Miller v. Miller

Markell, J., delivered the opinion of the Court. This is an appeal by plaintiff from a decree dismissing his bill against his brother (defendant, appellee) for an accounting for profits from the sale of 2,264 shares ($5 par) of the stock of Star Life Insurance Company, which until December 18, 1931, were owned ⁵⁷⁰ by plaintiff and since May 4, 1933, had been held by defendant, plaintiff says as pledgee for indebtedness from plaintiff, defendant says as owner by purchase from two other brothers, Fadeley (now dead) and Allen. Judge Niles, quoting plaintiff’s counsel, says the case boils down to one question: Was this stock purchased by defendant, or was it pledged to defendant? This question involves the same question as between plaintiff and Fadeley and Allen, viz., was plaintiff’s stock pledged or sold by plaintiff to Fadeley and Allen on December 18, 1931?

Plaintiff, 68, and defendant, 66 (who for two or three years has suffered from a “blood clot”), are the oldest of six brothers. The others were Daniel, Ezra (now dead), Fadeley and Allen, 50. The six were farm boys reared in southwestern Virginia; eventually all came to Baltimore. In 1908 plaintiff became the first president of a small mutual insurance society incorporated in Maryland.

In 1912 the mutual company was changed to a stock company with $25,000 capital stock; it changed its name to Star Life Insurance Company, and continued the “industrial” insurance business. A few years later statutory requirements of larger capitalization and deposits with the Insurance Commissioner, for new companies, created a special value of stock or “charters” of such old corporations, which in at least one instance even survived insolvency. Gontrum v. Union Liberty Life Ins. Co., 177 Md. 624, 631, 632 , 11 A. 2d 625 .

Plaintiff was president until December 8, 1931, when he retired and Ezra was elected president. At that time plaintiff was indebted to the company on a note; after payment of $7,000 this indebtedness, with interest, amounted to about $5,500 in January, 1933. On February 2, 1932, plaintiff’s resignation as director was accepted by a vote of four to two, plaintiff and defendant voting in the negative. The same day, by the same vote, a ten-year contract of employment between the company and Fadeley and Allen was ratified.

At December 31, 1930, the company had shown a deficit ⁵⁷¹ of $39,581.97, and at December 31, 1931, 1932, 1933, 1934 and 1935, showed deficits of $38,460.28, $18,615.93, $12,097.95, $9,466.03, and $8,111.65 respectively. About 1930 a representative of the State Insurance Department became a director, and salaries were cut about fifty per cent.; this director continued as such until 1940, when the company had a surplus of about $14,000. This surplus was established in part by contributions (“some, but very few”) from stockholders. Defendant and his wife say they mortgaged their house for $5,000 in 1939 for money the Insurance Department required “to be put up.” The company never paid a dividend from 1908 to 1945, when all its shares of stock were sold to Progressive Quaker City Life Insurance Company for $365,000, which yielded $67.88 per share, net after expenses, to its stockholders.

During the war the company prospered through prosperity of low-income workers, from whom it got its business. From time to time, if not all at the same time, the six brothers were stockholders, directors, officers or employees of the company. Before December 18, 1931, plaintiff held 2,264 shares, defendant 500, and Daniel and Ezra each 1,100 out of the 5,000 shares. On January 27, 1932, a ten-year voting trust agreement was entered into between Daniel and Ezra and Fadeley and Allen, covering all these 4,964 shares except defendant’s 500.

On May 11, 1934, this voting trust agreement was cancelled and a new one executed between Daniel and Ezra and defendant, for the unexpired term of the old one, covering all these 4,964 shares. After December 18, 1931, plaintiff received about two weekly salary payments and no more until May, 1934. From May, 1934, until the expiration of the voting trust on January 27, 1942, plaintiff received a salary of $70 semi-monthly as second vice-president; he had no authority to bind the company upon any agreement or in any manner. After January 27, 1942, he received no compensation from the company. ⁵⁷² Judge Niles, at the outset of his opinion, says: “Before deciding the merits of the case, the court cannot refrain from observing that all of these brothers seemed to treat this company as a private source for getting themselves on the payroll, and that that is the spirit in which they seem to have dealt with the stock and with each other.” We think there is also ground for a comment by counsel, that none got much salary but it is doubtful whether they were worth much.

Before December 18, 1931, plaintiff owed to Equitable Trust Company $1,200, secured by 264 shares of Star stock and other collateral, and to Union Trust Company $3,400, due December 27, 1931, secured by his remaining 2,000 shares. He was without means to pay his Union Trust note at maturity. On December 18, 1931, his note at Equitable was paid, and that at Union paid or assumed, by Fadeley and Allen, his stock from Equitable was delivered to them and by them to Union, and his other Equitable collateral was returned to him. On December 20, 1931, all the 2,264 shares were transferred of record into the names of Fadeley and Allen and continued to be held by Union as. collateral.

