Standard Founders, Inc. v. Oliver

Bond, C. J., delivered the opinion of the Court. This appeal brings up, at a second stage, the litigation before the court on the appeals reported in State Founders v. Oliver, 165 Md. 360 , 169 A. 59 . The former appeals arose from an ex parte appointment of receivers by the Maryland court, impounding of assets and books, and other relief, on a bill seeking a remedy of an alleged despoiling of the Great National Insurance Company by the defendants named; and this court, concluding on the ³²² main one of those appeals that the averments in the bill of complaint on which the court below acted were in important respects insufficient to support the granting of the relief ex parte, reversed the order. The second of those appeals, from an order staying as to some defendants the appointment of the receiver and possession of property by him, was dismissed, and it has no bearing on the present appeals.

These present appeals have been entered by ten defendants, or groups of defendants, from actions by the court below after the filing of an amended bill. The first is from an order or decree of September 13th, 1934, overruling demurrers to the bill, filed by eight defendants; the second, from an order of September 19th, 1934, impounding assets in the hands of the appellants, two building and loan associations; and the remaining eight appeals are from the overruling of motions by defendants to rescind the order of September 13th in so far as it overruled the demurrers. The amended bill differs from the original bill in that it omits some of the claims made in the original, and differs in the degree of particularization of its averments. To a large extent these averments are now supported by exhibits of documents of the transactions complained of, and are, besides, explained in detail and at length, so that the questions are of the sufficiency of fully exhibited transactions rather than of characterizations of them.

The question of the effect of the transactions as outlined in the original bill was expressly left undecided on the previous appeals. As was explained in the opinion on those previous appeals, the complaint in sum and substance is that two men, Henry L. Sinskey and Raymond A. Sinskey, his brother, and their associates, in the years 1930 and 1931 wrongly diverted funds from corporations in their control consolidated under the name of the Great National Insurance Company and now in the receiver’s hands, and by shifting those assets under various forms through the agency of corporations and individuals which they were ³²³ able to control and use for the purpose, appropriated the assets to themselves. The bill charges also an effort to build up by the process a false appearance of ownership of assets in the consolidated company for business advantages. And like the original bill, the amended bill of the receiver, filed in pursuance of an order of the Maryland court, seeks an undoing of the transactions and a return to the receiver of the assets of the despoiled corporation.

It seeks more specifically (1) discovery of amounts received as a result of the alleged transactions, (2) a declaration of indebtedness to the complainant for them, (3) that the sums be impressed with trusts for the receivership, (4) that there be a discovery and an accounting for them, (5) that a receiver be appointed tó take possession of all the property, books, and effects of the corporate defendants, and to preserve them, (6) that the officers, agents, and employees be required to deliver them up, (7) that the individual defendants be restrained from withholding or intermeddling with any debts or obligations of those corporations, or (8) from selling any stock or obligations of the corporations, and (9) be required to deliver to the receiver any and all the corporate assets, (10) that withdrawal by the defendants from any deposits by them be restrained, and (11) that custody of such of all these things as were then in the hands of the receiver be continued by him. The order of court on the demurrers sustained those of the two building and loan associations, the Berhenid and the Merchants’, to the entire bill, thus releasing them as defendants to the bill, and the complainant receiver has not appealed from that action or from any other action of the court. The demurrers of the remaining eight defendants, the Standard Founders, Inc., the State Founders, Inc., the Maurice Company, Inc., the Tri-State Investment Company, Henry L. Sinskey, Raymond A. Sinskey, Maurice Eisenberg, and Samuel Feitelberg, were sustained in part and overruled in part, sustained, that is, as to a twenty-seventh paragraph of the bill which attacked payments of $5,000 found made to each of Maurice ³²⁴ Eisenberg and Samuel Feitelberg, for arrears in salary payments, and as to the prayers in the bill numbered above 5, 6, 7, 9, and 10; and to all other parts of the bill of complaint the demurrers were overruled. After the action on the demurrers by which, as stated, the two building and loan associations were released as defendants to the bill, the. court, upon petition of the receiver, by an order of September 19th, 1934, six days after the signing of the order on the demurrers, impounded in their hands any funds on deposit with them for the accounts of the defendants alleged to have been participants in the shifting and wrongful appropriation of assets.

