Archway Motors, Inc. v. Edelson

Henderson, J., delivered the opinion of the Court. This appeal and cross-appeal is from a decree of the Circuit Court No. 2 of Baltimore City dismissing a bill seeking to invalidate three notes issued by Archway and a cross-bill seeking to invalidate the shares of stock issued by that corporation. When the idea of Archway originated, Abramson and Edelson were brothers-in-law, each married to a sister ⁷⁸ of Selig Miller. Abramson had had experience in the automobile business as an executive of the Park Circle Motor Company.

In 1946, he heard from a friendly Ford dealer that Ford was planning to establish a new Ford dealership in Baltimore, and, with Miller’s encouragement and offer of financial support, sought to obtain it. Miller was a man of independent means. Abramson was not. Edelson, a member of the Maryland bar, was at that time employed as a hotel manager in Florida.

He had previously been employed by a mortgage company. About'May, 1947, Edelson returned to Baltimore, and he and his wife and the Abramsons occupied duplex apartments in the same house. He became interested in the project. After exploring several proposed sites, they finally acquired and had rezoned a site at Hilton and Edmondson Avenues, which was acceptable to Ford.

Abramson, Edelson and Selig Miller each put up $50,000, part of Abramson’s advance being supplied by Miller. The corporation was formed in January, 1948, the charter being prepared by Edelson. A construction mortgage of $175,000 was obtained and a new building erected. H. D. Miller, the father of Selig Miller, advanced $100,000- in cash.

The company was highly successful from the start. According'to the cross-appellants the net profits were, roughly, $22,000 in 1948, $27,000 in 1949, $111,000 in 1950 and $91,000 in 1951. The appellants, disallowing certain payments for services claimed, figure the net profits at much higher figures. It- is agreed that the corporation is solvent and has accumulated a large surplus.

Selig Miller died in 1949, leaving his estate to his widow, Selma (now remarried), and three minor children. In 1950, Edelson’s wife, Raye Miller Edelson, obtained a- divorce from him in Florida and immediately remarried. The hostility between Abramson and Edelson •seems to have stemmed from, or was precipitated by, this event. As a part of the property settlement incident to the divorce, Edelson assigned to his wife, now Mrs. Windt, one-half of the 275 shares of Archway stock ⁷⁹ which had stood in their joint names.

The charter of the corporation, naming Abramson, Edelson and S. Miller as incorporators, authorized 2000 shares of preferred stock of the par value of 100 dollars each and 1000 shares of no-par common. No preferred stock was ever issued. All of the common stock was eventually issued to the three incorporators, or their nominees, in the proportion of 37%% each to Abramson and Edelson, and 25% to S. Miller. Corporate promissory notes, dated March 1, 1948 and bearing 8% interest, were issued to Abramson, Edelson and Selig Miller, each in the amount of $50,000, the sums they had previously paid in and deposited in the corporation account.

These notes were subsequently surrendered and new notes in the same amounts, dated January 1, 1950 and bearing 4% interest, were issued to the same parties. A corporate note, dated February 25, 1948 and bearing interest at 5% was issued to H. D. Miller. As a condition to the grant of its franchise, Ford required that a copy of the minutes of the first meeting of stockholders and directors be submitted to it by April 12, 1948. Minutes purporting to be of the first meeting were prepared by Edelson in Florida and mailed to Abramson who presented them to Ford after they had been signed by him and Selig Miller.

These minutes were never entered in the corporate minute book. The stockholders’ minutes, dated January 5, 1948, authorized the directors to issue stock “in the amounts and to the persons entitled to receive the same”, and to borrow money and issue notes therefor. However, the directors’ minutes show that no action was taken to exercise the powers granted. Edelson returned from Florida in June.

According to Abramson, Edelson suggested that notes be issued along with the stock, for purposes of tax saving. According to Edelson, the plan had been agreed upon in November, 1947. In any event, Abramson and Selig Miller agreed that the notes be issued. Minutes were prepared and entered in the minute book, purporting to ⁸⁰ be the first meeting of stockholders and directors, dated January 15, 1948.

