Crest Inv. Trust, Inc. v. Comstock, 926

• Decision Date: 15 November 1974
• Docket Number: No. 926,926
• Citation: 23 Md.App. 280,327 A.2d 891
• Parties: CREST INVESTMENT TRUST, INC., et al. v. Richard U. COMSTOCK et ux.
• Court: Court of Special Appeals of Maryland

Page 280

23 Md.App. 280

327 A.2d 891

CREST INVESTMENT TRUST, INC., et al. v. Richard U. COMSTOCK et ux.

No. 926.

Court of Special Appeals of Maryland.

Nov. 15, 1974.

Allan A. Noble, Chevy Chase, with whom were Joseph Patrick Clancy, Michael J. Budow, Clancy & Pfeifer, Chevy Chase on the brief for appellant Sidney Kaplan.

John Noble, Rockville, with whom were Joseph B. Simpson Jr., and Simpson & Simpson, Rockville, on the brief for other appellants.

Landon Gerald Dowdey, Washington, D. C., with whom were Dowdey & Urbina, Washington, D. C., William F. Abell, Jr., Heeney, McAuliffe & Rowan, Rockville, on the brief, for appellees.

Argued before POWERS, DAVIDSON and MOORE, JJ.

MOORE, Judge.

This appeal arise in the aftermath of a financial disaster involving a small business launched in 1964 on part of a 118 acre tract of farmland near Woodsboro, in Frederick County, Maryland. The enterprise involved the breeding of guinea pigs and other small animals for use in laboratory research.

The proceedings in equity below were upon the bill of complain of Mr. and Mrs. Richard Comstock, appellees, to enjoin the foreclosure of the farm and improvements, to enforce a trust by a reconveyance of part of the tract, to set aside a mortgage, for damages and other relief.

After a 7-day trial, the Chancellor granted a substantial part of the relief prayed. He held that there was an attorney-client relationship between the Comstocks and one of the appellants, Sidney Kaplan, Esq.; that because the attorney-client relationship also existed between Mr. Kaplan and the appellant, Crest Investment Trust, Inc., and certain of its subsidiaries (with the knowledge of all parties), the attorney was under a fiduciary duty to make an adequate disclosure of all factors involved in an agreement between the Comstocks and Cries dated November 30, 1967, which revised a previous agreement between the parties dated July 21, 1966; that such disclosure had not been made; and that this constituted a breach of the fiduciary relationship because the agreement was unfair to the Comstocks and preferential toward Crest and its subsidiaries.

The court enjoined the foreclosure, ordered the exercise by Crest and/or its affiliated companies of an option under the 1966 agreement to purchase 97 acres of the Comstock farm, free of mortgages or other encumbrances and granted alternative relief in the event of the non-exercise of the option.

I Summary of Facts and Relief Ordered

In 1964, Mr. and Mrs. Comstock began a potentially promising venture ¹ in the breeding of small animals for laboratory research under the corporate title of Copper Oaks Farms, Inc., after borrowing $65,000 from the Farmers and Mechanics National Bank of Frederick, secured by a mortgage on the 118 acres owned by them as tenants by the entirety. The proceeds of the mortgage loan were substantially consumed in constructing and equipping a building for the purpose of the business on approximately three acres of the tract. Mr. Comstock at that time was a plumber with a record of modest earnings. Mrs. Comstock was a school teacher in Frederick. Before coming to Maryland in 1953, Mr. Comstock's principal occupation was that of toolmaker, instrument designer and modelmaker. He had conceived-but had not perfected-an automated feeding and waste removal system to be used in uniquely designed buildings for the purpose of producing animals for research. His income projections for the business were in the range of $400,000 per year.

Pressed by business creditors and in dire need of capital, Mr. Comstock was introduced to appellant, Crest Investment Trust, inc. in the spring of 1966. Crest, which had been established in 1956, was essentially a commercial banking institution specializing in providing funds for small businesses. Its general counsel and chief executive officer was the appellant, Sidney Kaplan, Esq. The company rejected a loan application by Mr. Comstock in the sum of $25,000. Shortly thereafter, and at a time when foreclosure of the farm was imminent, a change in policy of Crest occurred, permitting equity participations in small business promotions 'where the loan application showed good possibilities for business appreciation.' After a period of negotiations with Mr. Comstock, and investigation of the potential of his business, Cret entered into a written agreement with the Comstocks on July 21, 1966. The agreement was prepared by Mr. Kaplan, who was designated in the instrument as the attorney for the parties to prepare all appropriate documents to implement its terms. It was testified by Mr. Comstock that prior to execution of the agreement he suggested that his own counsel ² examine its contents but that Mr. Kaplan replied: 'Save your money, I am your attorney'-a statement denied by Mr. Kaplan but confirmed by a former member of the Crest Board, Mr. Hy Perry.

