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 proceeds, 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 22d 1898, with a capital of 32,250 shares of preferred and 32,250 shares of common stock and 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 *Page 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 be 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 *Page 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 averring that they were so transferred by virtue of said contracts, represented an output for the preceding year of only 543,000 barrels against which the terms of the contracts would have permitted an issue of only $5,820,000 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 preferred and $2,750,000 of common stock.
That this issue of bonds and stock was authorized at a meeting of the company held on February 15th, 1899, by the presentation to a stockholder's meeting and the acceptance by the 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 *Page 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 subsequently 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 *Page 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, 1899, 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 to 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 with full knowledge of the relation of Sperry Jones to the company and of the terms of the contracts under which the breweries were to be acquired 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 them 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 *Page 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 unlessthe above-enumerated breweries, companies and individuals becomepart 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 *Page 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 the company not at the price of $1,050,000, fixed by this contract, of which $450,000 were required to be paid in cash, but that it went in at the price of $925,000, of which no part was paid in cash, but $400,000 was paid in the bonds and the residue in the stock of the company. Moreover, the brewery was not acquired by the company from Brehm or the price paid by it to him, but it was acquired from Sperry, Jones Co. in payment for stock and bonds issued to them. Not only, therefore, does it appear from the exhibits that the Brehm contract by its own provisions never become binding and operative but also that his brewery was not acquired by the company from him or under the terms of that contract.
If we turn now to an examination of the contract between Strauss and Sperry Jones we find that it was one for the out and out sale by the former to the latter of the brewery therein mentioned at the price of $1,100,000, of which $890,000 was to be in the preferred and common stock of the company and the balance in cash or bonds of the company as Strauss might prefer. This contract contains no provision whatever, such as is found in the Brehm contract, stipulating that it is to be assigned to the company or any statement that it was made for its account or on its behalf. The contract does provide that the property to which it relates is to be paid for by Sperry Jones in bonds and stock of the company which are to be issued by it only to the extent of $20 per barrel of the total output for the preceding year of such breweries *Page 579 as shall be acquired by it, exclusive of cash or workingcapital, but as there is nothing in the contract giving rights under it to any other persons than the contracting parties no right of action would have accrued to the company or to its receiver from a breach of that provision if such breach ever in fact occurred.
There is an allegation in the bill that the various breweries were put into the company under the management of Sperry Jones at much higher prices than those fixed on them in the contracts with the various brewers, but when we turn to the only contracts produced by the plaintiffs we find that Sperry Jones turned in the Brehm brewery to the company at a distinctly less price than that mentioned in the contract on which the bill rests its allegations, and that the brewery mentioned in the Strauss contract was turned into the company at precisely the same price as that for which the contract filed with bill shows that he agreed to sell it to Sperry Jones. The exhibits filed with the bill not only fail to afford reasonable ground for making this allegation but directly contradict it.
Turning now to Exhibit "C" we find that when the breweries in question were finally acquired by the company they were taken by it not from the several brewers who had formerly owned them but from Sperry Jones, who must in the meantime have acquired them. It is entirely consistent with the exhibits on which the allegations of the bill rest that these gentlemen should have purchased the properties on their own account with a view to capitalize their combined value by turning them into the company in payment for its bonds and stock. The Brehm contract which was on its face made for the benefit of the company was a purely conditional one which was to become operative and take effect only upon the happening of events which the bill alleges never occurred. No inoperative contract like that could create a fiduciary obligation to the company on the part of Sperry Jones. The Strauss contract is not only consistent with but it in its terms contemplates that Sperry Jones are to acquire on their own account and not in a fiduciary capacity the property to which it relates. *Page 580
The bill itself alleges that Sperry Jones were the real owners of all of the company's stock issued prior to the meeting of February 15th, 1899. There was nothing unlawful in that condition of affairs, in the fact that some of the shares stood in the names of their employees or agents. Pott Co. v.Schmucker, Trustee, 84 Md. 535. Nor was there anything unlawful in their subscribing for the remainder of the stock and paying for it by a transfer to the company of the brewing properties at any fair price agreed upon if they owned or controlled and could procure the conveyance of those properties, and complied with the provisions of the law in such cases. The company could also validly purchase property suitable for the purposes for which it was incorporated and issue its bonds or other obligations in payment therefor. The presence of all the stockholders at the meeting of February 15th, 1899, over came any supposed difficulty from want or prior notice of the meeting even though the statute prescribed the notice. Cook on Corporations, vol. 2, sec. 599;Clark Marshall on Corporations, vol. 3, p. 1968, and cases cited by those two authors.
The transfer to a corporation, by a subscriber to its stock, of property under such an arrangement as was followed in this case, if the property were valued at a grossly exaggerated price, might it is true not constitute payment in full of the stock so as to protect him from liability to its creditors in a suit brought by them under the provisions of sec. 64, Art. 23, of the Code.Basshor v. Dressel, 34 Md. 511-512. But this is not a suit of that character.
There could have been, under the conditions of the meeting of February 15th, no concealment of the true situation from any of the real stockholders for they were the same persons as the vendors of the property to the company. It was simply a changing by Sperry Jones of the form of property owned by them, or under their control for that purpose, from individual estate to corporate securities. The public were not invited to subscribe to any stock. It was perfectly well-known by the parties to the transaction that the full $7,500,000 of *Page 581 bonds were also being issued for the property. The bill itself alleges that "there were issued by the Maryland Brewing Companyagainst the properties therein set forth $7,500,000" in first mortgage six per cent gold bonds."
