Munich Re-Insurance Co. v. United Surety Co.

²⁰³ Boyd, C. J., delivered the opinion of the Court. This is an appeal from a decree which dismissed the hill of complaint of the Munich Re-Insurance Company filed against the United Surety Company, decreed that the defendant was entitled to cross-relief as prayed in its answer, and referred the cause to the auditor to ascertain and report the amount, if any, due by the plaintiff to the defendant under what is called a “participation contract.” The bill charges that the Munich Company was induced to enter into and execute that contract with "the Surety Company through false and fraudulent representations of material facts on the part of the Surety Company and certain of its officers. It alleges that upon discovery of the frauds the Munich Company rescinded the contract and notified the Surety Company that by reason of said fraud's the contract was null and void from the beginning, but that the Surety Company had denied the right of the Munich Company to rescind the contract, and had instituted a suit at law to recover damages against it, under the terms and provisions of the contract. It then prayed that a decree might be passed declaring the contract null and void, and cancelling it, and also praying for an injunction restraining the Surety Company from further prosecuting the suit at law.

The defendant answered the bill and neither admitted nor denied' the allegations of fraud set out in it, but called for strict proof thereof. It further alleged that it was immaterial whether the charges of fraud and misrepresentations set out in the bill were true or not, for the reason that the plaintiff had ratified and confirmed the contract in question, and had waived any right to rescind it, after discovery of the frauds and with full knowledge thereof. By way of cross-relief the defendant then charged that the plaintiff was indebted unto it under the provisions of the conti act in a large sum of money, and prayed for an accounting and a decree in its favor for such amount as might be found to be due. ²⁰⁴ The Munich Company answered the allegations for cross-relief, alleging that, apart from and' in addition to the invalidity of the contract by reason of the fraud and misrepre sentations charged in the bill, the Surety Company was not entitled to relief because at the time of the execution of the contract it had not come into being, had no corporate exist ence and was legally incapable of having or exercising any of the rights or privileges contained in its charter, and was legally incapable of executing or entering into the contract because by its charter it was a condition precedent to acquiring or having any corporate existence or exercising any corporate powers that all of the capital stock of the Surety Company, to wit, five thousand shares, should first be subscribed for, and that fifty per cent, should first be paid in cash, while a large part was unsubscribed for, and far less than fifty per cent, had been paid in cash. The authorized capital of the Surety Company was five hundred thousand dollars, divided into five thousand shares, of one hundred dollars each.

It was determined that the stock be subscribed at one hundred and fifty dollars per share—thus making a surplus of two hundred and fifty thousand dollars, in addition to the authorized capital. Oliu Bryan, the then president of the Surety Company, entered into negotiations, in the early part of 1906, with Carl Schreiner, who had charge of the “Foreign Department” of the Munich Company, and had his headquarters in London but spent part of his time in this country, with a view to making a contract with the Munich Company, whereby it should undertake, upon terms to be agreed upon, to participate in some part of the business of the Surety Company and also requested the Munich Company to become a subscriber to the capital stock of the Surety Company. The bill alleges that in the course of the negotiations between them it was understood and agreed, as a condition of the Munich Company entering into the contract and subscribing to the stock, that the whole capital should be subscribed and actually paid into the treasury at the rate of $150.00 per share, without ²⁰⁵ discount or rebate to anyone, so that the entire capital of $500,000 and $250,000 of surplus should be actually paid in cash and be available for the purposes of the business of the Surety Company. It was agreed that upon those terms, the Munich Company would take three hundred and thirty-three shares, at $150.00 per share, and in order to have a definite and official confirmation of the representations and statements of said Bryan, on March 24th, 1906, Schreiner wrote to the Surety Company requesting it to deliver to the banking firm of Ladenburg, Thalmann & Co., of New York, the three hundred and thirty-three fully paid shares of stock, together with a statement as to its capital, etc. On March 30th, 1906, Bryan, as president, wrote to the banking firm stating that all the shares had been subscribed for at $150.00 per share, no discount or rebate being allowed on a single share to any stockholder, of which there was then paid $443,000 in capital and $221,500 in surplus, making $664,-500, which with the 333 shares subscribed by them would make a total of $714,500 which would leave an unpaid balance of $35,550, being 237 shares, and that all of the capital and surplus would be paid on or before the 15th of April, 1906.

