Tompkins v. Sperry, Jones & Co.

Schmucker, J., delivered the opinion of the Court. This is an appeal from a decree of the Circuit Court No. 2, of Baltimore City, sustaining the appellee’s demurrer to and dismissing a bill filed by the appellants as Receivers of the Maryland Brewing Company of Baltimore City, hereinafter called “ The Company.” The purpose of the suit is to procure an account of certain bonds and the proceeds thereof which the bill alleges the appellees, Sperry & Jones, while occupying a fiduciary relation to the company and being in control of its corporate organization, caused to be overissued by it to themselves and which they and their co-appellees, who acted with full knowledge of the facts, sold and disposed of for their own use and advantage. The allegations of the bill in large part relate to the stock of the company which is charged to have been overissued at the same time and in the same manner as the bonds, but there is no prayer in the bill for an account of the stock or its proceéds, although there is a prayer for general relief. The bill of complaint alleges that the company was incorporated under the General Laws of this State by articles of incorporation filed on February 7th, 1898, and amended on December 22nd, 1898, with a capital of 32,250 shares of preferred and 32,250 shares of common stock arid that it subsequently authorized an issue of $7,500,000 of bonds.

That the incorporators and directors named in the certificate of incorporation and also the stockholders who participated in the organization of the company consisted of the appellees, Sperry ⁵⁷³ & Jones, and persons who were under their control and were in fact their agents and were not independent subscribers, and by that means the said two appellees remained in absolute control of the company from its organization down to and including February 28th, 1899. That pending the organization of the company and prior to the last named date Sperry & Jones, who were bankers and brokers by profession, contracted for and on its behalf with each one of certain named brewers and brewing companies of Baltimore, including George Brehm and Joseph Strauss, to the end that they should sell and transfer their brewing establishment to the company to be paid for by it partly in cash and partly in its bonds and stock at a valuation to be determined by their respective barrelage, or output of barrels of beer, for the preceding year. That the total capitalization of the company, which was expected to absorb all' of the breweries in Baltimore having an estimated output of 700,000 barrels per annum, was fixed in the contracts, at $14,000,000 being $20 of capital for each barrel of output, it being further understood that if the entire brewing interests of Baltimore were not brought into the company its capitalization should be reduced, at the rate of $20 per barrel of output of such breweries as failed to come in, such reduction of capitalization to he pro rata in bonds and stock. That it was further provided in the contracts that the several properties should be transferred free of debt to the company, but the latter would buy for cash the stock of malt and hops on hand at the several component breweries as of March 1st, 1899; and further that out of the proceeds of the bonds and stock to be issued by the company a cash working capital of $500,000 should be provided and that the balance of the stock and bonds so to be issued should go to Sperry & Jones as compensation for their services they to pay all of the expenses attending the promotion of the enterprise.

Copies of the alleged contracts between Sperry & Jones and George Brehm and Joseph Strauss were filed as Exhibits “ A ” and “ B ” with-the bill which alleged that all of the contracts with the other ⁵⁷⁴ brewers were- similar in terms to the two, of which the copies were, filed, and. that the other contracts were in the possession of Sperry & Jones. It was further alleged that all of these contracts-were made by Sperry & Jones for and on behalf of the company and provided on their faces that they-were-to be assigned to and filed with it. The bill then-, after having directly charged that Sperry & Jones in making the contracts with the brewers-were acting for and on behalf of the company, proceeds to aver that Sperry & Jones through- the said board of directors “did compel the said Maryland Brewing Company on February 28th, 1899, to assume the obligations of the various contracts with various brewers hereinbefore-referred to. ” * *■;. The-bill,then further alleges that the various breweries- which- were in fact transferred, to.the company, without av.erring that they were so transferred-by virtue of said contracts; represented'an output for the- preceding year'of only 5-43,000' barrels, against which- the terms of the contracts would have- permitted an issue of only $$.,820,000 of bonds and a> corresponding amount of stock by the company: But that the appellees, Sperry & Jones; having- control as aforesaid of the company, caused it to issue to- them against the said, properties $7,500,000 of bonds and:$2,750,000 of preférred and $2,750;Ooo of common-stock.

That this issue of bonds and stock- was authorized at a meeting of the company held on February 15th, 1-899, by the presentation to- a stockholder’s meeting and the acceptance by {he stockholders in such- meeting assembled of a-written offer from Sperry-& Jones to subscribe for and take-the above-mentioned amounts of bonds and. stock of the company and to pay for $500,000 of the bonds in cash.and to pay-for the remainder of bonds and stock, so to be subscribed for by-a transfer and conveyance to-the company-of certain specified brewery properties at-the valuations-therein set forth. A copy of the minutes of said stockholder’s meeting showing that all of the: stockholders were present in, person or by-proxy and containing in full the said proposition of Sperry & Jones, is filed with- ⁵⁷⁵ the bill as Exhibit “C.” The bill then charges that this stockholder’s meeting had no legal right to receive or accept said proposition because it does not appear that prior notice had been given of the meeting and its purpose as is required by law in such cases. The bill further charges that the two Trust Companies, which were made co-defendants with Sperry & Jones and which appear in this Court as appellees, with full knowledge of the matters hereinbefore mentioned entered into an agreement with Sperry & Jones to furnish them the sum of $3,800,000 to consummate the promotion of the company for which they received $4,000,000 of the bonds and a large amount of the stock of the company and that they became jointly interested with Sperry & Jones in such promotion and in the transactions connected therewith, and that they subseqently sold said bonds for the sum of $4,240,000, but did not account to the company or its receivers therefor, and that Sperry & Jones failed to account for such of the bonds as were retained by them. The bill then charges that this alleged over issue and sale and disposal of the bonds and stock of the company procured by Sperry & Jones with the aid and connivance of the two trust companies was a fraud upon the company and its original stockholders and its creditors.