The stock holders’ minutes contained the same authority to issue stock contained in the set delivered to Ford. The directors’ minutes, in addition to general resolutions as to bank accounts, borrowing money and similar matters, contained resolutions directing the officers to issue notes to the three incorporators, each in the amount of $50,000 to be dated March 1, 1948, payable four years from date and bearing interest at 8%, with a statement that “the holders of said notes agree that they will not demand payment of said notes after maturity until such time as the payment of said notes by the corporation would not jeopardize the financial position of the corporation”. The minutes also contained a resolution that the officers issue stock on the “basis for loans made to the company in the amount of $50,000 each” by Abramson, Edelson and S. Miller. “In consideration of said loans” there was a direction to issue stock as follows: to Abramson and wife 275 shares, to Abramson 100 shares; to S. Miller 150 shares, to Miller and wife 100 shares, to Edelson and wife 275 shares, to Edelson 50 shares, to Leon Edelson and Florence Edelson Benioff, 25 shares each. The last two designees were the brother and sister of Edelson.

None of the witnesses was able to recall the exact date of this meeting. Apparently it was held in the club basement of Abramson’s apartment, and all the incorporators and their wives were present. Abramson says it was in July. At one point he testified that the notes were executed a few days after the stock had been delivered; later he testified that the stock and notes were issued about the same time.

The certificates were not printed until July 20, 1948. Edelson says that the notes were issued about a month before the stock, because there was a delay in obtaining the' printed certificates. Mrs. Windt says she was present at a meeting where they talked about the division of the stock; she wanted ¿11 of Edelson’s stock put in their joint' names, on the ground that she had signed a note with Edelson to bor ⁸¹ row $25,000 of the money paid in. Finally, she agreed that 100 shares should be put in the names of Edelson and his brother and sister.

She did not hear about the notes until later, but when Edelson told her “that will never be collected * * * because these notes only exist for tax purposes and to absorb certain expenses when the business gets big”, she “let it go at that.” Mr. Woolen, a Certified Public Accountant, set up the books and prepared a certified statement on July 22, 1948. This statement showed the $150,000 paid in as “bills payable”, and listed the common stock as of no value. He set up .the $100,000 loan from H. D. Miller as preferred stock. His jurisdiction was an entry in the minutes authorizing the issuance of a note to H. D. Miller (which was in fact issued) which “would later be transferred into preferred stock as soon as the stock was ready for issuance to Mr. Miller.” H. D. Miller apparently never agreed to this.

In any. event no preferred stock was issued to him, and the entry was corrected in later statements. When this statement was brought to Ford’s attention, there was objection to the. notes, primarily because of the high interest rate. In April, 1950 minutes were adopted calling for the cancellation of the notes and substitution of 4% notes, to be dated January 1, 1950, bearing 4% interest, and maturing January 1, 1952. The resolution provided: “repayment of each of said notes at maturity shall be within the discretion of the Board of Directors, who shall have the right of determining whether repayment of all or any part of each of said notes may jeopardize the financial position of the corporation”.

Ford was apparently satisfied with the reduction in interest. Interest, except for one payment on the earlier notes, was shown as accrued on subsequent statements. Ford did not seriously object when later statements, issued in 1950, showed the $100,000 invested by H. D. Miller as a loan instead of a preferred stock liability, although on the basis of these statements all of the invested capital was in the form of loans. Ford is ⁸² not a party to this suit, nor is H. D. Miller, and we express no opinion as to their rights or status.

Nor do we express any opinion as to the possible claims of the mortgagee or other creditors, or tax claims by the state or federal authorities. We are only concerned with the respective rights, in a solvent corporation, of the note-holders and stockholders. The appellants’ main contention is that the chancellor erred in failing to find as a fact that the consideration for the issuance of the stock was the cash paid in, and that the notes were issued without consideration. In an effort to avoid the effect of the time-honored rule that findings of fact by the chancellor, especially on a question of credibility, should not be disturbed unless clearly erroneous, the appellants point out that the testimony of the Ford representatives was taken by deposition, and the chancellor did not see these witnesses.

They also contend