O'Donnell v. Sardegna

• Decision Date: 01 September 1993
• Docket Number: No. 138,138
• Citation: 336 Md. 18,646 A.2d 398
• Parties: Charles F. O'DONNELL, M.D. et al. v. Carl J. SARDEGNA et al. ,
• Court: Maryland Court of Appeals

Page 18

336 Md. 18

646 A.2d 398

Charles F. O'DONNELL, M.D. et al. v. Carl J. SARDEGNA et al.

No. 138, Sept. Term, 1993.

Court of Appeals of Maryland.

Aug. 25, 1994.

Abraham A. Dash, Bowie (Jon W. Brassel, Brassel & Baldwin, all on brief, Annapolis, Stephen J. Nolan, Nolan, Plumhoff & Williams, Chtd., all on brief), Towson, for appellant.

George Beall (Stephen J. Immelt, James J. Benjamin, Jr., Hogan & Hartson, all on brief, Baltimore), for appellees William A. Beasman, Jr.; Barry Bosworth; J. Owen Cole; Dan A. Colussy; M. Thomas Goedeke, Ed.D.; Frank A. Gunther, Jr.; John D. Jeffries; and Albin O. Kuhn.

Jeffrey B. Maletta ^* (Kirkpatrick & Lockhart, Washington, DC, Richard C. Burch, Mudd, Harrison & Burch, Towson, John E. Sandbower, III, Phillips P. O'Shaughnessy, Sandbower, Gabler & O'Shaughnessy, P.A., Robert E. Scott, Jr., P.C., Semmes, Bowen & Semmes, all of Baltimore, Chadbourne & Parke of New York City, all on briefs), for appellee.

Before MURPHY, C.J., and ELDRIDGE, RODOWSKY, CHASANOW, KARWACKI, BELL and RAKER, JJ.

RODOWSKY, Judge.

The plaintiffs in this case (Plaintiffs) are subscribers to health services insurance plans offered by a nonstock, nonprofit corporation. They sued, on behalf of the corporation, former officers and certain of the corporation's then present directors. Because no Plaintiff is a director or member of the corporation, no Plaintiff has standing to bring this derivative action.

The corporation is Blue Cross and Blue Shield of Maryland, Inc. (BCBSM). It is a Maryland nonstock corporation that resulted from the 1984 consolidation of Blue Cross of Maryland, Inc. and Blue Shield of Maryland, Inc. The articles of consolidation are the original form of the charter of BCBSM. The first of the purposes for which BCBSM was formed, as recited in the charter, is:

"(1) To establish, operate and maintain a non-profit health service plan as authorized by Subtitle 20 of Article 48A of the Annotated Code of Maryland and any and all amendments thereto, whereby hospital, medical, dental and other health care is provided by hospitals, physicians, dentists and other providers to persons who become subscribers to such plan, so that such health care and service may be obtained at a minimum cost and expense."

The charter further provides that "[t]here shall be no capital stock of the Corporation and it shall be operated as a non-profit organization." That basic document identifies by name the initial directors of BCBSM and provides that "[t]he Directors of the Corporation shall also constitute the members of the Corporation and, when meeting as Directors, may exercise the rights and powers of members." Upon the dissolution of BCBSM its remaining assets, per the charter, "shall be used exclusively for the benefit of or distributed to organizations entitled to exemption from federal income taxes under Section 501(c) of the Internal Revenue Code...."

The reference to Subtitle 20 in the purposes section of the BCBSM charter is to the Maryland Insurance Code subtitle on "Nonprofit Health Service Plans," which governs BCBSM. References in this opinion to the Insurance Code will be to Maryland Code (1957, 1991 Repl.Vol.), Art. 48A, unless otherwise indicated. Article 48A, § 355(b)(6), part of Subtitle 20, deals with the reserves of nonprofit health service plans. Under that section the Insurance Commissioner of Maryland (the Commissioner), after determining that reserves are excessive, may order the insurer to submit a plan for distribution of the excess reserves to subscribers covered at the time distribution is made. ¹ Nonstock corporations are governed by Md.Code (1975, 1993 Repl.Vol.), §§ 5-201 through 5-208 of the Corporations and Associations Article (CA). But, CA § 5-201 states that

"[t]he provisions of the Maryland General Corporation Law apply to nonstock corporations unless:

(1) The context of the provisions clearly requires otherwise; or

(2) Specific provisions of [the nonstock corporations] subtitle or other subtitles governing specific classes of corporations provide otherwise."

In the instant matter Plaintiffs do not contend that the Insurance Code, the CA Article, or a combination of both, prohibit BCBSM from limiting its membership to its directors, or from utilizing a self-perpetuating method for electing directors.

