# Hecht v. Resolution Trust Corp.

> Court of Appeals of Maryland · January 11, 1994 · 333 Md. 324

URL: https://www.frixlaw.com/law-library/cases/9648257

## Case

- **Full name:** Robert E. HECHT Et Al. v. RESOLUTION TRUST CORPORATION
- **Court:** Court of Appeals of Maryland
- **Decided:** January 11, 1994
- **Citations:** 333 Md. 324; 635 A.2d 394; 1994 Md. LEXIS 9
- **Precedential status:** Published
- **Opinion:** Dissent by Bell
- **Judges:** Bell, Murphy
- **Cited by:** 139 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9648257

## How later opinions describe it (automated extraction)

- stating that the discovery rule applies generally in all civil actions and “provides that a cause of action accrues when a plaintiff in fact knows or reasonably should know of the wrong”
- holding that Maryland does not allow implied or equitable exceptions to the statute of limitations, absent legislative exception

## Opinion text

ROBERT M. BELL, Judge,
dissenting.
I agree with the majority that the adverse domination theory is a corollary to the discovery rule and, therefore, properly is characterized as an accrual doctrine. On the other hand, I disagree that it is the “disinterested majority” variant of the theory that should be adopted as the law of Maryland. On the contrary, I believe that the “single disinterested director” version, as enunciated in Farmers & Merchants Nat’l Bank v. Bryan, 902 F.2d 1520 (10th Cir.1990), is more consistent with Maryland law and, thus, it is that variant that ought to be adopted. Under the “single disinterested director” theory of adverse domination, the burden is placed on the plaintiff to prove that there was, during the period of domination, no director who could, or would, have brought suit on behalf of the corporation. 1
*354 Adverse domination has relevance only in the context of an attempt to avoid the preclusive effect of the statute of limitations on a cause of action. Only when the defendant raises the statute of limitations as a bar and establishes its application does the issue of corporate control, or domination, become an issue. That the corporation was controlled, or dominated, by the defendants during the period in which the actionable conduct occurred is a matter which affects whether the corporation should be held to account for the delay in instituting suit; it tolls the running of the statute of limitations. RTC v. Kerr, 804 F.Supp. 1091, 1094-95 (W.D.Ark.1992); RTC v. Gallagher, 800 F.Supp. 595 (N.D.Ill.1992); FDIC v. Carlson, 698 F.Supp. 178, 180 (D.Minn.1988). See FSLIC v. Williams, 599 F.Supp. 1184, 1194 (D.Md.1984). Its rationale is that the wrongdoers should not reap the benefit when the possibility of suit is foreclosed by virtue of their control of corporate decision making. Moviecolor Limited v. Eastman Kodak Co., 288 F.2d 80, 83 (2d Cir.), cert. denied, 368 U.S. 821 , 82 S.Ct. 39 , 7 L.Ed.2d 26 (1961); Saylor v. Lindsley, 302 F.Supp. 1174, 1184 (S.D.N.Y.1969); FDIC v. Howse, 736 F.Supp. 1437, 1441-42 (S.D.Tex.1990). As the Howse court put it:
“As long as the. majority of the board of directors are culpable they may continue to operate the association and control it in an effort to prevent action from being taken against them. While they retain control they can dominate the non-culpable directors and control the most likely sources of information and funding necessary to pursue the rights of the association. As a result, it may be extremely difficult, if not impossible, for the corporation to discover and pursue its rights while the wrongdoers retain control.”
736 F.Supp. at 1442 , quoting Williams, 599 F.Supp. at 1193 -94 n. 12. Moreover, as stated in Williams, 599 F.Supp. at 1194 , quoting FDIC v. Bird, 516 F.Supp. 647, 652 (D.P.R.1981), quoting First State Bank of Hudson County v. United States, *355 599 F.2d 558, 568-64 (3d Cir.1979), cert. denied, 444 U.S. 1013 , 100 S.Ct. 662 , 62 L.Ed.2d 642 :
The rationale for this principle is that control of the association by culpable directors and officers precludes the possibility of filing suit because these individuals can hardly be expected to sue themselves or to “initiate any action contrary to their own interests.”
See also FDIC v. Hudson, 673 F.Supp. 1039, 1042 (D.Kan.1987); cf. Carlson, 698 F.Supp. at 180 ; FSLIC v. Burdette, 696 F.Supp. 1196, 1200 (E.D.Tenn.1988); FDIC v. Buttram, 590 F.Supp. 251, 254 (N.D.Ala.1984).
Like the discovery rule, under which a cause of action accrues at the time the plaintiff first knows, or reasonably should have known, of the alleged wrong, Pennwalt Corp. v. Nasios, 314 Md. 433, 441 , 550 A.2d 1155, 1159 (1988); Poffenberger v. Risser, 290 Md. 631, 636 , 431 A.2d 677, 680 (1981); Harig v. Johns-Manville Products Corp., 284 Md. 70 , 394 A.2d 299 (1978), adverse domination is an exception to the general rule that a cause of action accrues when the wrong is done. Bird, 516 F.Supp. at 651 ; Williams, 599 F.Supp. at 1194 ; FDIC v. Hudson, 673 F.Supp. 1039, 1041-42 (D.Kan.1987).
