Devereux v. Berger

Barnes, J., delivered the opinion of the Court. In this appeal, the principal question presented to us is whether the Circuit Court for Montgomery County (Shook, J.) erred in concluding that the appellant, C. Kemp Devereux, as president, chief executive officer, controlling stockholder and a director of both Metropolitan Acceptance Corporation (MAC) and Blair’s Television & Music Company (Blair’s), was guilty of gross negligence, culpable mismanagement and waste of corporate assets in discharging his duties to MAC and had engaged in a course of conduct to advance his own personal interests and the interest of Blair’s at the expense of MAC. Various aspects of this controversy have previously been before us. In Metropolitan Acceptance Corporation v. Irving D. Berger, No. 204, Sept. Term, 1967, involving Law No. 19680 in the Circuit Court for Montgomery County in which Berger, the plaintiff in that case, had obtained on March 16, 1967, a summary judgment against MAC in the amount of $72,501.53, with interest from March 16, 1967, and costs, we dismissed the appeal on August 22, 1967.

A second appeal, No. 38, Sept. Term, 1968, in the ²² same law action, from an order of February 9, 1968, overruling MAC’s motion to set aside a prior order for supplementary proceedings, was dismissed by us on June 26, 1968. In Devereux v. Berger, 253 Md. 264 , 252 A. 2d 469 (1969), we affirmed an order of the Circuit Court for Montgomery County, holding Devereux guilty of contempt by violating the terms of an interlocutory injunction passed November 4, 1966, restraining MAC and Devereux as its president and their agents, servants, employees, attorneys, successors and assigns from, inter alia, any liquidation, dissipation or dissolution of MAC and from engaging in any course of conduct designed to impair, diminish or destroy the present assets of the corporation. Devereux was required to pay $600.00 to purge himself of the contempt. The action involved in the present appeal is Equity No. 34236.

The bill of complaint was filed on December 6, 1967, by Berger, the appellee, for himself and for all common stockholders of MAC against MAC, Devereux and Blair’s. The prayers for relief were that (1) Devereux be required to reimburse MAC for all losses sustained by the evidence up to $150,000.00; (2) Devereux account to MAC for the entire financial injury caused by his “breach of trust and gross negligence in discharging his duties as president and director of MAC”; (3) Devereux and Blair’s be required to reimburse MAC for all losses sustained by the evidence up to $150,000.00; (4) Devereux and Blair’s be required to account to MAC for the property of MAC conveyed to or appropriated by Blair’s “in bad faith, without sufficient consideration or authority and in fraud of plaintiff”; (5) the promissory note made by Blair’s on or about October 31, 1965, to the order of MAC for $40,000.00 be annulled; (6) Blair’s be required to pay MAC or the plaintiff the sum of $40,-000.00 ; and (7) the plaintiff have other and further relief. After several legal skirmishes, taking of depositions ²³ and filing interrogatories, exceptions, orders, etc., the case came on for a hearing on its merits on August 3, 1970, before Judge Shook, testimony being taken for three days. The testimony and documentary exhibits indicated the following: Devereux at all of the times involved in this appeal was the president and chief executive officer of both MAC and Blair’s, as well as a director and controlling stockholder of both corporations.

Blair’s was engaged in selling various types of appliances at retail. MAC was organized as a Maryland corporation on September 20, 1960, for the purpose of buying commercial paper in the nature of installment sales contracts from retail appliance dealers. When MAC was formed, it was contemplated that a substantial portion of its purchases of commercial paper would be from six of its original directors who operated retail appliance stores. For the first full year of operations, 1960-61, MAC purchased installment sales contracts of approximately $63,655.00.

For the following years through 1964, its purchases were approximately: 1962 — $73,037; 1963— $65,544; 1964 — $60,425. MAC, however, by early 1966 had practically ceased operations. In 1963, MAC wished to make a public offering of 150,-000 shares of its stock from which it hoped to gross $525,000.00 and net $453,000.00. To accomplish this, MAC prepared a prospectus and filed it with the Securities and Exchange Commission.

