Strauff v. Kavanaugh

¹⁷⁴ Adkins, J., delivered the opinion of the Court. Edward A. Strauff purchased all the stock, 10,500 shares, of the Security Life Insurance Company of Maryland at a sale of said stock by the holders of a note for $100,000 for which the stock had been pledged as collateral security. The note was originally given to the Atlas Realty Company of Baltimore City by a holding company to which the stock had been assigned by all the stockholders, and on default the note was assigned to Strauff and his wife, and sold by them under the terms of the collateral agreement. On the death of Strauff the stock passed to the appellant as his executrix.

This suit is based on the contention of the plaintiff that he was induced to transfer his 1,500 shares of said stock to the said holding company by the oral promise of Strauff that he would put into the concern a sufficient amount to purchase the 7,500 shares of the five stockholders, other than plaintiff and Harry G. Calvert, who held 1,500 shares each, and that upon the acquisition of the stock of said other stockholders, these shares, together with the 1,500 shares of plaintiff and the 1,500 shares of Calvert, would be assigned to and held by a holding company to be organized for that purpose, and that the stock of said holding company would be issued to plaintiff, Strauff, and Calvert in equal amounts, so that each would have a one-third interest in said holding company, and that Strauff would look solely to the earnings of said holding company for repayment of any sums which he would furnish for the acquisition of said outstanding five interests, and that he would continue to finance the purchase of said other five interests until such time as the earnings of said holding company should be sufficient to pay off the amounts so furnished by Strauff. These allegations are contained in the 13th paragraph of the bill of complaint. The preceding paragraphs set out the long connection of the plaintiff with the industrial insurance business; the formation of the company under another name in 1909 by plaintiff and six associates, and its change of name to that of “Security Life ¹⁷⁵ Insurance Company of Maryland,” and its continuaance in business up to the present time; its capitalization into 10,500 shares of common stock of the par value of one dollar per share, divided equally between the seven associates, who held the same up to June 6th, 1929; that plaintiff was always its president; that the corporation greatly prospered under their management; the prominence of Strauff as a lawyer and real estate man, until his death on November 2nd, 1933, and the probate of his will on November 7th, 1933, and the grant of letters testamentary to his widow, Loretta P. Strauff; the association of Strauff and Calvert as attorney and client, and also in the real estate business since 1906; that in the year 1928 Strauff informed Calvert that he, Strauff, had a large sum of money available and wanted to get into the industrial insurance business and would like to buy out plaintiff’s company, with which he knew Calvert was connected, and instructed Calvert to interview and interest plaintiff in such a proposition; that in February, 1929, at the invitation of Strauff a conference was had between Strauff, Calvert, and the plaintiff, at which Strauff announced his affluence and his desire to become associated with plaintiff and Calvert in the insurance business, and offered to furnish the necessary money to buy out the remaining five interests in said company if plaintiff and Calvert would continue as officers, and devote their skill and experience to the growth of the company; that Strauff then proceeded to examine the affairs of the company and appraised the value of all the stock at $280,000. In the paragraphs following the 13th it is alleged that plaintiff, at the time of said proposal, informed Strauff that he desired to consult his own attorney in reference to all matters touching the interests of plaintiff, and especially the proposed plan suggested by Strauff, and the manner of carrying the same into effect, but that Strauff strenuously objected, claiming that plaintiff was going into a very large undertaking on an equal basis with Strauff, and therefore ought to have sufficient confidence in him to allow him to represent plaintiff as counsel and attorney in said transac ¹⁷⁶ tion, and that as a result of said objection, and, relying upon StraufE’s assurance of protection of plaintiff’s interests, he entrusted the drafting of necessary papers and handling of the transaction to Strauff, who thereby undertook to represent plaintiff as attorney in said transaction; that, upon obtaining authority to represent plaintiff, Strauff proceeded to consummate the transfer of all the stock to a holding company, and on or about March 8th, 1929, presented a paper prepared by him, which he represented to plaintiff was the first step in carrying out the agreement they had entered into, and instructed plaintiff to have all the stockholders execute, and that, believing that said paper was in proper order to carry into effect the aforesaid understanding, plaintiff, with the other six stockholders, executed said paper, marked complainant’s Exhibit “B.” (Then follow allegations as to other papers marked as exhibits, which plaintiff alleges he executed on the representation of Strauff that they were necessary to carry out the said agreement); that on or about June 6th, 1929, Strauff called a meeting of all the stockholders and obtained, endorsed in blank, the sealed certificates of stock representing 10,500 shares, on the following terms: Wm.

