Coppage v. Maryland Thrift Savings & Loan Co.

Smith, J., delivered the opinion of the Court. This is a battle between two receivers. Appellant John H. Coppage (Coppage) is receiver for Security Financial Insurance Corporation (Security). Appellee J. Ingram Medley (Medley) is receiver for Maryland Thrift Savings and Loan Company (Maryland Thrift).

Coppage is operating under the jurisdiction of the Circuit Court of Baltimore City. Medley is under the jurisdiction and control of the Circuit Court for Montgomery County. Coppage as receiver of Security filed a claim against Maryland Thrift. Judge Shure sustained Medley’s exceptions to the claim.

We reverse the action of Judge Shure, for the reasons stated herein. This litigation might be called a by-product of the Maryland savings and loan difficulties of a few years ago and might also be called a direct result of a failure to adhere to the procedures prescribed for receivers in Maryland Rules BP 1 to 10, inclusive. A petition was filed on April 18, 1962, requesting appointment of a receiver for Maryland Thrift. Security had issued a policy of insurance insuring the free shareholders of Maryland Thrift against loss.

Therefore, Security filed a petition to intervene as a party defendant. Mr. Medley was appointed receiver ²⁴⁰ of Maryland Thrift on August 3, 1962, and qualified on the same day. Some time prior to August 2, 1962, (the exact date does riot appear in the record) Coppage (as Deputy Insurance Commissioner) was appointed receiver for Security. Prior to either receivership, Security loaned Maryland Thrift $40,000.00 on January 9, 1962, and $38,000.00 on January 17, 1962.

In each instance demand promissory notes were executed calling for interest at the rate of six percent per annum and there were pledged to and deposited with Security certain first deeds of trust owned by Maryland Thrift. After Medley’s appointment as receiver,’the Circuit Court for Montgomery County authorized the appointment of an accountant to examine the books and records of Maryland Thrift. The report filed by that accountant under date of November 15, 1962, noted these loans, stated that the amount payable on the books of the corporation as of August 3, 1962, was $78,000.00 and listed seven mortgages which the accountant said had been pledged by Maryland Thrift to Security as collateral for these notes. The accountant indicated that he did not confirm with Security either the amount of the notes or that the mortgages were in fact held by Security.

On September 6, 1962, counsel for Medley addressed a letter to Coppage stating that it was his understanding that Security had been holding as collateral, to secure the repayment of $78,-000.00 borrowed by Maryland Thrift, certain mortgages or deeds of trust to Maryland Thrift. He indicated a desire to discuss “the possibility of making a sale of those mortgages, if possible, to obtain whatever value possible in order that Maryland Thrift’s debt to Security Financial might be paid and to secure the balance for the benefit of Maryland Thrift’s depositors”. Coppage replied requesting that counsel for Medley contact Peter Parker, Esq., then one of his attorneys, to discuss the matter with him. Apparently there followed various telephone conversations.

As a result, on August 5, 1963, Mr. Parker forwarded mortgage files on three loans held by Security as security for the loan to Maryland Thrift, stating, “It is my understanding that you will have Substitute Trustees appointed and will proceed to foreclose on these mortgages with the hope that you will be able to retire the loan between Maryland Thrift and Security Financial in full.” ²⁴¹ Medley filed a petition through counsel on August 8, 1963, with the Circuit Court for Montgomery County requesting the appointment of a substitute trustee under several deeds of trust and for authorization to foreclose certain deeds of trust. The petition included the following: “That among the assets of the aforesaid Savings and Loan Company, your Petitioner has found the following described Deeds of Trust which were pledged to Security Financial Insurance Corporation to secure a loan to Maryland Thrift Savings and Loan Company of $78,000.00, which obligation is still outstanding, and the Receiver has released them to your Petitioner for the purpose of foreclosures, because they are now in default, with the understanding that any funds received will be applied on Maryland Thrift’s obligation to Security Financial Insurance Corporation * * *.” The petition then went on to list three of the deeds of trust which had been assigned to Security. The record discloses yet another petition was filed on January 27, 1964, with identical language relative to the $78,000.00 asking for the appointment of substitute trustees for three more deeds of trust. On October 2, 1964, counsel for Medley asked counsel for Coppage for the figures necessary to pay the principal and interest that Maryland Thrift owed Security.

