Hand v. Manufacturers & Traders Trust Co.

Dissenting Opinion by HARRELL, Judge, which BELL, C.J., and RAKER, J., join. I dissent. Cordelia Smith lacked legal capacity to bind the guardianship of Clifton Dominick Smith with regard to the deed of trust and deed of trust note at issue in this case. Accordingly, the guardianship possessed a valid defense to M & T Bank’s collection efforts concerning the note.

It is of no material consequence to my analysis that M & T Bank concededly is a holder in due course of the instrument. I. A holder in due course takes an instrument subject to several “real” defenses, including lack of legal capacity of the maker, if it took with notice that a party had such a defense. Maryland Code (1975, 2002 Repl.VoL), §§ 3-302, 3-305. Regarding the validity of an instrument, “[i]f an instrument is taken from a fiduciary for ... value, the taker has knowledge of the fiduciary status of the fiduciary, and the represented person makes a claim to the instrument or its proceeds on the basis that the transaction of the fiduciary is a breach of fiduciary duty ... [njotice of breach of fiduciary duty by the fiduciary is notice of the claim of the represented person.” ⁴¹² Maryland Code, Commercial Law, § 3-307.

Maryland law protects an individual represented by a guardian if the person dealing with the guardian has “actual knowledge or ... reasonable cause to inquire whether a guardian is improperly exercising his [or her] power.” Maryland Code (1974, 2001 Repl.Vol.), Estates & Trusts Article, § 13-219. 1 As noted by the Majority opinion, it is beyond cavil that Cordelia Smith signed both of the instruments for the refinancing at issue here in her capacity as guardian and fiduciary under District of Columbia law, and M & T Bank, as successor in interest to the original payee/secured party of the instruments, had notice of this fact. Majority op. at 381-82, 952 A.2d at 243-44. The questions remaining are whether she did so in breach of her fiduciary duties and, if so, whether the breach gave rise to a valid “legal incapacity” defense on the part of Clifton Smith’s guardianship against M & T Bank, as a holder in due course.

II

Petitioner argues that Smith lacked the legal capacity to sign the promissory note under District of Columbia law and that the Guardianship of Clifton Smith thus has a defense against the collection efforts of M & T Bank, even though the latter was a holder in due course. The Majority opinion dismisses this argument. According to the Majority, “[l]egal capacity and legal authorization are different concepts entirely” and legal capacity relates only to whether “Ms. Smith’s appointment as guardian was in any way defective.” Maj. Op. at 392, 400, 952 A.2d at 250, 254.

In my view, the Majority too narrowly limits the meaning of the term “legal capacity” to legal status. The Comment to the Uniform Commercial Code (UCC) (adopted in Maryland) is more expansive. According to the Comment, one may advance a lack of legal capacity ⁴¹³ where the act taken was ultra vires. Maryland Code (1975, 2002 RepLVol.), § 3-305(a)(l)(ii), Official Comment.

Such incapacity is largely statutory. Its existence and effect is left to the law of each state. If under the state law the effect is to render the obligation of the instrument entirely null and void, the defense may be asserted against a holder in due course. Id.-, see also Samuel Wxlliston & Richard A. Lord, A Treatise on the Law of Contracts § 60:44 (4th ed. 2000) (noting that an entity may lack legal capacity and have a defense to the enforcement of an instrument because its actions were ultra vires and that whether the defense voids the obligation of the entity depends on state law). 2 We have defined “ultra vires” as “ ‘denoting] some act or transaction on the part of a corporation which, although not unlawful or contrary to public policy if done or executed by an individual, is yet beyond the legitimate powers of the corporation as they are defined by the statutes under which it is formed or which are applicable to it, by its charter or incorporation paper.’ ” City of Frederick v. Pickett, 392 Md. 411 , 420 n. 4, 897 A.2d 228 , 233 n. 4 (2006) (quoting Penn.

R. Co. v. Minis, 120 Md. 461, 488 , 87 A. 1062 , 1072 (1913)). Although the term is employed most often with regard to private corporations, we have held that other artificial entities similarly may take actions fairly described as “ultra vires.” Id. (noting that the doctrine of ultra vires applies to municipal ⁴¹⁴ corporations (citing Boitnott v. Mayor of Balt., 356 Md. 226 , 738 A.2d 881 (1999); Inlet Assocs. v. Assateague House Condo. Ass’n, 313 Md. 413 , 545 A.2d 1296 (1988))); Respess v. City of Frederick, 82 Md.App. 253, 263 , 571 A.2d 252, 257 (1990) (noting that a trustee city committed an ultra vires act by violating the limitations on a charitable trust); Carroll Park Manor Cmty.

