Katski v. Boehm

Singley, J., delivered the opinion of the Court. William J. Boehm, who is one of the appellees here and was one of the plaintiffs below, is a member of the bar, in practice in Annapolis, Maryland. In 1954, he was instrumental in forming Bay Electric Co., Inc. (the Company) which was engaged in the electrical contracting business and from 1954 to 1963 “more or less managed and operated the business from the administrative standpoint” and was the Company’s executive vice president. At the time of the events which gave rise to this litigation, Mr. Boehm was vice president and director of Bay Electric; was receiving a salary which ranged from $50 to $200 per week ; owned “eleven or twelve per cent” of the Company’s stock; and acted as its counsel.

The appellants Clayton O. Katski and Jane Perry Katski, who were defendants below, were the president and secretary-treasurer respectively of Bay Electric. Pre ⁵⁷¹ sumably, Mr. and Mrs. Katski owned the remainder of the Company’s stock, although the record is silent on this point. By 1963, according to Mr. Boehm’s undisputed testimony “[T]he [C]ompany had progressed from a small corporation to a rather sizeable one, with contracts totaling close to $900,000. * * * All during that period of time we had our financial problems. I would advance any sums needed that the banks would not loan.

Unfortunately our company did not have a good bank credit and we were unable to get money * * In 1963, Mr. Boehm guaranteed a $25,000 line of credit (not here involved) from Maryland National Bank to the Company at which time his salary was increased from about $75 per week to about $150 per week. In April of 1965, Mr. Boehm borrowed $3500 from Maryland National Bank, assigning his trust account as security, and lent to Bay Electric $3440 to cover unpaid checks for materials and payroll. On 31 July or 1 August 1965, Maryland National Bank lent Bay Electric Company, directly, $67,000 (not here involved). As primary collateral the Bank took a security agreement from Bay Electric on all of its equipment.

Mr. and Mrs. Katski and Mr. Boehm guaranteed the loan, whereupon Mr. Boehm’s salary was increased to $200 per week. On about 1 October 1965, because of further financial difficulties, Mr. Boehm’s salary was stopped and Mr. Katski’s salary reduced to $150 a week. In November of 1965, Mr. Boehm and his wife borrowed $13,000 from Union Trust Company and Mr. Boehm then lent it to Bay Electric to meet payrolls. On 3 January 1966, Mr. and Mrs. Boehm borrowed another $7,000 from Union Trust Company and Mr. Boehm borrowed $20,000 from Annapolis Banking & Trust Company.

Mr. Boehm lent it all to Bay Electric to meet payroll taxes for which he, with other officers of the Company, was indirectly responsible. In August, 1966, Mr. Boehm learned that a check not covered by sufficient funds had been issued by Bay Electric for $18,000 to pay employees’ withholding and social security taxes. Mr. Boehm, who feared that he was again responsible for such ⁵⁷² taxes and possibly subject to criminal indictment for non-payment, borrowed $18,000 from Maryland National Bank and lent it to Bay Electric to cover the checks. The earlier security agreement on equipment which had secured the $67,000 loan (by then reduced to $38,000) was re-executed to cover the $38,000 and the $18,000 and, as additional security, Mr. Boehm obtained for Maryland National Bank an assignment of Bay Electric’s earned contract retainages, totaling $72,000.

At the same time, Mr. Boehm noted that the Maryland National Bank security agreement did not cover Bay Electric’s, inventory valued at about $35,000. Mr. Boehm as trustee took from Bay Electric a chattel mortgage for $30,000, as security for Mr. and Mrs. Boehm’s $20,000 Union Trust loan and his-$20,000 Annapolis Banking & Trust loan. No notes were ever taken by Mr. Boehm from Bay Electric, the only evidence of indebtedness being recorded on the books, of account of Bay Electric. Mr. Boehm made inquiry of Mr. Katski in November, 1966, and was told that contract retainages were $75,000, and that Mr. Boehm’s loans from the various banks had been reduced by Bay Electric as follows: the Annapolis Banking & Trust loan from $20,000 to $15,000; the Union Trust loan from $20,000 to $19,000, and the Maryland National Bank loan from $18,000 to $12,000.