A reply under date of October 8, 1964, stated: “As to the principal and interest owed Security Financial Insurance Corporation by Maryland Thrift S. & L. Association under the loan dated January 7, 1962, the amount owed as of October 17, 1964, is $44,624.68 with interest accruing at the rate of $214.32 for each month thereafter. Upon payment of the above sum, we will deliver to you the collateral pledged against same, which, in the opinion of Mr. Coppage, the Receiver of Security Financial Insurance Corporation, and real estate experts retained by him, is well in excess of that amount.” (emphasis added) On December 4, 1964, counsel for Medley wrote counsel for ²⁴² Coppage saying that he was enclosing the check of Medley to pay the obligation of Maryland Thrift to Security “in full.” The check was in the amount of $44,774.70. He asked for an acknowledgement of receipt of the check by signing an enclosed copy of the letter and returning it. This copy was not signed and returned, but on December 14 counsel for Coppage wrote counsel for Medley in part as follows : “There are a few loose ends which I would like to tie up so that this matter may be fully and finally disposed of and the file closed. “You will recall my letter of October 8, 1964 in which I set forth the amount owed as calculated by Mr. Coppage and the Circuit Court for Baltimore City.

It appears that you calculated the additional interest due based on November 17, 1964 instead of October 17, 1954 (sic) and that, accordingly, Mr. Medley still owes Mr. Coppage $214.32. I would appreciate it if you would send me that amount when convenient.” On December 29 counsel for Coppage wrote counsel for Medley in part as follows: “One final matter remains to be cleared up and that is covered by the second paragraph of my letter to you dated December 14, 1964 concerning the amount of $214.32 which is still owed by Mr. Medley to Mr. Coppage. Please let me know when you plan to send me this amount so that our files in this regard may be closed.” The check enclosed with the December 4 letter had marked on the front of it, “Full settlement of Md. Thrift obligation”. Counsel for Medley filed a petition with the Circuit Court for Montgomery County on October 28, 1964, alleging that there was due Security as of October 17, 1964, $44,624.68 plus interest at the rate of six percent and asking leave to pay that amount.

The petition does not say this was the only obligation of Maryland Thrift to Security. The order of court granting leave to Medley to pay this sum, however, described it “as full payment of the obligation” of Maryland Thrift to Security. ²⁴³ Pursuant to an order of court passed on August 17, 1962, directing Medley to “publish a Notice to Creditors in accordance with Rule BP 4 * * giving notice that creditors should file their claim with the Clerk of the Circuit Court for Montgomery County “before a specified date, which shall he not less than One Hundred Twenty (120) days from the date of the order of publication”, Medley duly published notice to creditors notifying creditors to file their claims “on or before the 26th day of December, 1962; otherwise they may by law be excluded from all benefits of said Receivership Estate.” On November 10, 1967, almost five years after expiration of the notice, Coppage filed claim for the sum of $40,000.00 together with interest thereon from January 9, 1962, until paid at the rate of six percent per annum, reciting the loan of cash in the amount of $40,000.00 on January 9, 1962. Appended to the claim was a copy of the note in that amount bearing that date from Maryland Thrift to Security. Medley excepted to the Coppage claim stating: “That laches should he applied against John H. Cop-page, Receiver of Security Financial Insurance Corporation in that he delayed unnecessarily in filing his claim in this cause, and in that he misinformed the Receiver for Maryland Thrift Savings and Loan Association, Inc. about the amount of his claim, all of which caused said Receiver to act without considering the additional amount now claimed.” and that Maryland Thrift was entitled to a setoff on the ground that Security is indebted to Maryland Thrift in the amount of $333,639.23 as a result of having insured the savings share accounts of Maryland Thrift.

