Panamerican Consulting Co. v. Broun

OppenhEimee, J., delivered the opinion of the Court. The use of Maryland since colonial times as a base for international economic adventure is reflected in this appeal, which comes to us through one of the most technical of procedural actions. 1 The facts in this case are, to a certain point, virtually undisputed. We shall first set forth these facts; then the testimony as to certain transactions which occurred thereafter; then the nature of this litigation and the decision of the court below; and, finally, our determination of the legal issues involved. I In 1955, Olney Broun, then a resident of Mississippi, and Frank N. Hillis, a Maryland citizen, both of whom are chemical engineers, incorporated Panamerican Consulting Company, Inc., a Maryland corporation (Panamerican), for the purpose of designing, building and operating chemical plants outside of the United States, chiefly in Mexico, South America and Canada.

Broun contributed $20,000 for 200 shares of common stock and $25,000 for 250 shares of preferred stock, both of the par value of $100 a share; these shares were issued in the names of Broun and his wife (the Brouns). Both Broun and Hillis were directors of Panamerican and Broun has remained a director for the entire period here involved. Hillis contributed the assets of a former unincorporated company owned by him, the Panamerican Consulting Company, in return for 750 shares of common ⁴⁴¹ stock, and paid $5000 for shares of preferred stock. Otto K. Musall and B. V. Sterk are also chemical engineers who had worked for Hillis in his former company.

They were engaged by Panamerican and Musall became a director of that company. In the course of Panamerican’s operations, Hillis and Broun formed foreign subsidiary companies to build and operate the chemical plants; the assets of Panamerican largely consisted of the capital stock of these subsidiaries. A major disagreement arose between Hillis and Broun in the fall of 1958. Broun had opposed a gift of Panamerican stock to Musall and Sterk.

Hillis proposed that a company be organized in Panama to acquire all of Panamerican’s assets in exchange for the issuance of stock to Panamerican which was subsequently to be issued to Panamerican stockholders in proportion to their stockholdings in Panamerican. Hillis set forth this proposed plan in a letter to Broun, dated December 12, 1958. Broun vigorously opposed this proposal because he felt he would lose control or supervision over his financial interests if all assets of Panamerican were transferred to a company in Panama. Because of the disagreement betw'een Broun and Plillis, negotiations ensued looking to the sale of Broun’s interest in Panamerican.

Hillis, on behalf of Panamerican, offered to purchase the Broun’s stock in Panamerican for $30,000 and 1500 shares of the Panama corporation which was to be formed and which was to be known as “Cia. Promotora Panamericana, S.A.” (Promotora). Panamerican withdrew its offer while the Brouns wTere still considering it. Promotora was formed in Panama on January 23, 1959.

Broun continued in his opposition. At a meeting of the board of directors of Panamerican, in Reisterstown, on April 16, 1959, a majority of the board voted to authorize the transfer of Panamerican assets to Promotora in exchange for its stock; Broun voted against it. The transfer of assets was effected as of March 31, 1959. Promotora issued 12,773 shares of its common stock of the par value of $10 a share (being all of the shares issued out of the authorized capital stock of 100,000 shares) and in exchange Promotora received Panamerican’s assets of cash and common stock of for ⁴⁴² eign development companies.

Hillis resigned as president of Panamerican and became chairman of the board of Promotora. Musall replaced Hillis as president of Panamerican and became treasurer and a director of Promotora. Broun became vice-president and a director of Promotora. There were further negotiations between Broun and Hillis and their respective counsel to settle the disagreements between them.

All agreed that the best solution was for Broun to sell his Panamerican stock but no agreement was then reached as to price. On March 3, I960, Broun filed suit in the United States District Court for the District of Maryland against Panamerican, Hillis, Musall and Sterk to set aside the Promotora-Panamerican transaction. Broun sought the appointment of a receiver for Panamerican, unpaid salary and the fair value of his stock in Panamerican. The suit was a stockholder’s action based on alleged fraud perpetrated by the officers and directors of Panamerican in the Promotora transaction and in the gift stock transfers to Sterk and Musall.

The bill alleged, inter alia, that the transfer of funds from Panamerican to Promotora was ultra vires, illegal and fraudulent. On April 30, 1960, the Brouns and Panamerican entered into an agreement of sale and settlement. This agreement recited the pending litigation in the United States District Court and provided for the sale of the 250 shares of preferred stock and the 200 shares of Panamerican owned by the Brouns to Panamerican for the sum of $80,000, of which $20,000 was paid on the execution of the agreement and the remainder of which was to be paid in stated instalments. Upon final payment of the full purchase price, Panamerican was entitled to receive from the Brouns a general release “of all claims against Panamerican, its present and former officers, directors and stockholders, including specifically Frank N. Hillis, Otto K. Musall and B. V. Sterk, * * The $80,000 was paid in full by Panamerican and Broun delivered the release, which was dated as of April 30, 1960, the date of the agreement of sale and settlement, which stated: “For value received the undersigned Olney Broun and Stella Norris Broun do hereby jointly and separately forever release and discharge Panamerican Consulting Company, Incorporated and its present and former officers, directors, agents ⁴⁴³ and servants including particularly Frank N. Hillis, Otto K. Musall and B. V. Sterk of and from any and all claims, demands, rights, actions and suits whatsoever based upon matters and facts arising prior to the date of this release.” II During the months of January and April, 1960, there were transactions in respect of Promotora stock which are the basis of this litigation.

