Straus v. Madden

Bruñe, C. J., delivered the opinion of the Court. The trial court entered a decree for the rescission of a transaction or series of transactions between Bartholomew Properties, Inc. (“the Company”) and Ralph D. Rocks (sometimes referred to below as “the Purchaser”) and his nominees or straw parties, the defendants Justine A. Straus and Dorothy M. Parkison. The suit was originally brought on July 15, 1957, by Margaret E. Madden, a minority stockholder of the Company, against the Company, Orlo A. Bartholomew, the President and a Director of the Company, and Beulah Bartholomew (wife of Orlo A.), the Secretary and a Director of the Company, and sought the appointment of a receiver for the Company and kindred relief on the grounds of fraud and mismanagement. The bill was subsequently amended so as ⁵³⁸ to join Straus and Parkison as parties and to seek relief by-rescission and cancellation.

Rocks was not joined as a defendant, but he testified as a witness and stated that he was the real party in interest in the case and that Straus and Parkison were his straw parties. He appears to have assumed and controlled the defense of the case. A demurrer filed by Straus and Parkison did not present as one of its grounds the non-joinder of Rocks, and we shall not consider further in this opinion any such objection which might have been raised, nor do we express any view as to its validity, if it had been raised. Straus and Parkison are the appellants of record.

The Company, which was organized in May, 1954, acquired as actually or practically its only asset, a tract of 30.33 acres of land at the northwest corner of the intersection of the Baltimore-Washington Parkway and Riverdale Road, in Prince George’s County. Apparently, most of its authorized stock was issued for this property, which was conveyed to the Company by Orlo A. and Beulah Bartholomew. 188 shares, out of an authorized 1500 shares, of the par value of $100 per share, were issued to the plaintiff for cash. Their validity is not challenged, nor is the validity of the issuance of other shares involved on this appeal, though the record may suggest some questions. The Bartholomews seem to have run the Company as if they owned it—which was far from the fact.

It would be difficult to imagine a corporation whose affairs were conducted with less regard for proper corporate procedure. The transaction or transactions involved in this appeal resulted in the execution of the following documents: (1) a contract of sale dated June 14, 1957, between the Company as vendor and Rocks as purchaser, covering seven acres of the above tract, and a collateral so-called guaranty by Rocks; (2) a deed of trust dated July 1, 1957, from the Company to John M. Conroy and John D. Gilmore, Jr., as Trustees, to secure an alleged indebtedness of $75,000 to Dorothy M. Parkison; (3) a promissory note of the Company for $75,000, payable to Dorothy M. Parkison, dated July 1, 1957, secured by the deed of trust of the same date; (4) an escrow agree ⁵³⁹ ment, also dated July 1, 1957, between the Company, Rocks, and Edward W. Nylen and John D. Gilmore, Jr., as Trustees; 1 (5) a deed dated July 3, 1957, from the Company to Justine A. Straus and Dorothy M. Parkison conveying the seven-acre tract referred to in the contract of sale dated June 14, 1957. The 30.33 acre tract is somewhat irregularly shaped. It has a total frontage of about 2287feet along the right of way of the Expressway, of about 452J4 feet on Riverdale Road, and of just under 2100 feet on 64th Street.

At the northwest corner of the tract is what may be called a sac having a frontage of about 491 feet on Brier Boulevard, which runs off at an angle of about 125 degrees from the north end of 64th Street. The northern line of the property from the Parkway to the sac runs southwesterly from the Parkway at an angle of about 70 degrees for approximately 842^2 feet. The northerly 20 acres of the tract were so zoned as to permit motel use; the southerly ten acres were zoned only for residential use. The seven acres covered by the contract of sale of June 14th and by the deed of July 3, 1957, form a parallelogram lying in the twenty-acre area where motel use is permitted and are in the northeast corner of the whole 30.33 acre tract and have a frontage of 800 feet on the Expressway.

