DeBoy v. Harris

Collins, J., delivered the opinion of the Court. This is an appeal from a judgment for costs entered in favor of the appellees, defendants, Alfred J. Harris and George W. Smith, and against the appellant, plaintiff, James J. DeBoy, upon the sustaining of a demurrer, without leave to amend, to an amended declaration filed by the appellant. The amended declaration is in five counts and makes substantially the following allegations. The first count alleges that on or about March 10, 1948, James J. DeBoy entered into a joint adventure agreement with Alfred J. Harris and George W. Smith.

The agreement provided in effect that they and each of them in considera ²¹⁴ tion of the participation of the other and the contribution by DeBoy of the sum of $1,400.00, by Harris of the sum of $2,600.00, and by Smith of the sum of $1,000.00, would associate themselves together as joint adventurers with the intention of acquiring sites for, and constructing industrial and warehouse facilities to be leased, sold for profit or otherwise dealt in and with. It was agreed by all the parties that DeBoy should at all times have a twenty-eight percentum interest in the joint venture or ventures undertaken, that Smith should at all times have a twenty percentum interest, and that Harris should at all times have a fifty-two percentum interest, so that the said parties would enjoy a fixed and unchanging percentage of ownership in the assets of the venture and the profits thereof, which would constitute an annuity to. the joint adventurers after the completion of the erection and leasing of properties, as hereinafter set forth. It was a part of said agreement that, to carry out the intention of the parties, the said joint adventurers would cause a corporation to be formed under the laws of Maryland to be known as The DeBoy Smith Construction Company. This corporation should have an authorized capital of $100,000.00 and should be an instrument or tool of the joint adventurers; that the respective interests of the joint adventurers, in the agreed percentages heretofore set out, should be permanently fixed and established by the issuance of shares of capital stock of said corporation to be formed; that the joint adventurers would build or cause to be built structures in the name of the corporation; that the corporation would negotiate with prospective lessees of such structures for the erection of such facilities and the leasing thereof upon completion, for periods of time and at rentals adequate'to insure that construction loans covering the cost thereof could be procured from lending agencies; that the joint adventurers would at all times share in the joint adventure and the ownership and profits of the corporation, which was a creature or instrument of the joint adventure according to the agreed fixed percentages of ownership as aforesaid; and, that ²¹⁵ they, and each of them, would undertake to devote their full time, energy and skill to said ventures and would, as officers of the corporate instrumentality of the joint venture, accept the sum of $100.00 per week as salary until all buildings to be constructed, were completed and leased as aforesaid.

The named individuals entered upon the performance of the said joint adventure agreement and on or about March 10, 1948, the proposed corporation was formed. In the charter of said corporation it was provided in accordance with said agreement that the capital stock be issued to said joint adventurers in the following amounts, (a) Fourteen shares, twenty-eight percentum of all shares, issued to DeBoy, (b) Ten shares, twenty percentum of all shares, issued to Smith, (c) Twenty-six shares, fifty-two percentum of all shares, issued to Harris, all of said stock to be issued at the par value of $100.00 per share for cash. As provided for in said charter, pursuant to said agreement, said stock was issued as above set forth and DeBoy paid the sum of $1,400.00, Smith paid the sum of $1,000.00, and Harris paid the sum of $2,600.00. Pursuant to said agreement they constructed by joint adventure, in said corporate name, during the period from March 10, 1948, to May, 1950, in Baltimore a coffee warehouse and three industrial buildings, and in Hartford, Connecticut, a warehouse, at the total cost of $1,135,747.02 for the land, buildings and equipment.

During the aforesaid period the said named persons devoted their full time, energy and skill to the acquisition, erection, and completion of said buildings and other corporate affairs of said corporation in accordance with said agreement and, except as hereinafter set forth, salaries were paid to said named individuals as officers in accordance with said agreement. In wilful disregard of the joint adventure agreement and in violation of DeBoy’s rights thereof, the defendants, Harris and Smith, on or about April 15, 1952, breached the said joint adventure agreement in the following manner. Harris and Smith purported to act in their capacity as directors of the ²¹⁶ corporation which was an instrumentality of the joint adventure, to cause a resolution to be passed by the board of directors of the corporation recommending to the stockholders an amendment of the corporate charter to increase the capital stock of the corporation. Said act constituted a wrongful and wilful breach and abandonment of the aforesaid agreement, in that it was designed and intended to cause and compel DeBoy to abandon his interest in the joint adventure, to sacrifice such interest for a nominal sum, and to destroy DeBoy’s rights under the agreement aforesaid to participate in the ownership of the assets and profits of the joint adventure, held in the name of the corporation.

As a result of the breach of the agreement herein-before set out,. DeBoy has suffered and will continue to suffer large losses by reason of the acts of the defendants. DeBoy has been deprived of his rights to receive profits and to participate in the assets to the extent provided in the agreement, and has suffered other losses, all as a direct result of the breaching of the agreement by the defendants, wherefore a right of action has accrued to him against the defendants to recover in respect of said damages. The second count of the declaration further recites that over the protest of DeBoy at a special stockholders meeting held on April 30, 1952, the defendants purported to approve the proposed charter amendment to increase the capital stock of the corporation in violation of the joint adventure agreement.

