First Mortgage Bond Homestead Ass'n v. Baker

Bond, C. J., delivered the opinion of the Court. The two appeals bring’ up a single controversy over the representation of divergent interests on the board of directors of a corporation. The questions at issue are involved in difficulty because of departures in the use of words and forms in. the organization and business of the corporation, and because proceedings taken by the contestants were irregular in some respects. The business and methods of the corporation were described in detail in the opinions in the cases of First Mortgage Bond Homestead Assn. v. Mehlhorn, 133 Md. 439 , and First Mortgage Bond Homestead Assn. v. Nelson, 151 Md. 181 ; and the printed forms by which the business was carried on were quoted at length in those cases, and need not be repeated here.

The corporation was originally incorporated as a building association under the laws of this state, and an act of 1910, chapter 242, giving it some additional powers, still provided (section 3) that it should be subject to all the laws made and provided with reference to building and homestead associations in this state. But it has adopted some business forms and methods followed more familiarly in mortgages to trustees to secure issues of corporate bonds. When an approved borrower on mortgage of property applies for a loan, he subscribes to an appropriate number of shares of stock in the corporation, as if he were becoming a member of an ordinary building association, and agrees to pay a specified amount monthly on that stock as dues, another amount as interest on the loan to be made, and a third sum as expenses ³¹² on the property to the parties legally entitled to receive the sum, and such other sum as may be necessary. And it is agreed in the application that all the amounts thus paid in. shall, until maturity of the stock or the release of the mortgage, remain in the hands of the corporation as agent of the borrower, and the corporation shall pay for the ultimate release all moneys due the borrower under the by-laws, which may be necessary for that purpose.

And it is agreed that the money shall constitute a sinking fund for payment of the debt. All the money from all borrowers is, however, held in one fund, used in the general business of the corporation. The by-laws allow for loans “on the drop-interest plan,” upon which the borrower is not to share in the profits of the association, “or on any other plan agreed upon,” and the form for application for loans speaks of an option in the borrower in the choice of plan; but, actually, all borrowers have contracted on the drop-interest plan, and, so, have been without interest in the profits of the association’s business. Upon securing a loan the borrower’s stock, according to the by-laws, falls into the category of redeemed stock.

But ultimately the borrower does not borrow from the association. At the time of signing his application for a loan, he also signs bonds to be sold when and if possible to third persons; the mortgage is expressly given to secure the bonds, and it is made to the association as trustee for that purpose. And, as stated, the amounts paid into the association by the borrowers under the several heads are accumulated on the books of the association until maturity and payment of the bonds. The corporation has investing shareholders also.

Like ordinary building association shareholders, they undertake to pay the total value of their shares in instalments, but they share in the profits of the association’s business, and are the only shareholders who do so. The present controversy is one which has arisen between two groups of such investing shareholders. Mr. O. Parker Baker, who was the originator of the enterprise, has had a minority of shares subscribed, and he, together with associates, all still holding together ³¹³ only a minority of shares, has been opposed by subscribers to what has been, up to the beginning of the contest, at least, a large majority. It appears that in 1921, after a lapse of several years without a meeting of stockholders, a dispute arose for the first time between Mr. Baker and holders of a majority of the investment shares, and it was settled by an agreed division of representation on the board.

And, after that, Mr. Baker, to fortify the position of himself and his associates thenceforth, and insure future control by them, induced Mr. E. M. Supplee to subscribe to 2,000 shares, to be divided among Mr. Supplee and three of his family or business associates. Mr. Baker then, in the following year, called a regular annual meeting of stockholders for April 2nd, 1928, to elect a new board of directors. The call was by means of a notice printed in a daily paper and not otherwise. On April 2nd, shareholders assembled in response to the call, officers of the meeting were elected, and tellers, after a canvass of shares represented, and after a settlement by them of a question of one shareholder’s right to vote, reported over 2,000 shares represented, out of a total of 2,500 shares issued.

Mr. Baker offered some amendments to by-laws, and these were laid over for a later meeting, and the meeting then proceeded with the election of directors. The nominations and elections were contrary to Mr. Baker’s wishes, and he announced that the meeting had been called upon legally insufficient notice, and could take no action, because no notice had been mailed to individual stockholders as required by section 39 of article 23 of the Code, applicable in the absence of a provision in the by-laws of any particular corporation covering the subject of notice. The meeting proceeded with the election, however, Mr. Baker apparently voting. Mr. Baker did not take part in a subsequent meeting of the directors voted for.

