Sornberger v. Chesapeake & Ohio Railway Co.

GARRITY, Judge. In this matter, we shall focus upon the operation and effect of the Maryland appraisal statute which allows an owner of stock in a corporation, which consolidates or merges with another corporation, to receive payment based upon the fair value of the company rather than accept the offering price for its shares. This appeal is from a judgment of the Circuit Court for Baltimore City (Kaplan, J.) which granted the appellee’s motions to dismiss several of the appellants’ claims regarding dissenters’ rights of the corporate merger of the Baltimore and Ohio Railroad with Chesapeake and Ohio Railway Company. The appellants presented the following issues for review: I. Whether the lower court properly found that the erroneous tender of shares by a shareholder’s nominee precludes the shareholder from pursuing statutory appraisal rights; II.

Whether the lower court erred in not permitting the beneficial owners of shares to intervene in the pending appraisal matter where the record owner has duly demanded appraisal of the shares; III. Whether the lower court properly dismissed a complaint for appraisal of shares where there was no proof that the appellants had met the statutory appraisal requirements; and IV. Whether the lower court properly dismissed a Complaint for Appraisal of shares filed in lieu of the re ¹⁷ quired written demand for payment of the fair value of its shares. FACTS On April 30, 1987, the Baltimore and Ohio Railroad Company (hereinafter “B & 0”) merged with its parent corporation, the Chesapeake and Ohio Railway Company (hereinafter “C & 0”) through a short form merger procedure under Section 3-106, Md.Corps. & Ass’ns.Code Ann. (1985 Repl.VoL).

Pursuant to section 3-106(d), a Notice of Approval of Merger and Information Statement was sent to each B & 0 stockholder of record on March 27, 1987. The statement notified the stockholders of the impending merger, and offered $124 per common share and $100 per preferred share. 1 A. Midlantic National Bank and Robert C. Rooke On the date of the merger, appellants Midlantic National Bank and Robert C. Rooke, (hereinafter “Midlantic”) as co-trustees, owned 1,850 shares of B & O. These shares were held in the name of its nominee, Cede & Company. 2 On April 16, 1987, in a letter to C & O’s corporate secretary, Midlantic stated its objection to the merger with respect to all of its shares. On May 7, 1987, the Midlantic appellants filed with C & O and with the circuit court a Letter Petition asserting its appraisal rights with respect to all its shares, pursuant to Title 3, Subtitle 2, of the Corporations and Associations Article. Notwithstanding Midiantic’s stated objection to the merger and its intent to seek appraisal of its shares, Cede & Company tendered Midiantic’s 1,850 shares to C & O. Mid ¹⁸ lantic discovered this “erroneous tender” on May 20, 1987, when its account was credited in the amount of $229,400.

The Midlantic appellants, upon discovery of the erroneous tender, attempted to return the funds to C & 0 and repudiate the surrender of shares. C & 0 refused to repudiate the surrender and payment for the 1,850 shares on the grounds that C & 0 had acted in accordance with applicable law and was not responsible for the error or mistake in communication between Midlantic and its nominee. 3 C & 0 moved to dismiss Midiantic’s Letter Petition, averring that Midlantic had been paid in full for the shares tendered and could no longer avail itself of its remedies under the appraisal statutes. The motion was granted. B. Charles Sornberger, et al. 4 i) On the date of the merger, appellant Prudential-Bache Securities, Inc. (hereinafter “Prudential-Bache”), an experienced securities company, was the registered owner of 2,020 shares of B & O. Of these shares, 800 were alleged to be beneficially owned by appellants Louise C. Trapp and Louise Stiloski (90 shares), Louise C. Trapp as custodian for Kevin Trapp (60 shares), Louise C. Trapp as custodian for Eileen Trapp (90 shares), and Louise C. Trapp and Charles Trapp as joint tenants (60 shares). 5 Prudential-Bache surrendered its 2,020 shares to C & O and received payment in full for its shares at $124 per share.

Alleging that it had made a mistake in tendering these shares, Prudential-Bache attempted to repudiate its ¹⁹ surrender. C & 0 refused to agree to the repudiation on the grounds that it had acted in accordance with applicable law and was not responsible for Prudential-Baehe’s mistake. The court below granted the appellee’s Motion to Dismiss, finding cause to do so regardless of whether the Trapp shares were Prudential-Bache shares. ii) As of the date of the merger, appellant Advest, Inc. (hereinafter “Advest”), an experienced securities company, was the registered owner of 1,500 shares of B & 0 which it surrendered to C & 0 and for which it received payment in full at $124 per share. Advest attempted to repudiate this surrender, alleging erroneous tender.

C & 0 refused to agree to the repudiation, again, averring that it had acted in accordance with applicable law and was not responsible for Advest’s error. C & 0 moved to dismiss Advest’s complaint for appraisal of these shares on the ground that Advest had been paid for its shares and could no longer avail itself of the appraisal statutes. The court granted the motion. iii) As of the date of the merger, appellant Cede & Company was the registered owner of 2,813 shares of B & 0 beneficially owned by appellants Over the Counter Securities Fund (635 shares), Wellington Trust Company of Boston (300 shares), Boston Safe Deposit & Trust Company (250 shares) and Mellon Bank (1,610 shares). Once again, miscommunication resulted in these , shares being surrendered to C & O by Cede & Company at the rate of $124 per share.