In Farmers & Merchants Nat’l Bank v. Bryan, 902 F.2d 1520 (10th Cir.1990), the doctrine of adverse domination was applied in a case much like the one sub judice, where the former officers and directors were sued for violating federal lending limits and making imprudent loans. Characterizing the doctrine “as another equitable vehicle under federal common law for tolling the statute of limitations,” the court, in effect, equated it with the application of the discovery rule in cases where there is active concealment. See id. at 1522. Explaining the relevant inquiry, the court said:
“[A] plaintiff who seeks to toll the statute on the basis of domination of a corporation has the burden of showing “a full, complete and exclusive control in the directors or officers charged.” Payne v. Ostrus, 50 F.2d 1039, 1042 , 77 A.L.R. 531 (8th Cir.1931). Such control was found for *356 example, in Adams v. Clarke, 22 F.2d 957 (9th Cir.1927), where all the directors were accused of wrongdoing and held a majority of the capital stock, and also in our [Michelsen v. Penney ] case, supra [ 135 F.2d 409 ] (2d Cir.1943). This principle must mean at least that once the facts giving rise to a possible liability are known, the plaintiff must effectively negate the possibility that an informed director could have induced the corporation to sue.”
Id. at 1522-23, quoting International Railways of Central America v. United Fruit Company, 373 F.2d 408, 414 (2d Cir.), cert. denied, 387 U.S. 921 , 87 S.Ct. 2031 , 18 L.Ed.2d 975 (1967). The court added: “Of course, a plaintiff may also demonstrate adverse domination by proving that an informed director, though capable of suing, would not do so.” Id. at 1523. Thus, the court placed the burden of proving that the corporation should be excepted from the rule that an improper loan accrues at the time the loan is made squarely on the shoulders of the plaintiff, the proponent of the action. See United Fruit Co., 373 F.2d at 419 ; see also ITT v. Cornfeld, 619 F.2d 909 , 931 (1980); Michelsen v. Penney, 135 F.2d 409, 415-16 (2d Cir.1943); Moviecolor Limited, 288 F.2d at 88-90 . The majority, on the other hand, would place that burden on the defendant. As it sees it:
This presumption [engendered by the “disinterested majority” version of the adverse domination doctrine] can be rebutted ... by evidence that someone other than the wrongdoing directors had knowledge of the cause of action, and both the ability and the inclination to bring suit. This burden of production is on the defendant, who has the obligation to prove the defense of limitations.
Maj. op. at 347. The majority cites, for support, Newell v. Richards, 323 Md. 717, 725 , 594 A.2d 1152, 1156 (1991).
In Newell , the question presented concerned the allocation of the burden of proof “when a defendant asserts that the three-year ‘discovery’ provision of § 5-109(a)(2) should bar a claim that is filed within the five-year provision of § 5-109(a)(1).” 323 Md. at 724-25 , 594 A.2d at 1156 . Although we *357 recognized the general rule that the party relying on the statute of limitations to avoid a cause of action carries the burden both to plead and prove the statute as an affirmative defense, id., we also acknowledged, citing and discussing Finch v. Hughes Aircraft Company, 57 Md.App. 190 , 469 A.2d 867 , cert. denied, 300 Md. 88 , 475 A.2d 1200 (1984), cert. denied, 469 U.S. 1215 , 105 S.Ct. 1190 , 84 L.Ed.2d 336 , reh’g denied, 471 U.S. 1049 , 105 S.Ct. 2043 , 85 L.Ed.2d 341 (1985), and Comptroller v. World Book Childcraft Internat'l, Inc., 67 Md.App. 424 , 508 A.2d 148 (1986), that, under certain circumstances, a plaintiff may have the burden of proof even though a limitations defense has been interposed. We explained why those cases were distinguishable and, so, provided the rationale for the principle which is applicable in the case sub judice:
The issue in World Book 2 was whether or not a tax assessment could be maintained where the defendant could show that the claim was, on its face, barred by limitations. In that case, the rationale for placing the burden of proof on the plaintiff to show the statute of limitations had not run was that the plaintiff was trying to evoke an exception to the statute of limitations and should have the burden to prove the exception. Finch involved a plaintiff who alleged that fraudulent concealment had prevented filing an action for breach of contract within the statutory period. Probably the most typical situation where the courts apply the cited principle is in cases of fraudulent concealment, such as Finch . In these cases, the burden is on the plaintiff to *358 show an expired limitations period should not bar a claim. Thus, the legal principle cited by Richards is usually applied where a plaintiff concedes that the statutory period has run but asserts that some equitable reason or exception exists which prevents the claim from being barred. This was the situation in both Finch and World Book.
