Employers' Liability Assurance Corp. v. State Ex Rel. Hudgins

Parke, J., delivered the opinion of the Court. The bill of complaint of the State of Maryland, for the use of William H. Hudgins, trustee in the case of O. Parker Baker, Assignee, v. Amelia Klotz and Louis Klotz, against the Employers’ Liability Assurance Company and the Fidelity & Deposit Company of Maryland, was filed to enforce an alleged liability of each of the defendant corporations as the separate sureties on the two bonds of O. Parker Baker, as assignee of a real estate mortgage from Amelia Klotz and Lewis Klotz, her husband, to Eleze E. Crawford. The allegations of the bill of complaint were held on demurrer to be legally sufficient to raise an equity in the plaintiff to prosecute a suit against the sureties of the former trustee on his bonds for his failure to account for and pay over trust funds; and the ruling of the chancellor was affirmed by this tribunal on the appeal of Employers’ Liability Assurance Corp. v. State, use of Hudgins, Trustee, 161 Md. 103 , 155 A. 324 . After the remand, the cause being at issue, evidence was. taken, the parties heard, and the chancellor decreed that the two sureties were liable for the default of the assignee in proportion to the respective principal amounts of each bond.

The amount of the assignee’s default was $5,186.16, with interest, which, after credits, was apportioned as of January 8th, 1932, the date of the decree. The Fidelity & Deposit Company was a surety on the original bond of $2,500, and paid its portion. The Employers’ Liability Assurance Company was the surety on the second bond of $5,000, but declined to. pay its share of the default, or $3,740.24, with interest from the date of the decree, and took this appeal. ¹²³ There is no controversy on the facts. So far as it is necessary to state them, O. Barker Baker, an attorney at law, was the assignee of a mortgage on real estate.

He began the proceedings to foreclose, gave bond in the penalty of $2,500, with the Fidelity & Deposit Company as surety, sold the land, and reported a sale of the mortgaged land to his wife for $4,100; and on July 12th, 1927, secured the ratification of the sale and a reference to the auditor to state an account. The: auditor’s account was not filed until August 21st, 1928, and thereupon the First Mortgage Bond Homestead Association filed exceptions to t-ho account on the ground that Baker, who was then its treasurer and general counsel, had purchased the mortgage with $1,800 of the association’s money, and had taken the assignment in his own name, and as such purporting assignee .had caused the distribution of $1,998 to he made to him in the audit, and a residue of $1,425.28 to a certain Nellie J. Gribson, by virtue of her being the then owner of the mortgaged premises, when, because of an agreement with her, the exceptant was entitled to this fund. The matter dragged without action until June 13th, 1929, when Nellie J. Gribson obtained an order nisi of the chancellor requiring Baker to show cause why he should not pay into1 the registry of the court all the moneys he had received on account of the sale of the mortgaged premises. As a result of this order, the assignee; the exceptant, and the putative purchaser filed a stipulation in open court that the only sale made by the assignee of the mortgaged property was on July 30th, 1928, to one Louis T. Zbinder for $5,300,, which should be accounted for by the assignee in the mortgage foreclosure proceedings.

On the same' day the parties were heard, and immediately thereafter the chancellor passed an order requiring the assignee i» increase his bond, with corporate surety, to the amount of $5,300, and to file the new bond in the cause on or before the 10th of July, 1929. The chancellor set forth in the order that his action was based upon the disclosure that the actual purchase price was $5,300 and that the first audit was thereby falsified; and directed ¹²⁴ the cause to be again referred to the auditor to state an account surcharging the assignee accordingly. The bond was executed by the assignee, with the Employers’ Liability Assurance Corporation, Limited, as the surety, on July 2nd, 1929, and filed in the cause on July 8th, 1929. The bond contains recitals which make certain that it was given by Baker, as the assignee of the mortgage mentioned, in an entitled foreclosure proceedings begun, in the local court where the land was situated, by the assignee against the mortgagors for the sale of the property mortgaged under the power conferred by the deed of mortgage.

The surety, therefore, knew the purpose, nature, and effect of the bond, and either knew or was charged with knowledge of the equity proceedings wherein the additional bond was required. A new audit was filed on October 16th, 1929, and exceptions were interposed which were pending when the assignee died, on December 28th, 1929. The chancellor, on May 29th, 1930, appointed William H. Hudgins trustee in the place and stead of the dead assignee. On March 6th, 1930, the chancellor passed his decree, in which he decided that the dead assignee’s conduct had disentitled him to $531.05 that had been allowed him as commissions; and directed that this'sum should be held subject to the chancellor’s further order, but that the second audit should be ratified and confirmed in all other respects.