So far as it concerns Mr. Baker and other shareholders who attended the meeting, the objection on the ground of lack of mailed notices is untenable, for, quite apart from the fact that Mr. Baker himself called this meeting, those who actually attend a meeting have not ordinarily, and have not here, ³¹⁴ any reason to complain of a lack of notice to bring them to it. The statutory provisions regarding notice are designed only for the benefit of stockholders, to insure them proper opportunity to attend the meetings; and if the object is attained, the law is not then concerned with the method for its own sake. Tompkins v. Sperry, Jones & Co., 96 Md. 560, 580 ; Larkin v. Maclellan, 140 Md. 570, 580 ; Cook, Corporations, sec. 599; Borg & Co. v. New Orleans, 244 Fed. 617 ; Foote v. Greilick, 166 Mich. 636 ; Hill v. Atlantic & N. C. R. Co., 143 N. C. 539 ; Handley v. Stutz, 139 U. S. 417, 423 . And it is questioned whether those who do attend a meeting, and have no ground for objecting on their own behalf because of a defective notice, are the ones to make objection for those who do not attend, and who do not themselves object to the action taken.

Reviews of Decisions, 51 A. L. B. 941, and Ann. Cas. 1916E 1038. Compare section 27 of article 23 of the Code. There are in this instance, however, holders of a few shares, not borrowers, who have intervened with objections to the meeting of April 2nd, and it seems to us that their objections invalidate the meeting. It is true that there are some irregularities in corporate proceedings which cannot be complained of by a minority stockholder, so long as the action taken is within the legitimate power of the majority and the majority is satisfied.

Shaw v. Davis, 78 Md. 308, 316 , etc. But this principle does not, we think, apply to insufficiency of notice of a meeting of stockholders, and validate action taken at a meeting of which a minority and objecting stockholder was not notified. In our opinion, and we think according to the authorities, every stockholder is entitled at least to an opportunity to attend and be heard if he wishes, and to vote on measures proposed at a corporate meeting; and action taken at a meeting held without giving him this opportunity by full legal notice may be repudiated and set aside by him. Reviews of Decisions, 51 A. L. B. 941, Ann. Cas. 1916E 1038, and cases cited supra. The few unnotified shareholders whose complaint we are now considering were investing shareholders, and we consider the ³¹⁵ action taken at the meeting of April 2nd, 1928, voidable upon their complaint, and therefore now to be treated as void.

There is also a borrower intervening and complaining of the action taken at the meeting of April 2nd, because of lack of the statutory notice, and while it has become unnecessary to consider the effect of his complaint on that meeting, it is necessary to consider it, and to consider the legal position of borrowers in this business arrangement generally, for possible bearing on action taken subsequently by the contending factions. Apparently neither faction treated these' as coming within the class of voters entitled to vote at stockholders* meetings, at least until after the litigation had advanced to a later stage. The by-laws do not distinguish between investing stockholders and borrowers, but provide that, “at all meetings of the stockholders, each member who is not in arrears in the payment of dues shall be allowed one vote for each share held by him, and five members holding unredeemed stock shall constitute a quorum to transact business.” And, applying that provision, it is contended that the borrowers, too, are members to the extent of the stock to which they subscribe, and as such are entitled to vote at meetings, and therefore are entitled to equal notice of meetings. Section 169 of article 23 of the Code, applicable to building associations especially, and to borrowing members whose shares, subscribed and pledged by them, are redeemed by the associations, provides that “the member or members of such corporation so redeeming their said share or shares of stock shall cease to be stockholders, and shall not be entitled to vote at any meeting of such corporations held for the purpose of electing directors or for any other purpose.” And this corporation has the charter of a building association, and its special act of 1910, chapter 242, provides, as has been seen, that it shall be subject to all the laws made and provided with reference to building and homestead associations.

And a first question at this point is whether, assuming this to be a building association, the provision in the by-laws is to prevail to give borrowers votes at the meetings notwithstanding the statutory provision to the contrary. That it is to prevail, ³¹⁶ is argued on the basis of a clause in the special act of 1910, section 1, “that, in addition to the powers possessed by it under the certificate of incorporation and by-laws, which are hereby ratified and confirmed,” the corporation shall have the further powers given. That ratifying clause is somewhat ambiguous, but this court is of opinion that, in view of the provision in section 3, keeping the corporation subject to all the laws made and provided with reference to building and homestead associations, and in view of the purpose sought to be accomplished in the special act, it would not be permissible to construe the ratifying clause as providing special statutory foundation to any and every provision in the by-laws which might be at variance with the general statutes, and that the by-law now being considered could not be regarded as intended to prevail over the statutes. The special act had a limited purpose in view.

As stated in a preamble, it was to enable the corporation “to more securely indemnify its members from loss,” and “to turn over to the free shareholders the security given by the borrowing members in order that each may be secure and to act as guarantor of all such securities.” And it was following this recital of purposes that section 1 provided “that in addition to the powers possessed by it under the certificate of incorporation and by-laws, which are hereby