Miller v. Hockley

• Decision Date: 06 January 1936
• Docket Number: No. 3886.,3886.
• Citation: 80 F.2d 980
• Parties: MILLER v. HOCKLEY et al.
• Court: U.S. Court of Appeals — Fourth Circuit

80 F.2d 980 (1936)

MILLER v. HOCKLEY et al.

No. 3886.

Circuit Court of Appeals, Fourth Circuit.

January 6, 1936.

Isaac Lobe Straus, of Baltimore, Md. (J. Wallace Bryan, of Baltimore, Md., on the brief), for appellant.

George Moore Brady and Hilary W. Gans, both of Baltimore, Md. (James U. Dennis, of Baltimore, Md., on the brief), for appellees.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

NORTHCOTT, Circuit Judge.

This is a suit instituted by the appellees, herein referred to as the plaintiffs, against the appellant, herein referred to as the defendant, in the District Court of the United States for the District of Maryland, in October, 1933, to recover on several promissory notes aggregating $628,125, with interest. The appellees had been appointed, and duly qualified, as receivers of the Davison Realty Company, a corporation, and the notes were payable to that corporation. By leave of court, the receivers were authorized to institute suit against the defendant on said notes.

The defendant demurred to the declaration on the ground that the court was without jurisdiction; that the plaintiffs did not have authority to institute said suit; and that the suit was instituted without authority of law; which demurrer was overruled. The defendant then filed three pleas, the first and second of which were the general issue pleas, and the third, a special plea alleging that all the amounts of money mentioned in the promissory notes sued on were advanced and paid to, and for the use, avail, and benefit of, the Davison Chemical Company, a corporation, and were not advanced or paid to the defendant for his own use, but solely and wholly for the purpose of purchasing stock of the Davison Chemical Company, which company owned all of the stock of the Davison Realty Company, and that the defendant had applied and expended said money for that purpose. The third plea further alleged that the Davison Realty Company and the Davison Chemical Company fully understood and had agreed that said sums of money were not advanced to and used for the account of the defendant.

Plaintiffs demanded particulars of the defendant's first and second pleas, and demurred to the third plea, which demurrer was overruled by the court below. Answering the plaintiff's demand for the particulars on his first and second pleas, defendant alleged that he did not owe the receivers the amount, or any part thereof claimed and that the Davison Chemical Company had been and was liable to the Davison Realty Company or its receivers for the whole of said amount of said claim; that no consideration passed from the realty company to the defendant for the notes mentioned, or any of them, or for the sums which said notes represented, but that the whole of such consideration was for the benefit of the chemical company; and giving other particulars of the transaction as the defendant claimed it to have been.

Plaintiffs then demurred to the defendant's first and second pleas and also filed motions to strike out parts of the defendant's bill of particulars, which said motions were overruled by the court with leave to raise the questions during the course of the trial. The court overruled the plaintiffs' demurrer to the particularized first and second pleas and issue was then joined on the pleas. The case then went to trial and the jury, after the charge and instructions of the court, returned a verdict for $779,812.69 for the plaintiffs, with interest and costs.

The Davison Chemical Company has been, for many years, a large industrial corporation engaged in the fertilizer business, owning and operating, either directly or through subsidiaries, besides its main plant, which employed a large number of people, plants in many eastern states. It owned a very large tract of land in the neighborhood of its main plant at Curtis Bay, Baltimore, Md. In the year 1928 it caused a corporation to be organized under the name of the Davison Realty Company and formed certain plans for the development of the land and conveyed to the realty company about 300 acres of land. The defendant had been, for many years, the president and a director of the chemical company and, after the formation of the realty company, became president and a director thereof. The realty company had no cash or assets other than this land. The capitalization of the realty company was fixed at 5,000 shares of no par value stock, which made up the whole of its capital stock, and the chemical company took all of this stock for the land which it had conveyed to the realty company. The officers of the two corporations were virtually the same and the chemical company controlled and dominated the realty company through a board of directors and officers selected, by the chemical company, from its own organization.

In the year 1930 negotiations were begun looking to the sale of securities proposed to be issued by the realty company, the proceeds of which sales were to be used, at least in part, for the development of the land owned by the realty company. As a result of these negotiations, certain brokers and bankers agreed to sell a note issue to the public and it was agreed to give them, as a part of their compensation in the transaction, an option to buy 30,000 shares of the stock of the chemical company at a beginning price of $30 increasing from year to year thereafter until the option price ran up to $75 a share. It was further agreed, as a part of the financial plan, that the notes of the realty company should carry what were called option warrants, which gave the privilege to the holder of each $1,000 par value of the stock of the realty company notes to subscribe to 10 shares of the stock of the chemical company at the rate of $30 a share up to September 30, 1931, and at an increased rate for subsequent years.

Securities of the realty company aggregated the principal amount of $2,000,000, and these notes were guaranteed by the chemical company. The proceeds of the issue of the realty company notes amounting, less commissions and expenses, discount, etc., to $1,849,000 were paid to the realty company by check dated October 28, 1930, which check was in turn indorsed by the realty company and deposited in the account of the chemical company and an entry made on the books of the chemical company showing a credit to the realty company of this amount. On October 30, 1930, at a meeting of the directors of the realty company, two days after the receipt of the purchase price of its notes, the following minutes were entered and the following resolution passed:

"The Treasurer called the attention of the Board to the fact that the funds in the Company's treasury resulting from the sale of $2,000,000 par value of ten year Debenture Notes were in excess of any immediate needs, after advances made to it by the Davison Chemical Company had been repaid, and recommended that loans to the extent of $1,500,000 be made. An application for loan of $500,000 had been received from Mr. C. Wilbur Miller, and a loan of $1,000,000 from the Davison Chemical Company. After full discussion the following resolution, duly made and seconded, was unanimously passed:

"`Resolved that the Treasurer of the Company be and is hereby authorized to loan the amount of $500,000 from the Company's treasury to Mr. C. Wilbur Miller on his demand note, and the further sum of $1,000,000 from the Company's treasury to the Davison Chemical Company on its demand note, both notes to bear interest at the rate of 7 per cent per annum.'"

The theory upon which the resolution was passed was that all the money borrowed by the realty company would not be used, at least immediately, for the purpose of developing the land it owned and that the surplus would be lent at interest. On various dates from October 27, to December 23, 1930, the defendant received checks from the chemical company in the total amount of $628,125. On the same dates on which he received these various amounts the defendant delivered to the treasurer of the realty company (who was also the treasurer for the chemical company) his demand promissory notes payable to the realty company for the respective amounts received. As the chemical company issued these checks to the defendant, it charged the realty company with the amounts paid. On September 24, 1931, the defendant submitted to the board of directors of the realty company and the board passed the following resolution:

"Whereas, the Board has heretofore authorized an advance of $...