The amount of the Munich Company’s subscription to the stock was duly paid by two drafts, and the contract, which is at times spoken of in the record as a “participation contract,” and in other places as a “re-insurance contract,” was executed in duplicate by the Surety Company on Ma'rch 20th, and by the Munich Company on April 10th. 1906— the duplicates having been sent to the home office at Munich, Bavaria, for execution by that company. Amongst other provisions in the contract Art. VIII provided for a detailed account by the Surety Company to the Munich Company of certain income and disbursements, and . Art. IX in part is, that: “If the account provided for in the preceding article shows a profit, the ‘Munich’ shall receive one-third (1/3) thereof as its share under the terms of this agreement. If the said account shall show a loss, the ‘Munich’ will pay one-third (1/3) of said loss to the United.” ²⁰⁶ The bill alleges that approximately 2312% shares were unsubscribed. and unpaid, and only 2687% shares (including what the Munich Company paid) actually subscribed and paid for; that the plaintiff and its agent, Schreiner, were at the time of making the contract and making the subscription, respectively, entirely ignorant of the true and actual condition of the defendant, and relied' on the representations and statements of Bryan, which were false and fraudulent.

It is later in the bill alleged that for reasons and considerations stated, the plaintiff did after the discovery of the frauds and misrepresentations, and upon the terms and conditions thereafter set out, waive the said frauds and misrepresentations, in respect to its contract of subscription to said capital stock, and ratified' and confirmed it, but at no time since the discovery of the frauds did it waive the same in respect to the participation contract. During the summer of that year it was discovered that a large number of the shares of stock were not in point of fact bona fide paid for, or subscribed as Bryan had led the Munich Company and the officers and directors of the Surety Company, with perhaps one or two exceptions, to believe. Mr. Janney, who was a director and attorney for the Surety Company, at once began investigations which resulted in having a special meeting of the board of directors and some others interested on the evening of August 25th, 1906, at the company’s building in Baltimore. The effort to show what took place on that occasion is largely the cause of this voluminous record of nearly eight hundred pages.

We are relieved of discussing the falsity of the representations to the Munich Company as to the subscriptions and payment of the stock by the admissions in the appellee’s brief. The case is peculiar because it is admitted by the bill, and shown by the appellant’s testimony, that it did on the evening of August 25th, 1906, waive the frauds and misrepresentations in respect to the subscription to the capital stock, and that it ratified and confirmed its contract in reference thereto, but the controversy is whether it also waived its ²⁰⁷ right to rescind the participation contract: That depends, outside of some questions of law, upon the facts and circumstances shown by the record, and therefore we are called upon to review them at some length. Mr. Schreiner sailed from this country for London about June 19th, 1906, and did not return again until about the middle of October of that year. The firm of Ladenburg, Thalmann & Co. were the New York bankers of the Munich Company, and Mr. Walter T. Eosen of that firm represented the Munich Company in the Surety Company—having been elected a director in the latter part of March, 1906, as the representative of that company, although the shares of stock stood in the name .of his firm.

About -the middle of August Mr. Janney requested Mr. Eosen to attend a meeting of the directors, on account of certain developments, and shortly after that date apprised him of the nature of the troubles. At Mr. Eosen’s instance the meeting was postponed until August 25th, to enable him to communicate with Mr. Schreiner, who was still in London. On August 22nd he sent to Schreiner a long calbegram in which he stated' there seemed to be a large amount of stock not paid in as represented, told him a directors’ meeting was called for the next day and asked for instructions. He (Eosen) suggested that he resign as director and stated that he thought it advisable that Schreiner should have Marshall, an associate of Mr. Van Vorst. to represent his interests.

He referred to Mr. J. Markham Marshall of the law firm of Underwood, Van Vorst and Hoyt of New York, who had represented the company in some matters, and of which firm Mr. Eosen had at one time been a member. On the next day (August 28) Schreiner cabled Eosen, “Please postpone your decision for a few days,” and Eosen again sent a long cablegram to Schreiner. He told him that the directors’ meeting was postponed until Saturday, which he would attend, taking Marshall with him, and that he considered it advisable to have Marshall elected. He said there was no doubt that Bryan made false statements regarding the payment of the ²⁰⁸ capital in full, seemed that there were about 2,200 shares not actually subscribed for, and referred to several matters which were afterwards considered at the meeting.

