Hospelhorn v. Poe

²⁴⁸ Parke, J., delivered the opinion of the Court. The action against Philip L. Poe, individually, and trading as Philip L. Poe & Co., and J. Emory Coekey, who- was nht summoned, proceeded to a judgment in favor of Philip L. Poe, after the court had held the declaration bad on demurrer. The appeal is by the receiver. The questions on this appeal and those on three other appeals now pending on the current docket are so similar that, in order to prevent repetition, the various questions will be discussed in this opinion, but appropriate judgments will be entered separately in every case.

Hospelhorn v. Boyce, 174 Md. 275 , 198 A. 597 ; Hospelhorn v. Blankman, 174 Md. 277 , 198 A. 598 ; Martin v. Hospelhorn, 174 Md. 279 , 198 A. 599 . Pursuant to section 9 of article 11 of the Code of Public General Laws of Maryland, as amended by Acts 1933, ch. 529, sec. 1, the Barde Commissioner of the State of Maryland duly took possession on January 5th, 1935, of the property, assets, and business of the Baltimore Trust Co’mpany, a banking and trust company which was duly incorporated under the laws of the State of Maryland. On the same day a suit was begun in the name of the State of Maryland against the trust company for the purpose of having a court of equity assume jurisdiction of the property and business of the institution and direct and supervise its liquidation. • In proper course, jurisdiction was taken and a receiver appointed with power and authority to take charge and possession of the books, papers, property, and effects of every kind, and to collect the outstanding debts due. The receiver proceeded in the discharge of these duties.

On November 13th, 1935, the chancellor passed an order empowering the receiver to convert all the assets of the trust company, and, specifically, to collect, under the direction of the court, all the statutory liability of its stockholders, and to make distribution of the funds received among its creditors. Later, on November 13th, 1935, the chancellor, who acted in accordance with the provisions of section 72 of article 11 of the Code, passed a decree whereby it was ²⁴⁹ adjudged that an assessment of the full par value of ten dollars a share on all the capital stock of the trust company was necessary to meet the statutory liability of the company to its creditors, and that such an assessment was levied and imposed, and the receiver was authorized and directed to demand and collect from the stockholders severally the said sum of ten dollars for every share of stock held by them, and, if not so paid, to take and institute such proceedings and suits against any and all parties liable. Before all these times and things, the Bank Commissioner of the State of Maryland had, on March 4th, 1933, pursuant to the provisions of chapter 46 of the Acts of the General Assembly of Maryland, passed in 1933, which is known as the Emergency Banking Law, taken custody, control, and management of the Baltimore Trust Company, and, until the appointment of the receiver, had retained his office, duties, and powers as Commissioner in respect of said trust company for the period of one year from the passage of said statute, and a part of the second additional year under an extension made with the approval of the Governor and the Attorney General. Against this common background of admitted facts, the several appeals present these particular allegations, which are required by the pleadings to be taken as true. 1.

With respect to the first appeal on the docket, it is charged that on March 4th, 1933, Philip L. Poe, trading as Philip L. Poe & Co., was the owner and registered holder of 100 shares of the capital stock of the trust company, which was part of a block of 115 shares, for which two certificates of stock had been issued, and that the said defendant as such trader continued to hold these shares until January 15th, 1934, when said 100 shares were transferred of record from the said trader to the said J. Emory Cockey, who has ever since continued to hold said shares of stock. The defendant, individually, and as he traded, pleaded the general issue pleas and later, on demand, furnished a bill of particulars of his defense. In this bill of particu ²⁵⁰ lars it is set forth that before November 13th, 1935, when the trust company was decreed to 'be insolvent, the defendant had sold, in good faith, the 100 shares of stock mentioned in the pleadings to Edward D. Allen & Co., members of the Baltimore Stock Exchange, and that on this date the shares of stock were owned by J. Emory Cockey, and were so registered on the books of the trust company, and that the defendant was neither the shareholder of record nor the transferee. The plaintiff then demurred to the pleas, which, mounting to the first error in pleading, caused the court to consider the legal sufficiency of the declaration and, as a result, to hold the declaration bad. 2.

