Ideal Federal Savings Bank v. Murphy

CHASANOW, Judge. The issue we must resolve in the instant case is whether the Court of Special Appeals erred in holding invalid, as against Maryland public policy, an election of directors for a federally-chartered savings and loan institution where members were required to vote “for” or “against” each candidate. In the election at issue, there were only ten candidates nominated for the 15 director vacancies and four of those candidates were declared not elected when they received more “against” votes than “for” votes. We must reverse the intermediate appellate court because even if there is a Maryland legislative policy disfavoring “negative” voting, it would not be applicable to this election for directors of a federally-chartered institution.

The overseeing federal regulatory agency’s interpretation of its federal charter form provision as precluding a plurality vote for directors and permitting “for” and “against” votes preempts any Maryland statutory provision which may be to the contrary. ⁴⁴⁹ I. Prior to April 6, 1987, Ideal Federal Savings Bank (Ideal) had been a state-chartered, savings institution. Because of the savings and loan crisis in Maryland in the mid-80’s, Ideal was required to obtain a federal charter and federal insurance in order to remain in business. Ideal’s charter and bylaws were adopted from the form for charters and bylaws for federal mutual savings associations found in Title 12 of the Code of Federal Regulations § 544.1. See 12 C.F.R. § 544.1 (1995).

On January 21, 1988, Ideal held its first organizational meeting of its members under its new federal charter. A primary purpose of that meeting was to elect a board of directors. Ideal’s charter provided for a board of directors of not less than five nor more than 15. The bylaws provided that the number of directors should be 15.

Former Baltimore City Solicitor Benjamin L. Brown, Esquire, the acting chairman for the meeting, advised the members at the meeting that, under Ideal’s new federal charter and bylaws, the conduct of the meeting and method of voting for Ideal’s board of directors were governed by Robert’s Rules of Order. See Robert’s Rules of Order (Henry Robert, III & William J. Evans eds., 1990). Mr. Brown informed the members that they were required to vote by written ballot and that they should vote “for,” “against,” or “abstain,” as to each candidate for director. To be elected, the candidate would have to receive a majority of “for” votes cast in his or her election, so that unless a candidate received more “for” votes than “against” votes, he or she could not be elected to a position on the board; abstentions were not to be counted.

Mr. Brown told the members that Ideal’s nominating committee had nominated eight people to run for the 15 director positions, and that the members had nominated two additional persons, H. Russell Frisby and Martin P. Welch, in accordance with the nomination process dictated by Ideal’s federal charter. ⁴⁵⁰ The members voted 1 as follows: Name For Against Abstaining B.L. Brown 4.360 -0--0- 1,157 3,203 -0-H.R. Frisby 3,905 455 -0-E.G. Lansey 4.360 -0--0-Y.F. Lansey 1,473 3,841 46 L. L. Lewis 2 498 3,862 -0-A.W. Murphy 566 3,794 -0-M. W. Murphy 455 19 C.M. Sherrard 3,886 531 19 J.F. Turpin 3,810 711 43 M.P. Welch 3,606 As per the vote tallies, six of the ten nominees received a majority of the votes cast, and they were declared elected by Mr. Brown. Madeline Murphy, H. Russell Frisby, Arthur Murphy, and Leslie Lewis did not receive a majority of the votes cast, and they were declared not elected directors. The four candidates for director who were denied seats on the board filed suit in the Circuit Court for Baltimore City against Ideal seeking a declaratory judgment that they had been duly elected to the board of directors at the January 21, 1988 meeting. We shall call that case the Madeline Murphy case.

The sole issue in that case was the validity of the “for” and “against” voting method used to elect directors at the January 21, 1988 meeting. While the Madeline Murphy case was pending, and just prior to what was scheduled to be Ideal’s second annual membership meeting, another somewhat related lawsuit was filed against Ideal by William Murphy, Sr. in the Circuit Court for Baltimore City. We shall call that second lawsuit the William Murphy case. The two cases will collectively be ⁴⁵¹ called the Murphy cases.

William Murphy, Sr. was a member of Ideal and was a candidate for director at the then-scheduled second annual meeting. He requested that Ideal forward to all members, at his expense, a letter he prepared recommending a slate of directors which also may have amounted to a proxy solicitation. Ideal refused that request and Mr. Murphy sought declaratory and injunctive relief. Shortly thereafter, Mr. Murphy amended his complaint and added allegations that the election of only six directors at the January 21, 1988 shareholders meeting was invalid and that a March, 1988 attempt by the six directors to amend Ideal’s bylaws and reduce the number of directors from 15 to seven was also invalid. 3 On January 19,1989, Judge Thomas Ward held a hearing on the interlocutory injunctive relief requested by William Murphy, Sr. Prior to Judge Ward’s entering any order in the William Murphy case or in the Madeline Murphy case, Ideal filed with the United States District Court for the District of Maryland a Notice of Removal of the William Murphy case.