Plaintiff’s version of these transactions is that Fadeley and Allen (a) offered and agreed to “take up” plaintiff’s loans, in order to avoid sacrifice of his stock at forced sale, by arranging for the “transfer” of the $3,400 loan to their loan account with Union, for payment of the $1,200 Equitable loan and transfer of the stock held by Equitable to their Union account, and for repayment of the loans by plaintiff to them in.small amounts of $200 or more a month, and (b) carried out their offer and agreement on December 18, 1931, but' later, in February, March and April, 1932, refused offers by plaintiff to pay $200 on account of his loan. Fadeley and Allen’s version was, and defendant’s conteniton is, that on December 18, 1931, at plaintiff’s request Fadeley and Allen purchased outright plaintiff’s 2,264 shares for $4,700—$100 more than plaintiff’s loans from Equitable and Union—by obtaining a new loan of $3,500 from ⁵⁷³ Union, secured by the 2,264 shares, and paying for the shares (i) by a check for $3,500 to plaintiff, out of which plaintiff paid his $3,400 loan from Union and thereby released 2,000 of the shares sold, and (ii) by a check for $1,200 to Equitable, whereby the other 264 shares were released to Fadeley and Allen and the other collateral was returned to plaintiff. Plaintiff consulted his lawyer, Mr. James S. Pennington, who told him he needed a more experienced lawyer and introduced him to Mr. Edward L. Ward. Mr. Pennington left during plaintiff’s first conference with Mr. Ward and, though nominally associated with Mr. Ward in plaintiff’s business, took little active part and knows little about details.

He received $250 out of a fee of $1,000 ultimately received by Mr. Ward from plaintiff for services in a suit against Fadeley and Allen and in two other unrelated matters. On July 2, 1932, plaintiff, through counsel, demanded of Fadeley and Allen return of the 2,264 shares and “tendered himself as ready and willing” to pay his alleged loans of $3,400 and $1,200. This demand was refused. On October 26, 1932, plaintiff filed a bill against Fadeley and Allen (a) for return of the 2,264 shares upon payment by plaintiff of his alleged loans with interest, and (b) for a “credit upon said loans” of all weekly payments of $50 each to Fadeley and Allen by the company under their employment contract.

Fadeley and Allen answered through the late Edward J. Colgan, denying plaintiff’s verson of the transactions between them, stating their own version, and alleging inter alia that: Plaintiff had repeatedly asked them to advance him money for discharge of his two notes and to hold his 2,264 shares, in their names, until plaintiff should get a discharge in bankruptcy; they refused to be parties to any such proceeding, but suggested that they might buy his shares outright; again, at the office of their counsel, Mr. Earl W. Blackburn, plaintiff proposed an arrangement whereby his stock could, in some manner, be concealed until after he had got rid of his ⁵⁷⁴ creditors; Mr. Blackburn “condemned this project,” and eventually an outright purchase was agreed upon and consummated. Mr. Ward testifies that after this answer was filed he felt that, with three reputable witnesses against plaintiff, plaintiff’s case was hopeless; he tried t,o get a settlement. Through Mr. Colgan he got an offer from Fadeley and Allen to take $5,000 for the 2,264 shares, plus $10,000 if the shares were resold within three years. Mr. Ward had four conferences at his office with plaintiff and defendant (whom plaintiff introduced to him) and their respective wives.

He says he reported Mr. Colgan’s offer and asked plaintiff if he could buy the stock. At the next conference plaintiff said it was impossible for him to raise the money. Mr. Ward then asked defendant if he could buy it. At the third conference defendant asked Mr. Ward what he thought about it; Mr. Ward said, for reasons stated, he thought it would probably be worth while for defendant to buy.

At the fourth conference defendant said he would buy it. The case was set for trial on April 12, 1933, but on that day was evidently passed for settlement. In January, 1933, the company had brought suit against plaintiff for the $5,500 then due on his note. There were executed, dated May 4, 1933, (1) a release from plaintiff to Fadeley and Allen from all claims by reason of anything “arising out of and in connection with the purchase, ownership or subsequent sale of 2,264 shares” of Star stock, (2) an agreement between Fadeley and Allen and defendant, whereby they sold to him 2,264 shares of Star stock for (a) $5,000 in cash (which he then paid) and (b) $10,000 additional if he should sell the stock within three years, and (3) a power of attorney from defendant to Mr. Colgan and Mr. Ward, irrevocable for three years, to sell for him the 2,764 shares (500 plus 2,264) “owned” by him “at such price as they may determine” and to take action to have the voting trust dated January 27, 1932, declared invalid.

The stock certificates, assigned in blank, were delivered to defendant but were not transferred of ⁵⁷⁵ record until May 11, 1934. On December 4, 1933, defendant, through Mr. Ward, brought suit to set aside the voting trust. On May 3, 1934, Ezra and Daniel and defendant executed an agreement, reciting the voting trust suit and an agreement to settle that litigation and other related matters, and providing that (a) the voting trust agreement should be annulled, and a new one entered into for the unexpired term of the old, Ezra, Daniel and defendant to be the trustees, their “stock ownership” being respectively 1,100, 1,100 and 2,764 shares; (b) the trustees should be authorized to sell the capital stock of the parties for not less than $30 per share; (c) plaintiff should be made a second vice-president with the salary, during the term, and under the restrictions above stated; (d) if possible, Fadeley and Allen’s ten-year employment contract should be purchased and annulled; (e) defendant should get an increase of $10 a week in salary, and any future increases or decreases in salaries of Ezra, Daniel and defendant should be in proportion to their existing salaries. Plaintiff says he saw this agreement'of May 3, 1934, about three to five years thereafter.

On May 11, 1934, the new