In regard to the second appeal on the docket, which concerns an action against the banking and brokerage house of Stein Bros. & Boyce, it is averred in the first count of the declaration that a copartnership, trading as stock brokers and investment bankers, under the firm name of Stein Bros. & Boyce, had a certain clerk in its employ who acted as agent for the said copartnership as its undisclosed principal, and, in all things so done, under its direction and control, and an implied contract or obligation by said principal to hold said agent harmless against any liabilities incurred by him in the course of his employment'. In the course of his employment and for the benefit of his principal, and without any knowledge on his part of the beneficial ownership thereof other than that of his principal, the agent had registered on March 4th, 1933, 665 shares of the capital stock of the said trust company in the name of the agent, and on the 15th of March, 1933, these shares of stock were transferred of record from registration in the name of the said agent to the Wortendyke Corporation, a foreign corporation which was not engaged in business in the State of Maryland, and had its offices in the City of New York, and which is now in course of liquidation. The defendants demurred to this count of the declaration. The demurrer was sustained and judgment was rendered, and appeal taken by the plaintiff. ²⁵¹ 3.

In reference to the third appeal on this docket, which is from a judgment on a receiver’s action against Wilmer P. Smith and Meyer Blankman, the declaration alleges that on September 11th, 1931, 200 shares of the capital stock of the Baltimore Trust Company were bought for the account of Meyer Blankman by the brokerage firm of J. Harmanus Fisher & Sons and the shares of said stock were registered in the name of one Wilmer P. Smith, an employee of the brokerage firm, and, upon the receipt of said shares of stock by the brokerage firm, they were placed in the possession of the said Blankman, and were intended and did become the property of the said Blankman, and that, on the 4th day of March, 1933, and ever thereafter, the said shares of stock so remained registered in the name of the said Smith with the ownership as aforesaid, and the possession of the said certificates of stock so issued in the name of Smith, assigned in blank by him, and held by the said Blankman. The defendant Blankman demurred to the declaration. The demurrer was sustained, and judgment entered in favor of the defendant, and the receiver has appealed. 4. The fourth appeal on this docket is from a judgment in an action by the receiver against Glenn L. Martin.

The plaintiff alleges that on March 27th, 1933, the defendant was the holder and owner of 965 shares of the capital stock of the trust company and has continued to hold and own the shares until the bringing of the action. The defendant pleaded the general issue pleas. The third plea was “for partial defense on equitable grounds” and the fourth plea was a “special plea for partial defense.” The plaintiff demanded the particulars of the defendant’s defense under the first and second pleas. The bill of particulars disclosed that the defense under the general issue pleas was that, on March 4th, 1933, the Bank Commissioner of Maryland assumed the custody, control, and management of the Baltimore Trust Company, and that this status continued until the appointment of the receiver for the company on January 5th, 1935; and that at the beginning and throughout this period the trust ²⁵² company was insolvent; and that the commissioner only received deposits and made collections upon the basis that such deposits and collections were held in cash, subject to demand withdrawal by such depositors, but otherwise did no general banking business.

It is further stated that, as of January 5th, 1935, the Baltimore Trust Company had no debts or liabilities other than those incurred before March 4th, 1933, except the subsequent deposits and collections for which cash was held in trust. Under these circumstances, it was asserted, any stockholder who became such after March 4th, 1933, was not subject to an assessment on his capital stock; and since the defendant had not acquired his stock until March 29th, 1933, his stock so obtained was not subject to an assessment. The bill of particulars was followed by a motion on the part of the plaintiff for a judgment by default, pursuant to section 312 of the Baltimore City Charter (1927), on the ground that the pleadings, when read in connection with the bill of particulars, did not set up a good defense, as required by the provisions of chapter 184 of the Acts of 1886, Rule Day Act of Baltimore City, but were an admission of an indebtedness of $6,750 on the assessment on 675 shares of stock; and a pre-purchase payment of fifty per centum on the assessment of $2,900 on the remaining 290 shares of stock. The payment of five dollars on every one of 290 shares was made under an order of the court having jurisdiction of the receivership and of the liquidation of the affairs of the Baltimore Trust Company.