Ideal did not seek to remove the Madeline Murphy case although there was some question as to whether the two cases were consolidated. William Murphy, Sr. maintained that his case was improperly removed to the federal court. We shall omit the many motions and arguments that are not necessary to resolve the issues before this Court. We note that, as the Murphys candidly acknowledged in their brief in this Court, “[t]he only constant in this now seven-year struggle for the ⁴⁵² control of Ideal is the willingness of the parties to take any favorable position without close attention to how the position might be inconsistent with other positions the party has taken.” VOLUNTARY DISMISSAL OF THE WILLIAM MURPHY CASE Prior to filing an answer to the William Murphy case, Ideal moved to dismiss, alleging that the Federal Home Loan Bank Board (FHLBB) had primary jurisdiction over those claims.

Instead of responding to this motion, William Murphy, Sr. filed a notice of dismissal, pursuant to Fed.R.Civ.P. 41(a)(1)(i), voluntarily dismissing his case. Fed.R.Civ.P. 41(a) provides in pertinent part: “(a) Voluntary Dismissal: Effect Thereof. (1) By Plaintiff; By Stipulation. Subject to the provisions of Rule 23(e), of Rule 66, and of any statute of the United States, an action may be dismissed by the plaintiff without order of court (i) by filing a notice of dismissal at any time before service by the adverse party of an answer or of a motion for summary judgment, whichever first occurs, or (ii) by filing a stipulation of dismissal signed by all parties who have appeared in the action.

Unless otherwise stated in the notice of dismissal or stipulation, the dismissal is without prejudice, except that a notice of dismissal operates as an adjudication upon the merits when filed by a plaintiff who has once dismissed in any court of the United States or of any state an action based on or including the same claim.” That rule is similar to Maryland Rule 2-506, which would apply if in fact removal had been improper and which provides in pertinent part: “(a) By Notice of Dismissal or Stipulation.—Except as otherwise provided in these rules or by statute, a plaintiff may dismiss an action without leave of court (1) by filing a notice of dismissal at any time before the adverse party files an answer or a motion for summary judgment or (2) by ⁴⁵³ filing a stipulation of dismissal signed by all parties who have appeared in the action.” Although an order of court was not necessary to dismiss the suit since no answer or motion for summary judgment had been filed, Judge Frank Kaufman of the United States District Court for the District of Maryland initialed the notice of dismissal and noted it as “approved.” What happened following the notice of dismissal is summarized in the respondent’s brief in this Court: “After the federal court first accepted the dismissal, the procedural posturing between the parties continued. Ideal sought attorneys’ fees, alleging that the case had been dismissed only to avoid removal. Ideal also moved to vacate the dismissal. In response to that Motion, Mr. Murphy contended that Ideal had wrongfully removed that case to federal court.

In the thicket of accusations and counter-accusations between the parties, Judge Kaufman of the United States District Court for the District of Maryland sent the parties packing, back to the Circuit Court for Baltimore City.” William Murphy, Sr. contends that Judge Kaufman “remanded to state court the very case whose dismissal he had initially accepted, apparently granting Ideal’s motion to vacate the dismissal.” (Emphasis added). Although it did not reach any of the issues raised by the William Murphy case, the Court of Special Appeals apparently agreed with this contention. That court noted in a footnote: “Appellees contend that the William Murphy case was dismissed in federal court. The case was, in fact, dismissed at one point.

Appellees, however, later moved to vacate that dismissal. That motion to vacate was pending when the federal court remanded the case to state court. We are persuaded that, by remanding the case, the federal court vacated the dismissal, as it had been requested to do by appellees. Appellees also complain that, because there was no ruling on their motion to vacate, they had no official ⁴⁵⁴ decision on which to appeal.

In light of our holding, however, that complaint is irrelevant.” Madeline Murphy et al. v. Ideal Federal Savings Bank et al., Slip Op. No. 367 at 11, n. 9 (Md.Ct.Spec.App. Oct. 28, 1994). We disagree that there was, or could have been, an implied vacating of the voluntary dismissal merely because the case was remanded back to the state court. Under Fed.R.Civ.P. 41(a)(1)(i), a notice of voluntary dismissal, once filed with the clerk, deprives the court of jurisdiction to enter most orders unless the dismissal is vacated, pursuant to Fed.R.Civ.P. 60(b).

See Randall v. Merrill Lynch, 820 F.2d 1317, 1320 (D.C.Cir. 1987), cert. denied, 484 U.S. 1027 , 108 S.Ct. 753 , 98 L.Ed.2d 765 (1988); Smith v. Phillips, 881 F.2d 902, 904 (10th Cir. 1989). What Judge Kaufman seemingly did in the instant case was remand the requests for attorneys’ fees. William Murphy, Sr.’s prayers for injunctive and declaratory relief were, and still remain, dismissed. It is obvious that, if Judge Kaufman intended to vacate the dismissal, he would have expressly done so.

Thus, the dismissal was never vacated pursuant to Fed.R.Civ.P. 60(b). The effect of Mr. Murphy’s voluntary dismissal was to withdraw his complaint. Therefore, none of the issues raised in that complaint are before this Court. THE DECISIONS BELOW IN THE MADELINE MURPHY CASE On January 17, 1990, the day before Ideal’s third scheduled annual meeting and election of its board of directors, the Madeline Murphy plaintiffs filed a motion for summary judgment and a motion to enjoin the scheduled January 17, 1990 membership meeting. 4 The Madeline Murphy case and what ⁴⁵⁵ ever remained of the remanded William Murphy case were assigned to Judge Mabel Houze Hubbard of the Circuit Court for Baltimore City.

