Cannon v. Brush Electric Co.

This appeal presents for the second time questions growing out of the alleged maladministration of the affairs of the United States Power and Light Company of Baltimore City by the Brush Electric Company of the same place. Sometime prior to January, 1893, one Augustus Davis and others, stockholders of the United States Company, filed a bill in the Circuit Court of Baltimore City on behalf of themselves and others for a receiver of the United States Company to prevent it being wrecked as alleged by the Brush Company. This was the beginning of the litigation which resulted in the appeal which was disposed of by this Court in the case of Davis et al. v. United States Electric Power LightCo. et al., 77 Md. 35. The history of the two companies and the relations existing between them are clearly given by PAGE, J., who delivered the opinion of the Court in the case just cited and we will reproduce it here. The United States Company was supposed to have been incorporated under the general incorporation laws of this State "for the purpose of manufacturing electricity for illuminating and for use as a power and for all other purposes to which electricity or magnetism may be applied and for buying and selling dynamo electric machines * * *. For a number of years it had been engaged in the business for which it was incorporated in the City of Baltimore * * *. The Brush Electric Company * * was also incorporated under the laws of this State for the purpose of conducting the same business, and, prior to the year 1886, was a rival and competitor of the United States Company in the City of Baltimore. To prevent the ruinous rate cutting and underbidding, which were the consequences of this rivalry, the Brush Company, in that year, became the purchaser of the majority of the stockof the United States Company on the invitation of the latter company or its stockholders. The affairs of the United Company seem to have been conducted to the satisfaction of both the companies until November, 1891, when the troubles began, which form the subject of complaint. The bill (in the Davis case) alleges that an election was held by the stockholders of the United States Company at which was chosen a board of directors, a majority of whom were persons principally interested in the affairs of the Brush Company, appointed by that company to carry out a policy dictated by the Brush Company as follows, viz.: First, to conduct the affairs of the United States Company "in the interest of, and in order to feed the Brush Company, at the expense of the stockholders, not interested in the said Brush Company; second, to permit it to earn only an income sufficient to provide for its running expenses and then to close up the affairs of the United States Company, and dispense with its operations, whenever it shall be found to be to the interest of the Brush Company." All the charges made against the Brush Company as well as the facts alleged to sustain them, were denied by that company, and it was averred in the answer of the Brush Company that so far as the officers and members of the Brush Company had taken part in the affairs of the United States Company they had been governed not only by the desire to give value to the Brush Company's large interest in the United States Company but to deal fairly and honestly with all concerned.

The case of Davis v. The United States Company, supra, came before this Court on the first appeal on the bill, answer and a large amount of testimony, and we held that the plaintiffs were not entitled to relief and affirmed the decree of the Circuit Court of Baltimore City dismissing the bill.

It appears that very soon after the former bill was dismissed Mr. A.G. Davis, one of the plaintiffs in that case, transferred 217 shares of his stock of the par value of $21,000 to Thomas J. Cannon, the plaintiff in this case, for $500, but Mr. Davis does not remember how this stock was paid for whether in cash or in certain stock of another company. At any rate, whatever may have been the consideration paid by Mr. Cannon he has filed this bill as a stockholder or member of the association of the United States Company re-affirming the charges made in the former bill and adding others of the same character against the defendant, the Brush Company. The bill filed in the case now before us alleges, in general terms, that for the purpose of using the United States Company for its own purposes and fraudulently intending, when it was for the interest of the defendant company, to destroy the plaintiff company, the plaintiff company was so mismanaged that it became insolvent and the prayer is, among other things, for an accounting upon the basis of a partnership; that a receiver be appointed to take charge of, protect and preserve the partnership property, c., pending a final decree, and to take such steps as may be necessary and to wind up the business, c., under the decree of the Court. Receivers were eventually appointed and finding, that owing to the crippled condition of company and the sharp competition for business to which it was subjected that it could no longer continue its business with profit, they asked and obtained leave to sell. The property was sold and the net proceeds of sale, together with the earnings of the business while in the hands of the receivers was distributed among general creditors and bondholders in September, 1897.

In the eighth paragraph of the bill the allegation of the plaintiff is that believing that the United States Electric Power and Light Company was a body corporate, the same being held out as such, he purchased and still holds 217 shares of the stock of said company; but that he has lately been informed that said company is not a corporation but a partnership, and that the members of said company stand in the position and are subject to the liabilities of partners.

It is conceded by both sides, and indeed the Circuit Court of Baltimore City so decided, and there has been no appeal from its decree in that respect, that neither of the two supposed corporations by the consolidation of which the United States Company was formed, had ever been legally incorporated and that hence the consolidated company itself had no legal existence as a corporate body.

