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April 10, 1970

Leonard S. GOODMAN et al., Plaintiffs,

Waddy, District Judge.

The opinion of the court was delivered by: WADDY


WADDY, District Judge.

 In this case the plaintiffs who are investing and borrowing members of Perpetual Building Association, sued said Association, its nine directors individually, and the Fidelity Investment Company, a partnership, all of the general partners of which are the same directors of Perpetual, for injunctive and other relief. All of plaintiffs' claims with the exception of one were disposed of by Judge George L. Hart of this Court by order dated March 7, 1968, granting partial summary judgment for all of the defendants. Plaintiffs' remaining claim is that: "Fidelity receives and unlawfully retains commissions for writing insurance on property securing the repayment of loans made by Perpetual." They predicate their claim upon the contention that the directors of Perpetual have unlawfully deprived Perpetual of a "corporate opportunity"* and violated their fiduciary duty by failing to qualify Perpetual to place hazard insurance on loans made by it and receive commissions therefor and by diverting such business to Fidelity. It is the position of the defendants that:

 (1) Plaintiffs have no standing to maintain this suit;

 (2) Plaintiffs have not exhausted their administrative remedies;

 (3) The doctrine of primary jurisdiction requires that this matter be first considered by the Federal Home Loan Bank Board;

 (4) That it would be ultra vires for Perpetual to take out insurance license;

 (5) That District of Columbia law precluded and still precludes Perpetual from engaging in the insurance business as agent or broker.

  The cause came on to be heard by the Court sitting without a jury and the first three contentions of the defendants were the subject of a motion made at the beginning of the trial by Perpetual, joined in by the nine directors, to dismiss the complaint. This motion was overruled by the Court and reasons were stated on the record. The Court having now considered the evidence adduced at trial, the memoranda of the parties and the arguments of counsel, sets forth in this Memorandum Opinion its Findings of Fact and Conclusions of Law.

 This is a derivative suit in the nature of a class action maintainable under Rule 23(a) and (b)(2) of the Federal Rules of Civil Procedure brought by two plaintiffs, Leonard S. Goodman and Barbara L. Goodman, his wife. Plaintiffs and the class they represent are investing and/or borrowing members of Perpetual Building Association. Plaintiffs have been investing (depositing) members of defendant Perpetual Building Association (hereinafter "Perpetual") since October 6, 1964, and borrowing members of Perpetual since August 16, 1962.

 The defendant Perpetual, is a voluntary unincorporated association of depositing and borrowing members organized in 1881 under the laws of the District of Columbia and engaged in the business of a building and loan association in the District of Columbia and, since about 1949, in Maryland, maintaining offices in both jurisdictions. Although Perpetual does not maintain an office in the State of Virginia, it does make loans which are secured by first deeds of trust on properties located in the State of Virginia. The Virginia State Corporation Commission has stipulated with Perpetual that the above-described Virginia-related activities of Perpetual do not constitute doing business in Virginia.

 The defendant Fidelity Investment Company (hereinafter "Fidelity") is a partnership engaged in the business of managing properties, making short term loans, and acting as an insurance agent or broker in the District of Columbia, Maryland and Virginia. Fidelity was organized in 1947. It is the successor to the Fidelity Mortgage and Investment Company (hereinafter referred to as "Fidelity Corporation"), a Delaware corporation that was organized on May 31, 1927, at the suggestion of the defendant, Edward C. Baltz, who was then Perpetual's Assistant Secretary and a director, and who is the present Chairman of Perpetual's Board of Directors. Prior to its dissolution on January 1, 1947, Fidelity Corporation conducted a general real estate business, which included acting as a licensed insurance broker in the District of Columbia. During its existence each of the stockholders of Fidelity Corporation was also a director of Perpetual.

 The nine individual defendants are members of and together comprise the entire Board of Directors of Perpetual. These same nine individual defendants are also general partners of Fidelity. Fidelity has no other general partners. Over the years as the directors of Perpetual have changed, the partners of Fidelity have similarly changed. As general partners, the nine individual defendants provide Fidelity with general supervision and share equally in the net profits earned by Fidelity from all sources of business conducted by that partnership, including business generated through Perpetual.

 Seven of Perpetual's nine directors have met informally on a daily basis for a number of years to discuss matters of importance to the Association. Formal meetings of the Board of Directors are held once a month. The minutes of such monthly meetings do not include discussions since, as a general rule, only the actions taken are recorded.

 Perpetual is comprised of approximately 140,000 depositing members and 30,000 borrowing members. Each member has only one vote even if he has more than one account and regardless of the amount he may have on deposit, and even if he is both a depositing and a borrowing member. Only the depositing members are paid dividends from the profits of the Association. Pursuant to its By-Laws a meeting of the members is held once a year, and is normally attended by one hundred (100) to one hundred-fifty (150) members.

 The By-Laws of Perpetual provide also that:


"I. Meetings of Members


"2. Special meetings of the members shall be held upon call by the Board of Directors or upon written request to the Board of Directors signed by fifty members in good standing which shall state the object and purpose for which the special meeting is requested.


"3. The members present, in person or by proxy, at any meeting of members shall constitute a quorum for the transaction of business.


"4. The time and place of the annual meeting of members shall be advertised for three successive days in two local newspapers, all of which days shall be more than seven days before the date of the meeting.