Ass’n., Inc. v. Bd. of County Comm’rs of Frederick County, 50 Md.App. 319 , 437 A.2d 689 , cert. denied, 292 Md. 595 (1981) (same for trustee county); Bd. of Educ. of Carroll County v. Allender, 206 Md. 466, 475-76 , 112 A.2d 455, 460 (1955) (noting that an administrative agency may not perform on an ultra vires contract (citing Coddington v. Helbig, 195 Md. 330, 337, 73 A.2d 454 (1950); Masson v. Reindollar, 193 Md. 683 , 69 A.2d 482 (1949); Blundon v. Crosier, 93 Md. 355, 361 , 49 A. 1 (1901))). “Even in the ease of a conventional trust, if the trustee goes beyond the scope of the power conferred by the deed or other instrument creating the trust, a court of equity will declare his acts to be ultra vires and legally inoperative.” Johnson v. Hines, 61 Md. 122, 132 (1883). Given that a conventional trust may act in a way that may be defined as “ultra vires,” it logically may be inferred that a guardian’s acts similarly may be defined as ultra -vires where he/she acts “beyond [his/her] legitimate powers [as] defined by the statutes under which it is formed” or in the document creating it. 3 Pickett, 392 Md. at 420 n. 4, 897 A.2d at 233 n. 4 (quoting Minis, 120 Md. at 488 , 87 A. at 1072 ). According to Maryland Code (1974, 2001 Repl.VoI.), Estates and Trusts Article, § 13-213, a guardian’s power to act may be limited in the same sense as any other fiduciary under § 15-102 of the Article. Specifically, the powers of a guardian may be limited within the document creating it and/or by other pertinent law.

See Maryland Code (1974, 2001 RephVoI.), Estates & Trusts Article, § 13-215 (“Any limitation on the powers of a guardian ⁴¹⁵ contained in a will or other instrument which nominated a guardian should ordinarily be imposed by the court on the guardian.”); Id. § 15—102(b)(2) (“Except as expressly limited in the governing instrument, the powers of a fiduciary under this section are in addition to those derived from common law, statute, or the governing instrument.”). As noted above, whether an act is ultra vires depends on the laws of the jurisdiction in which the subject entity was formed because those laws govern the entity and establish the limitations on its powers. Pickett, 392 Md. at 420 n. 4, 897 A.2d at 233 n. 4. We have ruled on more than one occasion that when the issue is the internal workings of a corporation, the law of the jurisdiction of incorporation governs the rights and responsibilities of the parties involved.

Tomran, Inc. v. Passano, 391 Md. 1, 17 , 891 A.2d 336, 346 (2006) (citing Gilman v. Wheat, First Sec. Inc., 345 Md. 361, 370-71 , 692 A.2d 454, 459 (1997); N.A.A.C.P. v. Golding, 342 Md. 663 , 674, 679 A.2d 554 , 559 (1996); Stockley v. Thomas, 89 Md. 663 , 43 A. 766 (1899)). Similarly, with regard to trusts, the Court has held that a trust agreement and the actions that a fiduciary legitimately may take under that agreement should be construed applying the law of the jurisdiction in which the trust w as formed, even if the trust property is within Maryland’s boundaries and the trust was formed elsewhere: The trust agreement should be construed according to the law of Illinois, not because the law of Illinois by its own force is operative in Maryland, but because by that part of the common law of Maryland known as the conflict of laws the construction of the trust agreement depends upon the law of Illinois. The only law in force in Maryland is its own law (including the laws of the United States). Within constitutional limitations, the State of Maryland ‘theoretically could draw a line of fire around its boundaries’ and recognize nothing concerning property within its boundaries that happened outside. ‘But it prefers to consider itself civilized and to act accordingly.’ Direction Der Disconto-Gesellschaft v. United States Steel Corporation, 267 U.S. 22, ⁴¹⁶ 28 , 45 S.Ct. 207, 208 , 69 L.Ed. 495 ; Restatement, Conflict of Laws, § 1.

Staley v. Safe Deposit & Trust Co. of Balt., 189 Md. 447, 454 , 56 A.2d 144, 147 (1947).

III

If Smith lacked legal capacity to act under the rules and laws of the District of Columbia, it still must be determined whether the guardianship may be bound by Ms. Smith’s unauthorized act. To answer that, this Court should apply the rules and laws of the District of Columbia. The Majority concludes that M & T Bank did everything required of it