Pellegrino v. Maryland National Bank

Singley, J., delivered the opinion of the Court. The appellants in this case are the widow and the three children of a prior marriage of Banks Lamar Smith (Mr. Smith), who died on 8 April 1969, domiciled in Charles County, Maryland. The appellees are Maryland National Bank (Maryland National), the executor of Mr. Smith’s will, and the trustee of two trust estates created by the will, and Robert J. Smith, Jr., a brother of Mr. Smith. The question presented is whether Robert J. Smith, Jr., validly exercised a purchase option accorded him by Mr. Smith’s will.

From a decree entered by the Circuit Court for Charles County, declaring that there had been a valid exercise of the option, and allowing a period of 90 days for settlement, Mr. Smith’s widow and children have appealed. On 9 April 1965, when Mr. Smith executed his will, he owned all of the capital stock of Smitty’s Steak House, ⁶⁹⁰ Inc., and Smitty’s Management Company, Inc. (Smitty’s Management). After the execution of the will and a 1966 codicil, and prior to his death, Mr. Smith had entered into a buy and sell contract with Robert J. Smith, Jr., covering all of the stock in Smitty’s Steak House, Inc., which in substance became effective in the event of Mr. Smith’s death. It is only the stock in Smitty’s Management which is here involved.

Paragraph XIV of Mr. Smith’s will provided: “I am the sole stockholder and owner of Smitty’s Steak House, Inc. [and] Smitty’s Management Company, Inc., both Maryland corporations to which I have devoted substantial efforts. It is my desire that after my death my brother, ROBERT J. SMITH, JR., be given the first opportunity to purchase the capital stock of these corporations. To the accomplishment of this end I direct that upon my death my Executor and Trustee offer to my said brother the right to purchase, within one year of my death all the issued and outstanding capital stock of either or both of the aforementioned corporations that I may own at the time of my death (but in no event less than all of said shares), at the book value of said shares at the date of my death. I further direct that my Executor or Trustee be liberal in the granting of credit and otherwise fixing the terms of sale to my said brother without being liable for any loss resulting therefrom except for its own negligence.” Robert J. Smith, Jr., learned of the provisions of Mr. Smith’s will within three weeks of Mr. Smith’s death, and discussed the purchase option with representatives of Maryland National on 20 June 1969.

Thereafter, there were conversations between Smith and Joseph A. Wald-man, Esq., who represented Maryland National, in which Smith steadfastly maintained that he had no intention of exercising his purchase option. Finally, Mr. Waldman ⁶⁹¹ advised Maryland National that it might be desirable to have a written confirmation of Robert J. Smith, Jr.’s determination not to exercise his option. Accordingly, Mr. Waldman drafted a letter which was sent by Maryland National to Robert J. Smith, Jr., on 2 February 1970, which said, in part: “It is our understanding that this aforementioned right granted to you to purchase the shares of Smitty’s Management Company, Inc. does not extend beyond April 8, 1970, one year after your brother’s death. We accordingly request that you promptly notify us, in writing, whether or not you intend to exercise your right to purchase the said shares of capital stock of Smitty’s Management Company, Inc. “If you do elect to exercise your right to purchase the shares of stock of Smitty’s Management Company, Inc., we urge that steps be immediately taken to negotiate the terms and conditions of the purchase agreement and to establish a time and place for settlement of the purchase.

We shall be glad to meet with you and your counsel at your earliest convenience to complete the necessary arrangements. As per your telephone conversation of January 30,1970 with Joseph A. Waldman, Esquire, we are sending a copy of this correspondence to Edward S. Digges, Esq., Route 1, LaPlata, Maryland, who we understand is your attorney. “If we can be of any service to you, please do not hesitate to call upon us.” Sometime between February and April, 1970, Robert J. Smith, Jr., learned from Isadore Wolfe, who had been Mr. Smith’s accountant, and had continued to act for Smitty’s Management, that the book value of the company’s stock as of 8 April 1969, the date of the death of Mr. Smith, had been determined to be $251,841.31. Wolfe had earlier advised Maryland National of this determina ⁶⁹² tion. As at the date of Mr. Smith’s death, the market value of the company’s stock was thought to have been $341,-310.71.

On 6 April 1970, Maryland National received a letter dated 2 April 1970 from Edward S. Digges, Esq., who by that time was representing Robert J. Smith, Jr. This letter said, in part: “Despite the statement in your letter [of 2 February 1970] contained in the second paragraph on page 2, the wording of the decedent’s Will is clearly mandatory that you must offer to Robert J. Smith, Jr. the stock at its book value, which you have the responsibility of determining as well as fixing the terms of the sale. This information has not been received by Mr. Smith at any time and, accordingly, demand is made for receipt of this information immediately. Should you fail to comply with this direction, my client intends to hold you responsible for negligence and any damages he may suffer as a result of his being unable to make an election within the one (1) year period as provided in Item XIV of the Will.” Maryland National replied on the same day, in a letter which was hand delivered on 7 April: “Your letter of April 2, 1970 sent certifiéd mail and addressed to John F. Fox, Trust Officer, was received on behalf of the addressee on April 6, 1970. In view of the addressee’s absence on vacation, your letter was turned over to me for response. “Regrettably, we must inform you that the Maryland National, as Executor, must take exception to the position taken by you for the reasons set forth below: “1.