When Sperry Jones afterwards sold or disposed of the bonds and stocks to the brewers or to the public either directly or through the agency of their co-defendants they were bound to exhibit the same candor and practice the same good faith toward the persons with whom they dealt that all vendors are and if they failed to do so they were liable to their vendees in proper proceedings seasonably instituted for damage or for a rescission of the sales as we held in the case of Brehm v. Sperry, Jones Co., 92 Md. 378, but that issue is not presented in this case brought by the receivers.
The proposition that no fraud is involved in the transmutation of property suitable to the purposes of a corporation into the form of corporate securities in the manner adopted by Sperry Jones in the present instance has been recently decided, after a full examination and discussion of the subject, by the House of Lords in Salomon v. Salomon, App. Cases 1897, p. 22, and was also adopted in In re Ambrose Lake Tin Co., L.R., 14 Chy. Div. 390. Mr. Morawetz in sec. 290 of vol. 1 of his work on corporations takes the same view saying: "The vendor of the property in truth took back what he gave. He placed the property in the corporate name, and at the same time practically became the corporation by becoming its sole stockholder. Evidently no one was injured by that transaction. If subsequent transferees were deceived by the false representation that the amount of shares had in fact been paid into the treasury of the company, their claims should have been for the damages, caused to themselves individually through the false representation, and not for an infringement of the collective or corporate rights of the shareholders."
There is no real conflict between these authorities and those relied on by the appellant. In Gluckstein v. Barnes, L.R. App. 1900, p. 240, and Erlanger v. New Sombrero PhosphateCo., L.R., 3 App. Cases, 1218, the promoters had a secret *Page 582 profit in the land which the corporation was formed to take over, and they issued a prospectus which did not disclose that fact and thereby induced other persons to subscribe to the stock. The same thing is true of the case of the Yale Gas Stove Co. v.Wilcox, 25 L.R.A. 90, with the aggravation that the promoter who had a secret profit in the property turned in to the company induced persons to put their money into the enterprise by the false representation that they would stand upon exactly the same basis that he did.
In Hooper v. Central Trust Co., 81 Md. 559, Hooper's executors sold a lot of ground to Hammond a promoter to be paid for in part by second mortgage bonds of a corporation to be formed to take over the land. It was agreed as part of the terms of sale that certain things should be done by the corporation tending to give value to the land. The corporation when formed put a first mortgage on the land under circumstances which this Court held to constitute a fraudulent breach of the agreement with the vendors of the land who had taken $100,000 of the second mortgage bonds in part payment for it. Under these circumstances when the corporation defaulted in the interest on its bonds and foreclosure proceedings had been instituted the Court, upon thepetition and cross-bill of the defrauded vendors, finding that the holders of the first mortgage bonds were not bona fideholders gave the second mortgage bonds held by the vendors of the land priority over the first mortgege bonds in the distribution of the proceeds of the foreclosure.
The true test of the responsibility of parties occupying positions such as Sperry Jones did in putting the brewing properties into the company in this case, is whether other persons than themselves hold stock in the company and are not made aware of the true state of facts, or are induced to come into it by concealment or misrepresentation of the facts, or have furnished all or part of the capital embarked in the enterprise and are misled or kept in the dark as to the actual transaction. In other words, the ground of their liability is the concealment or misrepresentation by those whose duty it is, by virtue of *Page 583 their relation to the other persons interested in the transaction, to make a full disclosure.
It is a misuse of terms in the present case to say that Sperry Jones stood in a fiduciary relation to the company at the time they made the contracts with the brewers or when they turned the property into the company in payment for its stock and bonds. They at that time held all of its stock and were the sole owners of the company. They were in equity the company itself. Swift v. Smith, Dixon Co., 65 Md. 428. There was no invitation to others to subscribe for the stock.
The relations of Sperry Jones to each of the brewers were it is alleged in the bill fixed by a separate contract. Assuming that these contracts called for the delivery by them to the respective brewers of bonds and stock of the company capitalized upon a certain basis and that they delivered securities issued upon a different basis of capitalization, that might afford to each individual brewer a right of action against Sperry Jones for such damage as he suffered under the terms of his particular contract, but these various contract rights of the different brewers cannot be asserted collectively in this suit by the receiver.
When Sperry Jones offered any of the bonds, or stock issued to them by the company for barter or sale to other persons and thus as it were invited them to become interested in the enterprise they were bound as we have already said to practice no concealments towards those persons and to give them all desired information as to their own relation to the company, but this like their duty to the contracting brewers, was an obligation to each person with whom they so dealt and the rights of their several vendees in case of a breach of the obligation are several and according to the nature of the particular transaction and cannot be collectively asserted in this suit. In fact the bill does not allege that any of the present bond or stockholders were the original holders of those securities or that they received them from the defendants or from either of them. Such an allegation has in several cases been held to be necessary to enable a receiver to maintain a suit of this *Page 584 character even when it is free from the other objections existing in the present case. Dimpfel v. O. M.R. Co.,110 U.S. 209-10; Robinson v. W.V. Loan Co., 90 F.R. 770-2.
We do not think that the bill states a good cause of equitable action in the receiver against Sperry Jones and still less does it do so against the other appellees and we will affirm the decree appealed from.
Decree affirmed with costs.
(Decided February 11th, 1903.)