Munich Re-Insurance Co. v. United Sur. Co.

• Decision Date: 06 May 1910
• Citation: 77 A. 579,113 Md. 200
• Parties: MUNICH RE-INSURANCE CO. v. UNITED SURETY CO.
• Court: Maryland Court of Appeals

77 A. 579

113 Md. 200

MUNICH RE-INSURANCE CO. v. UNITED SURETY CO.

Court of Appeals of Maryland

May 6, 1910

Appeal from Circuit Court of Baltimore City.

Bill by the Munich Re-Insurance Company against the United Surety Company. From a decree dismissing the bill and in favor of defendant for affirmative relief demanded in its answer treated as a cross-bill, complainant appeals. Affirmed.

Argued before BOYD, C.J., and BRISCOE, SCHMUCKER, BURKE, THOMAS, and URNER, JJ.

R. E Lee Marshall, Arthur George Brown, and Edgar H. Gans, for appellant.

Edwin J. Farber and Joseph C. France, for appellee.

BOYD C.J.

This is an appeal from a decree which dismissed the bill of complaint of the Munich Re-Insurance Company filed against the United Surety Company, decreed that the defendant was entitled to cross-relief as prayed in its answer, and referred the cause to the auditor to ascertain and report the amount, if any due by the plaintiff to the defendant under what is called a "participation contract." The bill charges that the Munich Company was induced to enter into and execute that contract with the surety company through false and fraudulent representations of material facts on the part of the surety company and certain of its officers. It alleges that upon discovery of the frauds the Munich Company rescinded the contract, and notified the surety company that, by reason of said frauds, the contract was null and void from the beginning, but that the surety company had denied the right of the Munich Company to rescind the contract, and had instituted a suit at law to recover damages against it, under the terms and provisions of the contract. It then prayed that a decree might be passed declaring the contract null and void, and canceling it, and also praying for an injunction restraining the surety company from further prosecuting the suit at law. The defendant answered the bill, and neither admitted nor denied the allegations of fraud set out in it but called for strict proof thereof. It further alleged that it was immaterial whether the charges of fraud and misrepresentations set out in the bill were true or not, for the reason that the plaintiff had ratified and confirmed the contract in question, and had waived any right to rescind it, after discovery of the frauds and with full knowledge thereof. By way of cross-relief, the defendant then charged that the plaintiff was indebted unto it under the provisions of the contract in a large sum of money, and prayed for an accounting and a decree in its favor for such amount as might be found to be due. The Munich Company answered the allegations for cross-relief, alleging that, apart from and in addition to the invalidity of the contract by reason of the fraud and misrepresentations charged in the bill, the surety company was not entitled to relief because at the time of the execution of the contract it had not come into being, had no corporate existence, and was legally incapable of having or exercising any of the rights or privileges contained in its charter, and was legally incapable of executing or entering into the contract because by its charter it was a condition precedent to acquiring or having any corporate existence or exercising any corporate powers that all of the capital stock of the surety company, to wit 5,000 shares, should first be subscribed for, and that 50 per cent. should first be paid in cash, while a large part was unsubscribed for, and far less than 50 per cent. had been paid in cash. The authorized capital of the surety company was $500,000, divided into 5,000 shares, of $100 each. It was determined that the stock be subscribed at $150 per share, thus making a surplus of $250,000, in addition to the authorized capital. Olin Bryan, the then president of the surety company, entered into negotiations, in the early part of 1906, with Carl Schreiner, who had charge of the "Foreign Department" of the Munich Company, and had his headquarters in London, but spent part of his time in this country, with a view to making a contract with the Munich Company, whereby it should undertake, up on terms to be agreed upon, to participate in some part of the business of the surety company, and also requested the Munich Company to become a subscriber to the capital stock of the surety company. The bill alleges that in the course of the negotiations between them it was understood and agreed as a condition of the Munich Company entering into the contract and subscribing to the stock that the whole capital should be subscribed and actually paid into the treasury at the rate of $150 per share, without discount or rebate to any one, so that the entire capital of $500,000 and $250,000 of surplus should be actually paid in cash and be available for the purposes of the business of the surety company. It was agreed that, upon those terms, the Munich Company would take 333 shares, at $150 per share, and, in order to have a definite and official confirmation of the representations and statements of said Bryan, on March 24, 1906, Schreiner wrote to the surety company requesting it to deliver to the banking firm of Ladenburg, Thalmann & Co., of New York, the 333 fully paid shares of stock, together with a statement as to its capital, etc. On March 30, 1906, Bryan, as president, wrote to the banking firm stating that all the shares had been subscribed for at $150 per share, no discount or rebate being allowed on a single share to any stockholder, of which there was then paid $443,000 in capital and $221,500 in surplus, making $664,500, which with the 333 shares subscribed by them would make a total of $714,500 which would leave an unpaid balance of $35,550, being 237 shares, and that all of the capital and surplus would be paid on or before the 15th of April, 1906. The amount of the Munich Company's subscription to the stock was duly paid by two drafts, and the contract, which is at times spoken of in the record as a "participation contract," and in other places as a "reinsurance contract," was executed in duplicate by the surety company on March 20th, and by the Munich Company on April 10, 1906--the duplicates having been sent to the home office at Munich, Bavaria, for execution by that company.

