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Mallis v. Faraclas

Decided : May 29, 1964.


Appeal from the Circuit Court No. 2 of Baltimore City (JONES, J.).

The cause was argued before Brune, C.J., and Hammond, Prescott, Marbury and Sybert, JJ.


PRESCOTT, J., delivered the opinion of the Court.

This case stems from interfamily acrimony, which arose from certain "extramural" activities of the appellee, John E. Faraclas (John). Faraclas v. Faraclas, 234 Md. 337. John instituted this action against Michael N. Mallis, his brother-in-law, and other parties who are not affected by the decree of the court below, and, therefore, are not interested in the present appeal. John alleged that Michael had wrongfully appropriated $12,000 of funds belonging to a partnership of John and Michael in order to release certain collateral belonging to Nick Mallis, the father of Michael and the father-in-law of John. Michael answered by denying that he had wrongfully appropriated any partnership funds and asserting that he had utilized the $12,000 of partnership funds to secure the release of Nick's collateral, because he and John were jointly obligated to Nick to secure such a release. After a hearing below, the trial judge found that Michael had misappropriated $12,000 of partnership funds, and directed him to pay $12,000 to the partnership to be distributed equally between him and John. This appeal followed.

The record discloses that John and Michael have engaged in various business enterprises together. Among their ventures is a partnership known as Mallis Enterprises, in which (for the purposes of this case) they are sole and equal partners. They

received substantial amounts of their interest in Mallis Enterprises and other family businesses by gifts from Nick (Nick stated this amount was in the neighborhood of $250,000).

In 1955 or 1956, John and Michael participated in the formation of a new corporation named Mischanton's, Inc., which was created to operate a restaurant. John and Michael each owned 26 per cent of the stock, which gave them together control of the corporation. (The ownership of the remaining stock is not material to our decision herein.) The company had only $1,000 of paid in capital, and everyone connected with the venture realized that substantial borrowing would be necessary before the restaurant could be put into operation, because a well equipped establishment was anticipated calling for an expenditure of nearly $200,000.

John and Michael pledged about $40,000 of the assets of Mallis Enterprises to various banks to secure loans to the new corporation. Among other assets pledged were two bank accounts, each in the amount of $3,750, one being in the names of John and his wife and the other being in the names of Michael and his wife. At the trial, John claimed that these accounts were individual, not partnership, assets. However, the trial judge found as a fact that these accounts were partnership assets and there has been no appeal from that ruling. In addition to the collateral pledged by Mallis Enterprises and John and Michael, the other stockholder of Mischanton's, Inc., put up their own collateral to the extent that they were able. Nick Mallis had no financial interest in the new corporation, but was made its president to increase its credit prestige. He never took any active part in the operation of the company.

At this point, the testimony becomes conflicting in certain of its aspects. Nick testified that he made available to John and Michael securities belonging to him of a very substantial value for use by Michael and john as collateral in securing loans to Mischanton's. Michael testified that this was done as the result of an express agreement between Nick, John and himself, whereby over a period of years Nick put up various securities to be used as collateral by John and Michael for loans to the company. He (Michael) and John agreed that after using the securities as collateral, they would return them to Nick "as soon

as we could put our business obligations in its [sic] place." John denied any express or specific agreement with Nick to return the securities. However, even his version as to why Nick permitted his securities to be pledged by John and Michael tends to support the conclusion that it was as an accommodation to them. During his cross-examination, the following colloquy took place:

"Q. You say your father-in-law put up some collateral. We know that. I am asking you what was your understanding why he did put it up. It is true he had no interest in the ...

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