Advance Finance Co. v. Trustees of Clients' Security Trust Fund of Bar

RODOWSKY, Judge. This proceeding comes to us on exceptions under Maryland Rule 1228 j 2 from a determination by the trustees of the Clients’ Security Trust Fund of the Bar of Maryland (the Fund) denying a claim submitted by Advance Finance Co., Inc. (Advance), a licensed consumer loan company. Advance makes loans to personal injury claim plaintiffs secured by assignments of any proceeds of the injury claims. Numerous clients of two attorneys, now disbarred, made such loans from Advance, but when the tort recoveries were received by the attorneys, they failed to remit the loan indebtedness to Advance.

Advance sought reimbursement from the Fund which denied any reimbursement. The former attorneys are Raymond A. Tubman (Tubman) and Glascoe A. Baker, Jr. (Baker). Baker was either an associate of Tubman, or Baker maintained an independent practice, working out of Tubman’s office. Tubman and Baker arranged loans for their clients from Advance in order for the clients to pursue personal injury claims.

The attorneys provided Advance with forms listing the client’s name, certain other information, an estimate of the settlement value of the client’s case, and the requested amount of the loan. Advance interviewed the client, and Advance decided whether it would extend credit to the client. If Advance determined to make a loan, it was evidenced by a preprinted document that combined a “transactional statement” (consumer credit disclosures), a promissory note signed by the client, and a security agreement. This document will ¹⁹⁸ be discussed further in Part III, infra.

A separate document contained an “Authorization and Assignment,” signed by the client, and an “Agreement of Attorney,” which Advance intended for signature by the attorney representing the borrower-tort claimant. The “Authorization and Assignment” reads as follows: “CLIENT: _ D/A: _ “In consideration of monies this day loaned, I irrevocably assign to you and authorize and direct my attorney(s)_ to pay to you from the proceeds of any recovery in my captioned case all monies, including interest to date of receipt by you and costs lawfully incurred. “I understand that this in no way relieves me of my personal primary obligation to repay you and that the signing of this form does not prohibit customary handling by you. __ (SEAL) “Dated: _ “Witness: _” The form of agreement for the attorney to sign reads: “AGREEMENT OF ATTORNEY “The undersigned attorney for the client referred to above hereby agrees to comply fully with the Authorization and Assignment and pay over at time of receipt all monies then due and owing after ascertaining the exact amount due from Assignee and agrees to deliver to the named Assignee in writing the status of the claim with[in] 10 days of the request. This agreement is made in accordance with the holding in Hernandez v. Suburban Hospital Association, Inc. [, 319 Md. 226 , 572 A.2d 144 (1990) ]. _(SEAL) Attorney” Between January and November 1991, at least seventy-seven loans were made by Advance to clients of Tubman and of Baker. Neither attorney ever signed the “Agreement of Attorney” portion of any of the loan documents.

For some ¹⁹⁹ initial period the attorneys remitted the money due to Advance from the settlements of the clients’ cases. Thereafter, beginning in early 1992, Tubman and Baker ceased remitting to Advance. In May 1992, Advance sued Tubman and Baker, and Advance subsequently obtained judgments by default against them. In October 1992, Advance filed a claim against each attorney with the Fund.

Advance also pursued collection efforts against the borrowers, with some success in many instances. Advance sought reimbursement from the Fund for the net balances of the loans to clients of Tubman and Baker where the tort cases were settled and the amount to be paid to Advance was not remitted. On March 17, 1994, the Fund denied the claims on the grounds that Tubman and Baker did not have an attorney-client relationship with Advance and that they were not fiduciaries for Advance. Advance then filed the exceptions that are before us.

The Fund does not contend on this record that the failure of the attorneys to remit to Advance would not be a defalcation if the attorneys were fiduciaries for Advance. Nor does the Fund contend that Advance failed diligently to pursue reimbursement of its losses from available sources other than the Fund. The Fund is a trust, administered by trustees appointed by this Court. Md. Rule 1228 b 1, b 2, and c 1.

