Hoffman v. Seth

Henderson, J., delivered the opinion of the Court. The appellants, complainants below, filed a bill of complaint to set aside, on grounds of fraud or duress by wrongful threat of criminal prosecution, a deed of assignment dated February 9, 1953, conveying their interest as tenants in common in certain leasehold properties to Sherwood, trustee, and an agreement of the same date setting forth the terms of the assignment. This case was consolidated with another case in which the appellants intervened by petition claiming, the proceeds of a foreclosure sale of the properties in question. After a lengthy hearing, the Chancellor dismissed the bill and the petition.

The appellants had organized in 1948 a corporation known as Television Company of Maryland (Television), of which they owned the entire capital stock, and which engaged in the business of selling at retail television ²³⁷ sets, radios, and household appliances. On May 25, 1949, and again on January 11, 1951, Television entered into agreements to engage in trust receipts transactions with Stephen Seth & Co., Inc. (Seth), a distributor that apparently did its own financing. These agreements were duly recorded, and thereafter, from time to time, television sets and other merchandise were delivered to Television by Seth, upon the execution of receipts describing the merchandise delivered, executed by the appellants as officers of Television, trustee, and endorsed by them individually. The recorded agreements purported to be made in compliance with the provisions of Code (1951), Art. 95as enacted by Ch. 268, Acts of 1941, known as the Uniform Trust Receipts Act.

While apparently not required by the Act, the agreements specified that each delivery should be accompanied by a down payment of 10% of the total cost of the merchandise so delivered to Television, 10% at the end of the month and the balance within 60 days. Seth retained a security interest in the merchandise to be exercised by repossession, or otherwise, in the event of default. However, it appears that the down payments were not insisted upon, and instead, it became customary for Television to settle its accounts monthly and, in 1952, to make irregular payments on account. In February, 1953, Television was indebted to Seth in the sum of approximately $120,000, and was heavily indebted to other creditors who were demanding payment.

Mr. Berwanger, general manager of Seth, induced the appellants to assign leasehold properties owned by them individually and to execute an agreement whereby the grantee, Sherwood, trustee, agreed to hold the properties in trust for one year as collateral for Television’s indebtedness to Seth. The appellants contend that Berwanger falsely represented to them that they were criminally liable for violations of the trust receipts law, and threatened to prosecute if they refused to assign the collateral. They did so to escape a prosecution. Other creditors threatened a receivership, and a Creditors Committee was appointed, with the consent of Television, to ²³⁸ take over the operation of the entire business and offer it for sale.

Several offers to purchase were received, the best offer being that of the appellants. About March 1, 1953, C. Edward Jones was brought into the situation as attorney for Seth. He had had no part in the transaction'of February 9, but had the deed of assignment recorded on March 11, 1953. He took the position that, to the extent of some $60,000, Seth had a preferred claim based on the trust receipts held by it, and a right to reclaim the merchandise on hand.

He refused to agree to the proposed sale to the appellants and their financial backer in the reorganization plan, Nemeroff, and the latter refused to put up the money if Seth persisted in any claim to a preference or to the merchandise on hand. Other creditors refused to recognize that Seth had a preferred claim. Jones finally told Rabovsky, in the presence of Rabovsky’s attorney, Stevan, that if he would agree to waive the one year clause in the collateral agreement of February 9, 1953, and would ratify that agreement, and the assignment, he would agree on behalf of Seth to waive all claim to a preference based on the trust receipts. Stevan drew up an instrument in which Seth waived any claim “for preferred or priority status which may arise from purported trust receipt transactions between [the parties] whether such merchandise be sold or unsold,” and Rabovsky and Hoffman ratified the agreement of February 9,1953.

The instrument recited that “the parties hereto have mutual interests in the consummation of the pending sale”. At the insistence of Rabovsky, a third clause was inserted, whereby Seth agreed to abstain from any criminal prosecution against Rabovsky and Hoffman. At the same time the appellants signed a letter to Sherwood, authorizing him to dispose of the properties held by him as trustee, without regard to any time limitation in the deed of trust. Rabovsky signed the papers that day, March 16, 1953, and Hoffman, who was out of town, signed them two weeks later in Stevan’s office.

Subsequently, foreclosure proceedings were instituted by Sherwood. ²³⁹ We may assume, without deciding, that an agreement or conveyance procured by a false representation of a material fact, as distinguished from a mere opinion, if known to be false and made with the intention of inducing another to enter into the transaction, may be set aside under some circumstances. Cf. Buschman v. Codd, 52 Md. 202 ; McKeever v. Realty Co., 183 Md. 216, 225 , and Clark v. Kirsner, 196 Md. 52, 56 . See also Restatement, Contracts, Sec. 492, et seq.

Such a transaction is voidable but not void, and subsequent ratification with full knowledge of the facts may operate as a bar to a suit to avoid it.