Schlens v. Poe

Burke, J., delivered the opinion of the Court. "When the conceded and uncontradicted facts are extracted from the mass of testimony contained in the record before us, the questions before the Court present little difficulty. An outline of these facts will show the precise issues raised by the pleadings and indicate the principles of law which must be applied to the ease. The Ibaited Surety Company was incorporated by Chapter 479 of the laws of 1902, and organized and began busines’s ³⁵⁴ about January, 1905.

It was authorized by its charter to sell surety and casualty bonds in the State of Maryland and elsewhere. It extended its business to the States of New York, Massachusetts, and other States, in each of which it had perfected an organization and was doing quite a considerable amount of business. On April 10, 1906, a contract was entered into between the United Surety Company and the Munich Reinsurance Company. The nature and terms of this contract were considered by this Court and the responsibility of the Munich Company under that contract was determined and established in Munich Re-Insurance Co. v. United Surety Co., 113 Md. 200 and 121 Md. 479 .

The business of the company was not profitable, and on January 13, 1911, the Circuit Court for Baltimore City upon a bill filed by Thomas H. Bowles and others against the United Surety Company, that Court placed the affairs of the company in the hands of receivers. The receivers qualified and have since administered their trust under the jurisdiction of that Court. About the close of the year 1909 the Surety Company found itself in a precarious condition. The insurance commissioner of the State of Maryland refused to permit the company to include in its annual statement certain items as assets.

At a special meeting of the executive committee of the company held on February 3, 1910: “The President of the company reported that, as stated at the last meeting of the Executive Committee, the statement of the company from an insurance point of view showed an impairment of ■capital to the extent of $39,000, unless the Munich Reinsurance claim, advance on. contracts and several other disputed items could be allowed in the statement as assets. He stated that he had been in daily conferences with the Insurance Commissioner for Maryland, with the representatives of the company at Washington, and before the Treasury Department there, making every effort possible to have these items allowed as assets, but that he had been unable to accomplish this, and that the Insurance Commissioner for ³⁵⁵ Maryland, as well as the Treasury Department at Washington, insisted that these items could not he allowed, and that therefore they would not he allowed by tbe Insurance Commissioners of other States in which the company did business, and that consequently the only statement of the company which the Insurance Commissioner could pass showed an impairment of $39,000; and that unless this could be made good the company’s statement would be disallowed and the Insurance Commissioner stated that it could not continue to write further business. He also stated that the Insurance Commissioner for Maryland had notified the company that this impairment must he made good by noon of February 4th, and that the commissioner also stated that in his judgment at least $75,000 in cash ought to he put up' as a safe margin to make good this impairment and give a reasonable surplus. The president further stated that after the passage of the resolution and the discussion of this matter at the last Executive Committee meeting, he, together with Mr. Ernest J. Knahe, Jr., the chairman of the board, and Mr. Hershey, as counsel, had been actively engaged in endeavoring to devise some means by which this money could he raised; that they had submitted the entire situation and all the facts, and statements, etc., to the insurance commissioner1 for Maryland, and at his suggestion and with his approval, they had put themselves in touch with several of the larger surety companies operating in the same line of business and acting through Mr. Edwin Warfield, the President of the Fidelity Trust and Deposit Company, with a view to securing assistance from those gentlemen to save the company from going by the hoard.

That they had submitted, with the approval of the insurance commissioner, and at his suggestion, a proposition through Mr. AVarfield, to sell the claim of this company for amounts due or to become due under the Munich Re-Insurance contract, also amounts due on advances on contracts, amounting to approximately $47,282.57, also the so-called ³⁵⁶ “Salvage’’ account, amounting to approximately $39,211.00— as well as premiums over ninety days old, amounting to approximately $40,405.69, for the sum of $100,000.00, and that Messrs. Ernest J. Knabe, Jr., and his brother William Knabé, as majority stockholders of the company, in order to assist the company, also offered to guarantee the -said Fidelity Trust and Safe Deposit C'ompany, or any syndicate which they might form to make such purchase, to make good any loss that such purchaser might sustain from the purchase of these non-admitted assets. He reported that after prolonged negotiations and á number of conferences with these gentlemen, they took the position that in the light of their experience as insurance people, these non-admitted assets were of an extremely uncertain character, most of them being contingent upon "the outcome of law suits, and that they would not consider even paying $50,000 for the same, or any other price, nor would they purchase them or loan money on them to any purchaser. The president stated’ that after all other efforts had failed, he had succeeded in inducing the Messrs.

