State Founders, Inc. v. Oliver

Oeeutt, J., delivered the opinion of the Court. This proceeding was instituted by Joseph Oliver, receiver of the Great National Insurance Company, against Standard Founders, Inc., State Founders, Inc., the American National Real Estate Holding Corporation, the Berhenid Building & Loan Association of Baltimore City, Inc., Maurice Company, Inc., Merchants’ Building & Savings Association, Inc., National Title Guarantee Corporation, Tri-State Investment Corporation, Henry L. Sinskey, Raymond A. Sinskey, and Maurice Eisenberg, to the end that the defendants be de ³⁶⁵ dared to be debtors of the complainant, and, as ancillary to that relief, that the defendants discover under oath all moneys received by them from the Rational Fidelity Insurance Company of America and the Great Rational Insurance Company, and discover and account for all profits made by them or any of them as a result of certain transactions described in the bill of complaint; that moneys received from said insurance companies be declared to be impressed with a trust in favor of the complainant; that the defendants be required to account for all profits made by them from the use of money obtained from said insurance companies; that a receiver be appointed to take charge of the assets, books, and other goods and effects of the corporate defendants (except the Rational Title Guarantee Corporation), to collect debts due them, and to preserve and dispose of the properties belonging to them under direction of the court; that the officers of said corporation be required to deliver up to the receiver all property severally belonging to them ;• that the natural defendants, the two Sinskeys and Eisenberg, be enjoined from in any way intermeddling with the affairs or property of the said corporate defendants and from disposing of any evidence of stock ownership of the corporate defendants held by them or for their account; that said natural defendants be required to deliver to said receiver all property of the corporate defendants held by them; that they be restrained from disposing of a certain yacht named “Rujopa,” and that said yacht be declared to be the property of the complainant; that the defendants (except the Rational Title Guarantee Corporation) be restrained from withdrawing any funds standing to their credit in any banking or savings institutions or building’ associations, and from entering any safety deposit box or other place of safe-keeping, and from withdrawing therefrom any funds or securities stored therein. Upon that bill, with its accompanying affidavit and exhibits, the court on April 27th, 1933, appointed A. Wirt Duvall, Jr., and Joseph Oliver receivers, and enjoined the defendants, substantially as prayed, reserving to the defendants leave to move for a rescission of the order at any time ³⁶⁶ after filing their answer upon giving the complainant five days’ notice of such motion. On the same day, on petition of the complainant, the court enjoined the Emerson Hotel Company, the Baltimore Trust Company, and the Equitable Trust Company from permitting Henry L. Sinskey, Raymond A. Sinskey, and Maurice Eisenberg from having access “to their safe deposit boxes” until the further order of the court, and also enjoined them and the National Central Bank and the Savings Bank of Baltimore from paying to the Sinskeys any cash deposited in said banks or trust companies.

The defendants filed their answer to the bill on April 29th, 1933, and on the same day appealed to this court from “the decree” passed in this cause'on April 27th, 1933. There were two orders passed on April 27th, 1933, but since both parties treat the appeal as from the order appointing receivers rather than from the order on the receivers’ petition passed later on the same day, it will be so treated in this court. On May 9th, 1933, upon the petition of certain of the defendants, and upon the filing of an approved appeal bond, the court suspended and superseded the order of April 27th, 1933, as to such defendants, and directed Oliver and Duvall to return to said defendants all money and other property, including the yacht Rujopa, taken from them, and dissolved the injunction against them and the banks and trust companies affected by the second order of April 27th, 1933. From that order the complainant appealed.