Devereux, however, was not able to interest any underwriters in the proposed offering and in July, 1963, withdrew the registration statement. Shortly after the proposed public offering failed, the attorney for MAC (and its then secretary) suggested to Devereux that private money might be available and suggested a person who might be willing to lend MAC some money. As a result, Devereux communicated with Berger and on March 3, 1964, obtained a loan from him for MAC in the amount of $60,000, payable in five years, with interest at 12% per annum. ²⁴ The interest on the note was payable quarterly. At any time after the second anniversary of the note, either the maker or the holder had the right to prepay or to require prepayment, provided written notice of 90 days was given to the other party.

In the event of default, the holder, at his option, could accelerate the entire balance due including a reasonable attorney’s fee and other reasonable costs of collection. Devereux added a hand written notation that he guaranteed payment for 90 days from the date of the note and that during this period the provisions of paragraph 9 (a) (3) of the Security Agreement were waived. The Security Agreement referred to was between Berger and MAC and was taken by Berger as security for the $60,000 note. After certain recitals and warranties, by the respective parties, it was agreed that Berger (referred to as “Factor” in the Security Agreement) should have a continuing security interest, pursuant to the Uniform Commercial Code (Code, 1964 Repl.

Vol.) Art. 95B, §§ 9-101-507 upon the described collateral and to all of such collateral (with proceeds therefrom) which may from time to time come into MAC’S possession, described as all chattel paper (as defined by the UCC), accounts receivable, contract rights, notes, installment payment obligations and other obligations for the payment of money created or acquired by MAC, created or arising out of the loan of money by MAC, or rendering of services by it in its regular course of business. The continuing security interest was subordinated only to the security interest of banks which had loaned or were loaning money to MAC to the extent of the amount outstanding on such indebtedness. MAC further agreed that the face value of the collateral should exceed by at least $100,000 the then total outstanding bank loans to which the loan was subordinated. MAC further agreed to furnish, on or before the fifteenth day of each month, a statement listing, as of the end of the preceding month, the collateral held by it at its then face value.

There were a number of provisions of remedies in the event of a default. As part ²⁵ of the transaction, Berger also obtained a written option contract whereby he had the irrevocable option for two years to purchase 60,000 shares of MAC common stock at $1 per share. MAC defaulted on this loan and Berger filed an action against MAC to recover on the Berger note. Berger recovered judgment for $72,501.53 on March 16, 1967, which became final after our dismissal of the appeal from that judgment, as we have already stated.

MAC never paid the Berger judgment. On November 8, 1967, Berger, by letter, made demand on Devereux as president and as a director of MAC to conduct an investigation into whether MAC’S inability to meet its financial obligations resulted from a depletion of the corporation’s assets or the impairment of its business caused by the misconduct of any officer or director. Devereux not having replied to the letter and not having taken any action in response to it, Berger then filed the present suit in equity on his own behalf and on behalf of all of the common stockholders of MAC. The trial court in a carefully considered memorandum opinion made a number of findings of fact and concluded that Devereux was guilty of gross mismanagement, gross negligence and of a waste of corporate assets in discharging his duties as president and director of MAC; that he had engaged in a course of conduct, the purpose of which was to advance, at the expense of MAC, his own personal interests and those of Blair’s and that Blair’s through its president, Devereux, had engaged in a course of conduct, the purpose of which was to advance at the expense of MAC its own interests and those of its president, Devereux.

The lower court entered a decree on October 14, 1970, in favor of Berger, on behalf of MAC, for $83,666.35 against both Devereux and Blair’s, jointly and severally, with interest at 6% per annum from date, rescinded a $40,000 note transaction of October 31, 1965, authorized Berger to execute upon the decree in the name of MAC and to satisfy Berger’s ²⁶ obligation as a judgment creditor of MAC out of the funds obtained from the enforcement of the monetary-decree, and provided that any balance remaining after deducting the amount of the Berger judgment and expenses, including reasonable attorney’s fee incurred on behalf of MAC in enforcing the decree, be. paid to MAC, and required Devereux and Blair’s to pay the costs. The evidence at the hearing indicated the following: Devereux, almost as soon as the $60,000 proceeds from the Berger loan had been received by MAC, used approximately $30,000 — one half of the proceeds of the loan — to have MAC pay off a $30,000 note with Suburban Trust Company, even though that note provided for interest at 6% per annum and was not yet due. Approximately a month later, Devereux caused MAC to pay off the Bank of Bethesda another 6% loan of $2,000. Both of these payments were without prior corporate approval.

