McDaniel v. Frisco Emp. Hospital Ass'n

• Decision Date: 09 April 1974
• Docket Number: No. 35017,35017
• Citation: 510 S.W.2d 752
• Parties: G. I. McDANIEL et al., Plaintiffs, v. FRISCO EMPLOYES' HOSPITAL ASSOCIATION, and C. D. Ross, et al., Defendants. . Louis District, Division Two
• Court: Missouri Court of Appeals

Page 752

510 S.W.2d 752

G. I. McDANIEL et al., Plaintiffs, v. FRISCO EMPLOYES' HOSPITAL ASSOCIATION, and C. D. Ross, et al., Defendants.

No. 35017.

Missouri Court of Appeals, St. Louis District, Division Two.

April 9, 1974.

Motion for Rehearing or Transfer Denied May 14, 1974.

Application to Transfer Denied July 22, 1974.

C. Dudley Martin, Springfield, Edward L. Dowd, Francis M. Oates, St. Louis, for plaintiffs-appellants.

George E. Bailey, Gerald D. Morris, St. Louis, for defendants-respondents.

McMILLIAN, Judge.

This is an appeal by plaintiffs, members of the Frisco Employes' Hospital Association, a non-profit corporation, from a judgment of dismissal entered by the Circuit Court of the City of St. Louis, Missouri, in favor of defendants, members of the board of trustees of the Association. Plaintiffs' cause of action challenged a series of actions by the trustees designed to lead to the ultimate dissolution of the Association. For reasons stated herein, we reverse the judgment of the Circuit Court.

The Frisco Employes' Hospital Association (herein, 'Hospital Association') was incorporated in St. Louis, Missouri, by pro forma decree in 1898 under what is now Section 352.180, RSMo 1969, V.A.M.S. Its Articles of Incorporation declared its object to provide medical and surgical treatment for the employees of the St. Louis and San Francisco Railroad Company and its associated companies. In furtherance of that purpose, trustees were appointed to manage the affairs of the Hospital Association and were empowered to provide a hospital and otherwise deal with any property the corporation acquired. ¹

Under Chapter 352 the right to vote on voluntary dissolution of the Association was expressly conferred on the members. ² The Bylaws did not provide for any meeting of the membership which totaled, at the time this suit was filed, at least 10,000 persons, including both active and retired employees.

In September of 1966 the Board of Trustees adopted a Resolution to submit a letter ballot to the membership. The issue was whether or not the Association should discontinue its medical, surgical, and hospital services to its members, to be effective on a date fixed by the Board. In addition, the ballot provided that the members' obligation to pay dues, which was the condition of membership, would cease on that date. Further, no new members would be admitted, but those already members would retain their status until dissolution of the Association was completed. On November 30, 1966, the balloting done, of over 7,000 members voting, only 2,684 affirmed the Board's proposition.

Notwithstanding the results of the letter ballot, in October of the following year, the Board adopted a Resolution that the Association discontinue providing services effective January 1, 1968, or as soon thereafter as arrangements could be made for coverage of Association members under other plans, but no later than April 1, 1968. A second Resolution was also passed at that time directing the officers of the Association to take necessary steps to cause the corporation to accept the provisions of now Section 355.020, RSMo 1969, V.A.M.S. Articles of Acceptance were duly executed, the St. Louis Circuit Court approved them, and on November 13, 1967, the Secretary of State issued a Certificate of Acceptance.

After December of 1967, none of the above-mentioned services were furnished. In May of 1968, the corporation's principal asset, the St. Louis Hospital, was sold. In September of 1969, the Board resolved to dissolve the Association and adopted and filed with the Attorney General a plan of distribution of the net assets which totaled some six hundred thousand dollars. The plan provided for equal sharing among the members and a distribution of fifty dollars per member was made in November of 1969 amounting to $484,182.00. Dissolution was not effected at the time this suit was filed in November, 1969 or when it was tried in April, 1972.

The parties allege numerous grounds for reversal or affirmance of the Circuit Court. Plaintiffs urge that the court erred in denying them relief as a matter of law on the grounds that:

(1) the Trustees violated the charter and, hence, breached their duty under it by terminating the medical and surgical services to the members of the Association without their consent;

(2) the Trustees wrongfully rejected the provisions of Chapter 352 in favor of accepting Chapter 355 and thereby deprived the membership of the right to vote on the ultimate dissolution of the Association; and

(3) plaintiffs acted for the benefit of the corporation and all its members and so were entitled to costs and attorneys' fees.