On 11 December 1966, a fire occurred at the Bay Electric plant, destroying all of the inventory subject to Mr. Boehm’s security agreement as well as several buildings owned by the Katskis. This was the situation on 23 December 1966, when Mr. Boehm met with Mr. and Mrs. Katski and Kenneth L. Dunn, the Company’s accountant, at the Katskis’ residence. After a discussion, Mr. Boehm prepared and presented to Mr. and Mrs. Katski, in their capacity as officers of Bay Electric, five confessed judgment notes, all payable on demand: (1) $3500 payable to Maryland National Bank and William Boehm, Trustee, as co-payees. 1 , 2 ⁵⁷³ (2) $9000 payable to William Boehm as sole payee. 3 (3) $19,000 on a printed Union Trust Company form payable to William J. Boehm, Dorothy H. Boehm and Union Trust Company, as co-payees, with interest at 10% per annum. (4) $12,000 on a printed Maryland National Bank form payable to Maryland National Bank as sole payee.

(5) $15,000 on a printed Annapolis Banking & Trust Co. form 4 payable to Annapolis Banking & Trust Co. and William J. Boehm, as co-payees. These notes were then endorsed by Mr. and Mrs. Katski in their individual capacities and delivered to Mr. Boehm. At this -point, Mr. Boehm resigned as an officer, director and attorney ■of Bay Electric, delivered his stock in the Company to Mr. and Mrs. Katski, and accepted their check for $25, in payment for the stock. On 27 December 1966, the Katskis went to Mr. Boehm’s ■office and delivered to him a signed and partially completed assignment of certain insurance proceeds which was intended to guarantee the payment of the notes which Mr. Boehm proposed to give to the banks.

Mr. Boehm then visited the banks, and found them unwilling to accept the Bay Electric notes, endorsed by the Katskis, in substitution for the notes signed by himself or his wife and himself, but the banks did agree to renew the loans evidenced by the Boehm notes provided that monthly payments were made. Mr. Boehm then returned to his office, described the situation to the Katskis, advised them that he would have to hold the notes, and made the following changes: (1) On the $3500 note he struck out Maryland National Bank as co-payee, leaving himself as sole payee. 5 (2) On the $19,000 note he struck out Union Trust Company as co-payee, leaving himself and his wife as co- ⁵⁷⁴ payees, and changed the interest rate from 10% to 6%. (3) On the $12,000 note he struck out Maryland National Bank as sole payee and substituted himself as sole payee. (4) On the $15,000 note he struck out Annapolis Banking & Trust Company as co-payee, leaving himself as sole payee. 6 When the monthly payments were not made, on 17 January 1967 Mr. and Mrs. Boehm caused a confessed judgment to be entered against Bay Electric and the Katskis on the $19,000 note and Mr. Boehm on 18 January 1967 had similar judgments entered on the $12,000 note and the $15,000 note.

Motions to vacate the judgments were filed by the Katskis and by the trustee for the creditors of Bay Electric, who had been granted leave to intervene as a defendant. From orders denying the motions to strike the judgments entered on the $19,000, $15,000 and $12,000 notes 7 this appeal was taken. The appellants’ motions to vacate the judgments were filed under Maryland Rule 645 b which provides that “* * * the clerk shall issue a summons to the defendant notifying him of the entry of the judgment and requiring him to appear in the cause * * * and show cause, if any he has, why the judgment should be vacated, opened or modified.” ⁵⁷⁵ The Katskis assigned the following grounds for their motions : I. That the execution of the notes by Bay Electric was without consideration.

II

That the Katskis’ endorsement of the notes was without consideration.

III

That Mr. Katski was incompetent at the time of the signing of the notes.

IV

That Mr. Boehm was guilty of a breach of fiduciary relationship. V. That no demand was made on the Katskis.

VI

That certain of the notes were payable to payees other than Mr. Boehm, or Mr. Boehm and his wife. The trustee for the creditors of Bay Electric adopted grounds I and VI in his motion and modified grounds III and V to make them applicable to Bay Electric as maker. After a protracted hearing at which testimony was taken, the lower court denied the motions to vacate the judgments entered by confession on the $19,000, $15,000 and $12,000 notes. 8 The present appeal was taken from these orders. Judge Offutt, speaking for our predecessors in Keiner v. Commerce Trust Co., 154 Md. 366, 370-71 , 141 A. 121 (1927) described the Maryland practice with respect to the vacating of confessed judgments: “A judgment by confession possesses all the incidents, is supported by the same presumptions, and is entitled to the same faith and credit, as any other judgment (Freeman on Judgments, par. 1337), and that is so whether the confession is by the defendant in person or by another with his consent.

