Etgen v. Washington County Building & Loan Ass'n

Delaplaine, J., delivered the opinion of the Court. Joseph J. Etgen and Mary T. Etgen, his wife, prayed the Circuit Court for Montgomery County to restrain Washington County Building and Loan Association, Inc., through Charles E. Remsburg, president, Grover C. Crilley, secretary, and Martin V. B. Bostetter, attorney, from foreclosing a third mortgage for $4,000, which it holds on their real property near Gaithersburg, and to annul the mortgage. This appeal is from a decree dismissing the second amended bill of complaint. The first contention is that the mortgage was not based upon valuable consideration.

It appears that Etgen was one of the promoters who sold capital stock of the building association to the public in 1929 and 1930. He says that many of the purchasers of this stock became dissatisfied, and he was employed by Crilley, secretary of the association, to buy the stock back and resell it, and that at various times from 1932 to 1935 Crilley advanced him cash from association funds with which to buy the stock, and he in turn gave his checks to be held by the association until he was paid by the new stockholders. Etgen also says that it was intended that, after he returned the ⁴¹⁵ cash to the association, he should get his checks back, but that Crilley did not always return them, and that he improperly held ten of his checks in the total amount of $4,010. Crilley, however, denies that he ever employed Etgen to buy any stock from dissatisfied purchasers, but claims that he cashed the checks simply to help Etgen in emergencies.

It is unbelievable that Crilley, as secretary of the corporation, would take corporate funds to cash checks to the extent of $4,010 merely as a favor for a salesman, when they both knew the checks were worthless. Defendants' introduced in evidence two telegrams from Etgen, received in July, 1935, one promising to send a check in part payment, and the other offering to sell certain bonds which had been hypothecated with the association. Defendants also produced a copy of a letter mailed to Etgen in March, 1936, in which Crilley said: “It has arrived at the time when there must be something done on your part toward taking up these checks that we are holding here at the Association. * * * You are fully aware of the fact that this whole matter has put me in an embarrassing position with the Board of Directors.” Again, on August 11, 1936, Crilley wrote: “I have written you and talked with you personally as well as on the phone many times about these checks we have of yours and are still holding. * * * We continued to help you when you came and claimed you were in desperate trouble, and now you pass it off lightly. * * * You promised some time ago to give a mortgage on your home, that might satisfy.” Etgen denies that he sent the telegrams, but they appear to be his. He also denies that he received3 any letters from the association.

Yet the fact remains that on August 25, 1936, Etgen and his wife signed and sealed and acknowledged before a notary public in Hagerstown a mortgage in which they agreed to pay Washington County Building & Loan Association, Inc., the sum of $4,850 with interest at 6 per cent., and authorized foreclosure in event of default in payments for a period of ⁴¹⁶ three months. Defendants assert that the consideration for the mortgage was the total amount of the unpaid checks with interest thereon. Etgen, however, claims that he and his wife executed the mortgage for no other purpose than to help Crilley in concealing shortages in his accounts. Defendants state that Etgen was allowed credit for his mortgage on a property in Hagerstown, thus reducing his indebtedness to $4,024.12, and an adjustment credit of $24.12 was given, bringing the indebtedness to exactly $4,000.

They then state that the mortgage for $4,000, now in question, was executed by the Etgens on May 11, 1937, and the $4,850 mortgage was released. It is incredible that a business man like Etgen, acquainted with'securities, corporate promotion and salesmanship, could execute and deliver to a corporation a mortgage reciting an indebtedness of $4,850, and later obtain a release of that mortgage and give a new mortgage for $4,000, and still believe that he never owed the corporation anything. The deferment of foreclosure for six years is probably explained by the fact that the association’s third mortgage on the mortgagors’ property, considered to be worth less than $15,000, was subordinate to a first mortgage for $10,000 and a second mortgage for $2,700, and it was considered more advisable to try to induce the mortgagors to curtail their indebtedness than to incur the costs of foreclosure. It is immaterial for the decision of this case whether Crilley used corporate funds for purchase of stock or merely as a favor to Etgen.

If we assume that they were still engaged in promoting the sale of stock, they stood in a fiduciary relation to the corporation and to all persons who came into the enterprise as stockholders. A promoter is bound to exercise the utmost good faith and he will not be allowed to benefit by any secret profit or advantage which he may gain at the expense of the corporation or its stockholders. Hays v. The Georgian, Inc., 280 Mass. 10 , 181 N. E. 765 , 85 A. L. R. 1251; Moore v. Warrior Coal & Land Co., 178 Ala. 234 , 59 So. 219 ; Cushion Heel Shoe Co. v. Hartt, 181 Ind. 167, 168 , ⁴¹⁷ 103 N. E. 1063 ; American Forging &