Your letter assumes an inability on your client’s part to make a decision because the in ⁶⁹³ ventories in the court proceedings had not been filed and because ‘you (the Executor) have the responsibility of determining (the book value of the stock).’ “A. There is nothing in the Will which requires the Executor or Trustee to determine the book value of the stock. Furthermore, the Executor or Trustee would not have been required to determine the book value of the stock of Smitty’s Management Company, Inc. in order to file an inventory, which, as you know, is based on fair market value. “B. Your letter states that you have reviewed the matter with Mr. Wolfe. As you know, Mr. Wolfe is, and has been for many years, the accountant for Smitty’s Management Company, Inc. As such, he has complete access to all its books and records, including all information with respect to the book value of the stock on April 8,1969. Mr. Wolfe also knows the location of all the assets of ‘Management.’ As Mr. Smith is aware, thgre was nothing to prevent him from obtaining appraisals of the fair market value of the underlying assets of the Corporation. “2.

Your letter states that ‘you (the Executor or Trustee) must offer to Robert J. Smith, Jr. the stock at its book value.’ This, the Executor has done. The Executor’s letter of February 2, 1970 expressly offered to Mr. Smith the right to buy all the stock. We fail to understand, therefore, how you can imply that the Executor has not made an offer of the stock. “Although your letter does not mention the condition relating to Mrs. Smith’s right to renounce and obtain one-third (Vá) of the stock referred to in the Executor’s letter, it should be clearly understood that the mention of this right in Mrs. Smith in no way impeded, or detracted ⁶⁹⁴ from, the Executor’s obligations to make its offer. The Executor was required to notify your client of Mrs. Smith’s possible claim; to have failed to so notify your client would, in our opinion, have been misleading to your client. “3.

The most distressing aspect of your letter is, of course, its timing. Your client’s failure to communicate with us as to his interest in the capital stock of Smitty’s Management Company, Inc. until two (2) days before the expiration of the one (1) year period is inexcusable, particularly in view of the fact that it is our understanding that your client had, on several occasions, verbally assured Joseph A. Waldman, Esq., counsel to the Executor, that he (Robert J. Smith, Jr.) had no interest in exercising the right to purchase ‘Management’s’ stock. Mr. Robert J. Smith was given a copy of his late brother’s Will shortly after the decedent died. Mr. Robert J. Smith is, and has been, aware for at least nine (9) months of the extreme complexity and involvements of the decedent’s Estate.

Incidentally, we have learned that a copy of your letter of April 2, 1970 was received by counsel sometime on April 3,1970. “Over two (2) months ago, the Executor wrote Robert J. Smith (sending you a copy), setting forth the relevant provisions of the Will and offering him the right to buy the stock of ‘Management.’ In that letter, recognizing the complications that might ensue in arriving at mutually agreeable credit terms, even within the liberal standards set forth in the Will, the Executor requested that Robert J. Smith ‘promptly notify us, in writing, whether or not you (Robert J. Smith), intend to exercise your right to purchase the said shares of capital stock of Smitty’s Management Company, Inc.’ From February 2, 1970 until April 6, 1970, no written communica ⁶⁹⁵ tion was forthcoming from your client or from you. Only on or about April 1, 1970 did anyone even receive a telephone call from your client or you. “In the Executor’s letter of February 2,1970, the Executor also went so far as to '’urge that steps be immediately taken to negotiate the terms and conditions of the purchase agreement and to establish a time and place for settlement of the purchase.’ The Executor fails to understand why, in view of the generous accommodating approach taken by the Executor, its letter was ignored until two (2) days before the due date for the expiration of the offer. The Executor even added: ‘We shall be glad to meet with you and your counsel at your earliest convenience to complete the necessary arrangements.’ (Emphasis in original.) “The Executor, as you know, is not only acting as Executor, but as Trustee under certain Trusts, one for a wife who has already expressed some hostility to the Will and the other for minor children. If there be any value to the capital stock of Smitty’s Management Company, Inc. in excess of its book value, the Executor might be breaching its duty to the beneficiaries of these Trusts were it to ignore the fact that your client has seemingly disregarded the reasonable approach of the Executor, as evidenced by the letter of February 2,1970.

Surely you, as an attorney, will appreciate the fact that the Executor owes a duty to your client and to the beneficiaries of the Trust. The Executor could not ignore its obligation to offer the stock to your client; but similarly, the Executor cannot ignore its obligations to the Trust beneficiaries by dismissing as irrelevant your client’s delay, until the last minute, in responding to its letter of February 2,1970. ⁶⁹⁶ “The Executor feels that it has acted both properly and reasonably in discharging its duties to your client. “Your letter of April 2, 1970 demands receipt of information with respect to the book value of the stock as of the decedent’s death, as well as the terms of the sale. All of the information with respect to the book value is in Mr. Wolfe’s hands, and your client is fully able to determine the said book value; and he has been in this position for many months. “Subject to the court’s ratification and approval of the sale, including the dates, terms and conditions of the proposed Contract of Sale, the Executor will agree to sell the stock of Smitty’s Management Company, Inc. to your client on the following terms and conditions: “(a) Purchase price — book value per share as of April 8, 1969. “(b) Ten (10%) per cent in cash upon your client’s acceptance of the offer (within limitations of time in which the. Executor is authorized to act with respect to said offer). “(c) Forty (40%) per cent of the purchase price in cash at settlement, which settlement is to be held within thirty (30) days of the court’s final approval of the sale, if such approval is obtained. “ (d) Balance of the purchase price to be paid within ten (10) years of the date of settlement.

The balance of the purchase price to be secured by a pledge of the Corporation’s capital stock, plus a mortgage on the Corporation’s real estate. The mortgage to bear interest on the unpaid balance at the rate of eight (8%) per cent per annum; its unpaid balance to be amortized in ten (10) equal annual installments, the first of which is to be due and payable one (1) year from the date of settlement. ⁶⁹⁷ “Frankly, we do not see how this offer