Ernest J. Knabe, Jr.,,and William Knabe to purchase these non-admitted assets upon terms set forth in the following resolution, which he now submitted for the action of the committee, to wit: “'Whereas, in order to save this company from failure and to enable it to preserve its extremely valuable assets and to protect the interest of all the stockholders and policy holders, and to enable the company to continue in business, it is necessary to raise immediately a certain amount of cash; and “Whereas, Messrs. Ernest J. Knabe, Jr., and William Knabe have offered to purchase all the assets hereinbefore set forth for the sum of one hundred thousand dollars, upon terms herein set forth; now, therefore, be it “Resolved, That this company do sell for one hundred thousand dollars, on the terms hereinafter mentioned, to Messrs. Ernest J. Knabe, Jr., and William Knabe, absolutely, its claims for all premiums over ³⁵⁷ ninety days old, as per memo, submitted and to be set forth in these minutes, the face value of which is $40,405.69, but all of which are subject to agent’s commissions and some of which are admittedly bad, and the net value of which is estimated should bo at least $19,000, but whose amount is in no sense guaranteed; all advances on contracts, the net value of which is estimated should be at least $30,000, but which amount is in no sense guaranteed; and the so-called ‘salvage’ account, the net value of which should be at least $20,000, but whose amount is in no sense guaranteed; and also the claim of this company known as the Munich Re-Insurance claim, now ponding in the Court of Appeals of Maryland, the net value of which is estimated should be at least $88,000, but whose amount is in no sense guaranteed; all of which assets are to be sold as aforesaid, of which seventy-five thousand dollars is to he paid in cash this day and the balance to be paid within six months from the date hereof; the deferred payment of $25,000 as aforesaid to he secured by this company retaining title to the said Munich Re-Insurance claim, said claim to be assigned finally and absolutely to the said Messrs. Knabe when and as soon as said $25,000 is paid.

If the same shall not be paid until or before the final settlement is had of said Munich Re-Insurance claim, then any balance realized from said claim over and above $25,000 with interest from this date, to he and become the property of said Messrs. Knabe, subject, however, to the following conditions to which the said Messrs. Knabe are to agree and do hereby agree: “Eirst—The United States Surety Company shall agree and it does hereby agree that it will serve as the agent of the said Messrs. Knabe to use their best efforts and diligence to collect, subject to the general direction and control of the said Messrs.

Knabe, all of the aforementioned assets hereby sold, and to pay the net proceeds from such collections as collected to the said Messrs. Knabe. ³⁵⁸ “Second—That if the amount realized from all of the said assets shall exceed the amount of the purchase price paid as aforesaid, plus 6 per cent, interest and 33 1/3 per cent, of the amount paid in addition as a bonus, then the amounts realized from said assets in excess therefor shall be returned to the company. “Third—That no releases or settlements for less than the full amount of the claim shall be made, without the assent of the Messrs. Knabe or one of them being first had and obtained. “Fourth—That any time upon the demand of the Messrs. Knabe or either of them, a statement shall be rendered as to the conditions of the said claims, or any other information or assistance with reference to the collection thereof which may be needed shall be furnished. “Fifth'—Notice shall be given to the said Messrs.

Knabe when and as any payments are received on account of said claims, and immediate remittances thereof shall be made either to the Messrs. Knabe or to their order. “Sixth—The cost and legal expenses, if any, in connection with the collection of any of these assets, shall be deducted from the proceeds of the claim collected, and shall not be borne by the Surety Company, but no counsel fees shall be incurred except with the assent of the said Messrs. Knabe or either of them. “Seventh—That all provisions in this arrangement set forth as to any assignment by the Messrs. Knabe shall affect the Surety Company only in the event the said Messrs.

Knabe notify them that they have assigned said claim, and the said assignees requesting that they be treated in the place of said Messrs. Knabe. Otherwise the Messrs. Knabe shall be recognized as the only parties in interest. “Eighth—-That the said Surety Company in this connection assumes no other obligations than to use its best efforts and to exercise due diligence and good faith in the collection of these accounts, and in the car ³⁵⁹ rying out of the provisions of this resolution, and if in the judgment of the said Messrs.

Knabe the proper methods of diligence should not be exercised in the collection of any particular asset, the said Messrs. Knabe, or their assigns, may revoke the agency for the collection of that particular item. “In ease of any dispute between the Surety 'Company and the Messrs. Knabe as to the amount for which any claim shall be settled, the Surety Company shall always have the option of repurchasing any given item at the price at which the other parties wish to settle or vice versa. “Kinth—-Inasmuch as the Surety Company has an interest in a possible surplus over and above the amounts as hereinabove stipulated, the Messrs. Knabe are also to agree that no settlement of any claim shall be made without first obtaining the assent of the Surety Company. “Resolved also, That the officers of the company be authorized to execute any papers that may bo found necessary to carry out the provisions of this resolution. “This contract shall be binding on the successors and assigns, and the personal representatives of the parties hereto, provided that the Messrs.

