Maryland Trust Co. v. National Mechanics' Bank
| Decision Date | 11 January 1906 |
| Citation | 63 A. 70,102 Md. 608 |
| Parties | MARYLAND TRUST CO. v. NATIONAL MECHANICS' BANK. SOLTER et al. v. SAME. |
| Court | Maryland Court of Appeals |
Appeals from Circuit Court No. 2 of Baltimore City; Thomas S. Baer Judge.
Application by the National Mechanics' Bank for the allowance of a claim against the Maryland Trust Company and the receiver thereof. From an order overruling exceptions to the claim filed by the trust company and several shareholders thereof the trust company and John Solter and others, as stockholders therein, separately appeal. Reversed.
Argued before McSHERRY, C.J., BRISCOE, BOYD, PEARCE, JONES, and BURKE, JJ.
John F Williams, Frank Gosnell, E. P. Keech, Jr., and Wm. L Marbury, for appellants.
Edgar H. Gans and Randolph Barton, for appellee
These are appeals from an order passed by circuit court No. 2 of Baltimore City on July 31, 1905. By that order certain exceptions filed by the Maryland Trust Company and also several shareholders of that company against the allowance of a claim preferred by the National Mechanics' Bank of Baltimore were overruled, and the receiver of the trust company was ordered to pay the claim out of any assets of the trust company in his hands after the payment in full of the claims of all other creditors of the trust company. From that order both the Maryland Trust Company and the objecting shareholders have appealed.
The questions involved are numerous and important, and the amount of money at stake is large. The record and the briefs are voluminous, the cases have been argued with marked ability, and we have given to them a patient and careful consideration. Before stating or discussing the questions which are before us, a brief outline of the material facts must be given, and this we now proceed to do.
By an act of the General Assembly of Maryland approved on March 29, 1894, being chapter 164, p. 215, of the Acts of the January Session of that year, the Maryland Trust Company was incorporated. It was duly organized and began business under and pursuant to its charter. In March, 1901, a merger of the Guardian Trust Company in the Maryland Trust Company was proposed, and its accomplishment was undertaken by Mr. John B. Ramsey for a consideration of $100,000 to be paid to him by the Maryland Trust Company. The basis upon which the merger was to be effected was the exchange of two shares of Guardian Trust Company stock for one share of Maryland Trust Company stock; that ratio being adopted because it was considered that one share of the last-named company's stock was worth as much as two shares of the Guardian Trust Company's stock. In a short while Mr. Ramsay secured at least 60 per cent. of the Guardian Trust Company's shares for exchange under the merger agreement and was paid his stipulated fee of $100,000. There were, however, left outstanding quite a number, approximately 4,000, of Guardian Trust shares, the owners whereof seemed indisposed to go into the merger scheme because they believed the value of the Maryland Trust Company shares was not equal to double the value of the Guardian shares; and this belief had its origin in the fact that the market values of the respective shares did not show a ratio of two to one. A further disturbing element made its appearance on March 23d in the shape of an offer by Hambleton & Co., published in the Sun of that day to pay $110 a share for the Guardian Trust stock, provided a majority of the stock of that company was deposited with them by the 1st of April, 1901. On March 23d Maryland Trust Company stock was selling at $205 a share, though three days before it brought $214 per share. The officers of the Maryland Trust Company were anxious to get in all the shares of the Guardian Trust Company, and when this "obstacle" and "hitch in the deal," occasioned by the want of parity in the market value of the two stocks and the depression in the Maryland shares confronted them, they applied to Mr. Ramsay (whose contract to secure a majority of the Guardian Trust Company's stock had then been executed and completed) with a view of procuring aid to buy and carry the amount of Maryland Trust stock necessary to overcome the raid being made by Hambleton & Co. "We approached Mr. Ramsay on the matter," so Mr. Scott testified, "and he was perfectly willing to do as we suggested, and, in fact, thought it a very wise proceeding, but said that he could not lend the Maryland Trust Company enough money to buy the stock and the obligations would have to be given in somebody else's name, with the Maryland Trust Company as guarantor." At that time Mr. Ramsay was, and still is, the president of the National Mechanics' Bank, and when the application was made to him to buy and carry the Maryland Trust Company's stock, so as, by that means, to raise and maintain the apparent market price thereof in order thereby to