An appraiser, Mr. Dunn, called by the plaintiff, valued the twenty acres of land zoned to permit motel use at $8,000 an acre, or $160,000, and the remaining ten acres, zoned residential, at $4,000 an acre, or $40,000. In addition to the seven acre tract, the Purchaser was to acquire a 26-foot right of way along the Expressway frontage from the seven acre tract to Riverdale Road, a distance of nearly 1500 feet. Under the deed of July 3, an exclusive right of way was granted to the Purchaser’s nominees. At the start of the conference of June 14, 1957, at the end of which the contract of sale of that date was executed, Rocks ⁵⁴⁰ had made what was represented as an offer of $200,000 for the whole 30.33 acres.

In fact, the making of such an offer was a condition to the calling of the conference. One-half of the consideration was to be represented by five acres of land in Prince George’s County zoned as commercial. This offer was neither accepted nor rejected. The Bartholomews’ friend and adviser, Judge J. Warren Madden of the U. S. Court of Claims, attended the conference with the Bartholomews and was also a representative of the plaintiff as a minority stockholder.

Also present were Mr. Rocks, his attorney, Mr. M. J. Cuff, Mr. Casey, a real estate salesman employed by B. F. Saul Company, brokers (who had been employed by the Company to sell part or all of its property under a non-exclusive agency) and, at times, a Mr. Eawler, an employee of Rocks. Judge Madden expressed disappointment at the amount of the offer (which only matched the amount of a conditional offer received by the Company in November, 1955, and fell $100,000 short of that offer, if a zoning change could have been obtained), and he also stated his inability to value the property offered in exchange. The conference began at or after 4 P. M. and Judge Madden left at 6 P. M., with no agreement made or in sight on the $200,000 offer, and no other proposition before the meeting. After Judge Madden left, the Bartholomews remained and agreed, in the name of the Company, to sell the seven acres, to give the Purchaser the 26-foot right of way above mentioned, and to permit him to put up a sign for his motel in the southeast corner of the 30 acre tract, and further covenanted not to permit the use of any of the remaining 23 acres for a motel.

The consideration moving to the Company was to be $30,000 made up as follows: (1) cash at or before settlement, $2,500 ($1,000 of which was paid as a deposit) ; (2) $12,131 through the assumption by the Purchaser of 7/30 of the first trust on the property of $52,000, conditioned upon an arrangement satisfactory to the Purchaser and to the holder of the note securing the first trust being made; (3) the transfer of notes, or the proceeds thereof, of a construction company secured by deeds of trust in the aggregate principal amount of $15,099 (plus, apparently, $270 accrued ⁵⁴¹ interest on one of the notes). By a separate instrument Rocks “guaranteed” payment of these notes, but not as to the time of payment. (Just what that guaranty meant is not wholly clear.) Mr. Dunn found that land worth $56,000 (7 acres @ $8,000) was thus sold for $30,000, that the remaining 13 acres which could have been used for motel purposes were reduced in value from $8,000 to $4,000 an acre, a loss of $52,000. He made no allowance for depreciation in the value of the balance of the tract due to the right of way being made exclusive.

Simply on his figures, the Company sold nearly one-fourth of its total acreage for approximately one-seventh of the value of the entire tract, the seven acres were sold for 30/56, or approximately 54%, of their value, and the value of what the Company had left was $92,000 (13 acres plus 10 acres @ $4,000) instead of $144,000, or approximately 70%. If we add together the supposed value of the consideration received ($30,000) and the value of the remaining twenty-three acres ($92,000) we have a total of $122,000. If we then deduct $3,000 for the roughly of an acre to be occupied by the right of way (without any allowance for the damage which the exclusive right of way would do to the balance of the property), and another $3,000 for the 10% commission on $30,000 to be paid to the real estate broker for effecting the sale, we find that the Company comes out with remaining gross assets of $116,000 as against the original $200,000. Since it still has liabilities of $61,000 on the first and second trusts, its net worth is $55,000 as against $139,000 before these transactions began.

