Holmes v. Sharretts

Sybert, J., delivered the opinion of the Court. The essential question presented here is whether the Chancellor erred in holding a voting trust and employment and management agreements to be legally valid and binding. The involved facts, detailed in twelve volumes of stenographic transcript, begin with the attempted purchase by Constas G. Basiliko (one of the appellants-plaintiffs) of several Maryland properties located mainly in the Washington, ³⁶³ D.C. suburban area, and valuable for commercial development, from one Max Offenberg. The transaction was being conducted by Basiliko in the name of one Louis Sommers (who, it appears, had been dead for some time) because of Offenberg’s refusal to deal with Basiliko after experiencing some difficulties and alleged sharp practices on Basiliko’s part in prior transactions.

Offenberg testified that he did not realize he was dealing with Basiliko at the time of the negotiations in question. A contract for the sale of the properties was ultimately drawn up bearing the name of Sommers, as purchaser, and a deposit was made with funds advanced by one Schweitzer, not a party to the contract. The contract was then assigned to Basiliko, the assignment bearing the purported signature of the deceased Sommers. Basiliko, however, was unable to obtain the necessary financing to close the contract, which called for a purchase price of $427,500.

Although extensions of time for .settlement were granted, the continuing default of the purchaser led to the setting of a final deadline for cancellation of the contract by the seller, Offenberg, which was not met. Basiliko’s claim of later commitments by third parties to supply the needed capital and his allegation that Offenberg had accepted a later payment of another $10,000 as a further deposit are not supported by the testimony or documentary evidence. Meanwhile, the appellee, R. Carleton Sharretts (defendant below), an attorney who was representing Basiliko in regard to certain unrelated tax problems, learned of his efforts to obtain the properties in question along with two associates, David A. Holmes and Z. Sigmund Sachs (the other appellants), and also of Basiliko’s offer to pay a bonus of $100,000 for a one year loan of $250,000, plus a finder’s fee of $25,000. Since < 'fienberg refused to enter into any further transactions with Basiliko, or any agent of his, it was agreed between Sharretts and Basiliko that Sharretts should negotiate with Offenberg on behalf of the Dubladenhill Corporation ( a cross-plaintiff below and cross-appellant here, along with Sharretts).

The corporation had previously been formed by Basiliko, Holmes and Sachs for the purpose of acquiring the properties. The various understandings between Sharretts and Basiliko ³⁶⁴ were formalized in an “agreement and management contract”' of January 14, 1958 (to which the corporation was made a party), which incorporated within its terms certain provisions, and clarifications set out in two letters from Sharretts to Basiliko. The agreement provided that 85% of the stock in the corporation should be issued to Basiliko, with the remaining shares divided equally between Holmes, Sachs and Sharretts. It further provided for the return to the corporation of all the issued stock endorsed in blank and for the issuance of a certificate for the aggregate amount of stock to Sharretts as sole “voting trustee” for all of the stock, with the power in Sharretts to draw up a voting trust agreement at a subsequent time.

Various other clauses of the agreement provided for the payment of $100,000 bonus to Sharretts if he should be successful in procuring a loan, and the setting up of an employment contract making Sharretts general manager and his brother, Douglas, assistant mapager of the corporation. There was also a specific declaration in one of the letters incorporated into the agreement to the effect that Sharretts was not to be considered as acting as attorney for Basiliko. The employment contract was executed by the corporation and the Sharretts brothers on January 28, 1958. The voting trust agreement, provided for in the management contract, was drafted by Sharretts and was executed by the appellants and Sharretts on February 20, 1958.

It will be referred to in greater detail hereinafter. Its use appeared necessary to the parties as a positive assurance to Offenberg that the property would not be under Basiliko’s control. The Dubladenhill Corporation, previously organized but dormant, was reactivated by Sharretts and new officers designated, Sharretts becoming president and his brother vice-president and secretary. Thereupon Sharretts began negotiations with Offenberg to purchase the property in his own name.

On February 5, 1958, a contract for the sale of the property was executed by Offenberg and Sharretts, which provided in effect that if title were taken in the name of the corporation, the corporation was to be controlled as to voting power by Sharretts. As a further safeguard, Offenberg re ³⁶⁵ quired that quitclaim deeds or releases be exchanged between himself and Basiliko and his wife. In effect, Offenberg released any claims he might have against Basiliko as a result of alleged improper conduct by Basiliko in regard to the subject property. The Basilikos in turn released any claimed interest they might have in the property.