The July 1966 agreement, characterized by the Chancellor as 'fair' to all concerned, contemplated the formation of a new corporation (referred to as 'New Corporation') to carry on the amimal breeding business. The substantive provisions may be summarized as follows:

1. Crest would pay into New Corporation $10,000 for which it would receive 9% non-voting preferred stock ('in the amount of $9,000'), plus 800 shares of common voting stock at no par value. New Corporation agreed to give the Comstocks an option for 200 shares of common voting stock, to be issued for $1.00 'at anytime after the existing mortgage with Farmers and Mechanics Bank of Frederick' shall have been paid; and upon the same conditions, the Comstocks would have an option to purchase a one acre parcel upon which their residence was located for the price of $1.00. (Emphasis added.)

2. The Comstocks agreed to deed the 115 acres to New Corporation which would assume the liability of the mortgage of approximately $65,000. The Comstocks also would transfer and assign the buildings, chattels and equipment free of any claims of their own or of their corporation (Copper Oaks Farms, Inc.). ³

3. 'Upon satisfaction of all present corporate and mortgage debt' New Corporation would select 18 acres out of the tract and retain that parcel. With respect to the balance of the 97 acres New Corporation would either:

(a) Convey the 97 acres back to the Comstocks for the price of $1.00; or

(b) retain any or all of the 97 acres and pay the Comstocks at $500 per acre over a five year period. Any portion not thus purchased would be conveyed to the Comstocks for $1.00.

(Emphasis added.)

4. New corporation agreed to assume general trade debts of the Comstocks in the sum of approximately $12,000.

5. An employment agreement would be entered into between New Corporation and Mr. Comstock at an annual salary of $7200 for one year, plus 15% of the net profits of New Corporation and a directorship therein.

6. During the period that New Corporation would hold ownership of the 115 acres, it would lease to the Comstocks their residence at a monthly rental of $100. Contingent upon securing life insurance on Mr. Comstock in the sum of $50,000, it would also create a death benefit for Mrs. Comstock in the sum of $5,000.

7. Crest agreed to give Mr. Comstock a three-year option to purchase up to 3000 shares of Crest stock at $8.75 per share, payable in monthly installments over a three-year period from the date of exercise of the option. Crest also agreed to either loan or pledge its credit to secure a loan for New Corporation in the sum of $15,000.

8. At the sole option of Crest, the contract was contingent upon securing an agreement from Farmers and Mechanics Bank that 'interest only' would be due on the mortgage for a period of one year and an agreement from the Frederick Gas Company that Comstocks' account be paid in installments for 12 months, the balance to be due thereafter.

9. Upon formation of New Corporation the stockholders would execute a Buy-Sell agreement.

10. Sidney Kaplan was designated as attorney 'for the purpose of drawing the papers and documents,' reasonable compensation thereof to be assumed and paid by the Comstocks and Crest equally.

Mr. George Conover, a mortgage banker, realtor and insurer, who introduced the Comstocks to Crest management and testified below, had made an appraisal of the Comstocks' property in November, 1965, as follows:

Subsequently, on September 12, 1966, Mr. and Mrs. Comstock conveyed the entire property to 'New Corporation' which had been organized under the name of Comstock, Inc., and the latter assumed the mortgage debt. The conveyance was drawn by Mr. Kaplan in the form of a deed absolute without reference to the provisions of the agreement including those pertaining to the option to purchase by Crest or the alternative reconveyance to Mr. and Mrs. Comstock of the 97 acres. Shares of stock in Comstock, Inc. were issued in the name of Mr. and Mrs. Comstock but were held in escrow by Mr. Kaplan, in accordance with the agreement.

In the following 12-month period, the venture did not prosper despite a substantial infusion of funds by Crest. One explanation was the inability of Mr. Comstock to put in operation his automated system for feeding and waste removal. By the late fall of 1967 Crest's total cash contributions and commitments came to $215,346 and there were still trade debts outstanding. Between February and November, 1967, the total income of Comstock, Inc. was less than $5,000 and there were no sales from July, 1966 through January 21, 1967.

Some time prior to November 30, 1967, a decision was reached that a professional veterinarian, W. H. Dieterich, with experience in the business of breeding small animals, would be brought into the business and that the July 21, 1966 agreement would be revised. Dr. Dieterich was hired to operate the business at a salary of $20,000, a five percent stock interest, life insurance and a pension plan. Negotiations with him were handled by Mr. Comstock and Mr. Perry, a Crest director.

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