Ibid. But while that is true, the widespread and general practice of embodying, in promissory notes, warrants of attorney authorizing a confession of judgment for the amount thereof, together with counsel fees, lends itself too readily to fraud and abuse, and in this state at least such judgments ‘are freely stricken out on motion to let in de ⁵⁷⁶ fenses.’ Phillips v. Taylor, 148 Md. 162 . And although such a motion ‘must be supported by satisfactory proof of conditions which make such action necessary to serve the ends of justice’ (Wisner v. Reeside, 139 Md. 223 ), the court in dealing with it ‘should be very careful to see that no improper advantage has been taken of the maker of such note in entering judgment’ International Harvester Co. v. Neuhauser, 128 Md. 181 . “Necessarily, one making the motion assumes the burden of supporting the facts alleged in it, and as to all matters not going to the merits of the controversy, such as surprise or deceit in the entry of the judgment itself, he must prove such facts by a fair preponderance of the evidence. But as to defenses going to the merits of the claim upon which the judgment rests, a different rule prevails.

In such cases, if the evidence adduced in support of the motion is sufficient to persuade the fair and reasoned judgment of an ordinary man that there are substantial and sufficient grounds for an actual controversy as to the merits of the case, the defendant should be deemed to have met the burden of showing that he has a meritorious defense. In other words, if the evidence is such that persons of ordinary judgment and prudence could honestly and fairly draw different inferences from it, one favoring the plaintiff and the other the defendant, the court should not itself decide that conflict, but should submit it to a jury. And while the rule thus stated is not universally approved, it seems to be supported by the weight of authority, is consistent with justice and equity, and is in harmony with the decisions of this court. ‘Courts of law exercise an equitable jurisdiction over judgments entered by confession upon notes and warrants of attorney, and it is necessary to justice that they should liberally exercise that jurisdiction, and may therefore, on application of the defendant, vacate them and permit him to make a defense on the merits, provided the ⁵⁷⁷ proper showing of a meritorious defense is made.’ Freeman on Judgments, par. 1340. 34 C.J. 415; Wisner v. Reeside, supra; International Harvester Co. v. Neuhauser, supra; Phillips v. Taylor, supra.” The rule has been recently restated by Judge (now Chief Judge) Hammond in the opinion of the Court in Stankovich v. Lehman, 230 Md. 426, 432 , 187 A. 2d 309 (1963) : “To be successful in moving to strike a judgment by confession, one must adduce evidence in support of his motion sufficient to persuade the fair and reasoned judgment of an ordinary man that there are substantial and sufficient grounds for an actual controversy as to the merits of the case. If he does so, he is deemed to have met the burden of showing he has a meritorious defense, without the necessity of showing he will eventually prevail.

This is to say that if the evidence is such that persons of ordinary judgment and prudence could fairly draw different inferences from it, the controversy should not be decided as a matter of law but instead should be submitted to a trier of fact. If a meritorious defense is made out (by affidavits or testimony, Johnson v. Phillips, supra), the Court should liberally exercise its equitable jurisdiction over judgments entered by confession and, on application of a defendant who prima facie shows such defense, vacate the judgment to permit a trial on the merits. Cropper v. Graves, 216 Md. 229 ; Remsburg v. Baker, 212 Md. 465, 470 ; Keiner v. Commerce Trust Co., 154 Md. 366, 370-371 .” The lower court concluded that the appellants failed to meet the burden of the rule which required them to adduce evidence from which persons of ordinary judgment and prudence could fairly draw different inferences, which would have the consequence that the controversy should not be decided as a matter of law, but should be submitted to a trier of fact. We agree that the appellants did not meet this burden and pro ⁵⁷⁸ ceed to a detailed consideration of their contentions and an analysis of the testimony offered to support them. 9 I. The execution of the notes by Bay Electric was without consideration.

Testimony that the notes were for amounts previously borrowed by Mr. Boehm or Mr. Boehm and his wife and made available to Bay Electric was