We will not set forth in detail all of the proceedings before Judge Hubbard or her findings in the William Murphy ease since, as we have indicated, that case was dismissed and should not have been considered by Judge Hubbard. The finding made by Judge Hubbard that is properly before this Court is her determination on December 29, 1993, that the method of voting for directors employed by Ideal at the January 21, 1988 annual meeting was proper and resulted in the election of only six directors. William Murphy, Sr., Madeline Murphy, Arthur Murphy, and Leslie Lewis 5 appealed this decision to the Court of Special Appeals. Ideal appealed Judge Hubbard’s decision in the William Murphy case to the Court of Special Appeals, arguing that Judge Hubbard was without jurisdiction to hear that case because that case was dismissed.

In an unreported per curiam opinion, the intermediate appellate court held that based on the “public policy” expressed in Maryland Code (1975, 1993 Repl. Vol.), Corporations and Associations Article, § 2-404, the method of voting used at the January 21, 1988 membership meeting was invalid 6 and that all ten of the nominated directors were elected at that meeting. The intermediate appellate court stated: “The use of negative voting in the election of directors is inconsistent with the public policy of this state. That public policy is found in Md.Corps. & Ass’ns Code Ann. (1993 repl. vol.).

Section 2-404 of that article provides in part: ‘(c) Manner of voting.—Each share of stock may be voted for as many individuals as there are directors to be ⁴⁵⁶ elected and for whose election the share is entitled to be voted. (d) Plurality vote.—Unless the charter or bylaws of a corporation provide otherwise, a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director.’ Subsection (c) provides for ‘positive’ voting, not ‘negative’ voting. Although it is commonplace to allow a vote to be cast ‘for’ or ‘against’ a proposition or motion, this court finds no support for appellee’s argument that the same method should be employed in the election of directors. * % :{4 iH # The public policy of Maryland favors the presence of minority shareholders on a board of directors. This is evidenced by the plurality requirement of Md.Code Ann. (1993 repl. vol.), § 2-204(d) of the Corporations and Associations Article which appears above. * * * * * * Ideal had no right to use negative voting and to require that each director receive a majority vote, rather than a plurality vote, in order to serve on the board.” Madeline Murphy et al., Slip Op.

No. 367 at 5, 8.

II

Action by stockholders generally requires a majority of a quorum of stockholders (or, as in the instant case, members). 7 In Maryland, that general rule is codified in Md.Code (1975, 1993 Repl.Vol.), Corporations and Associations Art., §§ 2-506 and 2-404(c). Section 2-506 provides: “(a) General rule.—Unless this article or the charter of a corporation provides otherwise, at a meeting of stockholders: ⁴⁵⁷ (1) The presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum; and (2) A majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting. (b) Two or more classes of stock entitled to vote separate ly.—Subject to other provisions of this article, unless the charter of a corporation provides otherwise, if two or more classes of stock are entitled to vote separately on any matter for which this article requires approval by two thirds of all the votes entitled to be cast, the matter shall be approved by two thirds of all the votes of each class.” Section 2-404(c) provides: “(c) Manner of voting.—Each share of stock may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted.” In 1981, the legislature adopted a presumptive exception to that general rule applicable to the election of directors of a corporation. The 1981 statute, codified at § 2-404(d), stated: “Unless the charter or bylaws of a corporation provide otherwise, a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director.” Chapter 122 of the Acts of 1981.

The purpose of § 2-404(d) was stated in an “Explanation of Senate Bill No. 659 Vote Required to Elect Directors,” which accompanied the proposed legislation and stated: “The purpose of the Bill is to provide that corporate directors may be elected by a plurality of the votes cast if a quorum is present. This would provide an exception to Section 2-506 of the Corporations and Associations Article which requires a majority of all votes cast to approve any matter. The Bill is needed because in some cases it is possible that less than the required number of nominees would ⁴⁵⁸ receive a majority of the votes cast—when, for instance, there are more nominees than directors. In that event the nominees that received a majority of the votes would fill the remaining directorships, not the stockholders.

It is also possible that no nominees would receive a majority of the votes cast, in which case there would be no election and the current'directors could continue to serve until the next annual meeting of stockholders. The Bill would essentially eliminate the possibility of these bizarre occurrences.” As the Court of Special Appeals noted, a plurality has been defined as: “The excess of votes cast for one candidate over those cast for any other. Where there are only two candidates, he who receives the greater number of the votes cast is said to have a majority; when there are more than two competitors for the same office, the person who receives the greatest number of votes has a plurality, but he has not a majority unless he receives a greater number of votes than those cast for all his competitors combined, or, in other ■words, more than one-half of the total number of votes cast.” Madeline Murphy et al., Slip Op. No. 367 at 8-9 (quoting Black’s Law Dictionary 1039