The Fund is financed in significant part by assessments on each lawyer practicing law in this State, the payment of which is a condition precedent to practice. See Md. Rule 1228 f 1. By Chapter 779 of the Acts of 1965 the General Assembly authorized this Court, by rule, to provide for the creation and operation of the Fund. 1 That statute, as revised and amend ²⁰⁰ ed, is now codified as Maryland Code (1989) §§ 10-310 through 10-312 of the Business Occupations and Professions Article (BOP). The purpose of the Fund, as stated in BOP § 10-311(b), is “to maintain the integrity of the legal profession by paying money to reimburse losses caused by defalcations of lawyers.” Rule 1228 b 3, drawing on the language of Chapter 779 of the Acts of 1965, states that “[t]he purpose of the trust fund shall be to maintain the integrity and protect the good name of the legal profession by reimbursing, to the extent authorized by this Rule and deemed proper and reasonable by the trustees, losses caused by defalcations of members of the Bar of the State of Maryland ... acting either as attorneys or as fiduciaries (except to the extent to which they are bonded).” The statute addresses the criteria for payment and the discretion of the trustees in BOP § 10-312(b) which reads as follows: “Distribution of Fund.—To the extent the trustees consider reimbursement proper and reasonable, the trustees may use the Fund to reimburse a person for a loss that was caused by a defalcation of a lawyer if: (1) the lawyer caused the loss while acting for the person as an attorney at law or a fiduciary; and (2) the person cannot recover the money under a bond.” Advance does not contend that either Tubman or Baker or both were acting as attorneys for Advance; rather, Advance contends that the attorneys were fiduciaries.

In Monumental Life Ins. Co. v. Trustees of the Clients’ Security Trust Fund of the Bar of Maryland, 322 Md. 442 , 588 A.2d 340 (1991), we held that BOP § 10-312(b)(1) “must be read to limit recovery to those cases in which ‘the lawyer caused the loss while acting for the [claimant] as an attorney at law or a fiduciary....’ ” Id. at 449, 588 A.2d at 343 . Advance submits, inter alia, that ²⁰¹ Tubman and Baker were fiduciaries for Advance because (1) the attorneys were trustees, or (2) the attorneys were fiduciaries for Advance under The Maryland Lawyers’ Rules of Professional Conduct (Conduct Rules), Rule 1.15, “Safekeeping Property.” In addressing these contentions we do so under the standard for judicial review of decisions of the trustees of the Fund set forth in Rule 1228 j 2, reading in relevant part as follows: “The decision of the trustees shall be deemed prima facie correct and the exceptions shall be denied unless it is shown that the decision was arbitrary or capricious, or unsupported by substantial evidence on the record considered as a whole, or was not within the authority vested in the trustees, or was made upon unlawful procedure, or was unconstitutional or otherwise illegal.” This standard of review is analogous to the standard of review applicable to administrative agencies, specifically, “ ‘whether a reasoning mind reasonably could have reached the factual conclusion the agency reached.’” Folly Farms I, Inc. v. Trustees of the Clients’ Sec. Trust Fund of the Bar of Maryland, 282 Md. 659, 670 , 387 A.2d 248, 253 (1978) (quoting State Ins. Comm’r v. National Bureau of Casualty Underwriters, 248 Md. 292, 309 , 236 A.2d 282, 292 (1967)).

As hereinafter explained, Advance may be an eligible claimant against the Fund because of the fiduciary duties imposed by Conduct Rule 1.15. Advance’s argument based on the creation of a trust nevertheless presents an instructive contrast that illuminates the analysis underlying our holding. I From the standpoint of the law of agency, and disregarding for the moment that the agents are lawyers whose principals are clients, the common law rules that govern the civil liability of Tubman and Baker to Advance are synthesized in Restatement (Second) of Agency § 342 (1958). That section reads: ²⁰² “(1) An agent who receives money or other thing from his principal to pay or transfer to another person is not thereby liable to the other. “(2) An agent whose promise to pay is primarily for the benefit of a third person may be liable in an action of contract to the third person for his failure to perform his promise. “(3) If an agent receives money in trust from the principal for the benefit of another, the agent is liable as a trustee to the other.” Restatement § 342(1) accords with Maryland law as enunciated in Mish v. Schindel, 164 Md. 164 , 164 A. 166 (1933).