So that there are two appeals in this record, one from the first order of April 27th, 1933, the other from the order of May 9th, 1933, suspending and superseding that order. The appeal from the order of May 9th, 1933, is free from difficulty. Article 5, section 33, of the Code, after providing for appeal bonds in appeals from the orders or decrees of courts of equity, further provides “and upon giving such bond the appeal shall stay the operation of all such decrees or orders; provided, however, that if in its discretion the court in which such proceedings are pending shall decide that the case is not a proper one for such stay, such court may pass an order upon such terms (as to duration, keeping ³⁶⁷ an account, giving security, etc.) as to it may seem fit, directing that the decree or order appealed from shall not be stayed by such appeal, or only so far or on such terms as the court shall therein direct.” The language quoted is explicit and mandatory, and from it it appears (1) that if the trial court does not act at all, an appeal bond automatically stays the operation of the orders, or decrees, from which the appeal is taken, but (2) the court may “in its discretion” order that such bond shall not stay the operation of such orders or decrees. In this case a mere staying of the order appealed from may not have been adequate to restore to the appellants property and rights of which they had been deprived by the operation of the order appealed from, or to give to them the privileges in respect to such rights and property which, in the absence of adverse action by the court, the statute obviously intended they should have upon the filing of an approved appeal bond in a penalty fixed by the court.

Certainly it was not intended that, when an appellant complies in all respects with the requirements of the statute by filing a bond in compliance with its provisions, that he should be only partially relieved from the effect of the order or decree from which the appeal was taken, and should, unless the court so directs, be compelled to submit to having his rights and property in alien control pending the appeal. In such a case it is clearly in the power and discretion of the lower court to obviate any hardship incident to such a condition by appropriate action. The word “stay,” used in the statute, ordinarily means to stop, arrest, or forbear. Literally, as used in the statute, it could mean to arrest the operation of the order as of the time at which the appeal bond was filed, leaving what had previously been done under it unaffected.

But such a construction would be wholly unreasonable and too narrow, for it might well be that what had been done under the order or decree prior to filing the bond would more seriously affect the appellants than anything that could possibly be' done afterward. The manifest purpose of the statute was to repose in the trial court the power and the discretion to obviate any hardship incident to such a condi ³⁶⁸ tion by taking sncb action in respect to tbe effect of tbe bond upon tbe order or decree appealed from as might be necessary to afford to the appellant the full protection offered by the statute. In Shirk v. Soper, 144 Md. 287 , 124 A. 911, 918 , this court said: “In dealing with the character of the discretion, reposed in the court passing the decree, to order that it shall not be stayed by appeal, in Forbes v. Warfield, 130 Md. 407 , 100 A. 630, 634 , this court, through Judge Thomas, said: ‘The question whether in any particular case the execution of the order or decree appealed from shall be stayed by the appeal, is expressly left by the Code entirely to the discretion of the lower court, and we said in Crownfield v. Phillips, supra [ 125 Md. 1 , 92 A. 1033, 1034 ] : “This court' has no power to review the refusal of the lower court to annul the effect of the appeal, for it is a matter that is expressly left, by the statutes, to the discretion of the court where the proceedings are pending.” ’ Crownfield v. Phillips, 125 Md. 1 , 92 A. 1033 ; County Commissioners v. School Commissioners, 77 Md. 283 , 26 A. 115 .” And if in that case this court had no power to review the refusal of the lower court to annul the effect of an appeal, neither should it in such a case as this review the discretion of such a court in making complete and effective the protection provided by the statute upon the filing of an approved appeal bond, and the appeal from the order of May 9th, 1933, will be dismissed. Turning to the appeal from the order of April 27th, 1933, it may be said, by way of premise, that upon an appeal from an interlocutory order appointing a receiver or granting an injunction, the appellate court is confined to the allegations of the bill and such exhibits as are properly a part of it, and that the averments of the bill, in so far as they are well pleaded, are taken as true.

Miller’s Equity Proc., secs. 317, 319; Sterback v. Robinson, 148 Md. 27 , 128 A. 894 ; Shannon v. Wright, 60 Md. 521 . The question then is whether the bill states facts sufficient to support the order from which this appeal was taken. The first seventeen paragraphs of the bill describe and ³⁶⁹ identify the parties to the proceeding, and the substance of them will he stated in narrative form. The Great National Insurance Company was incorporated in the District of Columbia July 24th, 1926, and on February 11th, 1931, it consolidated with the National Fidelity Eire Insurance Company of America, which was incorporated in. the State of Maryland on July 27th, 1929, the consolidated company being known as the Great National Insurance Company.