And, therefore, the first and the only question of law presented by this appeal is, what is the legal relation existing between the stockholders (so called) of the United States Company, including, of course, among such stockholders the Brush Company, which owned three-fourths of the United State's Company's capital stock. The contentions of the plaintiff on this branch of the case are three; first, that the Brush Company in consequence of controlling and managing the property and business of the United States Company stood in the relation of an agent to said United States Company and its members, and owed to it and them the duties of that relation and was subject to its liabilities; or second, if not an agent, then the members of the United States Company, including the Brush Company, were partnersinter sese; or third, if neither an agent nor a partner, whatever name may be given to such an association as the members of the United States Company constituted, the Brush Company is directly responsible to those members for the acts complained of in this suit.

Remembering that the bill in this case is filed by one of the so-called stockholders of an illegally formed corporation it seems to us very clear that the first two of the plaintiff's contentions cannot be maintained.

In the first place it is nowhere in this case pretended that any of the stockholders of the United States Company ever intended to assume the responsibilities of an agent or a partner or indeed any other responsibility than that of a stockholder in a regularly and legally incorporated company under the laws of Maryland. Under these circumstances the managing stockholders or members of the United States Company cannot be held as agents, for there is no evidence to prove the fact of agency nor does the law imply such a relation under the circumstances of this case; nor can they be held as partners inter sese. In the case ofWaring v. Natl. Marine Bank of Baltimore, 74 Md. 278, attention is called to the recognized distinction between a partnership between the parties themselves and a partnership as to third parties which arises by operation of law. "But the question" said the Court "of partnership inter sese is one of intention and it may be laid down as a general rule that no such partnership can exist against the consent and intention of the parties. Bull v. Schuberth, 2 Md. 55." See also London Ass. v. Drennen, 116 U. S. 461; Paul v. Cullum, 132 U.S. 539. It is apparent from the evidence disclosed by the record not only that no partnership was intended, but that every body connected with the United States Company contemplated the formation of a corporation. The charter, or what was supposed to be a valid charter, is filed as one of the exhibits with the bill. It is but equitable, therefore, that the rights of the stockholders or members of the unincorporated association as between themselves should be governed by the terms and conditions and limitations set forth in the paper which they believed and understood to be a charter, that is to say, upon the articles, conditions and provisions therein set forth "and subject in all particulars to the limitations relating to corporations" formed under the general laws of this State.

If we are correct in this conclusion it follows that the rights of the United States Company and the Brush Company must be determined precisely as if both corporations, instead of only the Brush Company had a legal corporate existence. We then have before us the same question which was presented in the case ofBooth v. Robinson, 55 Md. 419, where it was held that the directors of the controlling company and the controlling company itself can be only held answerable for fraud, or such gross negligence in the management as amounted to fraud, and that the burden of proof in establishing such mismanagement was upon the plaintiffs.

The only remaining question, then, is whether the proof in this case, in view of what we have said in disposing of a similar appeal in 77 Md. 35, is sufficient to sustain the allegations of the bill now before us.

We have already referred to the fact that the allegations of fact of the present bill are to the same general effect as those of the bill in the former appeal, and the facts relied on in some instances are the same as those adduced to support the allegations of the former bill, together with additional facts not before brought to the attention of the Court. This branch of the case presents questions of fact, and they have been so fully examined and considered by the learned auditor of the Circuit Court in his report which was adopted by the Court below after a careful examination of the testimony on which it was based, that we do not deem it necessary to do more than state our conclusions based on our own examination of the record.

In the first place then let us state the grounds upon which the plaintiffs base their claim against the defendant company for nearly $350,000. In his report the auditor reduces them to five general heads as follows, and these five items are the same as those relied on by the plaintiffs in the Account X which was stated at his request. They are as follows:

1st. Total earnings of the Brush Company from all sources from October 13th, 1893, to December 1st, 1894, together with interest amounting to $339,851.01.

On October 13th, 1893, it appears from the testimony, that the plant of the Brush Company was destroyed by fire and the plaintiffs allege that immediately thereafter the United Company was ordered by the Brush Company not to take any more business until further orders by the latter company and that thereupon the Brush Company took possession of the United Company and its works and used them for the benefit and advantage of the Brush Company from October, 1893, to November, 1894, to the great detriment and loss of the United Company. After an examination of the testimony produced to sustain this item of the claim, we entirely agree with the conclusion reached by the auditor and approved by the Court refusing to allow this part of plaintiff's claim below. It appears from the testimony of the plaintiff himself that when the question was considered by the directors of the United Company — a majority of whom it is claimed really were representing the interests of the Brush Company and were put in the directorate for that purpose by the latter company — the sum of $1,500 per month was fixed upon as a reasonable rate per month to be paid by the Brush Company for the use of the power of the United Company in running the Brush Company's machines. The plaintiff objected to this allowance and asked if they (the board) could not make it $1,550 per month. The plaintiff testified that Mr. Clark thought the allowance of $1,500 per month was entirely too low "And" quoting "as he thought so I thought so too, and I made the proposition to try to get $50 more and failed," Under these circumstances it is difficult to believe that the plaintiff and those representing the minority and adverse interest in the United Company thought at the time that the amount actually allowed and paid by the Brush Company was unreasonably small, as there was only a demand for the small additional sum of $50. The clerk and book-keeper of the United Company testified that the day after the burning of the Brush Company's plant "there were a good many calls for lights which we" (the United Company) "did not fill for two reasons; one was we had an order from the Brush Company not to do anything in the matter of taking lights until we heard from them, and the other was, it was the fall of the year, and we were full of lights and I don't think we had much room to take any. The company was of small capacity." But in addition to this it abundantly appears that the Brush Company immediately after the fire installed a 60-light machine at McElderry's Wharf, and one of the defendant's witnesses testified that he was employed at the Brush works prior to and after the fire and that inside of three weeks after the plant was destroyed the Brush Company had at its own works two engines going capable of driving 500 horse-power; and that before the end of the year two other engines were going, one of about 240 and the other of 124 horse-power. The claim, therefore, that the United Company furnished the whole or any considerable part of the service to the Brush Company from October, 1893, to November, 1894, is far from being sustained by the testimony. Without further comment therefore upon this item, we are satisfied that the amount agreed upon and paid, viz., $1,500 per month, for the use of the power furnished by United Company to the Brush Company was fair and reasonable. Nor do we see that there was anything unfair or fraudulent in the action of the majority of directors of the United Company in using the money of the United Company in redeeming the ground rent on the United Company's works instead of purchasing and installing machinery in the United Company's works so that it could, as alleged, "reap the full benefit of the Brush Company's misfortune" for, as it turned out afterwards, the United Company was unable, even under the energetic management of the receivers, to compete with its rivals for business. Two other companies besides the Brush Company were in the field, and it necessarily followed that in the face of such competition the weakest company would go under.