Amongst other provisions in the contract article 8 provided for a detailed account by the surety company to the Munich Company of certain income and disbursements, and article 9 in part is that: "If the account provided for in the preceding article shows a profit, the 'Munich' shall receive one-third 1/3 thereof as its share under the terms of this agreement. If the said account shall show a loss, the 'Munich' will pay one-third 1/3 of said loss to the United." The bill alleges that approximately 2,312 1/2 shares were unsubscribed and unpaid, and only 2,687 1/2 shares (including what the Munich Company paid) actually subscribed and paid for; that the plaintiff and its agent, Schreiner, were at the time of making the contract and making the subscription, respectively, entirely ignorant of the true and actual condition of the defendant, and relied on the representations and statements of Bryan, which were false and fraudulent. It is later in the bill alleged that, for reasons and considerations stated, the plaintiff did after the discovery of the frauds and misrepresentations, and upon the terms and conditions thereafter set out, waive the said frauds and misrepresentations in respect to its contract of subscription to said capital stock, and ratified and confirmed it but at no time since the discovery of the frauds did it waive the same in respect to the participation contract. During the summer of that year it was discovered that a large number of the shares of stock were not in point of fact bona fide paid for, or subscribed, as Bryan had led the Munich Company and the officers and directors of the surety company, with perhaps one or two exceptions, to believe. Mr. Janney, who was a director and attorney for the surety company, at once began investigations, which resulted in having a special meeting of the board of directors and some others interested on the evening of August 25, 1906, at the company's building in Baltimore. The effort to show what took place on that occasion is largely the cause of this voluminous record of nearly 800 pages. We are relieved of discussing the falsity of the representations to the Munich Company as to the subscriptions and payment of the stock by the admissions in the appellee's brief.

The case is peculiar because it is admitted by the bill, and shown by the appellant's testimony, that it did on the evening of August 25, 1906, waive the frauds and misrepresentations in respect to the subscription to the capital stock, and that it ratified and confirmed its contract in reference thereto, but the controversy is whether it also waived its right to rescind the participation contract. That depends, outside of some questions of law, upon the facts and circumstances shown by the record, and therefore we are called upon to review them at some length.

Mr Schreiner sailed from this country for London about June 19, 1906, and did not return again until about the middle of October of that year. The firm of Ladenburg, Thalmann & Co. were the New York bankers of the Munich Company, and Mr. Walter T. Rosen of that firm represented the Munich Company in the surety company--having been elected a director in the latter part of March, 1906, as the representative of that company, although the shares of stock stood in the name of his firm. About the middle of August Mr. Janney requested Mr. Rosen to attend a meeting of the directors on account of certain developments, and shortly after that date apprised him of the nature of the troubles. At Mr. Rosen's instance the meeting was...