influence the outstanding holders of the Guardian Trust Company's stock to part with their shares on the basis fixed in the merger agreement, he was approached, not individually, but as the representative of the bank, and the transactions which immediately ensued brought the Mechanics' National Bank into the negotiations for the first time. As soon as the proposal to go upon the stock market and buy shares of the Maryland Trust Company for the Maryland Trust Company for the purpose indicated was suggested to and approved of by Mr. Ramsay, he proceeded to carry out the plan through a broker with whom he had been formerly associated as partner and also through other firms of brokers. As the stock of the Maryland Trust Company was bought, the bills in most instances were made out in the name of the Mechanics' Bank as purchaser, and upon presentation of the bills to the bank, accompanied by the shares, transferred in blank, they were paid generally, if not invariably, by checks of the bank's cashier. The shares were treated as cash items until a considerable amount expended in their purchase had accumulated, and then a receipt, to escape the payment of the revenue tax, subsequently changed to a note of, and signed by, some employé of the Maryland Trust Company, was given to the bank for that amount, and was guarantied by the Maryland Trust Company, and the shares of stock so purchased were pledged, at the market value paid for them, as collateral security. This process was repeated and carried on until the bank had paid out for 1,311 shares of the Maryland Trust Company's stock sums which, with interest added, now aggregated $285,763.48. This is the claim which the bank now seeks to have repaid out of the assets of the Maryland Trust Company in the hands of its receiver. There is no doubt that the trust company was entirely solvent when these transactions took place; but, from other causes, it was placed in the hands of a receiver in October, 1903. The company itself and its stockholders resist the payment of this claim upon several grounds, the more important whereof are the only ones we need consider or determine.
The form in which the transactions with the bank were couched excluded on its face the theory that the trust company was primarily liable to repay to the bank the sums advanced by the latter for the purchase in the open market of the stock of the former, because the receipts, later on replaced by the notes, given to the bank for the amounts so advanced, were the promissory notes, not of the trust company, but of three employés of the trust company, and the liability of that company on those notes was the liability of a guarantor, and therefore purely a secondary obligation. The books of the bank do not show an entry of any kind indicating that the trust company was an original debtor to the bank on account of these advances. The form in which these dealings were thus put was adopted with the distinct and avowed view of avoiding an open and apparent infraction of section 5200 of the Revised Statutes of the United States, [U. S. Comp. St. 1901, p. 3494], which prohibits a national bank from lending to any person, company, corporation, or firm more than 10 per cent. of the bank's capital. But, waiving these preliminary objections and treating the trust company as the primary debtor to the bank, it is settled by repeated decisions of the Supreme Court that no one except the Government itself can take advantage of a violation of section 5200 (Union Mining Co. v. Rocky Mt. Bk., 96 U.S. 640, 24 L.Ed. 648), and we are then brought to a consideration of the more serious and substantial difficulties which confront the bank in its efforts to get reimbursement for these advances from the assets of the trust company.
The trust company and its stockholders resist the demand of the bank on the ground that the contract entered into between Mr Ramsay, in behalf of the bank, and the officers of the trust company, in behalf of that institution, is both illegal and ultra vires; and it is insisted that the contract is illegal and ultra vires, first, because it contemplated and provided for a "rigging" of the stock market; secondly, because the purchase for the trust company of the shares bought pursuant to the terms of the contract withdrew from its creditors and depositors and the remaining shareholders the protection afforded by the double liability imposed upon the owners of its stock by the express provisions of its charter, and illegally reduced the amount of the capital stock; thirdly, because the executive committee, if it even did direct the officers of the trust company to enter into the contract--which is denied--had no power or authority to give such direction; fourthly, because, treating the advances as direct loans by the bank to the trust company, the lender made it a part of the contract of lending and borrowing, that...
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