The Great National Insurance Company, hereinafter called the Great National Company, was by its charter authorized to carry on a general insurance business and was duly authorized to operate in the District of Columbia, Virginia., Georgia, North Carolina, and South Carolina. The National Fidelity Eire Insurance Company of America, hereinafter called the Fidelity Insurance Company, was authorized to transact a fire and reinsurance business in Maryland. On November 16th, 1932, in a suit pending against it in the Supreme Court of the District of Columbia, the Great National Company was adjudicated an insolvent and Joseph Oliver appointed permanent receiver for it. On March 23rd, 1933, in a proceeding pending in the Circuit Court of Baltimore City, against the same company, the said Oliver was appointed receiver in Maryland for it, and was by that court authorized and directed to file the bill of complaint in this case.

The Standard Founders, Inc., is a Maryland corporation, incorporated on December 30th, 1930. Its charter was amended three times, and under the last amendment, made December 30th, 1931, it was authorized to issue 19,000 shares of common stock having no par value and no voting power, which was, however, preferred as to dividends “only if and when declared,” known as Class A stock; and 500 shares of common stock having a par value of two dollars per share but with full voting powers, known as Class B stock, so that the control of the corporation lay in the holders of the l500 shares of Class B stock. The receiver of the Great National Insurance Company, Oliver, holds 11,835 shares of Class A stock, which the records of the Great National ³⁷⁰ Company show cost $1,133,500, and which are alleged to be all the Class A stock of said company outstanding. The only other stock of said company outstanding are 450 shares of Class B stock, held by “various individuals,” but all controlled and operated by Henry L. and Raymond A. Sinskey, who also control, operate, and dominate the directors of said company.

Two of the incorporators were Maurice Eisenberg, an employee of the Sinskeys, and Samuel Feitelberg, both of whom are connected with other corporations named in the bill, and Clayton W. Bordley, a “nominee” of the Sinskeys. Its office is at 213 E. Fayette Street in the City of Baltimore, which is also the office of the other corporate defendants and of Eisenberg and the two Sinskeys. State Founders, Inc., is a Delaware corporation, incorporated in that state as the State Mortgage Company February 18th, 1926, its name having been changed to its present form by an amendment to its charter on February 11th, 1931. It too is “dominated, controlled and operated” by the Sinskeys, and its board of directors acts under their “orders and directions,” and they actually control it.

It was authorized to do business in the State of Maryland, but, while still doing business in that state and having assets therein, it applied to the State Tax Commission for permission to withdraw from the state and represented that it had no assets in the State of Maryland. The permission was refused and a 'tax was levied “upon the employment of assets of $1,000,000.” The American National Real Estate Holding Corporation was incorporated in Maryland June 25th, 1930. Two of its incorporators were Helen K. Rigdon, secretary to Howard C. Bregel, whose office is also at 213 E. Fayette Street, and Mary Kellam, bookkeeper for the Fidelity Insurance Company, and the third was Gerald J. Kerr, attorney for the Sinskeys. It had no assets so far as known to the plaintiff, and is also “dominated, controlled and operated” under the direction of the “two Sinskeys.” The Berhenid Building & Loan Association of Baltimore City is a Maryland corporation incorporated November 16th, 1923, and Maurice Eisenberg is its “resident agent,” ³⁷¹ and it is “dominated, controlled and operated” under the direction and management of the Sinskeys.

It has no assets known to the complainant. The Maurice Company was incorporated under the laws of the State of Maryland by employees of the Sinskeys and the corporate defendants Tune 21st, 1932. It is “dominated, controlled and operated” by the Sinskeys, and is a “mere sham” to carry out their “schemes and plans.” The Merchants’ Building & Savings Association is a Maryland corporation, incorporated “a number of years ago” as the Merchants’ Building & Loan Association of Baltimore City, and is “dominated, controlled and operated” by the Sinskeys. The National Title Guarantee Corporation was incorporated in Maryland August 1st, 1931, and its corporate acts are “dominated and controlled by the Sinskeys.” The Tri-State Investment Corporation was incorporated under the laws of Maryland Inly 2nd, 1931, by persons in the employ of the Sinskeys or corporations controlled by them, and is “dominated, controlled and operated by them.” In the last seventeen paragraphs of the bill, the complainant undertakes to describe a number of alleged fraudulent transactions through which the Sinskeys, acting in cooperation with Eisenberg and Feitelberg, are said to have used the eight corporations named above for the purpose of taking from the Great National Insurance Company cash and other valuable assets, leaving in their stead worthless securities and valueless obligations, and of turning over such assets to the Sinskeys for their individual use and profit.