The record discloses that an offer of $756,400 on behalf of the owners of 151,250 shares of the capital stock in final settlement of the liability of the owners as stockholders was made to the receiver and submitted to the court for its action. The chancellor passed an order, on December 11th, 1935, directing and authorizing the acceptance of the offer, unless cause to the contrary be shown by a designated day, with leave to all other stockholders to settle their respective assessments on the same basis if done by the same day, but thereafter the receiver should col ²⁵³ lect the full liability of the stockholders in accordance with the order of court dated November 13th, 1935. The limit within which the stockholders could avail themselves of this opportunity was subsequently extended to January 13th, 1936. The order became final and the predecessors in title of the defendant had apparently availed themselves of its provisions to the extent of 290 shares of the defendant’s block of stock, but the defendant was not financially able to do so with respect to his remaining 675 shares.

His plea by way of defense in part on equitable grounds sets up these facts, and advances as a bar to recovery on the ground that it is “inequitable, unjust and unconscionable” to enforce full liability against him who, he avers, was financially unable fully to take advantage of the terms of settlement during the limited period provided, and to allow those who were more fortunately circumstanced financially to be discharged of their liability by the payment of one-half of the assessment laid. The pleader, therefore, concludes that the receiver may not recover of him more than five dollars a share on his remaining 675 shares of stock. It is not perceived how the financial position of the defendant could avoid the liability on his part to pay the assessment on capital stock. Nor does an equity arise through the financial inability of a stockholder to take advantage of a reduction in the amount of the assessment already imposed upon shares of stock when the offer of the reduction is made by the court, after the assured acceptance of a large proportion of the owners of stock, and the offer is open to all stockholders alike, and is conditioned on payment without litigation, in cash, and within a brief and specified time.

The offer made was universal, so the defendant was accorded an equal opportunity with all others of his class. Hence, no unfair discrimination resulted. The requisites imposed by the court applied equally to all stockholders as a class, and whatever the disability under which the defendant labored was particular to himself and did not originate ²⁵⁴ with the plan adopted by the chancellor. Hambleton & Co. v. Glenn, 72 Md. 331, 340-343 , 20 A. 115 .

The remaining problems on these four appeals present four questions. With the facts that on November 13th, 1935, a decree of court was passed adjudicating the insolvency of the Baltimore Trust Company, a corporate banking institution of the State of Maryland, and declaring an assessment of the full par value of every share of stock be made and be paid by the stockholders liable therefor as a premise, the inquiries may be stated in these forms: First. Is P, who, at the time of the Emergency Banking Act. took effect on March 4th, 193.3, was the owner of shares of the capital stock of the company, and on the 15th day of January, 1934, had caused these shares of stock to be transferred in good faith to C, in whose name the shares of stock have ever since continued to be registered on the books of the company, jointly and severally liable with C, as transferor and transferee, to the extent of the par value of every share of the stock so held? Secondly.

If, at the time the Emergency Banking Act took effect, A was the agent of S. B. & B., brokers and bankers, who had engaged to indemnify the agent against any liabilities which he might incur in the course of his agency; and if, on that day, A, in pursuance of such agency, had shares of the capital stock of the trust company issued and registered in the name of said agent its owner, but for the undisclosed use and benefit of his principals, and subject exclusively to their orders, by which the said agent, on March 15th, 1933, transferred of record said shares of stock and the certificate theréof to the Wortendyke Corporation, are S. B. & B., as the undisclosed principals of their agent, A, and the transferee corporation, jointly and severally liable for the assessment of the stock so held? Thirdly. Are the registered holder of the legal title to shares of the capital stock and the unregistered beneficial owner thereof on March 4th, 1933, and continuously ²⁵⁵ thereafter until the assessment was made, jointly and severally liable for the assessment on such stock? Fourthly.