The substituted trustee made demand of the personal representative of the assignee for the payment of the trust funds, filed the claim therefor against the decedent’s estate, and received a final dividend of $259.31. On demand, the Eidelity & Deposit Company of Maryland, the surety on the assignee’s bond of $2,500, paid to the substituted trustee $1,662.16, on June 29th, 1930, as its proportionate share of the trust fund, with the understanding that it would meet any further liability to the extent of the principal amount of the bond on which it is surety. The Employers’ Liability Assurance Corporation, Limited, denied all liability under the bond of $5,300, upon the ¹²⁵ ground that, before the delivery of the bond, the assignee had received and used for his own personal purposes the purchase money of the mortgaged premises, which the assignee had sold under the power of sale contained in the mortgage deed. The soundness of this contention depends upon the meaning of the condition of the bond that the “assignee do and shall well and faithfully perform the trust reposed in him by the powers contained in said mortgage and his duty under the Jaw as s-uch assignee or that may be reposed in him by any future order or decree of said court in the premises”.

The meaning of this condition is to be ascertained by reference to the terms of the mortgage deed and the statute. The first provides that the proceeds of sale made by the assignee under the power should be applied by the assignee: “First, to the payment of all expenses incident to such sale, including an appearance fee and a commission to the party making the sale of said property equal to the commission allowed trustees for making sale of property by virtue of a decree of a court having equity jurisdiction in the State of Maryland; secondly, to the payment- of all claims of the said mortgagee, her personal representatives and assigns under this mortgage, whether the same shall have then matured or not, and the surplus (if any there be) shall be paid to the said mortgagors, their personal representatives or assigns or to whoever may be entitled to the same.” The statutory law is that the bond, which must be filed before a sale may be made under the power contained in the mortgage shall be “to abide by and fulfill any order or decree which shall be made by any court of equity in relation to the sale of such mortgaged property or the proceeds thereof; and such bond shall be and remain as an indemnity to and for the security of all persons interested in such mortgaged property or the proceeds thereof and be subject to be sued as ■other bonds taken in the name of the State and subject to the same limitations and disabilities as such other bonds.” Code, art. 66, secs. 7, 6. After a bond had been approved and filed in what developed to be an insufficient amount, a sale had been reported, ¹²⁶ and jurisdiction assumed by tbe court of equity, tbe second bond, now under consideration, was required by the chancellor, and given by the assignee, because of the inadequacy of the principal amount of the first bond, and there can be no question of the duty and power of the chancellor thus to act. Code, art. 66, secs. 6-13; Warehime v. Carroll County Bldg.

Assn., 44 Md. 516; Cockey v. Cole, 28 Md. 283 ; Gaither v. Tolson, 84 Md. 641 , 36 A. 449 ; Warfield v. Dorsey, 39 Md. 302 ; Hebb v. Mason, 143 Md. 353 , 122 A. 318 ; Bilbrey v. Strahorn, 153 Md. 494 , 138 A. 343 . The chancellor’s power to increase the penalty of the bond to such an amount as may seem proper upon cause thereof appearing or being shown is confirmed by statute. Code, art. 16, sec. 248; .Condon v. Updegraf, 117 Md. 75 , 83 A. 145 ; Employers’ Liability Assurance Corp. v. State, supra. The proof having established the death of the assignee and the appointment of a substituted trustee, whom the chancellor authorized to collect all moneys due in the proceedings, and to account for and disburse the same in regular course in the same manner and to- the same extent as the assignee of the mortgage was authorized to do'; an account wherein the original trustee or assignee was charged with the $5,300 purchase money and credited with his allowance, and distribution made of the residue among the parties en titled; a final ratification of this account; and then, pursuant to his duty and authorization, a demand upon the personal representative of the dead assignee, and a failure of the personal representative of the assignee to pay anything but a small dividend on an admitted obligation as trustee— there was evidence of a breach of the covenant, which, prima facie, entitled the substituted trustee to recover on the bond.