"5. The time and place of any special meeting of members shall be advertised in the same manner as annual meetings, but the advertisement of a special meeting shall state the object and purpose for which the special meeting is called.


* * *


"9. Any members desiring to do so may give a proxy which shall be in writing, and which shall be filed with the Executive Committee of the Association at least thirty days before the date of the meeting at which it is used, and which shall be valid and remain in force until revoked in writing by the grantor * * *."

 The individual members of the Board of Directors of Perpetual hold approximately 48,000 proxies.

 Prior to the institution of this action neither plaintiff had ever attended an annual meeting of Perpetual; nor had either ever in writing or verbally brought their complaint to the attention of Perpetual. Neither plaintiff made any effort to determine the attitude of the members with respect to the matter in question or to call their grievances to the attention of the membership. The Court finds, however, that in view of the negative positions of the directors with respect to the matters complained of by the plaintiffs and by virtue of the extremely small turnout of members to shareholder meetings in relation to the size of the membership as well as the great number of proxies held by the same interested directors, an appeal by the plaintiffs to the Board of Directors and/or to the membership in order to secure the changes they desired would have been useless, and therefore a futile act.

 Perpetual was established in 1881. It makes first mortgage, monthly reduction loans secured by real property. It has known constant growth and its assets were approximately $555,000,000 in 1969.

 In connection with its loans Perpetual requires its borrowing members to obtain and pay for hazard insurance to protect Perpetual's security, all as provided in the deed of trust executed by the borrower. The borrower may select his own insurance carrier or he may authorize Perpetual to arrange for the placing of the insurance. At the time he executes the Deed of Trust securing the loan the borrowing member is advised by a Perpetual employee that "Fidelity Investment Company * * * is a business made up of the Directors of Perpetual Building Association and that it places hazard insurance." If the borrower does not select an insurance agent or broker Perpetual will arrange for the placement of the insurance. In recent years it has been the practice of Perpetual to place the major portion of the hazard insurance not otherwise placed by the borrower through Fidelity, which receives a commission from the insurance company with which the risk is placed. No portion of such commissions is paid to Perpetual. The general partners of Fidelity, however, share equally in all of the profits of the partnership. If the borrower selects an agent or broker other than Fidelity, Fidelity receives no commission on the insurance written to cover that particular property.

 Fidelity is a qualified (licensed) policy writing agent and insurance broker in the District of Columbia and it acts as agent or broker on hazard and other insurance related to some first mortgage loans made by Perpetual and others on properties located in the District of Columbia for which it receives commissions. Fidelity has policy-writing authority from three major insurance companies. Fidelity does not write certain forms of multi-peril insurance, but it does refer requests for such coverage to other brokers and it handles all inquiries and contacts concerning such insurance.

 Perpetual maintains an "Insurance Department" which, before a loan is disbursed, approves the insurance company assuming the hazard insurance, and the amount of insurance and maintains a tickler card file and copies of all insurance policies currently in force. The basic purpose of this department is to make sure that the properties securing Perpetual loans are continuously protected by adequate insurance. When a borrower does not obtain his own insurance, Perpetual's Insurance Department forwards to Fidelity a completed form entitled "Insurance Order" which contains the information necessary to obtain insurance coverage. Fidelity thereupon writes or brokers the required insurance for which it receives a commission. Once a month Fidelity is billed by the insurance companies for the premiums on business written during the month. On business generated through Perpetual, Perpetual collects and remits the full premiums to Fidelity as same are due and Fidelity reconciles the amounts remitted by Perpetual with the insurance company invoices, deducts its commission and pays the premiums due.

 Perpetual is not now and there is no evidence that it has ever been licensed as an insurance agent or broker in the District of Columbia, Maryland or Virginia, or elsewhere. Perpetual's Board of Directors have been advised by its attorneys (who have also been members of its Board of Directors) that Perpetual cannot legally be licensed as insurance agent or broker in either of the three jurisdictions and that it would be ultra vires for Perpetual to act as insurance agent or broker. Although Perpetual has never been licensed as an insurance agent or broker in the District of Columbia or elsewhere the evidence does establish that beginning as early as 1912 and continuing up to and including the year, 1935, Perpetual arranged the placing of insurance on property securing its loans and was paid all or a portion of the commissions for the placing of such insurance. Perpetual's records show receipt of the following insurance commissions during this period: Year Ending Commission on Oct. 20 Insurance Loans 1912 $ 750.92 $ 2,954,621.00 1913 1205.76 3,318,668.25 1914 1182.79 3,586,511.00 1915 1124.95 3,761,364.75 1916 1352.96 3,877,096.25 1917 2105.68 4,082,456.00 1918 1896.54 4,375,680.25 1919 2945.53 5,123,830.25 1920 5609.89 6,051,401.25 1921 4247.50 6,477,044.00 1922 6665.74 7,521,302.25 1923 6790.55 8,152,765.00 1924 No record 8,809,557.75 1925 8455.88 10,153,152.00 1926 9591.34 12,413,015.50 1927 11268.98 15,398,435.50 1928 4380.35 17,658,321.50 1929 3512.31 19,754,324.00 1930 2631.03 21,899,097.50 1931 3235.12 25,220,292.50 1932 3292.78 28,836,265.00 1933 2018.11 30,021,832.50 1934 3563.92 31,956,545.00 1935 2610.59 36,127,488.77


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