The present litigation is the direct result of an investigation of BCBSM by the staff of the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs of the United States Senate. The Senate staff report was made public on September 24, 1992, the first day of hearings conducted by the Subcommittee regarding BCBSM. That report concluded that BCBSM suffered from poor management.

From 1985 to 1992 the president and CEO of BCBSM was Carl J. Sardegna (Sardegna) who, in 1986, also became chairman of the board of directors of BCBSM (the Board). At a Board meeting on October 8, 1992, an outside director replaced Sardegna as chairman of the Board. The Board also appointed a special review committee of five directors to review operations and policies. At the Board meeting of December 4, 1992, the chairman produced Sardegna's resignation which the Board unanimously and immediately accepted. Prior to his resignation, Sardegna had terminated as BCBSM officers four persons later named as defendants in the instant action. Fred M. Gloth, Jr. (Gloth), also sued in this action, was a senior vice president and general counsel. He retired in February 1993.

Counsel for the Plaintiffs, by letter of March 4, 1993, made demand on BCBSM to bring action to recover losses caused by alleged mismanagement in certain areas of the corporation's activities. The Attorney General of Maryland on March 23, 1993 wrote to the Chairman of the Board expressing the view that the Board was compelled to make "a thorough and thoughtful examination" of the "misconduct" referred to by Plaintiffs' counsel and in the Senate staff report. At its meeting on March 25, 1993, the Board appointed a special committee to investigate possible claims of gross mismanagement and breach of fiduciary duties, and the Board authorized the employment of special counsel.

The instant action was commenced on March 31, 1993. Among those named as defendants were two of the three members of the special committee of the Board. Consequently, at the Board meeting of April 12, those two directors were replaced, as committee members, by two directors who were neither BCBSM employees nor members of the Board during the period 1985 through 1992 that was involved in the allegations of the Plaintiffs' complaint. That committee, known as the Special Litigation and Indemnification Committee (SLIC), was authorized to investigate and to decide on behalf of BCBSM whether to pursue claims raised by, or related to, the Plaintiffs' allegations. ²

The Plaintiffs ultimately stated their claims in a second amended complaint. They describe themselves as subscribers to various health service plans offered by BCBSM. ³ The defendants are Sardegna, Gloth, eight members of the Board as constituted when the second amended complaint was filed, the four former officers whose employment had been terminated, Booz-Allen & Hamilton, Inc., a consulting firm (Booz-Allen), and one of Booz-Allen's officers.

The Plaintiffs allege waste of corporate assets in perquisites, salaries, and bonuses. They allege millions of dollars of losses resulting from the formation and operation of a finance company as a subsidiary of BCBSM. They allege further losses in the millions of dollars from the formation and operation of another subsidiary engaged in a medical credit card business and in making and servicing loans to medical providers. They allege further losses of millions of dollars in connection with the attempted development of a claims processing computer system known as CARE. The Plaintiffs aver that the Booz-Allen defendants, together with BCBSM's former officers, concealed from the Board and from the public a Booz-Allen report concluding that expenditures for CARE were nearly triple the original $9 million estimate, that the costs of operating the system would exceed the cost of the existing system by a factor of two or three, and that the benefits of CARE were impossible to measure. The Plaintiffs recycle their factual allegations relating to the above-described subjects under the labels of various torts and breaches of fiduciary duties. The damages sought in each of the fifteen counts of the second amended complaint are to be paid to BCBSM.

In a section of the second amended complaint that presents general background facts under the heading, "Maintainability of the Action on Behalf of BCBSM," paragraphs 26 and 27 allege the following:

"26. The Plaintiffs are seeking an accounting and damages from members of the Board of Directors and Officers of BCBSM for corporate waste, breach of fiduciary duty, breach of implied contract, unfair trade practices, and gross negligence and gross mismanagement. Plaintiffs contend that because a majority of BCBSM's present Board members themselves have participated in many acts of waste and gross negligence and mismanagement, a demand upon the Board, itself, to commence this action would be futile."

"27. It is further alleged that contrary to the corporate mission set forth in the BCBSM Charter to provide health care and service at a minimum cost and expense, the Defendant Directors and Officers grossly misdirected corporate assets and resources causing substantial damages to this public trust company and its subscribers."

Pursuing the same theme, paragraph 28 alleges that the purpose of the charter in a nonstock, nonprofit corporation such as BCBSM is to protect the interests of the subscribers from the persons who control the corporation, so that there is an implied contract under which the directors and officers are "to conform to and fulfill the charter mission...."

The defendants moved to...