It may well he that no exceptions would have been filed to this claim were it not for the fact that on September 22, 1965, the chancellor authorized, upon Medley’s petition, distribution to depositors of a dividend of 42%. Medley said this “would leave [Medley] adequate funds on hand to take care of any expenses and other contingencies that might be incurred such as attorney’s fees, accountant’s fees, receiver’s commissions and other expenses.” ²⁴⁴ A partial distribution is authorized under Maryland Rule BP 10 b which states in pertinent part : “The court, in its discretion, upon application of the * * * receiver * * * may direct such partial distribution as may be safely made from the money in the hands of the * * * receiver to those creditors whose claims are not in dispute, reserving sufficient assets to secure, after final settlement of all claims, a proportionate distribution among all creditors whose claims are finally allowed.” (emphasis added) There are four questions presented in this appeal, (1) whether the claim on behalf of Security was filed at the proper time, (2) whether the claim should have been denied on the basis that Medley was led to believe that the obligation from Maryland Thrift to Security had been paid, (3) whether “the equities are such that the loss, if any, should be at the hands of the claimant and not the receiver for Maryland Thrift”, as stated by the chancellor, and (4) whether the claim should have been denied on the basis of a setoff under the insurance policy issued by Security. I. Coppage contended that under Maryland Rule BP 4 his claim was not late. Maryland Rule BP 4 c states in pertinent part: “Claims Piled After Date Specified in Order. “1.

Late Filed Claims Allowable—Conditions. “A valid claim filed after the date specified in the court order passed pursuant to section a of this Rule, but prior to the date of reference to the auditor for the stating of an account, shall be entitled to distribution as though filed by the specified date.” (emphasis added) Maryland Rule BP 9 c states: “All final reports and all other reports which are filed for the purpose of making a partial or total distribution of the estate shall be referred to an auditor. The auditor shall audit the report and state an account setting forth the distribution of the estate, but not, in ²⁴⁵ sofar as possible, restating the items contained in the report.” (emphasis added) The rule than goes on to require the auditor to give written notice of the stating of the account to, among others, each creditor who had filed a claim in the proceeding, the notice to contain certain specified information relative to assets, liens, priorities, expenses, the amount available for distribution to general creditors, the percentage of distribution, whether the distribution is final or partial and that the account will be finally ratified and confirmed at a designated time unless exceptions are filed prior thereto. It is undisputed that this case has never been referred to a court auditor. On the matter of the timely filing of the claim the chancellor said: “The claimant, Coppage, urges that their claim was timely filed because under Rule BP4, c (1), it is provided that a claim shall be entitled to be recognized as though filed by a specific date, if it is filed prior to the date of reference to the Auditor for the stating of an account, and that all final reports and all other reports which are filed for the purpose of making a partial or total distribution shall be referred to an Auditor, etc. This argument is not persuasive to the Court, since this claimant is a party to the proceedings and was from June 1, 1962, but more importantly, the reason for said rule is to assure full disclosure, through audit examination, where no special auditor has been appointed or where insufficient time has elapsed to fully protect the interests of a bona fide creditor.

In this Receivership case, as in any other case involving fiduciaries, no distribution should be made until the affairs of the company, or the individual, have been audited and it has been ascertained what in fact are the assets and liabilities in order to prevent speedy payment of unfounded claims. As was stated in Mendelis v. Broening ( 168 Md. 488 ) the purpose of requiring an audit is to give an opportunity for one to object and show injury. In the instant case, Security was a ²⁴⁶ party to the proceedings, and aware of the situation from the outset and there was a complete audit prior to any distribution. Mendelis v. Broening is strongly relied upon by the claimant, but is clearly distinguishable.

While it is not clear whether the C.P.A. audit was made in that case before or after the appointment of a Receiver, the claimants there had ‘recently learned’ of the status of the affairs and the claimants were in the process of analyzing the Report of the Receiver, which included the audit, but the Court, nevertheless, authorized distribution forthwith and before claimants were given any opportunity to object to show injury. The Court there pointed out that ‘they were deprived of the opportunity of making the objections and filing exceptions to the allowance of such claims as might be improper.’ In the instant case, we have no such set of circumstances, as the State of Maryland filed its original Petition in behalf of Maryland Thrift and it has been completely familiar, also, with the Receivership case of Security from the outset. The State 1 now appears to object to a matter which has been peculiarly within its knowledge for approximately six years and in face of the Notice to Creditors