2. The second item of the plaintiff's claim against the defendant, the Brush Company, relates to the receipts from the North Avenue and Lake Roland Elevated Railway Companies from January 1st, 1892, to June 30th, 1893. The claim, on the part of the plaintiff, is that the United Company is entitled to the whole of the money derived by the Brush Company with interest thereon, amounting to $13,453.62, because the Brush Company fraudulently deprived the United Company of the contract to serve the power to the railroad companies. This is substantially the same claim set up in the former appeal (77 Md. 35), where it was held that the contract was "lost by a policy which was adopted by the officers of the United Company, inaugurated for the benefit of that company," and that the Brush Company was not guilty of any fraudulent attempt to injure the United Company. The auditor also disallowed the plaintiff's claim based upon the theory that 66 per cent of the cost of operating the generators of the North Avenue Railway Company was an unjust discrimination against the United Company. Upon the testimony in the record quoted by the auditor and for the reasons given by him in his report we entirely agree with him, that this claim was properly disallowed. Speaking of this same transaction we said in 77 Md.: "The proof leaves it somewhat in doubt as to whether that company" (the United Company) "incurred loss in supplying the power under the new contract; the weight of the evidence, in our opinion, being that it did not. But it is shown that no complaint was ever made to the Brush Company or to anyone, that such was the fact." "The United Company," says the auditor, "continued to operate under these terms and to receive the 66 per cent." He therefore, as we have seen, refused to allow this second item of the defendant's claim, and we think he was right.

3. The third item is for gross profit on amount admitted by the Brush Company to have been realized by it from the business of the Northern Central Railway Company alleged to have been unfairly taken from the United Company by the Brush Company. This item amounts to $2,019.37. We have examined the testimony adduced to support this part of the plaintiff's claim and without discussing it in detail, we think it was properly disallowed.

4. The fourth item of the plaintiff's claim is for gross profits on business admitted by the Brush Company to have been done by it on Pennsylvania avenue and Patterson avenue in 1896 amounting to $182.66. This item appears to be based upon the theory that inasmuch as the United Company was the first to extend its lines on those streets — the Brush Company had no right to use them to serve its own customers. Surely the fact that the Brush Company owned a controlling interest in the United Company did not destroy the right it would otherwise have had to honestly and fairly compete with the United Company. We know of no principle of law regulating corporations situated as these two were which would sustain this contention of the plaintiff.

5. The fifth and last item of the plaintiff's claim is thus stated by him: Gross profits on earnings admitted by the Brush Company to have been made by it from sundry customers of the United Company, diverted from it by the Brush Company, viz: 40 per cent on $6,158.94 amounting to $3,245.81 including interest. A claim similar to this was discussed in the former appeal in reference to the order that all applications for lights should be referred to the secretary of the Brush Company. It was held in77 Md. 46, that the weight of testimony was to the effect that in deciding which company should take a contract a reasonable fairness was observed. "We do not undertake," continued the Court, "to pass upon the correctness of * * * the decision in each particular case so referred; it is sufficient to say that we find nothing that would justify a Court in holding there was anything fraudulent on the part of the Brush Company or its alleged representative."

This was the conclusion reached on the testimony before us in the former appeal, and we have failed to find any evidence taken in these proceedings which would justify a different conclusion now.

It follows from what we have said that we entirely agree with the learned Court below and the order appealed from will be affirmed.

The report of the Auditor accompanying the account which was ratified discusses the facts so fully and clearly that we will request the Reporter to include it in the report of this case.

Order affirmed with costs.

(Decided January 22d 1903.)