And that order forms the subject of the second appeal, by the two associations. Later in the same year, 1934, the remaining eight defendants, whose demurrers had been overruled, filed each a separate motion for rescission of the order of September 13th, on the demurrers, and for dismissal of the bill of complaint, and from the overruling of each motion another appeal was entered. The motions attack the right .of the receiver to maintain the bill, setting up additional facts in opposition to its maintenance. In testing the sufficiency of the averments, the court is not, of course, to look for proof of them, but so far as they are clear and definite to take them as sufficient if, supposing them to be established by proof or by admission, they would show the remediable wrongs contended for.

Upman v. Thomey, 145 Md. 347, 355 , 125 A. 860 . The averments and exhibits do include evidentiary material, with the natural effect of extending the argument into questions of probative force. Safe Deposit Co. v. Coyle, 133 Md. 343, 351 , 105 A. 308 . The Sinskey brothers are alleged to have maintained offices at 213 East Fayette Street, in Baltimore, and to have had a number of employees there, and to have organized and maintained at the same place a number of corporations in their control and management.

And these individuals and corporations are alleged to have served as channels for the diversion and appropriation of assets ³²⁵ as stated. These persons are named and described in the bill as having been in the Fayette Street offices, and to have been used directly or indirectly through corporations as officers and otherwise: Howard C. Bregel, an attorney; his secretary, Helen K. Rigdon; Sigmund Sin-' skey, an employee of the Sinskey brothers and of some of the corporations; Samuel Feitelberg, a cashier and bookkeeper employed to some extent for all the corporations; Maurice Eisenberg, a solicitor and appraiser of properties ; Barbara F. Woodward, an employee; Marie A. Flick, a stenographer; Marie A. Segrist, a telephone operator; Mary M. Kellam, a bookkeeper; Ethel M. Bird, personal secretary of Raymond A. Sinskey; and Joseph Horacek, an examiner of titles to real estate. Others whose names were used, but whose places of business are not stated, were Clayton W. Bordley, an examiner of titles to real estate, Morton P. Wolman, M. B. Levin, Arthur I. Klein, and B. W. Gatch, who are not described except as aids in the passing of assets without any interest of their own in them, and in some instances without their knowledge. Descriptions of the defendant corporations, and explanations of the control of each one respectively, are given in the bill, and they may be recited further in connection with the averments of particular diversions and appropriations of funds, except for the preliminary statements that all of those corporations were located at the same Fayette Street offices and that the records of all were kept chiefly by Feitelberg as clerk, the cash receipts for all Laving been entered by him on one sheet and subsequently segregated in books of the separate corporations.

Because of shifting of loose-leaf sheets of these corporations, it is averred, it is impossible to prepare a financial statement of any one corporation as of any particular date, and the maintenance of interchangeable records aided in the manipulations complained of. Some of the records of one of the corporations, Standard Founders, Inc., were partly destroyed by fire at the Fayette Street offices during the night after ³²⁶ the appointment of receivers in Baltimore on April 27th, 1933. The grounds of complaint, remaining after the rulings on the demurrers, are divided by the bill into three alleged diversions of funds and appropriations of them. The first in order is this: The Great National Company, now in the receiver’s hands, was a consolidated corporation composed of two corporations in 1931, a District of Columbia corporation and a Baltimore corporation.

And it is averred, in brief, that shortly before the consolidation was effected, the Sinskey brothers caused that Baltimore corporation to buy valuable stock from one of their other corporations, and then to exchange the purchased stock for valueless stock of still another of their corporations recently incorporated, and make a payment of $75,-000 to boot, and that thereafter they, the Sinskey brothers, passed both the valuable stock and the $75,000 through several merely formal transactions into their own possession or control. The transaction as described is much involved, and is presented in the bill with more than necessary detail. For the exchange in this first act of despoilment, it is averred, Henry L. Sinskey and Raymond A. Sinskey and their associates utilized two corporations with names of some similarity, but which may be designated as the State Company and the Standard Company. The State Company had been incorporated in the State of Delaware in 1926, under the name of the State Mortgage Company, and the name was changed to State Founders, Inc., on February 11th, 1931.