If shares of the capital stock of an insolvent bank, whose affairs, after March 4th, 1933, were in the custody, control, and management of the Bank Commissioner under the provisions of the Emergency Banking Act, were acquired and registered in the name of their owner after March 4th, 1933, and so remained until and after the time of the assessment of the capital stock of said bank, is the owner of such shares liable for the assessment of such stock ? I. The law governing the answers to the problems stated must be examined and applied. Before its amendment (Acts 1936, 1st Ex. Sess., ch. 151), the Constitution of Maryland provided that the General Assembly should grant no charter for banking purposes, nor renew any banking corporation in existence, except upon the condition that the stockholders should be liable to the amount of their respective share or shares of stock in such banking institution for all its debts and liabilities upon note, bill, or otherwise.

Constitution, art. ,3, sec. 39. The statutory provision with regard to the stockholders of every bank and trust company was that the stockholders should be “held individually responsible, equally and ratably, and not one for another for all contracts, debts and engagements of every such corporation, to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such stock; * * * and the liability of such stockholders shall be an asset of the corporation for the benefit rat-ably of all the depositors and creditors of any such corporation, if necessary to pay the debts of such corporation, and shall be enforceable only by appropriate proceedings by a receiver, assignee or trustee of such corporation acting under the orders of a court of competent jurisdiction.” Code, art. 11, sec. 72. The effect of these constitutional and statutory provisions was to incorporate in the contractual relation between the incorporated banking institution and its stock ²⁵⁶ holders, as one of its constituent terms, the obligation of the stockholders to pay, for the benefit of corporate creditors and claimants, an amount not in excess of the par value of the stock of the shareholders. Allender v. Ghingher, 170 Md. 156 , 183 A. 610 ; Ghingher v. Bachtell, 169 Md. 678 , 182 A. 558 ; Coulbourn Bros. v. Boulton, 100 Md. 350 , 59 A. 711 ; Norris v. Wrenschall, 34 Md. 492 .

The statutory obligation stated bound the actual stockholder. Should the registration on the books be in the name of the stockholder as an executor, administrator, guardian, trustee, or pledgee, he is not bound personally because he is acting in a representative capacity, and his pledgor or the estate to which he bears the representative capacity is responsible. The statute explicitly enacts so much, and thus affords evidence that the registered holder of the stock is the party contemplated. Section 72 of article 11.

Should the party be a pledgee, executor, administrator, guardian, or trustee, and have the shares of stock held in such capacity entered on the books of the corporation in his own name, then he, as between himself and the corporation, would, by his election, be bound individually to pay, and his remedy would be to look to his pledgor or the estate in his hands for indemnity, if permitted by his acts within the principles of subrogation. The statute makes no explicit declaration in regard to the relation of principal and agent. Nevertheless, upon principle and authority, a person who voluntarily permits his name to appear on the books of a corporation as a stockholder becomes liable as a stockholder, although he may actually hold the stock simply as agent, and may really have no beneficial interest whatsoever. By his acquisition of the stock, and his acceptance of the delivery of the share of stock as his document of title, after the record of its issue to him is entered on the books of the corporation, the person becomes. bound in accordance with this written evidence of his relation, so that later he may not disavow his obligations as the owner of the stock.

Fletcher on Corporations (Perm. Ed.) secs. 6331, 6362, 6360, 6365; Matthews ²⁵⁷ v. Albert, 24 Md. 527 ; Magruder v. Colston, 44 Md. 349 ; McKim v. Glenn, 66 Md. 479 , 8 A. 130 ; Kerr v. Urie, 86 Md. 72 , 37 A. 789 ; York County Bank v. Stein, 24 Md. 447 . The duty is on the agent, if he would avoid personal liability, to disclose his agency, and not upon others to discover it. Mechem on Agency (2nd Ed.) secs. 1410, 1411, 1413.