Code, art. 16, sec. 249, and supra. If the defending surety be exempt from liability, it must be due to facts which limit the scope of the plain terms in which the surety’s obligation is fixed by the written instrument and the statute. The argument that the receipt by the assignee of the trust fund and his use of it in his own affairs before the execution and delivery of the additional bond relieved the ¹²⁷ surety of any obligation under the bond is based upon a misconception of the nature of the contractual relation and obligations assumed by the assignee or trustee and his surety. The willful and fraudulent appropriation by a trustee for his individual use of the moneys held by him in trust is at once a breach of trust, for which, upon proper procedure, the trustee may be removed, and an embezzlement, for which he becomes personally subject to- prosecution and punishment by the criminal law.

The wrongful act of the trustee is punishable at criminal law, notwithstanding the wrongdoer may have made full restitution before the beginning of his prosecution. His civil liability and that of his surety for his breach of duty ends, however, if, at any time between the wrongful appropriation of the money or trust funds and the bringing of an action on the bond, the trustee should make full restitution, so that no loss or injury resulted from his breach as a fiduciary. Ringgold v. Ringgold, 1 H. & G. 11, 26, 70, 71 ; Ricketts v. Montgomery, 15 Md. 16 , 53; Welbourn v. Kleinle, 92 Md. 114, 129 , 48 A. 81 ; Brooks v. Brooke, 12 G. & J. 306, 319 . Consequently, the mere diversion of money to the trustee’s use would not create either a legal or equitable cause of action on the bond.

Something more is required, because instances occur of imprudent or improper deviations from sound fiduciary conduct by a trustee of unquestioned integrity and motive-, where these deviations, while not approved and at the risk of the trustee, do not result in loss to the trust or its beneficiaries, nor justify a removal of the fiduciary. Perry on Trusts (7th Ed.), sec. 276, p. 193 and note 93, secs. 279, 127-129, 113-117, 168. Again, the covenants of the bond are to- protect the corpus and its product from loss. Although the fiduciary may be guilty of breaches of trust which would cause his removal, yet, if no loss be thereby sustained, there would be no breach within the contemplation of the bond, whose language is translated in monetary terms and confined in its operation to breaches resulting in a pecuniary loss for which an account may be had.

For these reasons, the general rule is that before a trustee may be said to be in actionable default, ¹²⁸ with respect either to the corpus of his trust or to- its yield, within the contemplation of his bond as fiduciary, the breach of duty must generally be shown or proved by proceedings in equity and become the subject-matter of an order or decree in an accounting there rendered and had. Infra. Since the obligations on the bond are in contract, the remedy on the bond, after the account taken in equity, is at law, but not until a demand has been made by a proper party upon the trustee and there has been a refusal or failure on his part to comply. State v. Annan, 1 G. & J. 450 ; Scott v. State, 2 Md. 284 ; State v. Mayugh, 13 Md. 371, 377, 378 ; State v. Digges, 21 Md. 240, 242, 243 ; State v. Banks, 76 Md. 136, 141 , 24 A. 415 ; National Surety Co. v. State, 152 Md. 71, 73, 79, 80 , 136 A. 274 .

The exceptions to this general rule are limited to those instances where an action at law either does not lie against the sureties or is an inadequate remedy because of some fraud, accident, mistake, or other ground of equitable cognizance. Under these circumstances and to prevent a failure of justice, equity will assume: jurisdiction and enforce the obligation of the bond according to its obvious meaning and design, as, by way of illustration, where the demand cannot be made because of the death of the trustee without the completion of the trust and the ascertainment of his indebtedness by an audit (Dent v. Maddox, 4 Md. 522, 529 ; Thruston v. Blackiston, 36 Md. 501, 503, 508 ; Gorsuch v. Briscoe, 56 Md. 573, 577 ), or where the trustee’s indebtedness is determined by a ratified account which, however, does not make a complete distribution of the trust-fund, and no demand can be made because of the trustee’s intervening death (Employers’ Liability Assurance Corp. v. State, 161 Md. 103 , 155 A. 324 ), or where the trustee is delinquent, has wasted the estate, and dies insolvent, so that a proper party in interest could not put himself in a position to proceed at law by obtaining an award in equity against the trustee, accompanied with notice and demand of payment. Brooks v. Brooke, 12 G. & J. 306, 308, 318-321 . These cases exemplify the point that the breach of duty contemplated by the obligors was a refusal or failure of the ¹²⁹ trustee to pay, upon proper demand, according to an accounting in equity.

Brooks v. Brooke, supra. The circumstance that, before the delivery of the second bond, the assignee had used the