Its officers, and the executive committee, at that time were Henry L. Sinskey, president; Howard C. Bregel, vice-president, and Morton Wolman, secretary and treasurer; and these, together with eleven others not parties to this proceeding, constituted the board of directors until five of them resigned on July 3rd, 1931, and left their places on the board unfilled. This corporation, then, and at the times of the transactions complained of, was, according to the averments of the bill, “controlled by Henry L. Sinskey ³²⁷ through stock ownership and as president of said corporation, the other officers and directors of said corporation being mere nominees or straw men in the hands of the said Henry L. Sinskey, who was the actual head of said company acting in conjunction with Raymond A. Sinskey, his brother.” The acts of the corporation were in fact the acts of Henry L. Sinskey and Raymond A. Sinskey, who used the corporation as an instrument for the accomplishment of their purposes in the transactions complained of. What was the arrangement of stock issues of this corporation, and how much Henry L. Sinskey and his brother held, and what assets the corporation had, if any, are not stated in the bill. Its stock had a market value of from $35 to $38 a share; and it was the valuable stock in the exchange.

The Standard Company was incorporated under the name of the Standard Founders, Inc., in Maryland, on December 30th, 1930, to engage in the business of petty loans. It, too, had its office at 213 East Fayette Street. There were three amendments to its charter, the last on April 11th, 1931. The incorporators were employees of Henry L. Sinskey and his brother at 213 East Fayette Street, that is to say, Samuel Feitelberg, Maurice Eisenberg, and Clayton W. Bordley, and these were the officers and directors after the organization of the company.

They subscribed together to ten shares of stock of a total par value of $1,000. By the last amendment to the charter, two issues of common stock were provided for, one known as Class A, of 19,500 shares of no par value, and with no voting privilege, and the other, known as Class B stock, of 500 shares at two dollars each, with voting power. By exchange of their certificates the three incorporators, who had subscribed the amount of $1,000, were made owners of all of the Class B stock, and it still stands in their names on the books of the corporation. There was, however, an interval of nearly ten months in 1931 when, during transactions later reviewed, the stock did not stand in their names.

These persons, it is averred, were without any financial interest in the company, but were nomi ³²⁸ nees and straw men, the actual interest and management being in Henry L. Sinskey and his brother at their Fayette Street offices, Eisenberg, as already stated, employed as solicitor and appraiser for the Standard corporation, Feitelberg as cashier and bookkeeper for it, and Bordley as examiner of titles of properties on which the corporation might make loans. And as to this corporation, also, it is averred that the control rested entirely in the two Sinskeys, and was availed of by them for accomplishing the wrongful transactions. The Class A stock of this corporation was unissued up to the time of the exchange made with it, and, of course, had no market value. The corporation had been in existence only two months and a half when the exchange took place.

Its business was limited by lack of capital, and it is alleged in one place that it did not actively engage in the business of petty loans and was not prosperous. The State Company, the stock of which was valuable, had in 1929 promoted the organization of a National Fidelity Fire Insurance Company, one of the two corporations later consolidated, as an investment for the State Company, and purchased $200,000 of its stock, thus vesting control of the National Fidelity Company in the State Company. By a vote of the directors of the State Company on January 23rd, 1930, those directors became the directors of the new National Fidelity Company. And in 1931 there was an executive committee of Howard C. Bregel, Eldridge Hood Young, Edward A. Gross, Morton Wolman, and Henry L. Sinskey, the vote of any two of whom, according to a provision in the by-laws, was to be effective.

In November of 1930 the board of directors empowered the executive committee to appoint some person to arrange the consolidation or merger with the Great National Company, of Washington, and the committee appointed Raymond A. Sinskey. At the time of the consolidation, the two constituent corporations had two officers in common, and two members of the executive committees in common, Howard C. Bregel and Spencer B. Curry, but their directors other ³²⁹ wise were different persons. The consolidation was finally arranged on February 11th, 1931, to be effective on April 17th, 1931. And the consolidated company succeeded to ownership of all the rights and assets of the constituents.