The bill further avers that subsequently the company was compelled to default upon its bonds and was, upon a bill filed for that purpose, put in the hands of receivers under secs. 264 and 264A of Art. 23 of the Code and that after a sale of substantially all of its property and effects and the application of the proceeds to the payment of its debts there still remains over $4,000,000 due to its bondholders ; and that the institution of the present suit was authorized by an order of Court passed in the receivership case. The prayer of the bill is for an account from the defendants of the proceeds of the bonds of the company unlawfully obtained and sold by them or appropriated to their own use and for general relief. The appellees, Sperry & Jones, and ⁵⁷⁶ The Citizens' Trust and Deposit Company ' demurred to the bill and the issue thus made was tried and the decree appealed from, which sustained the demurrers and dismissed the bill, was entered before the time of the other appellee to respond to the bill had expired. ■ Notwithstanding the positive averment already referred to in the bill that on February 28th, 1-899, Sperry- & Jones compelled the company to assume the obligations of -the contracts with the various brewers, the theory of the bill is that Sperry & Jones acted for and on behalf of the corporation in making the contracts with the brewers and for that reason stood in a fiduciary relation to it and could have no undisclosed interest in the property covered by the contracts nor make any secret profit out of their execution. It is charged that they violated their fiduciary-obligation by procuring the company to issue tó them a larger amount of stocks and bonds than are called for by the contracts.

The case against the two trust companies who are also made defendants to the bill rests upon the allegation that they w-ith full knowledge of therelar tion of Sperry & Jones to the company and of the-terms of the contracts under which -the breweries were to be apquired by it not only aided and abetted their co-defendants in securing their alleged secret profits but also shared in the profits. The allegation of the bill is that - all of the - contracts with the brewers were similar in their terms to the Brehm and Strauss contracts. Copies of these contracts are filed with and made part of the bill and they constitute the avowed foundation upon which it rests in averring what relation- Sperry & Jones occupied to the company in making thém and what were the terms and conditions upon which and the extent to which the company was to issue its bonds and stock in payment for the breweries. It therefore becomes of fundamental importance to ascertain what are the character ■ and scope of these- contracts in order to determine whether they, when construed in the light of the other allegation of the bill, and taken together with them, present such a case of breach by Sperry & Jones of a ⁵⁷⁷ fiduciary relation to the company as would constitute a sufficient cause of action to maintain the present bill.

If we now turn to the Brehm and Strauss contracts it becomes apparent at the first inspection of them that they are dissimilar in character and proceed upon theories which are inconsistent if not conflicting with each other. It cannot be accurately asserted that all of the other contracts with the brewers were similar in their terms to these two for these are not similar to each other. The Brehm contract recites that Brehm is the owner of a brewing establishment in Baltimore City and believes that it would be to his advantage to have his business consolidated with other breweries so as to effect certain economies and to produce an annual output of not less than 560,000 barrels of beer, and that he desires to secure the assistance of Sperry & Jones in effecting such a combination, and that they are willing to make an effort to accomplish the desired result. Sperry & Jones then agree “to give their best efforts to procure” the desired combination upon the terms briefly outlined-in the earlier part of this opinion and Brehm agrees to sell and transfer his brewery to the consolidated corporation when formed, at the fixed price of $1,050,000 to be paid $450,000 in cash, $100,000 in bonds, $250,000 in preferred and $250,000 in common stock of the company.

But it is provided by the terms of this agreement that certain breweries therein named and specified must be embraced within the proposed combination and that the annual output of the combined establishments should not be less than 560,000 barrels of beer and it is expressly declared that the agreement “is not to be binding upon said George Brehm unless the above-enumerated breweries, companies and individuals become part of the said consolidation.” Now the bill nowhere alleges that all of the breweries named in the agreement did come into the consolidation or that the annual output of those that came in amounted to 560,000 barrels. On the contrary it avers that such output was only 543,000 barrels and it appears from Exhibit “ C,” filed with ⁵⁷⁸ the bill that the breweries specified in the Brehm contract did not all come into the company. So it is apparent upon the face of the bill and exhibits that the so-called Brehm contract by its own terms never became a binding obligation or fixed the terms upon which Sperry & Jones were bound to effect the organization of the company, or on which Brehm was bound to convey his brewery to it when organized, or upon which a proposed consolidation of breweries was to be made. Nor does it appear that any attempt was ever made to put this contract into execution.

By reference to Exhibit “ C ” it appears that Brehm’s brewery went into