Cede & Company and the beneficial shareholders, all experienced securities companies, attempted to repudiate the surrender and receipt of payment, alleging that the shares were surrendered to C & O in violation of specific instructions given to Cede & Company. C & O again refused to agree to the repudiation, restating that it had acted in accordance with applicable law and was not responsible for the violation of specific instructions to Cede & Company. ²⁰ The court granted C & O’s Motion to Dismiss, stating that payment for the surrendered shares precluded application of the appraisal statutes. iv) Capital Investors, Inc., (hereinafter “Capital”) the record owner of 250 shares of B & 0 at the time of the merger, did not file a formal written demand for payment of the fair value of their shares, but rather served a copy of a Complaint for Appraisal seeking court determination of the fair value on C & O. C & 0 moved to dismiss Capital’s claim, averring that the demand for payment was invalid. The court granted its motion. v) Finally, Cede & Company was the record owner of 2,980 shares of B & 0 beneficially owned by Charles F. Sornberger (2,610 shares), Norwich Radiology, P.C. Pension Fund (100 shares), Norwich Radiology, P.C. Profit Sharing Fund (210 shares), and Harriet M. Sornberger (60 shares). These “Sornberger appellants” sought to intervene in the proceedings below on the grounds that as beneficial owners, they are the real parties in interest, and therefore should be permitted to intervene in the appraisal proceeding to “actively prosecute the matter.” The court denied their request because it was untimely.

I. ERRONEOUS TENDER This first issue involves appellants Midlantic National Bank, Robert C. Rooke, Prudential-Bache, the Trapp appellants, Advest, Inc., Over the Counter Securities Fund, Wellington Trust Company of Boston, Boston Safe Deposit & Trust Company, Mellon Bank, and Cede & Company. All of these appellants allege that miscommunications resulted in the erroneous surrender of their shares by the record owners. The appellants sought to repudiate the surrender and payment of these shares and pursue their remedies under the appraisal statutes. Section 3-208, Md.Corps. & Ass’ns Code Ann. (1985 Repl.

Vol.), states, in part: ²¹ (a) Petition for appraisal.—Within 50 days after the Department accepts the articles for record, the successor or an objecting stockholder who has not received payment for his stock may petition a court of equity ... for an appraisal to determine the fair value of the stock. [Emphasis added]. The Midlantic appellants urge that this provision should be interpreted to mean “accepted or retained payment,” rather than “received payment.” The Midlantic appellants contend that since they never “accepted” payment for the shares, they should be permitted to proceed under the appraisal statutes. While such a construction would certainly aid the Midlantic appellants in their action, we simply find no compelling reason to supplement the language of the appraisal statute to benefit the appellants. In Roselle Park Trust Co. v. Ward Baking Corp., 177 Md. 212, 9 A.2d 228 (1939), the Court of Appeals noted, in reviewing the appraisal statute, “that the provisions of the statute should be construed strictly____” Id. at 221 , 9 A.2d 228 .

See also, Ash v. Citizens Bldg, and Loan Ass’n, 225 Md. 395, 401 , 170 A.2d 750 (1961); State Roads Comm’n v. Laurel Pines Country Club, 256 Md. 605, 608 , 261 A.2d 480 (1970); Office & Professional Employees Int’l Union v. Mass Transit Admin., 295 Md. 88, 96 , 453 A.2d 1191 (1982). Accordingly, construing the provisions of the statute strictly, the appellants’ attempt to obtain a court appraisal of their shares was properly dismissed. Having received payment for their shares, albeit through erroneous surrender of the shares, the appellants are not eligible under the appraisal statute to pursue appraisal remedies. The circuit court further noted that the Maryland Uniform Act for the Simplification of Fiduciary Security Transfers clearly delineates the legal efficacy to be accorded a fiduciary transfer.

Section 15-303 of that Act, located in ²² the Estates and Trusts article of the Maryland Code Annotated, states: Except as otherwise provided in this subtitle, a corporation or transfer agent making a transfer of a security pursuant to an assignment by a fiduciary (a) May assume without inquiry that the assignment, even though to the fiduciary himself or his nominee, is within his authority and capacity and is not in breach of his fiduciary duties; (b) May assume without inquiry that the fiduciary has complied with any controlling instrument and with the law of the jurisdiction governing the fiduciary relationship, including any law requiring the fiduciary to obtain court approval of the transfer; and (c) Is not charged with notice of and is not bound to obtain or examine any court record or any recorded or unrecorded document relating to the fiduciary relationship or the assignment, even though the record or document is in its possession. Md. Est. & Trusts Code Ann. § 15-303 (1974). 6 This provision plainly states that it is not a corporation’s duty, when accepting a transfer from a fiduciary, to verify that transfer with the principal. Such a requirement would not only be burdensome, but also it would defeat the whole purpose of a fiduciary relationship. Since the fiduciary is a representative of