Bennett v. Baskin & Sears

ROBERT M. BELL, Judge. The former directors of First Montgomery Bank and Trust Company (in organization) (“First Montgomery”), as assignees of First Montgomery, in this appeal of the judgment of the Circuit Court for Montgomery County, challenge the correctness of that court’s ruling granting summary judgment on limitation grounds in favor of Baskin & Sears and its successors, appellees. The nature of their challenge is embodied in the three questions they present: 1. Does the Statute of Limitations bar this action filed September 24, 1984, where the transcript of the September 15, 1981, meeting (relied on by the court below) shows: a. not a single mention of a claim or basis for a claim ' against the law firm (but only claims against Daniel D. Morse) ...; b. that a member of the law firm stated only “No” in answer to the question “Do you represent Daniel Morse?” ..., thereby actively concealing the past dual representation; c. that the lawyer promised “to get back to the Board after I’ve discussed with Pittsburgh [main office]” in response to a question about “whether it has any ideas ⁵⁹ as to the norms when you start up a new bank for development fees,” ... thereby actively concealing the past malpractice; and d. that the lawyer continued to serve as counsel in a fiduciary capacity, thereby excusing any failure of the directors to use greater diligence in discovering the law firm’s wrongdoings. 2.

Was the Statute of Limitations tolled by the July 9, 1984, filing of the third-party complaint which involved exactly the same parties, the same facts, and the same claims? 3. Is a full trial on the merits required by the trial court’s disregard of the factual disputes established by the details in the Blunt affidavit ... regarding a directors’ lack of knowledge on September 15,1981, and the fact that “it was not until October 29, 1981,” that the Board of Directors learned that it had potential claims against Baskin & Sears? This action has its genesis in 1979, when a group of persons, which included some of the appellants and Daniel D. Morse, came together for the purpose of organizing a minority bank in Montgomery County, Maryland. To assist in the organization of the bank, the founders and original directors retained the services of appellees and Danmor Financial Management Services, Inc., a financial consulting corporation, of which Morse, one of the more active and significant members of the group, was the president.

First Montgomery agreed to pay Danmor $50.00 per hour plus reimbursement for expenses incurred during the organizational period. Danmor would be paid for no more than 100 hours of work in any month, the excess to be deferred until money was available. In return, Danmor agreed to perform the necessary services and to provide detailed invoices of the services it performed on behalf of the bank to First Montgomery. The organizational period for First Montgomery was lengthy.

By the fall of 1980, the bank, based on bills ⁶⁰ submitted by Danmor for services rendered in excess of the allotted monthly payment, was indebted to Danmor in an amount of approximately $78,000.00. At the suggestion of Jackley, the partner primarily responsible for providing services on behalf of appellees, the Board of Directors ratified that indebtedness and later executed a promissory note in favor of Danmor in the amount of $78,894.00. In 1981, the bank was in the process of seeking the approval by the Federal Deposit and Insurance Corporation of an application for insurance to cover deposits. Having hired a president and a chief operating officer, received a copy of an FDIC guideline stating that seventy percent of the banks organized incurred organization fees of less than $20,000.00, and been advised by the regional director of the FDIC that Danmor’s fees “are high considering its modest proposal ... [and] will be subject to a careful review during both the field and regional office investigation of this proposal,” the directors became concerned that Morse and Danmor had charged excessive organizational fees.

Consequently, the Board organized a committee of several directors to audit Morse and Danmor. The audit committee presented its findings at a board meeting held on September 15, 1981. Those findings led to Morse’s resignation as chairman of the Board. After Morse’s resignation had been accepted and he had left the meeting, the Board discussed a number of concerns that it had.

One concern involved the question of whether Jackley represented Morse. When asked that question, Jackley responded “no”. Another concern was the impending evaluation by an FDIC examiner of the organizational fees incurred by First Montgomery. The transcript of the meeting reveals the following, in that regard: MR.

BENNETT [A director]: I’d like to ask our counsel whether it has done any other work representing banks; and, secondly, in its opinion as counsel to this bank, whether it has any ideas as to the norms when you start up a new bank for development fees, et cetera, to give us some guideline as to what in your experience, if you have ⁶¹ any in this regard, is acceptable or normal for someone who has performed the services which we recognize Dan has rendered. MR. JACKLEY: All right. Our Maryland office, asking this here, says not.