Said act constituted a wrongful and wilful breach and abandonment of the aforesaid agreement because it was designed and intended to compel DeBoy to abandon his interest in the joint adventure and to sacrifice such interest for a nominal sum. As a result of the breach of said agreement, DeBoy has suffered and will continue to suffer large losses, has been deprived of his rights to receive profits and to participate in the assets as agreed, wherefore a right of action has accrued to him against the defendants to recover damages. The third count further alleges that the defendants on October 27, 1952, breached the said joint adventure ²¹⁷ agreement by causing a resolution to be passed to authorize subscriptions for 3,950 shares of newly authorized stock of the corporation at $100.00 per share, which placed DeBoy in such a position that he would be unable to maintain his proportionate percentage in the joint adventure and caused him to abandon and sacrifice his interest for a nominal sum. He is therefore entitled to damages.

The fourth count further alleges that the defendants on or about January 7, 1953, breached the agreement by causing 2,204 shares of the newly authorized capital stock of the corporation to be issued to Harris or his nominees for its par value. Such action was intended to cause the destruction of DeBoy’s interest in the joint adventure, in that he would be unable to maintain his proportionate percentage. As a result of this breach DeBoy has been deprived of his right to receive the profits to the extent provided in the agreement and has suffered other losses for which he is entitled to damages. The fifth count, which is in effect a combination of the first four counts, alleges the breach of the joint adventure agreement by Harris and Smith, who undertook a course of conduct designed to “water down” DeBoy’s proportionate share in the joint adventure by performing the following acts.

On or about April 7, 1952, they removed DeBoy as an officer and director of the corporation. On or about April 15, 1952, the defendants recommended to the stockholders an amendment to the corporate charter increasing the capital stock as aforesaid. On April 30, 1952, such change in the charter was approved by the defendants. On or about October 27, 1952, the defendants, as directors, authorized the subscription for 3,950 shares of the newly authorized stock at its par value.

On or about January 27, 1953, the defendants caused 2,204 shares of the newly authorized capital stock to be issued to Harris or his nominees at par value. This course of conduct on the part of the defendants was designed and intended to destroy DeBoy’s interest in the joint adventure by offering such a large number of shares that he would not be able to maintain ²¹⁸ his proportionate percentage in the joint adventure. By “watering down” his interest he is entitled to recover' from the defendants damages for every one of said breaches specifically set out in the said five counts of the declaration. It is admitted for the purposes of this case that the alleged agreement was oral and that the appellant was given an opportunity to subscribe to the newly issued stock of the corporation.

Technically, of course, a demurrer is an admission of the truth of such matters of fact alleged in the opposite pleading, which are well pleaded. Poe on Pleading, (Tiffany’s Ed.), Section 705. Whether such an agreement as that here alleged survives after incorporation has not been before decided in this State. The leading case holding that such an agreement does not so survive is that of Jackson v. Hooper, (1910), 76 N. J. E. 592, 75 A. 568, 571 .

There, as here, a stockholder in a corporation made a complaint in equity, similar to that of the appellant here, against another stockholder in the same corporation. It was there held that as a matter of public policy the parties to such an agreement could not be partners inter sese and a corporation as to the rest of the world. The New York Courts seem to have taken the same view as that taken in Jackson v. Hooper, supra. See Boag v. Thompson, 208 App. Div. 182 , 203 N. Y. S. 395; Berger v. Eichler, (1924), 211 App. Div. 479 , 207 N. Y. S. 147; Cohen v. Mahoney, (1936), 160 Misc. 196 , 289 N. Y. S. 802; Epstein v. Leibner, (1940), 258 App. Div. 1073 , 18 N. Y. S. 2d 11; Hennessy v. During, (1953), 124 N. Y. S. 2d 266; Manacher v. Central Coal Co., (1954), 284 App. Div. 380 , 131 N. Y. S. 2d 671.

Apparently the only case which reached the Court of Appeals of New York was that of Manacher v. Central Coal Co., supra, which was there affirmed on a procedural point in 308 N. Y. 784 , 125 N. E. 2d 431 . Compare In Re Flanagan’s Estate, 298 N. Y. 787 , 83 N. E. 2d 473 . On the ground of public policy, the cases of Seitz v. Michel, (1921), 148 Minn. 80 , 181 N. W. 102 , 12 A. L. R. 1060; and Sun River Stock & ²¹⁹ Land Co. v. Montana Trust & Savings Bank, (1928), 81 Mont. 222 , 262 P. 1039 , follow Jackson v. Hooper, supra. In Wabash Ry.

Co. v. Am. Refrigerator Transit Co., (1925), C. C. A. 8th Cir., 7 F. 2d 325 , cert. denied, 270 U. S. 643 , (1926), it was said: “The courts will look through the form to get at the real intent of the association of individuals or corporations forming the organization, and, if rights of third parties have not intervened, will give effect to the real purpose of the organization in order to promote square dealing and effectuate justice.” In Eisner v. Macomber, (1920), 252