Newell, 323 Md. at 725-26 , 594 A.2d at 1156-57 .
This is precisely the situation in this case. The plaintiff does not maintain that the elapsed time between the occurrence of the actionable conduct and the filing of suit does not exceed the period of limitations applicable to the cause of action brought; rather, the plaintiff argues that it would be inequitable to allow the preclusive effect of the statute of limitations to apply in this case. This is so, it says, because the corporation, which can act only through agents, was controlled by the very persons who are being sued for the wrongful conduct and it would be inequitable to allow those agents to benefit from that control. Having conceded that, but for the adverse domination, limitations would have run, but arguing that the adverse domination doctrine is an exception to the rule that a cause of action “accrues” immediately, as we recognized in Newell , the plaintiff should bear the burden of proving the exception.
That the plaintiff uses the term, “accrue,” in discussing the exception is not dispositive of the resolution of this issue. Accrual, in the sense in which the plaintiff uses it, relates to the ability of the corporation to bring the action, not whether the acts constituting the cause of action were known, or should have been known, at some earlier time. The causes of action brought by the plaintiff accrued, in the usual sense, when the conduct, on the basis of which the actions were brought, was engaged in — when the imprudent loans were made. There is no allegation that there was fraud in this case or that the loan policy of the corporation, or any other action taken by the defendants in this case, was the subject of any active concealment efforts on the part of the defendants. Indeed, in this case, it is not at all clear that the entire board of directors voted in favor of each of the subject loans. It may be that the *359 knowledge of directors who voted against the transactions may be attributable to the corporation, thus giving the corporation knowledge of the cause of action. Under that scenario — a divided vote on the loans — notwithstanding that the corporation was controlled by directors who voted in favor of the loans, it would have been possible for suit to have been brought on behalf of the corporation. Parish v. Maryland and Virginia Milk Producers Association, 250 Md. 24, 81-82 , 242 A.2d 512, 544 (1968), cert. denied, 404 U.S. 940 , 92 S.Ct. 280 , 30 L.Ed.2d 253 (1971) (single director or shareholder can bring action on behalf of corporation without making demand on the board of directors to do so when futile to make such demand).
I would assume, without deciding, that the doctrine of adverse domination would apply in this case and then answer the second question as follows: Maryland recognizes that variant of the adverse domination doctrine known as the “single disinterested director” as enunciated in Bryan.
CHASANOW, J., joins in the views herein expressed.
. I question the application of the adverse domination doctrine when the issue whether there is a cause of action depends upon an evaluation of the exercise of judgment by the directors. There is a significant difference between defrauding the corporation and its shareholders and, in good faith, using bad judgment, even to the point of recklessness. The cases, however, recognize the applicability of adverse domination in the imprudent loan context. Bryan, 902 F.2d 1520 ; FDIC v. Carlson, 698 F.Supp. 178 (D.Minn.1988); FSLIC v. Williams, 599 *354 F.Supp. 1184 (D.Md.1984). Because I believe that the burden of proof issue is dispositive in this case, there is no need to address whether this fundamental question heretofore has been decided properly.
. In Comptroller v. World Book Childcraft Internat’l, Inc., 67 Md.App. 424, 444 , 508 A.2d 148, 158 (1986) (citations omitted), the Court of Special Appeals opined:
[A] party relying on a matter in avoidance of the statute of limitations defense bears the burden of proving such a matter where it is shown that the cause of action accrued earlier than permitted by applicable statute.
In applying this rule to common law fraud or breach of contract actions, and in civil actions generally ... we have held that the "burden is on [the plaintiffs] to prove that they did not discover the alleged wrong” until after the limitations had expired.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9648257. Public record. Not legal advice.