On August 24th Schreiner sent Rosen a cablegram in which he referred to his letter to his (Rosen’s) firm of March 24th as to the payment of shares, and added: “This payment was only made conditionally on such undertaking. If President Bryan’s statement March 30 to Ladenburg, contains false statements, I withdraw from our contract and claim stock deal to be null and void, request return of our money paid. Decline assist financing situation. Place my interest in Van Vorst’s hands.” It resulted in Rosen and Marshall going to Baltimore on August 25th, and there was a meeting of the directors and others that night.

In addition to Messrs. Rosen and Marshall a large number of directors, officers and attorneys of the Surety Company and the Commercial and Earmera’ Bank, which was interested, were present. Mr. Bryan read a report, and Mr. Cans who had been employed as special counsel by some persons interested in the Surety Company made a statement explaining the condi uons, which was supplemented by Mr. Cocheu of the American Audit Company who had been examining into the Surety Company’s affairs. A number of persons spoke and at times there was great confusion.

It seemed to be conceded that there were 2312% shares of stock which were either in such shape as could not be said to be bona fide subscriptions, or were not in the names of persons who were regained as financially responsible. Mr. Marshall gave notice, as he said, that he rescinded the stock contract and demanded the money back, but a number of the witnesses testified he included both the stock and the participation contracts. At the instance of Mr. Baker, who was interested in protecting the Surety Company, the bank and other financial institutions, proposed that those present subscribe for the 2312% shares of stock, which was done, as the appellee contends, on the distinct condition that the Munich Company waive its asserted right to rescind the stock and participation con ²⁰⁹ tracts, which the appellee says was done, while the appellant contends it was only as to the stock. It is admitted that the one was waived and, as we have seen, the bill itself so alleges.

The great preponderance of the' testimony is unquestionably in favor of the appellee, on this point in controversy. There were four witnesses on the part of the appellant including Mr. Marshal], who is positive that he only mentioned the stock subscription, and thirteen who sustained the contention of the appellee as to what occurred. It is true the latter differed somewhat as to precisely what was said, and as to what some of them heard, but there can be no doubt that all of them understood from what Mr. Marshall said that the Munich Company was to continue to occupy the same relations it had been holding to the Surety Company. Before, however, we go into that testimony in detail, it will be well to consider some of the documentary evidence and the admissions of those representing the appellant.

It is only just to say before doing so that we do not believe that any of these gentlemen on the part of the appellant intentionally misstated or colored the facts as they recollected them when they testified, but it would seem to be clear that if Mr. Marshall only had in mind, and only knew of, the stock transaction, his principal was fully aware of both, and confirmed his action, supposing it to have had reference to> both, and moreover Mr. Marshall used language and did acts which authorized those who subscribed to believe that he fully understood' that both contracts were referred- to. In the first place, the letter dated March 30th, 1906, from Mr. Bryan to Messrs. Ladenburg, Thalmann & Co. began by saying: “Beplying to a letter of recent date from Schreiner, Manager of the Munich Ee-Insurance Foreign Department, who ha-ve entered into a participating contract with our company, I respectfully submit the following:”—then follows his statement about the stock. That was addressed to the firm of which Mr. Eosen was not only a member, but the member who had charge of the Munich Company’s interests, and his firm paid for the stock, took it in its name and he ²¹⁰ represented the Munich Company as a director in the Surety Company.

On August 24th Schreiner sent a cablegram to Rosen in which he said: “If President Bryan’s statement of March 30th to Ladenburg contained false statements, I withdraio from our contract and claim stoch deal null and void.” What contract did he mean, that he would withdraw from? The letter mentioned in terms spoke of the “participating contract ” and Rosen knew there was no executory contract for subscription of stock, because his firm had paid for and' had the stock. But the cablegram on its face spoke of two things—“I withdraw from our contract and claim stock deal null and void.” On the same day (August 24th) Mr. Van Vorst calbed to Mr. Schreiner that he must preserve all his rights against everyone, and not prejudice any remedy by hasty action; that Marshall and Rosen would go to Baltimore the next day, that “Marshall will state you have taken firm stand and that it is duty of directors and company to at once either give you solvent company or return your stock. After I have facts I can determine what is wisest to do.

