Poole v. Miller

⁴⁵² Brune, C. J., delivered the opinion of the Court. The appeal in this case is from a decree dismissing a shareholders’ suit against a building association and its president and other officers and directors. The suit involves controversies with regard to the conduct of the affairs of a building association and the rights of shareholders in its surplus. The defendant association, The Progressive Building Association of Baltimore City (usually referred to below as “Progressive” or as the “Association”) was incorporated in July, 1912, under the corporation laws of Maryland, including, of course, those provisions of the corporation laws which are contained in the sub-title headed' “Building and Homestead Associations”, and deal specifically with such organizations.

In the 1912 Code this sub-title of Article 23 consisted of Sections 134 to 143, inclusive; in the 1951 Code it consists of Sections 140-153, inclusive. References in- this opinion to provisions of Article 23 will be in accordance with their numbering in the 1951 Edition. The appellants, George A. Poole and C. L. Miller, are holders of free shares in Progressive. They brought this suit on their own behalf and, allegedly, on behalf of all other shareholders of Progressive similarly situated.

(No others joined them.) C. L. Miller was also a director from May, 1948 to January, 1953. A stipulation recites that C. L. Miller, his wife and two children held approximately $20,000 and Poole approximately $2,500 in Progressive. We suppose that this means the amount of their moneys on deposit with the Association. According to Progressive’s practice the number of shares owned by them would be the amount of their deposits divided by the par value per share.

Prior to an amendment of the charter made in October, 1954, (which was several months after this suit was filed), the'par value was $104 per share; since then it is $100 per share. The appellees are the Association, its president, W. E. Miller, and other officers and directors. The bill, inter alia, (a) charged that ultra vires loans had been made, (b) asserted numerous irregularities in corporate proceedings and in the handling of loan applications, (c) charged that the president individually had made profits in transactions growing out of the Association’s business in ⁴⁵³ breach of his fiduciary obligations, (d) alleged that he had received preferential treatment from the Association in several matters, and (e) claimed that the proportionate interest of the appellants in the surplus of the Association had been improperly diluted. The defendants answered and, in general, denied allegations of illegal or improper action.

The issues which the appellants raise or seek to raise are ill defined. The statement in their brief under the heading “Question Presented” that the “basic question * * * is to determine the proper construction of the Charter and the Constitution and By-Laws of Progressive and the provisions of the Homestead and Building Association sections of the General Corporation law” falls far short of meeting the requirement of Rule 39, sec. 1 (b), of our Rules Respecting Appeals (which is retained with a slight change in wording and considerably amplified in Rule 831, c. 2, of the new Maryland Rules effective January 1, 1957) that the appellant’s brief shall contain a “succinct statement of the questions involved, separately numbered.” Little help in defining the issues is derived from the only other statement under this heading, which enumerates sundry matters which it is said will be determined by the answer to the question above quoted. A statement of the appellants’ objectives appears in their “Conclusion.” These are: (1) an injunction against “the continuation of illegal and ultra vires acts”; (2) that Progressive be required to divest itself of mortgages said to have been illegally acquired; (3) an accounting by W. E. Miller, the President of Progressive for “profits * * * made in personal transactions while he was at the same time acting for Progressive”; (4) a further accounting from all of the directors “depending upon the outcome of the divestiture of mortgages ordered, for such losses as may have occurred during their tenure as Directors”; and (5) that after an accounting and after the establishment of a proper reserve for contingencies, the balance of the surplus of Progressive be “allocated to and appropriated to the free shareholders as they existed on the date of the filing of the Bill of Complaint in this case.” We shall turn first to charges of irregularities, rather than of ultra vires action, in connection with mortgages. It seems ⁴⁵⁴ clear that there were many irregularities in the handling of mortgage applications, such as failures to have properly signed reports of appraisal committees; but it is not shown that the Association has incurred or that it faces any losses as a result of any such irregularities.