Knabe shall notify the company in writing of any assignment of their interests as herein created, and in such event, shall file with the company a recital of the privileges reserved to them hereunder, which are to be extended to such assignees. “Resolved also, That this resolution be submitted to the Insurance Commissioner for Maryland, who is thoroughly informed as to this situation and as to the necessity of this action, and that before it becomes effective his approval thereof be obtained.” Attached to the resolution was a statement of the amounts advanced on contracts and of the sum that could probably be realized therefrom; also a statement of the salvage ac ³⁶⁰ count, and a statement of the gross amount of uncollected premiums. This schedule was designated “as a statement of assets sold.” Mr. Edwin J. Farber, the counsel of the company was present at the greeting, and approved of the action taken, and immediately after the passage of the resolution the Messrs. Knabe paid over to the company $75,000.00 on account of the purchase. Mr. James E. Green, the deputy Insurance Commissioner of Maryland, was. present at the meeting and approved in writing the action taken “as in said minutes recited.” The sum paid by the Knabes was borrowed by them from Wolfe Bros. & Company of Philadelphia, a banking firm, and, in addition to interest on the loan, they were charged a bonus of $25,000.00.

This probably accounts for the insertion of the provision as to a bonus appearing in the second clause of the resolution. The Knabes were largely indebted to Wolfe Bros. & Company at the time this money was borrowed and on February 2, 1910, had agreed to assign to them the assets they were about to acquire from the United Company as security for that and any other indebtedness, present or future which they might owe them, and on February 3, 1910, immediately after the passage of the above resolution, they executed a written assignment to Wolfe Bros. & Company of “each and ever right, privilege, and interest granted to us and either of us, by the resolution of the Executive Committee of the Board of Directors of the United Surety Company, duly passed this date, ánd this date approved and accepted by us, as collateral security as per agreement of February 2, 1910.” A copy of the resolution was attached to the assignment. The following note was appended to the annual statement of t'he United Surety Company for the year 1909 : “In the above statement of assets and liabilities, the Insurance Department on December 31st, 1909, allowed temporarily the following assets to stand, viz: Advance on' Contracts, $42,916.69; Open Be-Insurance Account, $88,962.83; for the reason that negotia- , tions were then on foot for a sale of those two items, ³⁶¹ which would realize a sufficient sum to furnish a substantial surplus, with said items eliminated. Such-sale has been effected, the sum of $75,000.00 has been received in cash, and the resulting state of the account shown in a supplemental statement hereto annexed presenting the condition that would have existed on December 31st had the payment of $75,000 heen made prior to that date.” The Knabes, since 1907, bad held a majority of the stock •of the United Company, which had been fixed by its charter at five thousand shares, and since that date had been the dominating and controlling factors in the affairs of the company.

On April 16, 1910, an agreement was entered into between the Knabes and Thomas H. Bowles whereby, subject to certain provisions therein contained, they sold and agreed to deliver to Mr. Bowles not less than 3,145 shares, .and if possible 3,500 shares of the capital stock of the United Surety Company at the price of fifty-nine dollars per share. The following provision, which throws much light upon one of the questions in this case, is here transcribed : “It is agreed that the sale to the said Knabe Brothers of certain ‘non-admitted assets’ as per resolution appearing on the minutes of the Executive Committee of the United Surety Company shall remain in full force and effect with the following exceptions, to wit: the said Messrs. Knabe shall be relieved from the payment of tile deferred payment of $25,000 therein provided for, and after the repayment to them of any balance due on the $75,000 paid on account of the purchase of said ffion-admitted asets,’ with interest, they shall he entitled to receive one-third (1/3) of any amount that may be realized by the company out of said fiion-admitted asets’ over and above the original $75,000 with interest up to $25,000 as their share; the management and control of said assets to he in the company exclusively.” ³⁶² As a part of this agreement the Knabes placed their resignations as directors of the United Company in the hands of Mr. O. E. Hershey and gave to Messrs. Janney and Hershey, jointly, an irrevocable proxy to vote the stock pending the transfer of the same to the name of Bowles or his assignee.