The averments found in these paragraphs are for the most part vague, confused, and general, and it is difficult to ascertain from them the precise nature and incidents of these transactions. So far as the bill permits any rational hypothesis of fraud, the theory of the complainant appears to be that the Sinskeys used the several corporate defendants as mere instruments or tools to divert assets of the Great National Company from its possession to some corporation controlled by them, and then by the exchange or sale of stock or the ³⁷² loan of cash to ultimately leave such assets either in the possession of the Sinskeys or in some corporation owned and controlled by them. These transactions may be considered as separable into seven categories, and for convenience will be dealt with in that way. 1. The bill alleges that on October 8th, 1930, the National Fidelity Fire Insurance Company of America purchased 12,500 shares of the stock of the State Mortgage Company, now the State Founders, Inc., which at that time “had a market value,” and on March 19th, 1931, it transferred that stock to the Standard Founders, Inc. On the same day, the insurance company agreed to purchase from the Standard Founders, Inc., 5,750 shares of its Class A stock, apparently for $575,000.

So that the Fidelity Insurance Company had sold to Standard Founders 12,500 shares of the stock of the State Mortgage Company for $500,000, and had bought from Standard Founders stock for which it agreed to pay $575,000. As a result of that transaction the Fidelity Insurance Company owed Standard Founders a balance of $75,000 in cash, which it obtained through the sale of securities having a value of $82,526.41. The stock of Standard Founders was not “listed,” had no market value, and “little, if any real value.” It is further alleged that the transfer of the 12,500 shares of the stock of the State Mortgage Company, and the payment of $75,000 in cash to the Standard Founders, Inc., was accomplished by fraud “practiced upon the National Fidelity Fire Insurance Company of America, its officers and agents.” While it is alleged that the stock of the State Mortgage Company had “a market -value,” there is no statement as to what the value was, and while it is alleged that the transaction was accomplished by fraud, it is not stated what the fraud was, nor what means were used to accomplish it. 2. The bill alleges that in the fall of 1931 “certain of the officers and directors of the Great National Insurance Company,” who are not named, and the two Sinskeys, represented to the board of directors of the Great National Company that the controlling interest in two other insurance companies could be secured, if the purchaser could “transfer ³⁷³ unto them stock which was upon a dividend paying basis,” and that as the stock of the Great National Company was not upon such a basis, its directors were “importuned” to buy stock in Standard Founders, Inc., which the Sinskeys said paid twenty per cent, dividends, for the “sole purpose of using the same for acquiring a controlling interest in” the insurance companies; that the Sinskeys acting for themselves and as agents for Standard Founders, Inc., and “the other corporate defendants then in existence,” represented that Standard Founders, Inc., was engaged in the “petty loan business,” that its business was lucrative, and that the money realized from the sale of its stock, would be used for “the purpose of making petty loans which would produce great revenue”; that, relying upon these representations, the board of directors of the Great National Company passed a resolution authorizing the purchase of stock “not to exceed $250,000” in the Standard Founders, Inc., said purchase to be made “when necessary,” but only in the event that the Great National Company could secure a controlling interest in one of the two insurance companies.

