Allen v. Steinberg

Hammond, C. J., delivered the opinion of the Court. Below and here the claims of appellant, a limited partner in a partnership for “the ownership and promotion for develop ¹²² ment of a tract of land,” against the general and managing partners might be paraphrased to be that she was a sheltered ewe, who, despite the guidance of a learned and experienced shepherd (her husband), was led by the general partners not to the slaughter but to the shearing area where she was fleeced of her investment and anticipated profits. Her bill of complaint sought an accounting as a basis for the return of that investment and the profits she would have received had not the partnership been “fraudulently breached” or, alternatively, damages that she says resulted from “the deceit practiced against her in the solicitation of her investment.” Judge Raine dismissed the bill at the end of the complainant’s case, apparently adopting the philosophy of Goethe that “mighty is the law but mightier still is necessity,” for he ruled that “the lending of money to the multiple corporations [in which the partnership had no interest and which built houses on lots leased to them by the partnership for ninety-nine year ground rents] * * * was necessary, as a practical matter, to the success of the venture and was legally permissible * * * [for] if the building corporations had not been able to supplement their funds by borrowing money from the partnership, then they would not have been able to build any houses and the whole project would never have gotten off the ground * * The case was decided on those allegations of the bill which were admitted by the answer, the exhibits, and the testimony of the appellant’s witnesess—her shepherding husband and the accountant of the partnership. Maryland Rule 535 now provides that in any action tried by the court without a jury at law or in equity, a party “may move at the close of the evidence offered by an opponent for a dismissal on the ground that upon the facts and the law he has shown no right to relief.” Rule 535, promulgated in 1961, added actions in equity to the practice formerly applicable to actions at law tried without a jury under Rule 565, which was a successor to Trial Rule 5 “Demurrer to Evidence.” In Eastern Contractors v. Zinkand, 199 Md. 250, 251, 256 , a law action tried without a jury, the Court said: “In the Reporter’s Explanatory Notes to the rules it is stated ‘Rule 5 merely provides the equivalent of ¹²³ a directed verdict in cases tried by the court alone * * *.’ Code, 1947 Supp., page 2075.

Whether Rule 5 may in any event provide more or less than the exact equivalent of a directed verdict, we need not consider.” The Court went on to say that in the case before it the defendant’s request to prevail at the end of the plaintiff’s case would be regarded as testing the legal sufficiency of the evidence, and then said: “On motion for a directed verdict for defendant we must take the view of the testimony, i. e., draw the legitimate inferences, most favorable to the plaintiff.” See also M. & R. Contractors and Builders, Inc. v. Michael, 215 Md. 340, 344 . We think that in deciding whether to dismiss an equity action at the close of the complainant’s case, the chancellor under Rule 535 must view the evidence, that is, draw the legitimate inferences most favorably to the complainant, and that Judge Raine did not do this. The evidence presented by the complainant, viewed in the light most favorable to her, included the following. The three appellees owned, as general partners, eighty-four acres of land on Old Court Road in Baltimore County which they had encumbered with purchase money mortgages totaling some $365,000.

In late 1958, in order to get funds with which to operate, they began solicitation of investments by individuals who were to become limited partners. One of those solicited was appellant’s husband. He had ñve or six conversations with the general partner who was acting on behalf of the partnership in the course of which he made it clear that he and his wife would not be interested in “any building operation whatsoever” but that “if this was a land deal” he would be interested. In return came the assurance “that this was a land deal, that the people who would invest in this project would have nothing to do with the building operation.” The limited partners’ monies would be used to release portions of the partnership land from the purchase money mortgages.

Rots would then be leased to one of several building corporations which would build houses on them. The ground rents received by the partnership for leasing the lots were to serve to return the lim ¹²⁴ ited partners’ investments and add a profit. Some eight acres of the land were to be retained for a shopping center and two acres were to go to the school board at $20,000 an acre. The appellant invested $10,000 by giving the partnership a check dated April 8, 1959.

Before the check was sent, the soliciting general partner was asked to send appellant a written outline of the proposed operations of the partnership, as he had promised to do when he described them orally as a basis for the investment. He again agreed to do so and the check went forward. A letter comprising “a brief sketch of how the Belle Farm Estates [the partnership] operates” went to the Allens on April 14, 1959. It read in significant parts as follows: “The entire tract of land has been conveyed to the Belle Farm Estates partnership.

The partnership, by mesne conveyance, took title to the land subject to a purchase money mortgage. The partnership in turn leases, subject to ground rents, specified number of lots to multiple building corporations, as established by the accountants for the partnership. “In all, the partnership will wind up with 267 ground rents of $120 and $150 each. Their capitalized value will amount to approximately $600,000.00. This amount approximates balance on purchase money mortgage ($350,000.00) ; (limited partners investment maximum $190,000.00); and (profits $63,000.-00).” A partnership agreement dated March 10, 1959, between the general partners and the various limited partners was signed by the appellant later, probably after the check was sent on April 8.

The executed agreement had been preceded by proposed drafts which the appellant’s husband had edited, the most significant change being in the definition of the partnership business. In one proposed draft it was described as “the ownership and development of a tract of land.” This was changed by the husband to “the ownership and promotion for development of a tract of land,” and this became the agreement. A subsequent paragraph made the general partners attorneys in fact to accept title to all assets purchased and to execute “all ¹²⁵ necessary deeds, bills of sale or any and all other papers for the conveyance of any or all of said assets in order to effectuate the purpose of said partnership.” The partnership was to continue until the ninth day of March 1961, when each of the limited partners was to be entitled to the return of his capital invested and up to thirty percent profit. The general partners began development operations by conveying lots in fee to certain so-called “leasehold corporations,” which mortgaged the fees for construction money and then conveyed the fees back to the partnership, which leased to a straw party to create ground rents.

The straw party conveyed the leaseholds thus created to the leasehold corporation, the reversion remaining in the partnership. The effect was to hypothecate partnership land for the benefit of corporations in which the partnership had no interest. Later, when houses were sold and the construction mortgages released, the partnership possessed certain unencumbered ground rents. These were sold or mortgaged by the general partners, resulting in cash for the partnership which the general partners lent on unsecured loans to the construction company (the “leasehold corporations” had engaged one building company, owned by the general partners as individuals, to build the houses) which was incurring construction and development difficulties resulting in a shortage of cash.

When it developed that the partnership was making a profit, at least on paper, on which income taxes would have to be paid, the partnership, without the consent or knowledge of appellant, agreed with the leasehold and construction companies that it would, by agreements backdated to a date prior to the date of the partnership agreement, assume $275,000' of utility installation expenses (60 percent thereof). This was done by crediting $275,000 on the partnership books against the partnership loans to the leasehold-construction corporations. No other payment was made on the loans. Finally, to raise still more money for the corporations, the general partners conveyed the remaining partnership land to a corporation controlled by them which executed a mortgage on it for $140,000 to a corporation known as KMK, Inc., and ¹²⁶ then reconveyed the mortgaged land toi the partnership, all again without the consent or knowledge of appellant.

All the partnership assets were thus dissipated and lost by assumption of utility costs, the making of unsecured loans and foreclosures of certain construction mortgages, the KMK mortgage and the purchase money mortgages. The appellant contends that the general partners violated Code (1957), Art. 73, Partnerships—Limited, § 9, which provides : “A general partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners, except that without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to (a) Do any act in contravention of the certificate, (d) Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose, * >Jc * » We agree that the decisive question is whether the general partners acted “in contravention” of the partnership agreement or possessed partnership property or assigned their rights in specific partnership property for “other than a partnership purpose.” If the partnership agreement is looked to alone as