The stock was delivered to Mr. Bowles pursuant to the agreement, and on April 29, 1910, at a meeting of the Board of Directors of the United Surety Company the Messrs. Knabe resigned as directors and severed all official relation with the company. After their resignations had been accepted, the following resolution—and it is admitted to be the only one passed at that meeting—was proposed and adopted: “Whereas, under and by virtue of a resolution of the Executive Committee passed Eebruary 3rd, 1910, as ratified and approved by the Insurance Commissioner of Maryland, certain so-called non-admitted assets of the company were sold to Messrs. E. J. Knabe, Jr., and William Knabe upon the terms and conditions in said resolution set forth; and •“Whereas, under the terms of said sale, as aforesaid, there is still due from said purchasers a deferred payment of twenty-five thousand dollars, and said purchasers are willing to consent to a modification of said contract of sale, as herein set forth, provided they are released from the payment of said deferred payment; and “Whereas, it is believed to be greatly to the advantage of this company to modify said contract, as herein provided; now, therefore, be it “Kesolvcd, That the said Messrs.

Knabe, their personal representatives and assigns, be and they are hereby relieved from the payment of said deferred sum of twenty-five thousand dollars, with interest, the conditions of said release and the modifications of said contract, to which Messrs. Knabe and their assigns have assented, and which assent is to be evidenced by such appropriate instruments as counsel of company may require, are as follows: ³⁶³ “Eirst—The management and control of said assets shall he in this company exclusively, for the purpose of collecting same and making payments as herein and in said original resolution provided. “Second—After the payment out of the first proceeds from the collections on all said ‘non-admitted assets’ of any balance of the seventy-five thousand dollars paid therefor, with interest, 1he company shall, out of all proceeds from said assets realized over and above such balance on seventy-five thousand dollars, with interest, pay one-third to the said Messrs. Knabe, their personal representatives and assigns, and two-thirds to the company. But such one-third going to the Messrs.

Knabe shall not exceed twenty-five thousand dollars. All over and above that amount to go to the company also.” This meeting was held and the above resolution was passed for the purpose of giving effect to the agreement between the Knabes and Bowles above referred to. Mr. Ernest J. Knabe, Jr., explained to the board the reasons for calling the meeting, and stated that he had disposed of his entire holdings of stock to Mr. Bowles, and in resigning thanked the board for their co-operation. His resignation was accepted with regret, and a vote of thanks was tendered to him and his brother, William.

It is apparent that whatever feeling had theretofore existed against Mr. Knabe l>y reason of certain acts mentioned in the1 evidence it was ihen entirely allayed— good relations had been established, and the company looked forward with hope to a profitable and successful future, which, however, as we have seen, was not realized. After the meeting had adjourned, and, without the knowledge of either of the Knabes, the following note, or memorandum was entered upon the minutes by the secretary under the supervision of Mr. Earber: It recited that before the resolution was passed it was discussed generally, and “It was stated and understood that the title to the claim of the United Surety Company against the ³⁶⁴ Munich Re-Insurance Company still vested and should continue to vest in the United Surety Company, and assurances to the above effect were also given by Mr. Ernest J. Knabe, Jr., and their counsel, Mr. O. E. Hershey on behalf of Messrs. Knabe, who also stated upon questioning -by Mr. Earber that the interest referred to in said resolution should only run against the assets and not against the company, and that if the assets should be insufficient to pay said claim of the Messrs. Knabe that their interest should cease to ■ run.” This note, made without the knowledge, authority or consent of the Knabes, can not operate to alter or modify the legal effect of the resolution, although it was made the subject of a great deal of oral testimony as to what a number of the-witnesses understood to be the meaning of the resolution.

About April 1, 1911, the loan from Wolfe Brothers & Company to the Knabes was paid. By the amended answer of the receivers filed in this case, September 15, 1915, it is stated that they hold in cash and United States Government Bonds realized from “Advances on Contracts,” “Salvage Accounts” and “Premiums over Ninety Days Old”—three items which it is admitted passed to the Knabes under the resolutions mentioned—the sum of $11,106.87, and the receivers have received from the Munich Re-Insurance Company on the re-insurance contract referred to, the sum of $77,445.79. On February 15, 1913, Gustav A. Schlens, claiming by assignment from Ernest J. Knabe, Jr., and William Knabe the non-admitted assets specified in and sold to them by the resolutions above mentioned, filed a petition in the receivership proceedings in which he claimed to be entitled to the proceeds of all said non-admitted assets. He prayed that an order be passed directing the receivers to answer the petition and show: ³⁶⁵ “First—What assets remain in their hands out of the original assets sold under the resolution of February 3rd, 1910, as modified by the resolution of April 29th, 1910; “Second—What monies have been paid by them to your petitioner or his predecessors in title to