Indeed, the record discloses a loss of only $100 which was realized upon the foreclosure of mortgages during a period of several years. The appellants’ effort to force the Association to divest itself of some mortgages is not based upon their alleged financial unsoundness, but upon the ground that they are not proper types of mortgages for a building association to hold or that they were unauthorized because they run for a longer period than was permitted under the Association’s by-laws or for some other reason. Under these circumstances, past irregularities in the handling of mortgage applications seem immaterial insofar as the relief now sought by the appellants is concerned. Another matter which has called forth much criticism from the appellants is the informal manner in which corporate proceedings have been conducted.

The appellants assert that meetings of shareholders were not valid because a quorum was not present at such meetings, and they complain that not a sufficient number of directors were elected and that because of the small number elected, as compared with the number called for by the charter, a quorum was lacking at many meetings of directors. Since the appellants do not seek to undo any of the actions allegedly taken without due corporate form on the ground of lack of compliance with proper corporate procedure, these allegations, too, seem of little present pertinence. We may add that the appellants have not offered actual proof of the lack of a quorum at a meeting of the stockholders; and in the absence of proof to the contrary, the presence of a quorum at a stockholders’ meeting will be presumed. Baile v. Calvert College, 47 Md. 117 ; Machen, Modern Law of Corporations, Sec. 1214.

We may also note that the number of directors may be fixed by the by-laws as either a greater or a lesser number than that stated in the charter (Code, 1951, Art. 23, Sec. 49). In view of the fact above mentioned that the appellants do not seek to overturn any specific action taken by the board of directors on the ground that a quorum was not ⁴⁵⁵ present we need not consider what effect should be attributed to the long continued acquiescence of the shareholders in the election of a less number of directors than that stated in the charter. We do not, however, wish to be understood as approving the loose practices as to the handling of mortgage applications and as to corporate procedure referred to above. The appellants’ complaints that the making of certain loans secured by mortgages constituted ultra vires transactions are based in most instances upon an alleged violation of the bylaws and in a few instances upon the nature and purpose of the loans.

In every case the loan has actually been made and the appellants do not now seek to set aside or rescind the transaction. In this they recognize the established rule that an ultra vires transaction which has been executed on both sides will not be set aside. This matter was fully considered and disposed of in the Master’s Report, chiefly on the authority of Montrose Bldg. Ass’n v. Page, 143 Md. 631 , 123 A. 68 .

See also, H. M. Brune, Jr., Maryland Corporation Law, Rev. Ed., Sec. 56. The appellants do, however, seek to force the Association to divest itself of allegedly illegal and ultra vires mortgages and to hold the individual defendants responsible for any losses which may be realized upon such divestiture. The contention that mortgages for a longer period than eight years are ultra vires is based upon a by-law of the Association and the par value of its shares. The by-law calls for payments of twenty-five cents a week per share, and the par value was $104 per share.

Arithmetically, it requires payments of twenty-five cents a week over a period of approximately eight years to reach a total of $104. The by-law provision in question is authorized under Code (1951), Art. 23, Sec. 140 (b). The evidence shows that it was a matter of business necessity, in order to meet competition, to make loans in excess of eight years and that it was impossible to obtain 6% interest on loans which did not exceed that period, and there is no showing of any loss to the Association by making loans for more than eight years. Without accepting the appellants’ ⁴⁵⁶ contention, we are of the opinion that if the by-law did limit the duration of loans to eight years, it had been waived 'or repealed by acquiescence.

Machen, Corporations, Vol. I, Secs. 727-728 states: “Repeals by Desuetude.- — We have seen above that custom may have the force of a by-law; and a necessary corollary of that proposition is that a similar custom may also repeal a by-law. Consequently, long-continued disregard of the provisions of a bylaw may be equivalent to an express repeal. Even a by-law which has been formally adopted may lapse or be repealed by desuetude.” “Sec. 728.

Disregard of By-laws without formal Repeal. — By-laws may in any individual case be disregarded by the same authority by which they might be formally repealed.” See also, 8 Fletcher, Corporations, Perm. Ed., Sec. 4200 and 1954 Supp. thereto; Patterson Park Perm. Bldg. Union No. 3 v. Juengst, 153 Md. 36 , 137 A. 498 .