M. Powell cash $40,000; H. C. Powell cash $40,000; Ida M. Powell cash $10,000, and a note for $30,000 executed by the Security Holding Company No. 2; James O. Whaley cash $10,000 and a note for $30,000 of said holding company; Estate of Louis M. Eastman, Jr., note of said holding company for $40,000; that plaintiff and Calvert were induced by Strauff to assign in blank their respective certificates for 1,500 shares each, the said Strauff stating that he would forthwith proceed to straighten out all matters and prepare all necessary agreements and documents, so as to fully carry out their understanding and agreement as set forth in paragraph 13 (erroneously designated 12 in bill); that at said meeting directors were elected, including Strauff, and plaintiff was elected president, Calvert secretary, and Strauff treasurer; that on or about March 20th, 1929, relying upon representations of Strauff that they were necessary to carry out said agree ¹⁷⁷ ment (in paragraph 13) plaintiff became one of the incorporators and executed charters, prepared by Strauff, of Security Holding Company No. 1, and Security Holding Company No. 2, and also signed certain option agreements and voting trust agreements relative to the stock of said holding companies; that plaintiff, having implicit confidence in the honesty and integrity of Strauff, was induced by Strauff to endorse a certain note dated June 6th, 1929, for $100,000, made by the said Security Holding Company No. 1, payable to the order of the Atlas Realty Company of Baltimore City, Strauff representing that the execution of said note and the endorsement thereof by plaintiff was merely to preserve a record of the transaction between the parties as evidence of the fact that the sum of $100,-000 had been advanced by him in connection with the transaction, which was to be repaid out of the earnings of the said holding company; that the said Atlas Realty Company was owned and controlled entirely by him, and that said note was not for the purpose of creating, and did not in fact create, any liability upon plaintiff for the payment thereof; that plaintiff signed the agreement marked Complainant’s Exhibit “K” on the representation of Strauff that the execution of said paper was necessary for the purpose of enabling Strauff as attorney for the parties in interest to adjust certain income tax matters with the Internal Revenue Department, Strauff assuring him that said agreement was merely for the purposes of record, and did not alter in any manner their status, or affect the agreement set out in paragraph 13; that not until March 23rd, 1933, did plaintiff become aware of the fact that all the shares of stock of the Security Life Insurance Company, including plaintiff’s 1,500 shares, which had been endorsed in blank and delivered to Strauff, instead of being held by the holding company, in accordance with the original agreement, had been fraudulently assigned by Strauff to The Atlas Realty Company, and that Strauff had, without the knowledge and consent of plaintiff, secretly and fraudulently stripped the said holding companies of all assets, so that the stock thereof was worth ¹⁷⁸ less; that plaintiff did not understand the purport of Strauff’s letter of March 24th, 1983 (notifying plaintiff as president of the holding company that the Atlas Realty Company would proceed with the sale of the stock), filed as complainant’s Exhibit “L,” which letter was received when plaintiff was suffering from a nervous breakdown; that after a period of four weeks, when plaintiff had partially recovered from his illness, and was able to get about, he made strenuous efforts to see Strauff in order to secure an explanation of matters, but was evaded by him on the pretext that he was ill and unable to see him at the time, but would take up the matters as soon as he, Strauff, was able to do so; that the procuring of said agreements from plaintiff by Strauff, upon the representations and assurances aforesaid, and plaintiff’s endorsement of said note, and the formation of said holding companies, was part of a scheme devised by Strauff to cheat and defraud plaintiff and his former associates out of their stock, so that Strauff could appropriate the stock to himself; and that, in consequence of said false and fraudulent representations by Strauff and his breach of duty towards plaintiff as his attorney in said transactions, plaintiff has been defrauded out of his stock. The prayer of the bill is: (1) That the said contracts, agreements, options and notes entered into, executed or endorsed by plaintiff be declared null and void. (2) That defendants (Loretta P. Strauff, executrix, The Holding Companies Nos. 1 and 2, and The Atlas Realty Company) be required to transfer and return to plaintiff the 1,500 shares of stock delivered by him to Strauff endorsed in blank. (3) For injunction restraining the defendants from transferring said stock.

(4) For an account of all moneys received by defendants by way of dividends, salaries, or gratuities. (5) That defendants be required to answer under oath and to set forth in detail who is in possession of said 1,500 shares of stock and of said note of Security Holding No. 1 ¹⁷⁹ for $100,000, and to deliver said 1,500 shares to the clerk to be impounded. (6) For general relief. A demurrer to the bill and each paragraph thereof was overruled.

Whereupon the executrix filed her answer under oath, in which she denied all of the allegations of fraud or wrongdoing on the part of Strauff, and the allegations that Exhibit “B” and other papers were signed and executed by plaintiff as a result of false or deceptive representations made by Strauff, or that plaintiff believed or had any reason to believe that plaintiff’s Exhibit “B” was intended to carry into effect the alleged oral agreement, or that any of the other papers were intended fcr that purpose, or that plaintiff and Calvert were induced by any such representations to sign in blank and deliver their respective certificates of stock. She denied that the Atlas Realty Company was owned solely by Strauff; that Exhibit “K” was executed at the request