corporation;” and that Peter Miller was elected president of the corporation, the bill states that in the year 1881 one Mrs. Osborne applied to the appellant for a loan of $1,000 and offered as security for the loan of said amount a mortgage on certain leasehold property held by her, and situated on Mc-Mechen street in the city of Baltimore; that after an investigation by the appellant through a committee as to the sufficiency of the security offered it was decided to make the loan subject to final approval, and the passing of the title to said property by the appellant’s solicitor; that it subsequently de- ■ veloped that in the year 1879 Mrs. Osborne had mortgaged the property, which she offered to the appellant as security for the loan applied for, to the Monumental Fire Insurance Company of Baltimore to secure a loan to her by that corporation of $3,200; that this mortgage had been paid off with the proceeds of property which her husband had conveyed in fraud of creditors; that at the time of the application to the appellant for the loan of the $1,000 there was pending a suit brought by certain creditors of her husband, who was then deceased, having for its object, among other things, the sale of the said McMechen street property “to satisfy the equitable lien” of the suing creditors; that the solicitor of the appellant in investigating the title to the said McMechen street property discovered the pendency of the said creditors’ suit, and being unwilling to pass or approve the title of said * * * property, so reported * * to the defendant, Peter T. Miller, as was the uniform custom and practice in such matters, stating to said Miller that he would decline to pass or approve the title;” that the said Miller “who had previously been trusted with the money to effect the said loan as was the custom and practice in such cases thereupon took upon himself without the knowledge or consent of the plaintiff (appellant) the responsibility of consummating said loan of $1,000 and paying the money to said Mrs. Osborne and accepting her mortgage therefor as security and placed the same on record” and received therefor his fee of $1.50 as provided in appellant’s by ²²⁷ laws; that in the year 1884 the said Mrs. Osborne applied for a further loan of $300 upon the same property as security and upon investigation of the title thereto by the then solicitor for the appellant it was found that the said creditors’ suit was still pending; that the said solicitor reported this to the said Peter T. Miller “and declined to pass the title;” but the said Miller accepted the said property as security and made the loan applied for, placed the mortgage on record and received his fee of $1.50 tor his services; “that it was the uniform practice and custom of long sanction by the board of directors for the solicitor to make his report in the matter of examination of titles to property offered for mortgage security to the president of the board and not to the board of directors or to the meetings thereof;” and that the defendant, Miller, never reported the fact to the board of directors nor to any of them that the title to the property, thus offered as security for the loan authorized by the board of directors, had been “found defective or had been turned down by the respective solicitors nor that the equity proceeding” in the said creditors’ suit “was hanging as a lis pendens over said property.” It is then charged ‘ ‘that by management, by manoeuvering, by trickery and with artifice and fraud the defendant (Miller) concealed from and kept the said body corporate (appellant) and the board of directors thereof and the members thereof ignorant of the true and actual state of facts and circumstances under which the said loans were made to Alice Osborne and the said two sums of one thousand, and three hundred dollars respectively paid to her, and especially that the title to said property had not been approved first by the said corporation solicitor, Abraham Sharp, Esq., and afterwards by Frederick Leist, its succeeding solicitor, but had been actually rejected by them.” The bill further alleges that default having been made by Mrs. Osborne in the mortgages given to secure the loans to her, the same were foreclosed and the appellant became the purchaser of the mortgaged property, and was after-wards made a party to the pending creditors’ suit wherein it was finally decided and decreed that the said property was ²²⁸ liable to the creditors of the husband of the said Mrs. Osborne for monies appropriated by her which properly belonged to his estate as heretofore mentioned; and that thereby the aggregate amount of the two loans made to Mrs. Osborne was wholly lost to the appellant save only the sum of something over $500 which had been repaid on said loans; besides which the appellant was subjected to further loss by reason of certain costs incurred and of being held to account for the use and occupation of the mortgaged premises from the time of acquiring the same at the foreclosure sale; and of having to indemnify the party to whom the appellant had made sale of the property in question with an agreement for indemnity. The bill concludes with a prayer for an account to be taken under the direction of the Court of the said alleged “claims and indebtedness” of the defendant and for further relief.

Miller, having failed to answer the bill within the time limited by the rules of practice a decree pro confesso was entered against him, but this having been stricken out with leave to answer upon his application, he filed an answer to the bill which put in issue all the facts therein alleged which had particular reference to his connection with loss sustained by the appellant as alleged in the bill. Testimony was then taken by both sides in addition to testimony which had been taken by the appellant under the decree pro confesso and the contention between the parties is mainly as to the effect of the proofs in the cause. Aside from certain minor questions there may be said to be no dispute as to any legal proposition. The meritorious question to be determined is did the acts of Peter T. Miller in connection with the loss sustained by the appellant as alleged and proved impose upon him a liability to the appellant for such loss?

Before examining the proof submitted upon this question we may refer briefly to the standard by which it is to be tested according to what seems to be the settled law and as to which we understand no dispute is here raised. In the well-considered case in this Court of Booth v. Robinson, 55 Md. 419 , Judge Alvey in the course of an exhausive ²²⁹ opinion treating upon the liability of directors and managers of a corporation such as is here sought to be enforced, says (adopting the doctrine laid down in the case of Overend v. Gurney, L. R. 4 Ch. 701), “facts which may show imprudence in the exercise of powers clearly conferred upon directors will not subject them to personal responsibility; but if the imprudence be so great and manifest as to amount to crassa negligentia, and consequently a breach of trust, personal responsibility will be incurred. Indeed all the cases agree that directors are not liable for the consequences of unwise or indiscreet management, if their conduct is entirely due to mere default or mistakes of judgment. And the onus of proof of fraud, combination or gross negligence, to render the directors personally