Situation criti'cal.” On August 25th Schreiner cabled Van Vorst, “Fully ■concur in your views not to hasten action. With yesterday’s •cable notified Rosen that decline to participate in further ■financing. You can wait developments. If misrepresentations are proved I withdraw from contract and demand return of money paid for shares.

Writing.” Mr. Marshall admitted he had interviews with Mr. Rosen on August 24th and 25th, went with him to Baltimore, and had the information contained in the cablegrams and the letter of Mr. Bryan to Ladenburg, Thalmann & Co., as well as others, which were given to his firm by Mr. Rosen, as shown by the latter’s letter of August 24th. The stock subscribed at the meeting of-August 25 th was paid for on Monday, August 27th. according to agreement, and Mr. Baker so notified Mr. Rosen and Mr. Marshall by telegrams. On August 27th Mr. Van Vorst cabled' Schreiner that the matter was adjusted in his opinion satisfactor ²¹¹ ily, “understood company doing excellent business; trouble not made public; and credit unimpaired. Under these circumstances believe it would have been most unwise to attempt to rescind, as such course would undoubtedly have entailed final loss on your company.

Marshall sending full details by letter. When do you expect to be in America?” Next day Schreiner cabled: “Your information very satisfactory; sail fifth October, Deutchland, for New York.” On the same day Mr. Marshall wrote at length describing Bryan’s methods, referred to his letter of March 30th, spoke of the ■ subscriptions the night of August 25th and their payment. He quoted the cablegram from Mr. Yan Vorst to him, said they had received his reply, “and notified the Surety Company through Mr. Baker that we waived your right to rescind your subscription.” On August 29th, Yan Vorst wrote to Schreiner: “I think the solution of the problem was 'the wisest. As stated in my telegram to you, I thought it was up to the directors to give you either a solvent company or to take back your stock, and I think they chose the best horn of the dilemma.

I understand you have a fairly j.profitable contract with the Surety Company. Had the matter become public it would have been a repetition of the old story—your contract would have been destroyed ” etc. On September 10th, Van Vorst cabled Schreiner: “Has your company re-insured risks on any deposits Mason’s Bank? Give amount, if any,” to which he replied, “Mason’s Bank possible interest only through reinsurance contract United.” On that day Mr. Van Vorst also wrote a long letter to Mr. Schreiner. Amongst other things he said they had learned that day that the Surety Company had guaranteed two accounts at Mason’s Bank, aggregating approximatelv $250,000, one on account of the City, and the other on account of the Order of ITeptasophs.

He said “The statement was also made that the Munich Ee-Insurance Company had re-insured these deposits under its general contract with the United Sui’ety Company.” Again he said “If it be true on ²¹² the one hand that your company is re-insuring risks on which its immediate liabilities would be $83,333 I am very thankful that we did not rescind our contract for subscription to the capital stock of the Surety Company, or undertake to rescind our contract of subscription of the 28th,” etc. On September 12th, Schreiner wrote Messrs. Underwood', Van. Vorst and Hoyt. He acknowledged their letters of August 29th and September 1st, also Mr. Marshall’s, and quoted the cahlegi'ams which had passed between them the day before, and then said: “We cannot find that we are interested to any of our friends on Mason’s Bank, hut it is possible that the United Surety Company may have given some guarantees and in that case we will be interested by our participation contract.” On September 18th, Schreiner acknowledged letter of 10th inst. from Van Vorst, enclosed a copy of the participation contract for their information, and said: “Permit us to point out, however, that the participation contract, and the participation in the stock was one transaction, one part dependent on the other and we believe therefore we would have run no great risk if the action of the “United” had caused the rescission of our participation in the stock.

