Tafflin v. Levitt

HARRELL, Judge. This is an appeal from the dismissal of consolidated cases by the Circuit Court for Baltimore City (Kaplan, J.) on 12 March 1991. The issue presented is whether appellants, depositors of an insolvent savings and loan association, stated a claim that may be brought individually against former officers and directors of the savings and loan and others. The circuit court held that appellants had failed to do so.

For reasons we shall explain, we affirm. Facts These consolidated cases arise out of the failure of Old Court Savings & Loan, Inc. (hereinafter “Old Court”), a state-chartered savings and loan association, and the attendant collapse of Maryland Savings-Share Insurance Corporation (hereinafter “MSSIC”), a state-chartered insurer of ³⁷⁸ deposits in Maryland savings and loan associations. 1 Old Court was placed into conservatorship on 13 May 1985. 2 On 8 November 1985 the conservatorship was converted into a receivership 3 and Maryland Deposit Insurance Fund (hereinafter “MDIF”), a Maryland governmental corporation, was appointed receiver. MDIF is also the successor-in-interest of MSSIC; all of the assets and liabilities of MSSIC were transferred to MDIF in the wake of MSSIC’s collapse. Appellants are depositors of Old Court who have recovered, largely due to MDIF’s efforts, the principal of their Old Court investments but have not recovered all of the interest.

Appellees are former directors, officers and accountants of Old Court (hereinafter “Old Court appellees”), former directors and officers of MSSIC (hereinafter “MSSIC appellees”), the law firm of Venable, Baetjer and Howard, which acted as outside counsel to both Old Court and MSSIC, and MDIF, in its capacities as receiver of Old Court and successor-in-interest of MSSIC: Appellants allege violations of the Racketeer Influenced and Corrupt Organizations Act (hereinafter “RICO”), 18 U.S.C. §§ 1961-1968 (1988), as well as state law claims of fraud, breach of contract, unjust enrichment and conversion. According to the complaint, appellees attracted depositors by holding Old Court out to the public as a well-managed and financially sound savings and loan association and by promoting high-yielding, risk-free investments ³⁷⁹ through advertisements, letters, brochures, responses to telephone inquiries and other means. According to the complaint, Old Court was in fact a “notorious violator of MSSIC regulations as well as state statutory law and regulations” and Old Court appellees had mismanaged the savings and loan and misappropriated its funds. The complaint further alleges that MSSIC appellees, despite their awareness of Old Court’s extensive regulatory violations, failed to regulate Old Court in the manner in which they were obligated, while at the same time representing to the public that MSSIC was carrying out its regulatory functions and that Old Court investments were fully insured.

The circuit court dismissed both cases, holding, inter alia, that dismissal was required under the rule of Pritchard v. Myers, 174 Md. 66 , 197 A. 620 (1938). We agree. We shall include additional facts as necessary in our discussion of the issue presented. Discussion The appropriate standard of review of the grant or denial of a motion to dismiss is whether the well-pleaded allegations of fact contained in the complaint, taken as true, reveal any set of facts that would support the claim made.

Flaherty v. Weinberg, 303 Md. 116, 135-36 , 492 A.2d 618 (1985). In Pritchard v. Myers, 174 Md. 66 , 197 A. 620 (1938), the Court of Appeals held that a claim by depositors of an insolvent bank for “damages” caused by mismanagement of the bank’s assets belonged to the bank itself, rather than to the individual depositors, and could only be brought by the bank’s receiver. “The equities of the corporate creditors [depositors] are to be sought and obtained through the medium of the corporate entity.” Id. at 77 , 197 A. 620 (citations omitted). The Pritchard rule is an example of the well established principle that “the courts will not entertain a derivative suit by a stockholder on behalf of a corporation unless it appears that the intra-corporate remedies have ³⁸⁰ been unsuccessfully pursued by the complaining stockholder.” Parish v. Milk Producers Assn., 250 Md. 24, 81-82 , 242 A.2d 512 (1968). The reason for this rule is that the cause of action for injury to the property of a corporation or for impairment or destruction of its business is in the corporation, and such an injury, although it may diminish the value of the capital stock, is not primarily or necessarily a damage to the stockholder, and hence the stockholder’s derivative right can be asserted only through the corporation.

The rule is advantageous not only because it avoids a multiplicity of suits by the various stockholders, but also because any damages so recovered will be available for the payment of debts of the corporation, and, if any surplus remains, for distribution to the stockholders in proportion to the number of shares held by each. Waller v. Waller, 187 Md. 185, 189-90 , 49 A.2d 449 (1946). Appellants assert that the requirements of a demand on the receiver and petition to the receivership court set forth in Pritchard, 174 Md. at 78-79 , 197 A. 620 , should not apply in the instant case because they are not asserting derivative claims. Appellants argue that the gravamen of their complaint is that appellees fraudulently induced them to deposit their money in Old Court and, therefore, they have stated a claim of direct injury since they, rather than Old Court, were injured by appellees’ fraud.

We reject this argument. In In re Sunrise Securities Litigation, 916 F.2d 874 (3rd Cir.1990), a federal court was presented with the same argument as appellants present in the instant case, and similarly rejected the contention of depositors of an insolvent savings and loan institution that they had stated a claim that could be brought individually. The court reasoned as follows: Although the allegations are cast in terms of defendants’ misrepresentation of and failure to disclose information, we believe that under the distinct circumstances of this case, such allegations do not state a claim of direct injury founded on fraud. The essence of the complaint is that ³⁸¹ defendants misrepresented the financial condition of Old Sunrise by failing to disclose that they had mismanaged Old Sunrise rendering the institution insolvent— The asserted injury emanated from mismanagement, not fraud.

Furthermore, in this case, the depositors’ loss cannot be separated from the injury suffered by the institutions and all other depositors, and the damages recoverable are assets of the institutions. Other federal courts have likewise held that the remedy for fraudulent representations affecting all depositors of an insolvent savings and loan association belongs to the institution’s receiver for the benefit of all depositors. See, e.g., Downriver Community Federal Credit Union v. Penn Square Bank, 879 F.2d 754 (10th Cir.1989); Brandenburg v. Seidel, 859 F.2d 1179 (4th Cir.1988). We find these decisions to be persuasive.

Appellees’ alleged mismanagement and misappropriation of Old Court funds are assertable by MDIF in its capacity as Old Court’s receiver — the damages recoverable for appellees’ mismanagement and wrongdoing are assets of MDIF as receiver of Old Court and successor-in-interest of MSSIC. 4 Appellants have alleged no special damages not common to other depositors. They allegedly relied upon misleading information available to all depositors. Appellants’ allegations of fraudulent representations are not distinct from the injury sustained by Old Court and all its depositors as a result of appellees’ mismanagement and wrongdoing. See Sunrise Securities, 916 F.2d at 887 (“The injury — loss of principal or interest — is