Hecht v. Resolution Trust Corp.

• Decision Date: 01 September 1993
• Docket Number: No. 4,4
• Parties: , 62 USLW 2438 Robert E. HECHT et al. v. RESOLUTION TRUST CORPORATION. Misc.,
• Court: Maryland Court of Appeals

Page 324

333 Md. 324

635 A.2d 394, 62 USLW 2438

Robert E. HECHT et al. v. RESOLUTION TRUST CORPORATION.

Misc. No. 4, Sept. Term, 1993.

Court of Appeals of Maryland.

Jan. 11, 1994.

Richard E. Dunne, III (George Beall and Kathryn W. Lovill, Hogan & Hartson, all on brief), Baltimore, for appellant.

Christopher A. Myers (Gina Schaar Howard and Colleen Covell, Dunnells & Duvall, all on brief), Washington, DC, for appellee.

Argued before MURPHY, C.J., and ELDRIDGE, RODOWSKY, McAULIFFE, ^* CHASANOW, KARWACKI and ROBERT M. BELL, JJ.

MURPHY, Chief Judge.

The questions presented in this case have been certified to us by the United States District Court for the District of Maryland, pursuant to the Uniform Certification of Questions of Law Act, Maryland Code (1989 Repl.Vol.) §§ 12-601 through 12-609 of the Courts and Judicial Proceedings Article, and Maryland Rule 8-305. They focus on the doctrine of adverse domination, which, in its several versions, may toll the running of limitations or accrual of a cause of action by a corporation against its officers and directors as long as they remain in control of the corporation.

I

Resolution Trust Corporation (RTC) ¹ instituted suit in the United States District Court for the District of Maryland on February 6, 1992, against the defendants, ten former directors and officers ² of Baltimore Federal Financial, F.S.A. (Baltimore Federal), a federally chartered mutual savings and loan association, for losses allegedly incurred as a result of reckless lending practices during the period 1983 to 1985. The complaint alleges counts of simple negligence, ³ gross negligence, breach of contract and breach of fiduciary duty for loans made by Baltimore Federal during that period. RTC alleges that the defendant directors and officers committed substantial sums of money to highly speculative and negligently underwritten commercial real estate and construction ventures that were excessively risky and ultimately resulted in claimed financial losses for Baltimore Federal in excess of $32,000,000.

RTC filed its claim in federal district court as assignee of the rights of Baltimore Federal; it asserts that the claim was assigned to it at the time it was appointed conservator of Baltimore Federal. This appointment was the culmination of a series of events marking the beginning of the end for the troubled institution.

The first event occurred in 1985, when the Federal Home Loan Bank Board (FHLBB), as part of its regulatory activities, conducted an examination of Baltimore Federal which resulted in a report severely critical of the institution's commercial real estate loan solicitation program, and, in particular, its large number of special purpose loans made out of the institution's normal lending area. ⁴ The report noted significant problems in record keeping and loan documentation controls.

The institution's difficulties continued when, on July 2, 1986, the FHLBB required Baltimore Federal to enter into a Supervisory Agreement which required, among other things, that Baltimore Federal remedy severe accounting and underwriting problems.

Baltimore Federal's financial condition worsened and by 1987 its losses began to mount as large commercial real estate loans fell into default. By February 8, 1988, the number of nonperforming loans had increased to so damage Baltimore Federal's financial condition that it was compelled to enter into a consent agreement with the FHLBB. The agreement set strict limits on the institution's commercial real estate and construction lending and upon executive compensation. Also in February 1988, CEO and Board Chairman Hecht was forced to resign.

On February 7, 1989, the FHLBB determined that Baltimore Federal was insolvent and appointed the Federal Savings and Loan Insurance Corporation (FSLIC) conservator of Baltimore Federal. On August 9, 1989, RTC succeeded the FSLIC as conservator. On April 19, 1990, RTC was appointed receiver of the institution. And on February 6, 1992, one day short of three years after the appointment of the FSLIC as conservator, RTC brought this action against the defendant directors and officers.

In its complaint RTC focuses its claims on six specific commercial real estate loans, ⁵ all of which took place between November 11, 1983, and July 31, 1985, more than six and a half years before RTC filed this suit.

In the federal district court, all defendants raised limitations defenses by motion to dismiss or for summary judgment or by answer. They argued that RTC's claims were barred by Maryland's three-year statute of limitations, Maryland Code (1989, 1992 Cum.Supp.) § 5-101 of the Courts Article. ⁶ Judge Norman Ramsay denied the motions and held that this Court would adopt the adverse domination doctrine so as to toll the running of limitations so long as a majority of the corporate board consisted of persons liable for the subject cause of action. Following Judge Ramsay's retirement, the defendants moved to have Judge Marvin Garbis reconsider the ruling on adverse domination. Judge Garbis denied the motions, but disagreed with Judge Ramsay as to how this Court would rule on the adverse domination doctrine. Judge Garbis predicted that we would view the adverse domination doctrine as a corollary of the discovery rule. Under this view of the doctrine, limitations would be tolled only if, and until, a person reasonably able to cause the corporation to commence a law suit had knowledge sufficient under discovery rule jurisprudence to trigger the running of limitations.