The name Great National Insurance Company was used for the combined corporation, and Washington was specified as its home office, but in point of fact all the records and possessions were removed to Baltimore and the office of the Sinskey brothers. And this consolidated company, having in that year accumulated losses of $862,500, $425,-000 of which, in cash, as it is averred, having been passed from its treasury to the defendants, was placed in the hands of the receiver in Washington, and further proceedings to the same end were had as outlined in the earlier opinion in 165 Md. at page 360 . The object of the appointment was not dissolution of the corporation, and the receiver is a chancery receiver and not a statutory one. The courts in both Baltimore and Washington authorized him to collect the assets, bringing any and all actions found necessary for that purpose.

The purchases and the exchange of stock were then made by these three corporations; and the details, as set out in the bill, may be summarized thus: On October 8th, 1930, before the consolidation of the two insurance companies had been effected, and a month before the first mention of the project of consolidation in the minutes of the National Fidelity Company, that company, under the authority of a vote of its directors, bought fom the State Company 12,500 shares of the stock of the latter, and delivered its check of $500,000 for it. The court does not understand that any claim is now made for repayment of the $500,000, and the defendants’ attorneys explain that the purchase was in fact an exchange of stock, not one for $500,000 in money. As the stock purchased had a market value of $35 to $38 a share, the National Fidelity Company received and held among its assets for the time being stock of the State Company of an aggregate market value of from $437,500 to $475,000. Five months later, on March 19th, 1931, the executive commitee of the Na ³³⁰ tional Fidelity Company and the Standard Company made an exchange of this block of stock for 5,750 shares of Standard Company Class A stock and a cash payment of $75,000 to boot.

The amount of $75,000 paid over by the National Fidelity Company was procured by the sale of interest bearing securities owned by that company. It is this $75,000 that is first alleged to have been improperly taken over from the Great National Company in the transaction. That company had, as a result of the exchange and payment, only a block of Standard Company stock, newly issued, and of no market value, carrying no voting rights, and in a company that had been in existence only two months and a half, and hád a capital of only $1,000 and little business. The subsequent course described for the $75,000 is this: A month after the exchange and passing of the money to the Standard Company, 1,875 additional shares of the State Company stock, which, according to the stock book stub, had been issued to M. B. Levin, were transferred to the Standard Company by erasure of the name of Levin and substitution of that of the Standard Company on the stub, and the check of the Standard Company for $75,000 was issued to Levin in payment.

Levin, it is averred, had no interest in the transaction, and no knowledge of it, but signed papers at the request of Henry L. Sinskey. He appears to have deposited the check for the $75,000 to his own account and at the same time to have drawn his check for the full amount of it in favor of Henry L. Sinskey. Sinskey deposited thq amount in bank to the credit of the Merchants’ Association, another of the corporations at 215 East Fayette Street, controlled and managed by the Sinskey brothers, and that corporation at the same time opened a passbook of its own in the name of Levin for the amount. Levin on the next day indorsed the passbook in blank, and then the Merchants’ Association erased the name of Levin and, without her knowledge, substituted that of Miss Segrist, the telephone operator, as trustee, the entry being, “M. Segrist, Trustee, No. 3.” It is averred that ³³¹ Miss Segrist is without any interest in the money, and that it is held deposited with the association for the Sinskey brothers.

That association, one of the appellants, had a capital stock of three shares of $100 each; its officers were Feitelberg, Eisenberg, and Miss Bird, all of them nominees of the Sinskey brothers and acting for them as agents. The transactions, starting with the turning of the money over to Levin, all took place within three days, most of them on April 21st, 1931. It is to be noted that, as a result of the passing of the money to Levin in the first place, the Standard Company acquired for the time being, in its treasury, 1,875 shares of State Company stock alleged to have had a total market value of about $70,000, and to that extent the original exchange by the National Fidelity Company of State stock for Standard stock later gave the National Fidelity Company some value in its holding, but only about $70,000 at the time for the $437,500 or $475,000 of stock exchanged for it. And the stock was, according to the averments, subsequently passed to the ownership of the Sinskey brothers without consideration, as follows: Adding the 1,875 shares acquired from Levin to the 12,500 acquired by the exchange with the National Fidelity Company, the Standard Company held altogether 14,375 shares of State Company stock.