In short, on the above figures, for a consideration of $30,000, the Company has parted with property, suffered a decline in value of remaining property, or incurred liability, in the aggregate amount of $114,000. This results in a net decrease in its worth of $84,000, or of 60% of its net worth. We think it clear that the consideration moving to the Company was grossly inadequate. We have carefully considered the lower values stated in testimony of the appraisers called by the defendants.

One valued the tract at $4,000 or $4,500 an acre; the other at $5,000 an acre. Each ascribed an overall acreage value to the ⁵⁴² entire tract and made no distinction in value between that part which could be, and that which could not be, used for motel purposes. Rocks himself was well aware of the greater value of the motel use part of the tract. Clause 15 of the June 14 agreement which prohibits the construction or operation of a motel on the parcel retained by the Company states: “it being expressly understood that the inducement to the Vendee [Rocks] to enter into this contract is the value of the seven (7) acre tract * * * for use as a motel site.” (Italics supplied.) We think that in reaching his conclusion that the transaction was “unconscionable”, the Chancellor accepted the view of Mr. Dunn and of Mr. Rocks that there was a material difference in value based upon this factor; and we find nothing in the evidence which would lead us to disagree with him on this question of fact—still less to hold that his finding based upon testimony as to valuation was “clearly erroneous”, to use the words of our Rule 886.

The Chancellor found: (i) that the officers of the Company who acted in this matter were without authority to make the conveyance of the seven acres, (ii) that “pressure, duress, coercion and misrepresentation [were] practiced by the Purchaser” upon the Bartholomews who were acting as officers of the Company in this transaction and (iii) “that this transaction was unconscionable.” As presented in this Court, the case has been argued under each of these three general headings separately. We find it unnecessary to pursue the first two problems to final and separate solutions. Instead, we think that the facts which give rise to the contentions that corporate authority was lacking or that pressure, coercion, duress and misrepresentation were employed, may better be considered in conjunction with the inadequacy of price. The latter, we think, was established.

It is, of course, true as a general rule that mere inadequacy of price will not of itself be sufficient to warrant the rescission of a contract or the refusal of the remedy of specific performance. One cannot be relieved of a contract merely because he may have made a bad bargain. Shepherd v. Bevin, 9 Gill 32; McShane v. Hazlehurst, 50 Md. 107 ; Lawson v. Mullinix, 104 Md. 156 , 64 A. 938 ; Vincent v. Palmer, 179 Md. ⁵⁴³ 365, 19 A. 2d 183 ; McKeever v. Washington Heights Realty Corp., 183 Md. 216 , 37 A. 2d 305 ; Great United Realty Co. v. Lewis, 203 Md. 442 , 101 A. 2d 881 . On the other hand, in the Great United Realty Co. case, it is stated that “a contract between competent parties cannot be rescinded by either party without an option to do so or without the other party’s consent, in the absence of fraud, duress, or undue influence, or unless the equities are such that the other party should not be permitted to enforce the contract.” ( 203 Md. 450 ).

In Kappelman v. Bowie, 201 Md. 86 , 93 A. 2d 266 , inadequacy of price and unilateral mistake, induced in part by the sellers’ real estate agent, were held a valid defense against a suit for specific performance by the buyer. The sellers were persons of little education or business experience. In Baltimore v. De Luca-Davis Co., 210 Md. 518 , 124 A. 2d 557 , an experienced contractor was held entitled to rescission of a contract where, as a result of the contractor’s error in arithmetic, it submitted the low bid on a municipal construction job, and the price bid was greatly inadequate. Uittle would be gained by the citation of many authorities.

We believe that the law is as indicated in the Great United Realty Co. case, supra, and as stated in Pomeroy, Equity Jurisprudence, 5th Ed., § 928. In that Section at pp. 639-641, the author says: “If there is nothing but mere inadequacy of price, the case must be extreme, in order to call for the interposition of equity. Where the inadequacy