II

However, the corporation may, on discovery of the agency, hold liable either the agent or his principal, as the real owner of the stock. The. identity of the principal may be established by parol testimony, because the evidence is not in conflict with the contract nor in discharge of the agent, but simply establishes the additional liability of the undisclosed principal as a party to the contract (a). The liability of the agent, in those instances in which he promises in his own name, although really for an undisclosed principal, is based upon the fact that the treaty between the contracting parties is made upon the single credit and faith of the agent, because of his choosing not to reveal his principal. In such circumstances, the other contracting party has the right to hold the agent individually bound or to elect between the agent and the principal, when the latter is disclosed (b).

The promisee, upon discovery of the principal, may enforce the contract against either at his election, and it is held that he may simultaneously bring an action separately against the principal and the agent, but the promisee may have but one satisfaction, (c). It is urged that the contractual relation of principal and agent does not admit of a joinder of the principal and agent in an action at law, since the promise is not joint nor several, but rather alternative. The obvious reply is that the fundamental things concerned are single. There is but one contract to be performed in respect of the one subject matter involved, and the principal and agent constitute but one party of the contract, (a) Mechem on Agency (2nd Ed) sec. 1733.

See Rider v. Morrison, 54 Md. 429, 443-445 ; Bloede v. Bloede, 84 Md. 129, 139-141 , 34 A. 1127 ; Kerr v. Urie, 86 Md. 72 , 37 A. 789 ; (b) 3 C. J. S., Agency, sec. ²⁵⁸ 248, pp. 175, 176; (c) 3 C. J. S., Agency, sec. 248, pp. 177, 178; Estes v. Aaron, 227 Mass. 96 , 116 N. E. 392 ; Gavin v. Durden Coleman Lumber Co., 229 Mass. 576 , 118 N. E. 897 . In the words of Meehem: “Whether the agent and the principal may be joined as defendants in the same action is a question involving a variety of considerations and leading to much difference of opinion. * * * It will suffice here to say that there is a large and constantly growing number of cases in which it is held that such a joinder i’s proper.” The learned author cites a number of cases in support of the quoted text. 1 Mechem on Agency, sec. 1487, n. 59, pp. 1103, 1104. In the course of a subsequent discussion of what will constitute an election by the third party after discovery of the principal has been made, the author observes that “the mere commencement of an action against an agent, although this act is often regarded as an election in other fields, is not here deemed to constitute a conclusive election as a matter of law, whatever may be its force as evidence of an election as a matter of fact. There is, moreover, as has been seen, authority for saying that principal and agent may be simultaneously sued severally, and possibly even jointly.” Section 1758, pp. 1336, 1337, 1759; Curtis v. Williamson, [1874] L. R. 10 Q. B., 57; Priestly v. Firnie, 1865, 3 H. & C., 977.

In Williston’s Wald’s Pollock on Contracts it is flatly stated: “When it is said that he (the other party) has a right of election this means that he may sue either the principal or the agent or may commence proceedings against both, but may only sue one of them to judgment; and a judgment obtained against one, though unsatisfied, is a bar to an action against the other.” p. 116. See Pollock on Contracts (7th Ed.), p. 105. The rule in Maryland is similarly stated in Codd Company v. Parker, 97 Md. 319 , at page 325, 55 A. 623 , 624: “And the general principle appears to be established that where an agent contracts in his own name, without disclosing his interest, though in fact for the exclusive bene ²⁵⁹ fit of another person, who is afterwards discovered, the creditor may sue either, but after he has elected whom to sue, and has sued either the agent or principal to final judgment, he cannot after that sue the other, whether the first suit has been successful or not.” Since the third party may simultaneously sue separately the agent and his undisclosed principal, after the latter’s discovery, and is not held to have made an election to look to the one or the other, until he takes a final judgment against the one he thus elects to hold to the exclusion of the other, there is no sound reason why the agent and principal may not be sued jointly by the third party, in an action to recover the stockholder’s liability on shares of stock held by the agent for a principal who was not known to the third party at the time the stock was registered, and the certificate issued, in the name of the agent. The plaintiff in the joint action may therein elect, with equal, if not greater, facility, and with more certainty and singleness of procedure and record, against which of the joined defendants he would take his final judgment.