With that naturally the participation contract would' also have fallen through.” It would appear from this correspondence that, although Mr. Van Vorst and Mr. Marshall were not aware of all the terms of the participation contract, until perhaps the receipt of the copy enclosed in the letter dated September 18th, they certainly must or ought to have known that there was such a contract. Mr. Marshall not only had the papers in his possession, showing that there was, but read the letter of March 30th at the meeting of August 25th, which expressly spoke of it. Then the same cables which directed a demand for the return of the money paid for the shares of stock directed a withdrawal from the contract. Certainly as early as two days after the money was paid to Mr. Baker, in payment in full for the stock, Mr. Van Vorst knew that there was such a ²¹³ contx*act, for in lxis letter of August 29th he .said: “I understand you have a fairly profitable contract with the Surety Company/5 and there is nothing in the testimony to show that he only received that information after August 25th.

On the other hand, Mr. Eosen knew of that contract as early as the letter of March 30th, he was a director in the Surety Company, recommended the employment of Mr. Marshall, talked with him in New Yox*k, went with him to Baltimore and sat by him at the meeting that night. It is difficult to uxxderstand why Mr. Marshall would have attempted to rescind the contract for stock, on the grohnd of fraud and misrepresentation, and yet would not attempt to relieve his client from the mox-e dangerous and bux’densome contract, the participation contx*act, excepting upon the theory that he did not know of its existence or did not appreciate its importance. Bxxt it is beyond comprehension that Mr. Eosen, who undoubtedly did know of that contract, as he so testified, would sit quietly by Mr. Marshall during the meetixxg of August 25th and not inform him—especially as the stock Mr. Marshall was demanding the payment for stood in the xxame of Mr. Eosen’s firm, axxd he was pxxt in the board of director’s to represent it. Thexx xxxxdoubtedly Mr. Schreiner knew all about it, gave instructioxxs as to both the “contract and stoclc deal,” and must have supposed whexx he heard from Mx\ Marshall and Mr. Van Yorst that they were caxuying oxxt his instructions as to both, and xxot that they were demanding paynxexxt for the stock axxd leaving his company liable under such a contract, especially if the Surety Company was in the hands of those he deexxxed guilty of false statemexxts, in order to induce him to exxter into it.

His letter of September 18th, above qxxoted, shows very clearly how he understood the sitxxatioxx. Thexx whexx we turn to the testimony of the witnesses, what do we find? Jxxstice Gerard, of the Supreme Court of New York, who was a director in the Surety Company, was px’esexxt with Mr. Janney, Mr. Max*shall and Mr. Eosexx ixx ²¹⁴ the latter’s office, several days before the meeting of August 25th. He testified that Mr. Rosen said that Mr. Marshall would represent the Munich Company and that was the reason he was present, and “that the Munich Re-Insurance Company had become connected with the United Surety Company through making a re-insurance contract with it, and at the same time buying a large amount of the stock of the Surety Company.” Mr. Janney said that “When Mr. Marshall came in Mr. Rosen stated to him that the Munich Re-Insurance Company was largely interested in the United Surety Company of Baltimore, both as a stockholder and as the owner of a participation contract, or re-insurance contract, and that the United Surety Company of Baltimore was in some trouble and that I was familiar with it.” Mr. Rosen told Mr. Marshall that his firm would doubtless be retained and he should be in touch with the matter from the beginning.

Mr. Janney said that Justice Gerard was sent for and came in, that “I recall myself, sketching to Mr. Rosen and Mr. Marshall the substance of the contract, but that was all,” and “in order to make clear to them the interest which they had in the company I simply sketched the outlines of the contract, the fact that the Munich Company was a participant as to one-third in the profits, and liable for one-third of the losses to the United Surety Company. I did not go into the details of the contract at all.” It is true that Mr. Marshall’s recollection is that he never heard of the contract until after the meeting of August 25th, but he is certainly mistaken • about that, for he admits he read the letter of March 30th at that meeting which in so many words spoke of it. It can only be explained either on the theory that his mind was on the stock arrangement, and he did not grasp the fact of the other contract, or that he has since forgotten. It is certain, however, as we have seen, that Mr. Rosen knew of it and we do not find in his testimony that he contradicts Justice Gerard or Mr. Janney as to what occurred in his office, although he does sav that nothing was said in the conference with Mr. Marshall and ²¹⁵ Mr. Van Vorst on the afternoon of August- 24th about the participation agreement.

That can only be explained by supposing that Mr. Rosen assumed they understood' it inasmuch as Mr. Marshall was present when Mr. Janney explained it a few days before. Mr. Rosen