It is further alleged that, in violation of that resolution, “there was paid from the treasury of the Great National Insurance Company unto the Standard Founders,,Inc., the sum of $158,500”,- that Standard Founders, Inc., used that money together with $41,500, which “may have been a part of” funds previously received from the Great National Insurance Company, to buy 4,000 shares of the capital stock of the Colonial Trust Company of Delaware, the value of which was “so small that the price paid therefor was greatly disproportionate to its value”; that said stock was actually owned by State Founders, Inc., for which the Tri-State Investment Company acted as agent; that, upon receiving the $200,000, the Tri-State Investment Corporation paid to State Founders, Inc., $156,500, and retained $43,500; that State Founders, Inc., thereupon loaned $156,500 to one Maurice Eisenberg, one of its employees, without collateral, although said Eisenberg was wholly without financial responsibility; that said transaction, while in the form of a loan, was a mere device to defraud ³⁷⁴ the Great National Insurance Company, and that Eisenberg indorsed the check for the $156,500, and it was deposited to the personal account of Henry L. Sinskey, and of that amount $100,000 was deposited to the account of Henry L. and Raymond A. Sinskey; that of the balance $56,500 was transferred to “Henry L. Sinskey and Raymond A. Sinskey by a deposit in their names or certain trustee accounts, actually the property of Henry L. Sinskey or Raymond A. Sinskey, or both, in the Berhenid Building and Loan Association of Baltimore City, Inc., and/or the Merchants Building and Savings Association, Incorporated, _ which are also owned, operated, controlled and dominated by the said .Henry L. Sinskey and Raymond A. Sinskey.” It is further alleged that the representations made to the directors of the Great National Insurance Company to induce them to invest $156,500 in the stock of the Standard Founders, Inc., were “false and fraudulent”; that Standard Founders had not “functioned” prior to receiving said sum of $156,500; and that it never was intended that the Great National Company should use Standard Founders stock to buy stock in either of the two fire insurance companies. The result of those interrelated transactions was to use $156,500 of the funds of the Great National Insurance Company for the purchase of stock of the Standard Founders, Inc., and ultimately to transfer all but $2,000 of that sum to the possession of the Sinskeys. 3. It is further alleged that on December 5th,. 1930, the Fidelity Insurance Company loaned to the American National Real Estate Holding Corporation, which at that time had no assets of any value, $156,500; and that on December 31st, 1930, it recorded a sale of 5,071 shares of its stock to the State Mortgage Company for $368,000, but that that transaction was not completed until March 4th, 1931, after the “articles of consolidation,” consolidating the Fidelity Insurance Company with the Great National Company, had been signed; that on March 3rd, 1931, the Fidelity Insurance Company sold mortgages “to the value of $25,027,” and on March. 4th, 1931, “apparently” purchased from State ³⁷⁵ Founders, Inc. (State Mortgage Company), 1,000 shares of the American National Real Estate Holding Corporation stock for $550,000, paying for it, from these funds, (a) $368,500, which'State Founders, Inc., owed the Fidelity Insurance Company for the 5,071 shares of its capital stock, (b) $156,500, the amount loaned to the American Real Estate Holding Corporation, and (c) $25,000 from the proceeds of the sales of its mortgages. As a result of that transaction, assuming the truth of the allegations of the bill, $181,500 in cash, being $25,000 realized from the mortgages, and the $156,500 loan, was taken from the treasury of the Fidelity Insurance Company and placed in the possession of State Founders, Inc., and 5,071 shares of its stock transferred to the same corporation, in return for which the Fidelity Insurance Company received 1,000 shares of the American National Real Estate Holding Corporation, which, until the transaction described, had no assets of any value.

The hill further alleges that that entire transaction was a fraud upon the Fidelity Insurance Company, “designed solely and for the purpose of enriching the defendants,” especially the defendants Henry L. and Raymond A. Sinskey, and that the complainant is entitled to he “declared a creditor of the State Founders, Inc., and of the other defendants herein participating in said fraudulent transaction and receiving any of the funds so transferred by the National Fidelity Fire Insurance Company of America to the State Founders, Inc., and thereafter transferred by it to the other defendants in furtherance of the scheme to defraud the National Fidelity Fire Insurance Company of America.” Referring, apparently, to the transaction set out in classifications 1, 2, and 3, the complainant alleges that “the result of these transactions” was not only to take from the treasury of the Fidelity Insurance Company the sums named above, but it enabled that company and the Great National Company, with which it consolidated, “to show on their statements amounts as issued capital stock and surpluses which permitted them to enter additional territories and broaden the fields in which they could write additional lines without having benefited their cash positions or ³⁷⁶ their ownership of investments of a readily marketable character, which policy had the effect of misrepresenting the financial position of the companies to their holders of policies or stock and to persons purchasing policies or stock subsequent to the date of the above transactions.” 1. It is further alleged that the complainant “believes” that the liabilities of Standard Founders exceeds its assets, but that beginning July, 1932, and “continuing through 1932,” it assigned “various and sundry” mortgages to the Maurice