Numerous problems arose which occasioned great delay in settlement under the contract between Offenberg and Sharretts. One problem, significant for the purposes of this opinion, involved a tax claim recorded by the Internal Revenue Service (I.R.S.) against Basiliko resulting in a lien against the property in question. The testimony shows that Basiliko had informed the I.R.S. that he had an interest in the property after he had executed the release to Offenberg and the management agreement, in which he renounced any claim he might have to the property. The tax claim was paid in part ($27,000) by Sharretts, using corporate funds, in return for a full release of all I.R.S. liens against Basiliko in respect to the properties.

This had to be done, according to Sharretts, in order to clear the way for the much delayed settlement under the property contract, since the title insurance company involved refused to issue a required policy until the I.R.S. liens were released. It was not until November 20, 1959, that the settlement took place, Offenberg transferring title directly to the corporation. Sharretts had obtained sufficient funds through loans to the corporation from various sources to provide the requisite cash payment, over and above a sizable deed of trust note taken back by Offenberg. By this time differences had arisen between Basiliko and Sharretts, and before the settlement occurred the instant suit was filed by Basiliko and the other appellants, on September 11, 1959, seeking cancellation of the voting trust and management agreements because of alleged illegality and fraud.

They also asked return of their respective stock certificates deposited with Sharretts under the voting trust agreement, and for the removal of Sharretts as voting trustee because of alleged acts of mismanagement and conflict of interest. Sharretts answered, denying the material allegations, and on behalf of himself and the Dubladenhill Corpo ³⁶⁶ ration he filed a cross-bill in which he sought to have the voting trust and the management agreements declared valid and enforceable, and to have the appellants enjoined from interfering with the exercise of his powers as voting trustee and with his management of the corporation. He also prayed for a decree in personam against Basiliko in favor of the corporation for the $27,000 paid by it on behalf of Basiliko to the I.R.S., and for a lien in that amount in favor of the corporation against Basiliko’s voting trust certificate. After hearing testimony extending over several weeks during which scores of exhibits were introduced, the Chancellor passed a decree dismissing the appellants’ original complaint and granting all of the prayers in the cross-bill, including a decree in personam in favor of the corporation against Basiliko for the $27,000 item, with the exception that the court refused to impress a lien upon the voting trust certificate of Basiliko.

The appellants entered this appeal. Sharretts and the corporation also appealed because of the exception just mentioned, but stated in brief and argument that their appeal is not being pressed, so we will disregard it. I Appellants’ first contention is that the voting trust agreement was void under the relevant Maryland statute in that it provided for the termination of the trust five years after the happening of an uncertain and contingent event, and so might have extended beyond ten years, and also because it failed affirmatively to express any proper business purpose. The statutory provision is Art. 23, § 45, Code (1957), which reads: “Any one or more stockholders of a corporation may confer upon a trustee or trustees the right to vote or otherwise represent their shares for a period not to exceed ten years, by entering into a written voting trust agreement specifying the terms and conditions of the voting trust, by depositing an executed copy of the agreement with the corporation at its principal office, and by transferring their shares to such trustee ³⁶⁷ or trustees for the purposes of the agreement.

Every other stockholder, upon his request therefor, may by like agreement in writing also transfer all or any part of his shares to the same trustee or trustees and thereupon may participate in the terms, conditions and privileges of such agreement.” The voting trust agreement contains the following reference to its duration: “(11) Termination of Voting Trust. This Agreement and the voting trust herein provided shall terminate in any event at the close of business five (5) years after the Corporation shall receive title by deed to any real estate conveyed to the Corporation under a certain contract dated February 5, 1958, wherein the said R. Carleton Sharretts, Jr., is contract purchaser.” Appellants’ position is that the quoted clause shows that the voting trust could have existed for more than ten years from the time of its establishment in that the significant event from which its duration and termination should be measured, i.e., the transfer of the property, was uncertain of fulfillment, and secondly, that even if the property should be transferred, the time of transfer would be uncertain. It is contended that on its face the trust agreement is in clear violation of the statute, and that the fact that the property was actually conveyed to the corporation shortly after creation of the voting trust is irrelevant if the agreement was invalid at its creation. As to the statutory provision, we have several times cited with approval the general rule that subsisting laws enter into and form part of a contract as if expressly referred to or incorporated in its terms, and the rule embraces alike those provisions which affect its validity, construction, discharge, and enforcement.