Since the obligation is of statutory origin, and, so, is not a right created by a consensual contract but falls into the class of quasi contracts, there is no difficulty in the joinder of the principal and agent at the suit of a third party to enforce the statutory obligation, because it is not necessary to find an express or implied contract entered into by the two defendants jointly promising the plaintiff to pay or to do, but merely a statutory obligation to pay an amount which the two defendants are alternatively bound to pay the plaintiff, who may be required to elect, before the final judgment, whether the judgment is to be taken against the principal or the agent. History of Assumpsit, Ames, Selected Readings on Law of Contracts, p. 56; Woodward on Quasi Contracts, sec. 1; Keener on Quasi Contracts, p. 16; Broderick v. Aaron, 151 Misc. 516 , 272 N. Y. Supp. 219, 236, 237 , affirmed 243 App. Div. 594 , 277 N. Y. Supp. 499 , affirmed in 268 N. Y. 411 , 198 N. E. 11 ; Id., 268 N. Y. 665 , 198 N. E. 547 , without a discussion of the question ²⁶⁰ of election as decided in 272 N. Y. Supp. 219, 236, 237 . If the parties had agreed in terms to these relative obligations arising out of the statute and their relations as principal and agent, the contract would have been valid and its breach of performance give rise to a good cause of action ex contractu against the joined defendants. See Addison on Contracts, sec. 319; Parsons on Contracts, ⁶⁵⁷; Williston on Contracts (Rev. Ed.) sec 328, p. 954.

In the making of the contract by the agent for his undisclosed principal, the agent had the right of exoneration against the principal to the extent of the liability assumed by the agent in the purchase of the shares of stock pursuant to the terms of the agency. This right was an asset of the agent. So, the payment by the agent of whatever might be assessed against him as the purporting owner of the shares of stock, constituted a claim of the agent for which he could maintain, if not paid, an action against the principal. Hence the demand or action which was recoverable of the agent on his liability as stockholder would, in turn, involve the reimbursement of the agent by the principal; and this circuitous and ultimate discharge of what was the principal’s primary obli.gation illustrates the substantial nature of the rights and liabilities which the principal and agent had in the statutory action brought to recover the assessment laid on the purporting owner of the shares of stock by a court, and collectible on the order of that court by its receiver or other officer for the benefit of the creditors of the banking institution in course of liquidation.

Code, art. 11, sec. 72. Thus the plaintiff’s joinder of the principal with the agent is justified in principle as a means of satisfying the agent’s liability for the assessment on the shares of stock by enforcing against his principal the right of the agent to be indemnified or exonerated by the principal for all liability on account of the discharge of the agency with reference to the shares of stock. Williston on Contracts (Rev. Ed.) sec. 289. The fact that the parties have not put their relationship in writing suggests a practical basis in support of a joinder.

The other ²⁶¹ party’s ignorance of the principal’s existence is due to the nondisclosure of the principal and of his agent, and, so, its consequences are chargeable to both. If the third party contract with an agent for an undisclosed principal, he may hold the agent or, upon discovery, the principal, but the third party cannot recover from both. If the third party elects to hold the agent, the principal is discharged; and, conversely, if he elects to hold the principal, the liability of the agent is at an end. The existence of the relation of principal and agent is a fact, and the agency may be asserted and denied by the immediate parties.

Under such circumstances, full knowledge of the facts which are material to the third party’s election is difficult of ascertainment, and, unless the principal and agent are joined in the action, the third party would be required to make an election before it was certain that he had two alternative remedies in reference to which an election was necessary. The following cases may be cited as affording illustrations of this point: Gay v. Kelley, 109 Minn, 101, 128 N. W. 295 ; Stevens v. Wisconsin Farm Land Co., 124 Minn. 421