On the other hand, Hospital Association argues that:

(1) the Trustees properly discontinued service;

(2) properly adopted the provisions of Chapter 355;

(3) costs and attorneys' fees were properly denied because plaintiffs' suit was unsuccessful and failed to benefit the class;

(4) there was no true class suit;

(5) plaintiffs were estopped to bring the suit by accepting the distribution checks; and

(6) plaintiffs were guilty of laches.

The Hospital Association's affirmative defenses (4), (5) and (6) are without merit. As plaintiffs countered and the court below concluded, plaintiffs were representative of the members of the Association and were in a position to fairly and adequately defend the interests of the class. Plaintiffs themselves were members of the Association which consisted of employees of the Frisco Railroad and of all subsidiary companies. Moreover, the letter ballot indicated the sentiment of a majority of the membership that the Association continue in existence and continue furnishing health services.

Application of the doctrine of estoppel is not germane here. An essential element is lacking--detrimental reliance induced in the party asserting the defense. Nor can the companion principle of ratification be resorted to in order to bar the members' rights. The trustees failed to meet their burden of proof showing that the members had knowledge of all material facts whereby they ratified the unauthorized acts of the Board. B & H Warehouse, Inc. v. Atlas Van Lines, Inc., 348 F.Supp. 517 (1972), applying Delaware law. Indeed, it is arguable that such acts could not have been ratified where they were void by statute or against public policy or strictly ultra vires. 2 Fletcher, Cyclopedia Corp. (Perm.Ed., 1973 Supp.) §§ 764, 780; Whitehead v. Farmers' Fire & Lightning Mut. Ins. Co., 227 Mo.App. 891, 60 S.W.2d 65, 71 (1933); Westlake Hosp. Ass'n v. Blix, 13 Ill.2d 183, 148 N.E.2d 471 (Ill.App.1958), cited in Kern v. Chicago & Eastern R. Co., 31 Ill.App.2d 300, 175 N.E.2d 408, 413 (1961), aff'd 44 Ill.App.2d 468, 195 N.E.2d 197 (1963).

Laches, another equitable principle, contemplates more than mere lapse of time. The doctrine may be invoked where the corporation (or, here the Trustees as agents for the corporation) is injured by unreasonable delay with knowledge of the material facts in bringing suit or in diligently prosecuting it. The membership of a corporation, especially where, in this case, no meetings are provided for in the Bylaws, is not held to know corporate affairs, 18 C.J.S. Corporations § 487; American Well & Pros. Co. v. Blackemore, 184 Cal. 343, 193 P. 779, 785 (1920); and we cannot say that these plaintiffs sat on their rights and have consequently lost them.

Plaintiffs first contend that the Board of Trustees violated the Association's charter and breached their collective duty under it by terminating services to the members without their consent. Did the membership have a right to continue receiving these services? We must answer affirmatively.

As noted above, the purpose for which this corporation was created, as provided in its charter, was to provide medical, surgical, hospital care, and treatment for member employees of the Frisco Railroad and its subsidiaries.

Members in both a stock, as well as a non-stock corporation are possessed of rights inherent in and as incidents of their membership. In this case the members were possessed of a valuable contract right to the health care services and a protectable interest in the corporate property, to wit, use and enjoyment thereof. Peters v. United States Mortgage Co., 13 Del.Ch. 11, 114 A. 598 (1921), cited in Voege v. Am.Sumatra Tobacco Corp., 241 F.Supp. 369, 373--374 (1965), applying Delaware law; Whitehead, supra, p. 71; Graham v. Kirchner, 365 Mo. 806, 287 S.W.2d 830 (1956). See also Gidwitz vs. Lanzit Corrugated Box Co., 20 Ill.2d 208, 170 N.E.2d 131, 135 (1960). We would not go so far as some Illinois cases as to hold that members of a non-profit corporation have the benefit of absolutely no constitutional protection of any right to vote, Westlake, supra, especially where such right is conferred by valid statute. The Illinois cases, however, seem to restrict application of the rule to situations such as the question of the right to vote on trustees or on purely management decisions, which restrictions Missouri likewise recognizes.

There is even authority for the proposition that distinct from the traditional contract between the corporation and its members arising by virtue of the charter and bylaws, a second contract exists. In a non-stock or mutual benefit corporation, a second contract may be said to arise between the corporation as insurer and member as insured. This corollary relation occurs when the members actually sign the constitution or bylaws, or when the application for membership is duly accepted and a policy or certificate or document containing the agreed benefits is issued, or merely by conduct, such as the receipt and retention of membership fees. Purdy v. Bankers' Life Ass'n, 74 S.W. 487 (Mo.App.1903); 8 Fletcher, supra, § 4198, 12a Fletcher, supra, § 5690.

These rights are enforceable in appropriate circumstances. Particularly in the case of an ultra vires exercise of power, an action lies where there...