Thus, the District Court has certified for our consideration the following questions, 833 F.Supp. 529:

1. Does Maryland law recognize the doctrine of adverse domination in any form or to any extent to toll the running of the Maryland Statute of Limitations or delay accrual of the causes of action alleged in the complaint filed in this case against former corporate officers and directors?

2. If the answer to Question 1 is in the affirmative, in what form and to what extent is the doctrine applicable in the context of the claims alleged in the complaint in this case?

II

A

Maryland law provides that directors of a corporation exercise all powers of the corporation, ⁷ unless conferred on or reserved to stockholders. Maryland Code (1975, 1993 Repl.Vol.) § 2-401 of the Corporations and Associations Article. In so doing, the board of directors acts as a unit. A director may not act alone for the corporation without authority from the board; rather, a director acts only as a member of the board whose identity is merged into the board. Jackson v. Trust Co., 176 Md. 505, 509, 6 A.2d 380 (1939). The same holds true for officers of a corporation; they cannot bring suit without approval of a majority of the board. Waller v. Waller, 187 Md. 185, 189, 49 A.2d 449 (1946). As a general rule, shareholders are also barred from bringing actions on behalf of the corporation. Davis v. Gemmell, 70 Md. 356, 376, 17 A. 259 (1889).

B

Section 5-101 of the Courts Article provides that "A civil action at law shall be filed within three years from the date it accrues unless another provision of the Code provides a different period of time within which an action shall be commenced." This rule is not absolute; other sections of the Courts Article provide different limitations periods for particular actions. See, e.g., § 5-102 (12-year limitation for actions on specialties), § 5-103 (20-year limitation for adverse possession), § 5-105 (one-year limitation on actions for assault, libel or slander). The Maryland legislature has also created several exceptions which toll limitations in certain situations. See, e.g., § 5-201 (persons under a disability), § 5-205 (absence from state or moving from county).

Statutes of limitation reflect legislative judgment of what is an adequate time for a person of ordinary diligence to bring an action. Pennwalt Corp. v. Nasios, 314 Md. 433, 437, 550 A.2d 1155 (1988); Pierce v. Johns-Manville Sales Corp., 296 Md. 656, 665, 464 A.2d 1020 (1983); Walko Corp. v. Burger Chef, 281 Md. 207, 215, 378 A.2d 1100 (1977). One of their purposes is to ensure fairness to defendants by encouraging promptness in bringing claims, thus avoiding problems that may stem from delay, such as loss of evidence, fading of memory, and disappearance of witnesses. Pennwalt, supra, 314 Md. at 437, 550 A.2d 1155; Pierce, supra, 296 Md. at 665, 464 A.2d 1020. Statutes of limitation are statutes of repose, allowing individuals the ability to plan for the future without the indefinite threat of potential liability. They serve society by promoting judicial economy. Pierce, supra, 296 Md. at 665, 464 A.2d 1020. But their purpose also is to serve plaintiffs, by providing adequate time for a diligent plaintiff to bring an action. Pennwalt, supra, 314 Md. at 437, 550 A.2d 1155.

We have long maintained a rule of strict construction concerning the tolling of the statute of limitations. Absent legislative creation of an exception to the statute of limitations, we will not allow any "implied and equitable exception to be engrafted upon it." Booth Glass Co. v. Huntingfield Corp., 304 Md. 615, 623, 500 A.2d 641 (1985); Walko, supra, 281 Md. at 211, 378 A.2d 1100; McMahan v. Dorchester Fert. Co., 184 Md. 155, 160, 40 A.2d 313 (1944).

Under § 5-101 the statute of limitations begins to run from the time the action "accrues." Because the term "accrue" is undefined by the legislature, ⁸ the question of accrual is left to judicial determination. Poffenberger v. Risser, 290 Md. 631, 633, 431 A.2d 677 (1981); Goldstein v. Potomac Elec. Power Co., 285 Md. 673, 684, 404 A.2d 1064 (1979); Harig v. Johns-Manville Products, 284 Md. 70, 75, 394 A.2d 299 (1978). Therefore, when limitations are at issue, it is necessary to judicially determine when accrual occurred to trigger the operation of the statute. This determination may be based solely on law, solely on fact, or on a combination of law and fact. Poffenbe...