The Pittsburgh office has—I have a call into the Pittsburgh office to get some indication of the normal fees in the normal setting. There have been some extenuating circumstances, perhaps for lack of a better word, which I think the Board is aware of, the changes in midstream when the Securities Commissioner changed his opinion, when the Bank Commissioner changed his opinion. The FDIC guidelines in Appendix A indicate what the normal fees that they run into are. You will see that they are substantially less than the amount that [Danmor] has charged.

I advised Mr. [Morse] and [Danmor] as of late last week to immediately obtain other counsel and strongly suggest that they do obtain counsel. Whether Mr. [Morse] will choose that course of action or proceed without counsel at this point, I am not sure. MR. BENNETT: Are you going to advise—Fm not sure if he really answered.

MR. JACKLEY: Okay. So a two-part, I will get back to the Board after I’ve discussed with Pittsburgh what the experiences have been as far as startup costs. It will primarily be with branch bank establishment of branch offices and as to the legal fees and the market study fees, the feasibility fees the coordination fees.

MR. BENNETT: And particularly since I assume you’re familiar with the many services which Dan has provided, the fees which would normally be paid to someone who’s has provided those services, I’d like to request that as soon as you have that information, that you phone it to John Days so that he can relay it to the Board. Mr. Bennett raised still another area of concern when he asked Jackley to “advise us as to whether, if we are unable to reach an amicable settlement with Dan: Are you going to ⁶² be in [an untenable] conflict of interest position?” Jackley responded: I’ll have to struggle with that too. Relative to general advice and counsel to the bank, the answer to that question is “no”.

Relative to filing a replevin suit on the return of the books and records, the answer is “no”. We have as I indicated, advised [Danmor] and Dan [Morse] to obtain independent counsel. Now, relative to suit over either the meaning of [hold] harmless agreement or anything like that. My feeling at this point is that we would recommend that that be referred out to independent counsel: (a) because of the appearance potentially of a conflict of interest; and also from a practical standpoint and that is that we are going to have to testify as to what came down at some of these meetings according to our notes.

And, our, you know, notes do not indicate what Mr. [Morse] remembers what happened at some of those meetings; and also some of what Mr. Blunt, as he and I have talked about, happened at some of those meetings. And, it’s tough when you’re going back three and four years. But, I would suspect that if it does go to litigation, as I said, you know, we certainly, you know, need the testimony. Some time in October, the Board consulted Hogan & Hartson, as independent counsel, to consider its position vis-a-vis claims which the Board anticipated Morse and Danmar would make for organizational fees incurred. 1 Significantly, Hogan & Hartson reported in its preliminary report that it had also been asked “to determine whether ⁶³ there was any basis for claims against Baskin and Sears (B & S), First Montgomery’s former general counsel.” Although it had not reached any firm conclusions as to that question, it recommended three areas to be pursued: (1) whether Baskin and Sears had a conflict of interest while representing First Montgomery; (2) whether Baskin and Sears have disclosed that the organizational expenses charged were excessive; and (3) whether Baskin and Sears made material omissions and misstatements in the offering circular.

Morse and Danmor filed suit against First Montgomery and its directors in December, 1983, seeking to recover on the promissory note in favor of Danmor as well as additional compensation they claimed the bank owed them. Having failed to obtain a defense from appellees, appellants filed the Morse/Danmor action a third-party claim against app lees in 1984. Appellee moved to dismiss that complaint on September 10, 1984 and, in response to that motion, on September 24, 1984, appellants filed this independent action. Their motion to consolidate this action with the Morse suit was denied.

Their third-party complaint was dismissed in December 1985. The Morse suit having been resolved in favor of First Montgomery, appellees moved for summary judgment as to this action, inter alia, alleging that it was barred by limitations. Appellants responded by submitting the affidavit of Roger R. Blunt, one of the founders and former directors of First Montgomery, with their opposition to the motion. In his affidavit, Blunt averred that the directors did not know on September 15, 1981, “that attorney Michael Jackley had committed any wrongful acts for which he or his firm might be liable in damages to First Montgomery”, and that it was not until October 29, 1981 that the Board, having received the report of the special counsel, became aware that it might have claims against appellee.