Whitworth, Adm’r v. Department, 222 Md. 98 , 158 A. 2d 765 (1960); Griffith v. Scheungrab, 219 Md. 27 , 146 A. 2d 864 (1958). This rule has been applied to voting trusts in other jurisdictions. In Lloyd v. McDiarmid, 19 N. E. 2d 292 (Ohio 1937), the court, in upholding a voting trust ³⁶⁸ agreement against the contention that by its terms it could exceed the ten year limit set by the law of Ohio, stated (at 294) : “It must be assumed that the parties to this trust agreement knew of this statute and contracted with reference to it. They are presumed to intend to contract in conformity to law and, in the absence of irreconcilable language, the applicable law is incorporated into their contract by implication of law.” See also De Marco v. Paramount Ice Corporation, 102 N. Y. S. 2d 692, 698 (1950).

However, in Christopher v. Richardson, 147 A. 2d 375 (Pa. 1959), cited by appellants, the Pennsylvania court rejected this rule of construction in regard to a voting trust, stating (at 376): “* * * In order to comply therewith [the statute] the voting trust agreement must, by its terms, be limited to a period of ten years or less, or it must be clear from the terms and provisions of the agreement that the voting trust will terminate in ten years or less.” (Emphasis supplied.) 1 While Professor Corbin, in his treatise on contracts, does not accept the view that statutes and rules of law are incorporated in a contract, he does recognize that: “* * * the processes of interpretation and determination of legal operations are almost always carried on together. Since different legal effects will usually follow different interpretations, this fact often plays an important part in the choice of one interpretation over another. Indeed, it is always true that words and ³⁶⁹ other symbols must be interpreted in the light of surrounding circumstances; and the existing statutes and rules of law are always among these circumstances.” (Emphasis supplied.) 3 Corbin, Contracts, § 551. With respect to the trust agreement now before us, we feel that a requirement that it be interpreted as though the ten year statutory limitation were expressed therein is implicit in its owm terms and provisions.

Drafted by an attorney and executed by men of business acumen, it specifically states that “* * * This agreement shall take effect and be construed in accordance with the laws of the State of Maryland.” (Emphasis supplied.) In addition, in providing a yardstick for the duration of the voting trust, the agreement refers explicitly to a contract executed fifteen days previously, under which title to the property was to be taken within ninety days. It is not necessary here to decide whether voting trust agreements in Maryland incorporate by implication of law the statutes relevant to such agreements. In this case the express provision in the trust agreement that it should take effect and be construed in accordance with the applicable statutes necessarily had the effect of limiting its existence to the statutory period. Furthermore, it was obvious from the provisions of the agreement and surrounding circumstances that the voting trust would certainly terminate within the ten year limit, thus meeting even those tests set forth in the Christopher case, supra, and in the passage quoted from Professor Corbin’s work, supra.

We also see no merit in the second part of appellants’ contention that the voting trust agreement fails affirmatively to express any proper business purpose and for that reason is invalid. It does not appear that the statute—Art. 23, § 45, Code (1957), supra—embodies such a requirement. What it does require is “a written voting trust agreement specifying the terms and conditions of the voting trust”. (Emphasis supplied).

Inspection of the instrument shows that the terms and conditions governing this trust and the powers and duties of the trustee are set out at length. Moreover, the agreement does specify a lawful purpose, i.e., that “the Depositing Stockhold ³⁷⁰ ers deem it for the best interests of themselves and of the Corporation to unite the voting power held by them as holders of Common Stock * * We fail to find any provisions within the instrument which on their face would frustrate this objective or show an improper motive or be opposed to public policy. See Anno., 105 A.L.R. 123 , and 5 Fletcher, Cyc. Corp. (Rev. vol. 1952), §§ 2078, 2080.

II Appellants next argue that because the voting trustee, Sharretts, owns five per cent of the stock in the corporation individually, both the legal and equitable title to those shares have merged in him and that part of the voting trust must fall. They further maintain that, under these circumstances, if all the beneficiaries of the trust agreement desire to terminate it, such relief should be granted. The appellants cite general law in regard to trusts to support their contention. This position is untenable, however, since it is completely alien to the area of voting trust agreements.

One of the early arguments, in fact, against the concept of the voting