The 14,375 shares were divided and reissued on August 8th, 1931, 8,404 shares to a National Title Guarantee Company, ninety per cent, of the stock of which was owned by the State and Standard Companies together, and 5,971 back to the Standard Company again. After a new stock issue of the State Company, giving five new shares for one of the old, the National Title Guarantee Company appears as having transferred its portion to a Tri-State Investment Corporation at a price of $315,150. The TriState Corporation was another of the companies at 213 East Fayette Street, having as officers at that time Miss Segrist as president, Feitelberg as vice-president, and Miss Flick as secretary and treasurer. Two days after the transfer from the National Title Guarantee Company to ³³² the Tri-State Corporation, all but two shares of the stock were transferred back to the National Title Guarantee Company for $315,126, the two shares being reissued to the Tri-State Corporation; and six days later the National Title Company charged the stock off in full on its books, placing no value on it.

Subsequently, on October 29th, 1932, a certificate for 42,018 shares was issued by the State Company to Arthur I. Klein, and dealt with in connection with the remaining shares bought by the National Title Guarantee Company, transferred to Klein through another channel, as is now to be stated. The new issue of five shares of State Company stock for one of the shares which the Standard Company did not pass to the National Title Guarantee Company gave the Standard Company a remnant holding of 29,855 shares. This was sold back to the State Company itself for $37,-319, for which the State Company issued its check to Standard Company; and four days later it was passed by the State Company to Arthur I. Klein, as was the portion mentioned above. These transfers placed under the name of Arthur I. Klein all the State Company stock, or the stock with a market value, originally purchased by the National Fidelity Company, and exchanged by it for the valueless stock of the Standard Company with $75,000 to boot.

Klein is one of the individuals described in the bill as a mere agency of the Sinskey brothers in the transactions. And it is averred, in addition, that he indorsed the stock certificates in blank, and that all the stock just mentioned was included in a list of stockholders- issued by Henry L. Sinskey and forwarded by him in December, 1932, to Delaware, the incorporating state of the State Company, and that a proxy for voting it at a stockholders’ meeting was at the instance and request of Henry L. Sinskey signed by Miss Segrist in the name of Arthur I. Klein. Not all the transactions in this chain are essentials of the complainant’s charge of improper withdrawal from one of the constituents of the consolidated corporation of assets belonging to it, and to its creditors. An averment ³³³ of that bare fact is complete with the statement that persons in control of the two or more sides made the exchange which left the National Fidelity Company with Valueless stock for its valuable stock and $75,000 of its money.

The purport of so much is that persons in a position of double interest and power made a transfer of assets to the unjustifiable loss of those interested on one side and the unjustifiable gain of those on the other. The remaining averments tracing the disposition of the exchanged stock and the money go to identify the gainers by the transaction, and other parties defendant. In all the averments so reviewed there may be facts left unconsidered. The demurring defendants urge that the presence on the board of directors of the National Fidelity Company and the State Company of other persons not concerned in it would have prevented the wrongful diversion of assets averred.

And they urge other explanations of transactions outlined. But nevertheless it is definitely averred in the bill that the wrongful diversion took place, and the facts stated are consistent with that contention. That so many individuals and corporations should be subservient to the purpose, and that so many transfers should be made for it, is unusual, but it cannot be said to be impossible. That being true, the charge must, on the consideration of the demurrers, be treated as if established.

Difficulties in establishing it, arising from the presence of nonparticipating persons on boards of directors or from other possibilities, if there are any, are difficulties in the way of sustaining the burden of proof, and are not before the court on the demurrers. Safe Deposit Co. v. Coyle, 133 Md. 343, 351 , 105 A. 308 . This court concurs in the conclusion that the ultimate essentials of the charge are stated, directly or by implication. Whether in respect to so much of the facts here there is any misjoinder or nonjoinder of parties, and whether the bill is multifarious, are questions which may be left for consideration after all the particular transactions complained of have been explained, and these and other questions raised by the demurrers are taken up.

Neither here ³³⁴ nor elsewhere is it found necessary to consider any questions of contravention of the corporation laws of the State. The second particular complaint recites many shifts of money and stock at or about the same times, with the ultimate result that $181,500 in money was taken from the National Fidelity Company, or the consolidated corporation, in exchange for 1,000 shares, the entire stock issue, of a holding company, which held only stock of the constituent companies themselves. The holding company, the American National Real Estate Holding Corporation, was, according to the averments, one of the corporations at the Fayette Street offices, and was incorporated in Maryland in June, 1930. It is averred that it was an instrumentaltity for the