In his view, “[t]he earliest date on which the Board of Directors could have known that First Montgomery might have been injured by Mr. Jackley’s dual representation of Daniel ⁶⁴ Morse/Danmor and First Montgomery was when it obtained, in late October 1981 or early November 1981, copies of the Daniel Morse/Michael Jackley correspondence of November 17 and November 20, 1980 in which Jackley advised Morse to obtain a note from First Montgomery for Morse’s tax—planning purposes, an action which Jackley recommended to First Montgomery at the board meeting of November 24, 1980. The affidavit further stated that: Although the Board of Directors was informed at the September 15, 1981 meeting of the FDIC guideline figure and appendix A (1976), it did not know whether appendix A was still applicable; it asked Mr. Jackley to check and report back. Mr. Jackley did not subsequently report back to the Board. Following a hearing, the court granted appellees’ motion for summary judgment on the ground of limitations.

It found pertinent to the ruling the facts that the Board inquired of Jackley whether he represented Dan Morse and that Jackley advised the Board that he had “advised Mr. [Morse] and [Danmor] as of late last week to immediately obtain other counsel and strongly suggest that they do obtain counsel”. Then, referring to the total circumstances, the court said: The board meeting shows that the board was fully on inquiry and made inquiry, and the evidence further discloses that the very purpose of inquiry notice was served when a separate law firm was engaged within a very short time thereafter and rendered, in response to a request, a decision that the defendants here might be liable for some or all of the damages involved. There is, in my view, nothing to submit to a jury. As a matter of law, the minutes of the meeting of September 16th and all of the surrounding circumstances, combined with all of the other filings here, the nature of the pleadings and the nature of the claims, and the date upon which the action which form the basis for the alleged claim of negligence, all add up to one thing: There was complete inquiry notice, totally documented, as is so rare, ⁶⁵ by the recorded transcript, that as of that date and no later the statute of limitations began to run. 1., 3.

As pertinent to this case, the summary judgment rule, 2-501, provides: (a) Motion.—Any party may file at any time a motion for summary judgment on all or part of an action on the ground that there is no genuine dispute as to any material fact and that the party is entitled to judgment as a matter of law. The motion shall be supported by affidavit filed before the day on which the adverse party’s initial pleading or motion is filed. (b) Response.—The response to a motion for summary judgment shall identify with particularity the material facts that are disputed. When a motion for summary judgment is supported by an affidavit or other statement under oath, an opposing party who desires to controvert any fact contained in it may not rest solely upon allegations contained in the pleadings, but shall support the response by an affidavit or other written statement under oath.

Sj! Sfc Jfc J}! (e) Entry of Judgment.—The court shall enter judgment in favor of or against the moving party if the pleadings, depositions, answers to interrogatories, admissions and affidavits show that there is no genuine dispute as to any material fact and that the party in whose favor judgment is entered is entitled to judgment as a matter of law____ Pursuant to the Rule, the hearing judge may grant summary judgment only when, after reviewing the pleadings, depositions, answers to interrogatories, admissions and affidavits submitted by the parties, he or she determines that there is no genuine issue of material fact, i.e,, one that somehow affects the outcome of the case, King v. Bankerd, 303 Md. 98, 111 , 492 A.2d 608 (1985), and that the party for whom judgment is entered is entitled to judgment as a matter of law. Maryland Rule 2-501(e); Dietz v. Moore, ⁶⁶ 277 Md. 1, 4 , 351 A.2d 428 (1976); Castiglione v. The Johns Hopkins Hospital, 69 Md.App. 325, 332 , 517 A.2d 786 (1986); May Department Stores v. Harryman, 65 Md.App. 534, 538 , 501 A.2d 468 (1985), aff'd, 307 Md. 692 , 517 A.2d 71 (1986).

