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Independent Directors Law Challenged


A recently enacted Maryland law that makes it more difficult to challenge the independence of fund directors in court is under attack.

The Maryland Court of Appeals, that state's highest court, has agreed to hear arguments on whether the directors' independence law violates the Maryland constitution. The Appeals Court, in a two-page order Dec. 8, agreed to hear a case brought by two Maryland mutual fund shareholders, David Migdal and Linda B. Rohrbaugh, against the state legislature and Maryland Gov. Parris N. Glendening (D). The appeals court is scheduled to hear oral argument on the case in March. A specific date for the hearing has not been set, officials at the Appeals Court clerk's office said last week.

A decision in the case could come next year, said Robert Zarnoch, the assistant attorney general handling the case for Maryland. Ronald B. Rubin of Rockville, Md., a lawyer representing Migdal and Rohrbaugh, declined to comment.

Migdal and Rohrbaugh sued the state on Feb. 23, claiming that the law that the Maryland legislature passed on April 13, 1998 violated the state constitution. (MFMN 3/1/99) The Maryland trial court dismissed the suit in a one-page decision dated Oct. 14.

The law provides that Maryland would use federal law to define whether a mutual fund director is independent. The bill was intended to limit a May 1997 federal court decision in a case involving shareholder Robert Strougo and the closed-end Brazil Fund. U.S. District Court Judge Robert Sweet, interpreting Maryland law, held in the Brazil Fund case that a fund director could lose his independence based on the fees he received. Under federal law, directors do not lose their independence by virtue of the fees they receive.

In their lawsuit, Migdal and Rohrbaugh contended that the legislature and Glendening violated state law because the directors' legislation was grafted onto another bill pending in the state legislature. Maryland law requires that every law enacted by the state legislature cover only one subject.

The legislature and Glendening contend that the directors' provisions are consistent with the subject of the original bill, Zarnoch said. The original bill had to do with an aspect of corporate law - resident agents, the individuals who accept court papers on behalf of companies when they are sued - that Migdal and Rohrbaugh allege is unrelated to mutual fund directors.

If Migdal and Rohrbaugh are successful, the legislature could pass the same substantive legislation in a stand-alone bill. But passage of the directors' legislation last year proved difficult. The state Senate's judicial proceedings committee refused to recommend passage of the original bill on director independence. That proposal died, but the substance of the bill was added to the resident agent legislation and ultimately passed on the last day that the legislature was in session.