In addition, insofar as C. L. Miller is concerned, his active participation in the making of many such loans would seem to bar any complaint on his part. Kraft v. Highland Perm. Bldg. Ass’n, 165.

Md. 570, 169 A. 71 . See also, Matthews v. Headley Chocolate Co., 130 Md. 523 , 100 A. 645 . Beyond all of the above considerations is the further fact that the by-laws were amended in October, 1954, so as to permit loans for a longer period than eight years. It would seem a vain act at best to require the Association now to divest itself of mortgages which it could at once reacquire.

This amendment occurred before the decree was entered in this case. As is said in 19 Am. Jur. Equity, Sec. 411, “While equitable jurisdiction is to be determined with reference to the situation existing at the time when the bill is filed, the relief to be accorded by the decree is governed by the conditions which are shown to exist at the time of making thereof, and not by the circumstances attending the inception of the litigation.” See Randel v. Brown, 2 How.

(U. S.) 406; Stonega Coke & Coal Co. v. Price (C. C. A. 4th), 106 F. 2d ⁴⁵⁷ 411, cert. den., 308 U. S. 618 ; United Corp. v. Federal Trade Comm. (C. C. A. 4th), 110 F. 2d 473 . A similar rule is applied in cases where a court will not decree specific performance of a contract under which the defendant has an option to terminate the contract and so might render the decree of no effect. Pomeroy, Equity Jurisprudence, 5th Ed., Sec. 1405 b.

Like reasoning underlies the reftisal of courts to decide moot questions. Indeed, by reason of the amendment, this question may be described as moot. The appellants’ other contentions that certain loans are ultra vires transactions rest principally upon the ground that a building association can make loans only to finance the purchase of homes and may not make loans for commercial purposes. Undoubtedly, the general purposes of building associations are to promote thrift and to facilitate the building or purchase of homes, or both; but the Maryland statutes do not limit them to making loans for such purposes.

Moreover, it is clear that under Code (1951), Art. 23, Sec. 145, a building association may invest in mortgages on real or leasehold estate situated in this State. Though exemption from taxation granted to building associations under Code (1951), Art. 81, Sec. 8 (16), which prior to 1929 was contained in what is now Sec. 145 of Article 23, is doubtless intended to promote thrift and home ownership, it may be noted that prior to the passage of Chapter 226 of the Acts of 1929 (Sec. 5, pp. 719-720), Sec. 145 (then 165) of Article 23 expressly exempted from taxation shares of building associations to the extent that they represented (inter alia) investments in mortgages, “whether said mortgages be building association mortgages or ordinary mortgages.” Sec. 8 (16) of Article 81 uses the term “mortgages on real estate, situated in this State”, without any expressed restriction that it shall apply only to mortgages of the building association type; and we find no indication of any intent so to limit it. (Under Sec. 2 (12) of Article 81, the term real estate includes leaseholds, unless such a construction would be unreasonable.) It is clear, we think, that at all times material to this suit, Progressive had sufficient surplus to make the mortgage loans which were wholly or partially commercial, without using ⁴⁵⁸ capital represented by the par value of its shares to make such loans. We cannot say that the existing statutes regulating such associations prohibit a building association from investing its surplus in such mortgages; indeed they appear to be within the authorization of Section 145.

We do not mean to imply that a different rule would be applicable if there were no surplus, but find it unnecessary to express an opinion with regard to that matter. We note, however, that the document entitled the “Constitution and By-Laws” of Progressive provided by Article VIII, Sec. 12 that “Should there at any time be money on hand that cannot be disposed of by redemption of shares in the regular manner, the Board of Directors, by written consent of all the members of the entire Board, may make any other investment advantageous to the Association.”, It is clear that C. L. Miller, while and as a director, objected to the Farace loan, which was partly — we think predominantly— commercial in character. The above quoted passage, if applicable, prohibited the making of a loan without the unanimous written consent of the directors, and the consent of two directors was lacking. The amendments of the by-laws effected on,October 11, 1954, seem to