When we review a lower court’s ruling on a motion for summary judgment, we too are concerned with whether there is a genuine dispute as to any material fact and whether the moving party is entitled to judgment as a matter of law. We, like the lower court, must view the facts in the light most favorable to the party against whom the motion is made and resolve all inferences against the moving party. Austin v. Thrifty Diversified, Inc., 76 Md. App. 150, 152-3 , 543 A.2d 889 (1988); May Department Stores, 65 Md.App. at 538 , 501 A.2d 468 ; Schlossberg v. Epstein, 73 Md.App. 415, 423 , 534 A.2d 1003 (1988). We will not disturb the lower court’s ruling unless our review reveals that there is a genuine dispute as to a material fact or that more than one inference can be drawn from the facts.

At issue in the case sub judice is when does the three-year statute of limitations applicable to this case, see Maryland Courts & Jud. Proc. Code Ann., § 5-101, begin to run and the kind of notice that triggers it. Recent cases have addressed these points.

In Poffenberger v. Risser, 290 Md. 631 , 431 A.2d 677 (1981), the seminal case on the “Discovery Rule”, the Court addressed the “nature of the knowledge necessary, under the discovery rule, to start the running of the limitations period.” 290 Md. at 636 , 431 A.2d 677 . Having pointed out that notice could be of two kinds, actual and constructive, and defining them thus: Actual notice may be either express or implied. If the one, it is established by direct evidence, if the other, by the proof of circumstances from which it is inferable as a fact. Constructive notice is, on the other hand, always a presumption of law.

Express notice embraces not only knowledge, but also that which is communicated by direct information, either written or oral, from those who are cognizant of the fact communicated. Implied notice, ⁶⁷ which is equally actual notice, arises where the party to be charged is shown to have had knowledge of such facts and circumstances as would lead him, by the exercise of due diligence, to a knowledge of the principal fact, 290 Md. at 636-37 , 431 A.2d 677 , the Court held: Affirmatively speaking, we determine the discovery rule contemplates actual knowledge—that is express cognition, or awareness implied from “knowledge of circumstances which ought to have put a person of ordinary prudence on inquiry [thus charging the individual] with notice of all facts which such an investigation would in all probability have disclosed if it had been properly pursued____ In other words, a purchaser cannot fail to investigate when the propriety of the investigation is naturally suggested by circumstances known to him; and if he neglects to make such inquiry, he will be held guilty of bad faith and must suffer from his neglect____ [citations omitted] 290 Md. at 637 , 431 A.2d 677 . See also Lutheran Hospital v. Levy, 60 Md.App. 227, 237 , 482 A.2d 23 (1984), in which we, explicating Poffenberger , stated: Under the discovery rule as stated in Poffenberger limitations begin to run when a claimant gains knowledge sufficient to put her on inquiry. As of that date, she is charged with knowledge of facts that would have been disclosed by a reasonably diligent investigation.

The beginning of limitations is not postponed until the end of an additional period deemed reasonable for making the investigation. O’Hara v. Kovens, 305 Md. 280 , 503 A.2d 1313 (1986) involved the question of whether, and when, the accrual of a cause of action is a question of fact to be determined by the trier of fact. The Court held that where there are questions of fact relating to when the statute of limitations began to run, those questions should be determined, in a jury trial, by the jury and not the trial judge. 305 Md. at 301 , 503 A.2d 1313 . Although it held that, in that case, the question was one for the jury, it nevertheless recognized ⁶⁸ that “the ordinary principles governing summary judgment ... continue to apply when the issue on summary judgment is limitations____” 305 Md. at 304 , 503 A.2d 1313 .

In that regard, the Court observed: This argument uses “matter of law” in the sense that reasonable men, on this record and properly instructed as to the applicable law, could not fail to find that the plaintiffs were on notice more than three years before this suit was brought. To decide this question one must know what being on notice means, or could mean, in this case. Notice is not limited to actual knowledge of the fraud. Nor does it mean discovery of proof which, if believed, would, in the opinion of counsel, take the case to the jury on the merits.

It is not limited to admissible evidence. We have seen ... how being “on notice” means having knowledge of circumstances which would cause a reasonable person in the position of the plaintiffs to undertake an investigation which, if pursued with reasonable diligence, would have led to knowledge of the alleged fraud. 305 Md. at 301-02 , 503 A.2d 1313 . See Baysinger v. Schmid Products Co.,