On January 25, 1960, Musall received four certificates of Promotora common stock by mail which bore the signature of Hillis as president. On or about April 1, 1960, Musall received another four certificates of the stock by mail from Panamerican, which again bore the signature of Hillis as president. The total of the shares so received by Musall was 6844, of which 953 were in Broun’s name. Of these 953 shares, 370 shares were received by Musall on January 25 and 583 on April 1.

The other certificates were made out to Sterk for a total of 450; to Musall, for a total of 976, and 4456 shares to bearer, evidently for Hillis. Musall, the treasurer of Promotora, at no time signed the certificates or affixed the seal of the corporation thereto. The only testimony as to the certificates and what happened to them came from Musall. 2 The reasons for the sending of the certificates are shrouded in conjecture. Musall testified that he did not know by whose authority the stock was sent.

Promotora kepi no books, at least until 1961. Musall “presumed that Mr. Hillis arranged it.” Promotora had been conceived and established by Hillis, under power of attorney from Sterk, Musall and “possibly” Broun; as far as Musall knew, this was in accordance with Panamerican law. Musall understood that the stock sent to him represented a declaration or a distribution authorized by Promotora. He based this understanding upon previous conversations with Hillis and Sterk “in which this had been agreed upon, with the exception of Mr. Broun and then Mr. Sterk and myself giving Mr. Hillis power of attorney to act in our name as Promotora.” ⁴⁴⁴ Musall further testified that he did not issue the stock because he wanted to keep Promotora in status quo in view of the litigation which was then pending in the Federal Court.

In July 1960, Musall returned the certificates for the 6844 shares of Promotora stock to Panamerican unexecuted and undelivered. On May 9, 1962, a suit was filed by Mrs. Hillis against her husband in the Circuit Court for Baltimore County. Through this suit, Broun learned for the first time of the certificates for 953 shares of Promotora stock which had been made out in his name and sent to Musall. Musall testified that he had made no effort to tell Broun of the stock in his name in January or April of 1960; that he sent the stock back in July, 1960 because of the contentions being made by Broun in his suit in the Federal Court and that the stock was held by him, Musall, “in safekeeping” pending a settlement.

He testified further that in 1961 he talked to the attorney for Promotora, in Panama, who stated he knew nothing about the issuance of any stock. Musall had never discussed the January and April, 1960 transactions with Hillis. Musall stated in a pre-trial deposition that there was no consideration for the stock issued to him or Broun and that, to the best of his knowledge, it was a stock dividend. The 953 shares of stock in Broun’s name were returned to the Promotora treasury and were carried on Promotora’s books as treasury stock at a cost of $10 a share.

Musall did not know how this entry was put on Promotora’s books. Musall’s and Sterk’s stocks were “held in safekeeping” by Promotora in Panama. The Promotora statement for 1960 indicates that in connection with the 6844 shares some $156,800 was paid. There was testimony by a certified public accountant, on behalf of the Brouns, that the source of the $156,800 was Panamerican, and that this sum represented an asset of that company which did not appear on its balance sheets.

This alleged asset was not disclosed to the Brouns prior to their settlement. Musall testified that he knew of no such amount having been paid into Promotora. In 1962, stock in Promotora in the amounts of the original certificates was reissued to Sterk, Musall and to bearer (for Hillis) but not to Broun. Musall believes that Broun’s 953 ⁴⁴⁵ shares were treated as treasury stock or were nullified and voided.

Broun knew nothing of the transactions to which reference has been made until the suit was filed by Mrs. Hillis in May, 1961. He testified that if he had known of the Promotora shares in his name, he would not have settled the suit in the United State District Court for the amount he received. Ill The Brouns filed the present suit against Promotora in the Circuit Court for Baltimore County on September 20, 1961. In their original declaration, in addition to the common counts, the Brouns alleged that the Promotora issuance of 953 shares of its common stock to them was for a consideration furnished by Panamerican and by its direction, that the said shares thereupon became the property of the Brouns, and that Promotora subsequently redeemed and re-acquired the said shares for $9530 which it owes to the Brouns.

In another count, the Brouns alleged that Promotora issued stock dividends aggregating 6844 shares to Panamerican, its sole stockholder; that Panamerican directed said shares be issued in the names of and distributed to its common stockholders as dividends on their Panamerican common stock payable in stock of Promotora; that the plaintiffs, owning 18.2 per cent of Panamerican common stock, were entitled to 1245 shares out of the 6844 shares issued and that Promotora accordingly has withheld from the Brouns and owes to them the value of 1245 shares at $10 a share. Panamerican, although a Maryland corporation with a duly authorized resident agent, was not joined as a party defendant. There was, however, an attachment on the claims against Panamerican as garnishee, with the necessary account and affidavit. Promotora had no resident agent or place of business in Maryland; it was never served and did not appear to defend the case.

Panamerican as garnishee confessed assets consisting of an unmatured indebtedness due by it to