The effect of these note payments was that Devereux used money borrowed at 12% to pay loans borrowed at 6%. Devereux explained that the prepayment of the 6% bank loans was necessary in order to regain the collateral that secured those loans, the face amount of the loans being approximately 70% of the value of the commercial paper collateral pledged to secure the loans. During the period, May through August, 1964, Devereux caused MAC to transfer to Blair’s $23,725 in cash in exchange for trust receipts. The interest rate MAC charged Blair’s on the $23,725 was 9% per annum.

As of October 31, 1965, Blair’s owed MAC $47,002.75. No steps were taken to collect that debt notwithstanding MAC’S need for cash to purchase commercial paper. Devereux negotiated, on behalf of MAC as its president and on behalf of Blair’s as its president, an arrangement whereby MAC accepted a $40,000 non-interest bearing note in lieu of the amount Blair’s owed MAC. This note was originally drafted by Devereux.

When some of the MAC directors and stockholders complained in December of 1965 about the $40,000 note, the note was changed to ²⁷ provide for interest, but only at the rate of 6% per annum. Devereux was unable to produce the original $40,-000 note and testified that he did not know where it was. The $40,000 note was to be repaid at the rate of $125 a week. At the same time, however, MAC was to pay Blair’s an administrative fee of $150 a week ($7,800 a year later mentioned in this opinion), so that, in addition to the loss of some $7,000 by MAC in the $40,000 note transaction, MAC was to pay Blair’s a net amount of $25 a week — $150 weekly administrative fee less $125 weekly note repayment.

By May, 1966, the $40,000 note had only been reduced by $500, leaving a balance due of $39,500. On December 31, 1965, MAC’S seven directors were reduced to three, who were then Devereux, Margot Loys, his secretary, and Dorothy Payette, his mother-in-law. The then legal counsel for MAC resigned on January 5, 1966. Prior to these changes, no corporate authorization was sought or given for the $40,000 note transaction or for certain administrative fees charged MAC.

Prior to the Berger loan, MAC had never paid Blair’s any administrative fees. On March 10, 1964, however,— some seven days after the execution of the Berger note —MAC paid Blair’s $2,500 for administrative services. On March 31, 1964, an additional $600 was paid by MAC to Blair’s as an administrative fee. As a fee for administrative services in prior years, MAC paid Blair’s $3,500 on May 31, 1964.

The following year — on August 31, 1965, MAC set up an account payable to Blair’s in the amount of $12,614.89 for administrative services. In 1966 and 1967 Blair’s charged MAC for administrative fees in the amount of $7,800 for each of those years. Devereux testified that these administrative fees were charged to compensate Blair’s for expenses. MAC, however, owned most of its own equipment and paid its own operating expenses, which amounted to approximately $19,000 in 1965, $15,000 in 1966 and $15,000 in 1967, including the expense for clerical help needed to operate ²⁸ its business.

No approval of directors or stockholders was given for the payment of these administrative fees. MAC had ceased its acquisition of commercial paper from sources other than Blair’s in 1964 and had ceased buying commercial paper altogether by the end of 1965. Devereux caused Carte Blanche charges, travel and other expenses in the amount of $2,719.29 to be charged to MAC without providing substantiation for these charges. He also charged to MAC the $600 contempt fine, previously mentioned, which he had been ordered to pay personally.

Devereux also caused MAC to make personal loans to various employees of Blair’s and to several of his relatives and acquaintances. The total amount of these loans was $7,507.61 of which $3,734.11 was never repaid. There was also evidence that Devereux had caused the assets of MAC to be commingled with his own and with those of Blair’s and to be kept under the control of Blair’s.