Bostetter v. Freestate Land Corp.

Couch, J., delivered the opinion of the Court. In 1971 and 1972, Martin V. B. Bostetter, Jr. (Bostetter, Jr.) and Gladys V. Taylor, the appellants and executors of the estate of Martin V. B. Bostetter, Sr. (Bostetter, Sr.), deceased, filed a petition and an amended petition in the Circuit Court for Washington County against the appellees, Freestate Land Corporation (Freestate), Julian L. Oliver, Sr., and Irene R. Burris. By these petitions the court was requested to declare null and void certain acts of the appellees, and to require the appellees to transfer to the appellants certain papers, books, checking accounts, instruments and records. An accounting of monies received and distributed also was sought.

Freestate, Oliver, and Burris filed a bill of complaint in 1976 in the same court, against Bostetter, Jr., Joanne R. Bostetter, wife of Bostetter, Jr., and James C. Rice, individually, against Gladys V. Taylor as executor of the Bostetter estate, and against Bostetter, Jr. as trustee in and executor of the Bostetter estate. This bill of complaint alleged fraud and the commission of a fraudulent conveyance by the appellants and sought injunctive relief, an accounting and damages. The two actions were consolidated and heard by the court. 1 By an order dated March 10, 1980, the court dismissed the ¹⁴⁴ appellants’ petition and granted the relief sought by the appellees. From this action Bostetter, Jr. and Taylor, as executors, and Joanne R. Bostetter, James C. Rice, and Bostetter, Jr., individually, appeal and raise several issues.

In summary the appellants contend that the chancellor erred in determining that the appellees own Freestate and its asset, a farm located in Washington County. We agree with the appellants, and for the reasons set forth in this opinion we find that the appellants own Freestate, and title to the subject farm is properly vested in the appellants as executors. 2 When lawyers involve themselves in corporate affairs, we hope that they follow the model cited by Chief Judge Gilbert in Dixon v. Process Corp., 38 Md. App. 644, 651 , 382 A.2d 893 (1978): "The role of the lawyer and his relationship to a business corporation is colorfully stated by Roy A. Redfield in Factors of Growth in a Law Practice 30 (1962): When the business corporation is born, the lawyer is the midwife who brings it into existence; while it functions he is its philosopher, guide and friend; in trouble he is its champion, and when the end comes and the last sad rites must be performed, the lawyer becomes the undertaker who disincorporates it and makes final report to the Director of Internal Revenue.’ ” The present case disappoints our hopes because the Freestate Land Corporation was deliberately used to create confusion, and the lawyers who should have befriended the corporation neglected it. The record shows that Bostetter, Sr. practiced law for many years in Washington County. During 1965, as part of his practice, Bostetter, Sr. served as an assignee for the ¹⁴⁵ purpose of foreclosing the mortgage on a farm of some 102 acres in Washington County.

This farm, containing all or part of tracts known as "Much Grumbling” and "Wolfs Chance,” lies adjacent to the Bostetter family tract, referred to as "The Home Place.” Desiring to expand his family holdings, Bostetter, Sr. sought to purchase the 102 acre farm. In the foreclosure action, however, Bostetter, Sr. already represented the mortgagee and the estate of the mortgagor. Apparently attempting to avoid further appearance of conflict, Mr. Bostetter arranged to have the subject farm purchased for him through an agent. Bostetter, Sr. asked his friend and business associate, Julian L. Oliver, Sr., to locate someone who could bid for the farm at its public sale.

When Bostetter, Sr. conducted the public sale on February 16, 1965, the property was seemingly sold to Edward S. Routon of Arlington, Virginia. Routon, the brother-in-law of Julian Oliver, merely served as nominee for Bostetter, Sr. At or about the time of the farm’s purchase, Bostetter, Sr. contacted his son, Bostetter, Jr., a lawyer in Virginia, and asked him to prepare the articles of incorporation for Freestate. Bostetter, Jr. drafted the document. The three incorporators and original directors were James C. Rice, Bostetter, Jr.’s law partner and half-brother; Betty L. Mattos, Rice’s legal secretary; and Edward S. Routon.

A Bethesda attorney was named as the corporation’s resident agent. On April 12,1965 the articles of incorporation were signed by the incorporators, notarized, and mailed to the Maryland Department of Assessments and Taxation. This agency approved the articles and issued a charter to Freestate on May 3, 1965. Several weeks later, Bostetter, Sr. asked Oliver to act as president of Freestate for the purpose of signing a demand note payable to Bostetter, Sr. Oliver signed the $32,715.00 demand note, prepared by Bostetter, Sr. and dated June 21, 1965.