In that case the principals were persons who had guaranteed loans for a corporation that became insolvent. The principals, in an effort to effect a composition with their creditors, agreed to be represented in negotiations by a committee of three persons. The principals also agreed on the amount that each would contribute to the committee, their agent, for payment by it to creditors of the principals. One of the principals, the plaintiff, was among those principals who were personally liable to banks which would not settle for less than 100% of the indebtedness owed to them by the insolvent.

Anxious over the delay in resolving his personal liability, the plaintiff paid the insolvent’s full indebtedness to the banks and took an assignment from the banks of their claims against the insolvent and the other guarantors. The amount paid by the plaintiff to the assignors exceeded his agreed contribution to the committee. The committee credited the plaintiffs payment to the banks in satisfaction of the plaintiffs promise to contribute to the committee, but the committee would not reimburse the plaintiff for the excess paid to the banks. When the plaintiff, as assignee of the bank-creditors, sued the committee, this Court held that the agent was entitled to a directed verdict.

This Court said that the plaintiff “could not, merely because he is holder of the notes, enforce payment from the agents, even though money for payment was placed at their disposal, because agents in that situation are accountable only to their principals. 1 Meehem, Agen ²⁰³ cy, secs. 1447 and 1449; Amer.Law Inst Restatement Agency, sec. 565; note, 5 L.R.A. 431 . There is no evidence of a superadded agreement of the committee to make full payment to [plaintiff], or to reimburse him for his excess payment____” Id. at 168, 164 A. at 168 . Thus, the promise of the agent to the principal to pay as directed by the principal ordinarily does not create civil liability on the agent to the intended payee. Restatement § 342(2) elevates the analysis to the plateau of a contract between the principal and agent to which the third party payee is a beneficiary with enforceable contract rights against the agent based on the agent’s express or implied promise to the principal to execute the principal’s instructions.

This Court has recognized that, depending on the facts, including primarily the intention of the client to benefit a third party, an agreement between an attorney and client may be enforceable by the third party in contract, or, based on the attorney’s negligent failure to perform a contractually assumed duty to the third person, in tort. See Flaherty v. Weinberg, 303 Md. 116 , 492 A.2d 618 (1985). The Fund, however, does not pay clients or non-clients on claims against an attorney for breach of a contract or for professional negligence. In the instant matter the “Agreement of Attorney” portion of the loan documents is drafted to create direct privity of contract between the tort claimant-borrower’s attorney and Advance.

Where an attorney had contracted directly with his client’s creditor, and with his client’s authority, to disburse to the client’s creditor from tort claim settlement funds, we enforced the attorney’s civil liability for damages for breach of the contract in Hernandez v. Suburban Hosp. Ass’n, Inc., 319 Md. 226 , 572 A.2d 144 (1990). But, because the Fund does not reimburse for loss caused by breach of contract, it is immaterial in the instant matter that Tubman and Baker did not sign the “Agreement of Attorney,” and it is immaterial whether the attorneys, orally or by their conduct, contracted ²⁰⁴ directly with Advance to perform the promises set out in the unsigned “Agreement of Attorney.” The next plateau of the Restatement principles, set forth in § 342(3), is an agreement between principal and agent under which the agent holds the money from the principal in trust for the benefit of the third party. “Although an agent receives money from his principal for payment to another and, by implication or otherwise, promises the principal to pay the other, he does not ordinarily become a trustee of the money, even though directed to pay over the specific money.” Restatement (Second) of Agency § 342, comment b on Subsection (3). The loan transactions, as structured by Advance, do not transcend the ordinary, so as to create a trust.

In Hernandez , we recognized a similar assignment by the client to a third party as having been taken by the assignee as security for the client’s debt obligation to the assignee. Hernandez, 319 Md. at 236-37 , 572 A.2d at 149 . Thus, the trustees of the Fund made no error of law in concluding that the assignments in the instant matter did not constitute Tubman and Baker fiduciaries in the sense that they were trustees of trusts of which Advance was the beneficiary. II Advance alternatively contends that Tubman and Baker are fiduciaries, for Advance, as a result of their ethical obligations under Conduct Rule 1.15(b).

That rule provides: “(b) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this Rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by ²⁰⁵ the client or third person, shall promptly render a full accounting regarding such property.” (Emphasis added). Here, Tubman and Baker were the intermediaries between