Later that day, Bostetter, Sr., as assignee for foreclosure, transferred the 102 acre farm to Freestate. The ¹⁴⁶ consideration recited in the deed was $36,350.00. The deed was recorded among the Washington County land records on July 9, 1965. I Thereafter, Bostetter, Sf. acquired a standard corporate outfit for Freestate, and he assumed control of the corporation’s assets.

His secretary, Irene Burris, collected the rent paid by the farm’s tenants, including rent paid before Bostetter, Sr. deeded the property to Freestate. Rather than open a separate bank account for the rent money, Bostetter, Sr. had the money deposited into his attorney/client trust account. From this account, Burris paid Freestate’s. bills with checks signed by Bostetter, Sr. At the direction of Bostetter, Sr., Burris prepared Freestate’s annual franchise tax reports for the years 1965, 1966, and 1967. These reports list Oliver as president, treasurer and director, Routon as vice president and director, and Rice as secretary and director.

The reports also designate Bethesda as Freestatje’s principal place of business. Freestate’s Maryland corporation income tax returns for these years, however, list the corporation’s principal place of business as Bostetter, Sr.’s office in Hagerstown. These tax returns for 1965 through 1968 were filed in December, 1968 by an accountant who prepared the returns using a summary of Freestate’s records drafted by Burris in July, 1968. These records, together with Freestate’s corporate books were taken by Bostetter, Sr., sometime in July or August of 1968, and relocated in the nearby office of Oliver.

Bostetter, Sr. also designated Burris as secretary and director of Freestate, and had her prepare a check for $4,641.85 drawn on his attorney/client trust account, and dated July 29, 1968. This check was signed by Bostetter, Sr. and made payable to Freestate. With this check, endorsed by Burris, a bank account was opened for Freestate on August 23,1968. Only Burris and Oliver were authorized to draw on these funds which apparently represented the net surplus realized by Freestate’s rentals.

Bostetter, Sr. died on November 16, 1968 leaving a will which, among other' things, gave a monetary bequest to ¹⁴⁷ Bostetter, Jr., made his son an executor of the estate, and appointed him trustee of the remainder of the estate for the benefit of Bostetter, Jr.’s children. Bostetter, Jr. and Taylor, the other executor, opened Bostetter, Sr.’s estate on November 29, 1968. Among the decedent’s belongings, the executors found the demand note dated June 24, 1965. They had judgment by confession entered on this note on May 11, 1972, in the amount of $49,072.50.

This judgment against Freestate has not been satisfied. During the management of his father’s estate, and in the course of litigation against Freestate, Bostetter, Jr. found no evidence of a valid organizational meeting for the corporation. Believing that in the absence of a valid meeting Burris and Oliver never legally became corporate directors, Bostetter, Jr. requested that the original incorporators and directors hold the requisite meeting. On July 28, 1972, James Rice met with Betty Mattos McFadden in Alexandria, Virginia.

The third incorporator, Edward Routon, had died in 1971. Rice and McFadden signed, and had notarized, a document designated their waiver of notice of the first meeting of incorporators of Freestate. The minutes of this meeting record the incorporators’ acceptance of the charter issued to Freestate, and the election of Rice, Bostetter, Jr., and Joanne Bostetter as succeeding directors. The directors authorized the issuance of stock and the purchase of property by the corporation.

Later that same day, Bostetter, Jr. chaired an organizational meeting of the new Board of Directors. Having waived their right to notice of the meeting, the directors adopted corporate by-laws and elected officers. The directors also designated a depository for Freestate’s funds, and adopted a corporate seal and stock format. Bostetter, Jr., as president and treasurer of Freestate, received authority to resolve the conflict concerning the 102 acre farm and demand note.

By deed dated December 18, 1972, Freestate, by Bostetter, Jr., conveyed the farm to Bostetter, Jr. for the sum of $10.00 and other valuable consideration. 3 This deed was recorded ¹⁴⁸ among the land records of Washington County on January 4, 1973. The above-stated facts precipitated the equity actions which were consolidated and heard in February of 1980. The chancellor characterized the circumstances surrounding Freestate as "strange,” "unorthodox,” and "highly irregular if not even more suspect.” We agree with this description of the factual background. Nevertheless, we find that the chancellor clearly erred in concluding from the facts that (1) Freestate was properly organized prior to July 28,1972, that (2) Bostetter, Sr. divested himself of any interest in Freestate, and that (3) Oliver and Burris obtained ownership of Freestate.

I. Organization of Freestate In his memorandum opinion of March 10, 1980, the chancellor found that Bostetter, Sr. "assumed complete control of Freestate” following the June 21, 1965 meeting of Bostetter, Sr. and Oliver. Responding to appellants’ contention that Bostetter, Sr. and