Fetting v. Flanigan

Henderson, J., delivered the opinion of the Court. This is an appeal from a decree of the Circuit Court of Baltimore City,. dated December 26, 1944, directing execution by equitable procedure (under Section 211, Article 16 of the Code) against certain funds due to the estate of Katherine Roney and Margaret C. Fetting from a trust created under the will of Jbhn D. Roney. John D. Roney died on June 24, 1941, leaving an elaborate will and codicil disposing of a large estate. After certain proceedings in the Orphans’ Court of Baltimore City, the executors and trustees under the will and codicil filed a bill of complaint on October 15, 1942, in the Circuit Court of Baltimore City, making all beneficiaries parties defendant, and asking the court to assume jurisdiction of the further administration of the estate and to determine the many complicated questions arising therein.

Answers were filed on behalf of all the defendants and the court assumed jurisdiction. Miss Roney and Mrs. Fetting were sisters of the decedent and entitled to several bequests and devises under his will. By item 2, he devised his residence, No. 3400 ⁵⁰² Strathmore Avenue, to them jointly; by item 3 his automobile to them jointly; by item 4 he bequeathed his jewelry and personal effects to Mrs. Fetting. By item 19 he bequeathed $15,000 to each of them.

By item 20 he set up a $100,000 trust for Miss Roney for life; by item 22, he set up a $125,000 trust for Mrs. Fetting for life. By item 27, he created a trust for Mrs. Fetting, for life, in certain shares of stock. In item 46, he provided that the beneficiaries under items 20 and 22 should have the unqualified right to draw $3,000 a year from corpus. Prior to his death, the decedent made Miss Roney and Mrs. Fetting the beneficiaries of life insurance totalling $67,939.94, and transferred to them interests in a joint bank account amounting to $33,688.70.

He likewise transferred to Mrs. Fetting the property, 3405 Strathmore Avenue, appraised at $5,500 but reserved full power to sell or convey it during his lifetime. These interests were not mentioned in the will and did not pass under it. John D. Roney left no children or descendants, and his wife predeceased him. Many of the requests in his will wqre to charitable or religious organizations, friends, employees or business associates.

But the principal objects of his bounty were his three sisters, a sister-in-law, and his nephews and nieces. On November 16, 1940, about three months before the execution of the will, Mr. Roney sold to his nephews, Francis D. McNamara and Donald C. McNamara, a large block of stock in the Globe Brewing Company, at a price of $500 per share, for which he took their promissory note. Said stock was afterwards reappraised by the Federal authorities at $802.85 per share. By item 31 of his will the testator forgave the payment of the note or any unpaid balance thereon, upon condition that “they shall jointly pay to my estate the amount of the Maryland inheritance tax chargeable against this forgiveness of debt and legacy, and also jointly a proportionate share or part of the total Federal estate tax ⁵⁰³ payable by my estate, and also any additional sums necessary to pay all other legacies given, bequeathed and preferred under this, my will, and in accordance with the terms hereof and especially any overpayment or deficit occasioned thereby.” In item 37 of the will certain legacies were directed to “be preferred and paid in full free of all taxes to the exclusion of any and all other items.” In this category were items 19, 20 and 22.

Certain items were directed to be preferred and paid in full free of all taxes “except for the Maryland inheritance tax which shall be paid by the respective legatees.” In item 45, Federal Estate Taxes chargeable against items 19, 20 and 22 were directed to be paid out of the corpus of the estate, so that the legatees should receive their legacies “without diminution from any such taxes.” Other provisions required stock legatees to pay “a proportionate part” of the total Federal Estate Tax payable by the estate. It should be noted that after the payment of debts and legacies there was no residuary estate, but rather a deficiency which was duly apportioned among the legatees chargeable therewith. Virtually all of the questions raised by the bill and answers were settled by agreement of counsel and confirmed by decree of court passed on March 1,1943, whereupon the matter was duly referred to the auditor, who stated an account on May 21, 1943. An order nisi was signed thereon.

This account for the first time set up as a credit for Federal Estates Tax, items to be collected from Katherine Roney, 37,883.75, and from Margaret Fetting, 39,290.91. The details of these items were explained in Auditor’s Exhibit No. 1, under the heading “Calculation of apportionment of U. S. Federal Estate Tax.” Miss Roney was there charged with one-half the taxable portion of life insurance, in excess of 340,000, and one-half the joint bank account, Mrs. Fetting was charged with one-half the taxable portion of the life insurance, one-half the joint bank account, and the value of the property No. 3405 Strathmore Avenue. The audi ⁵⁰⁴ tor’s report, accompanying the account, called specific attention to the exhibit showing the liability for the tax. Notice of the filing of the auditor’s account was duly given to the appellant’s counsel of record, but no exceptions were filed thereto, and the account was finally ratified on June 2, 1943.

There is not the slightest suggestion that their attorney neglected or failed to examine the account, or acquaint his clients with its contents. Mrs. Fetting, on the stand, would go no further than to say that she did not recall getting any postcard notice; of course, this notice went to the attorney of record, under Rule 15 of the Supreme Bench of Baltimore City. Mr. Wrightson, of the Safe Deposit and Trust Company, testified that he talked with Miss Roney and Mrs. Fetting about their liability for a portion of the Federal Estate Tax on numerous occasions, both before and after the filing of the auditor’s account. The first occasion was three or four months after the death of Mr. Roney, when the insurance proceeds were collected for them by the Safe Deposit and Trust Company.

Mr. Wrightson also testified that Miss Roney and Mrs. Fetting made an agreement with him in October, 1943, whereby they would pay the amounts charged against them out of amounts they might draw from the corpus of their respective trusts, but such an agreement was denied. In a letter to the appellees dated October 28, 1943, the appellants returned checks he had drawn for them to sign to pay the liability; they said they would give the matter consideration, and inquired why their legacies were not exempt under the will. On February 16, 1944, they refused to pay, and nothing has been paid on account thereof. In the course of the hearing below Mrs. Fetting was asked the specific question, “When was the first time that you had any knowledge of that charge in the auditor’s account?” Her reply was: “I knew—my sister and I knew that we owed the money. * * * My sister and I had known of the tax, but we could never really understand it because I thought the tax * * * was to be paid by ⁵⁰⁵ the Brewery stock.” It is perfectly clear that they knew what they were charged with before they discussed settlement with Mr. Wrightson in October, 1943.

Presumably they gained this knowledge from their attorney at the time the account was filed. Katherine Roney died on April 5,1944, intestate. Margaret C. Fetting died May 28, 1945, and on June 8, 1945, John H. Fetting, her executor, intervened in this appeal. All of the income due to Miss Roney, Mrs. Fetting, or their legal representatives, has been paid, but the appellees are holding $9,000 of corpus due to each of their personal representatives.

These are the funds sought to be reached by equitable execution in this proceeding, by petition filed by the appellees on September 22, 1944. By their answers filed a year and four months after the filing of the auditor’s account, the appellants prayed the court to vacate the said auditor’s account on the grounds: (1) That the apportionment of Federal Estate Tax charged against the appellants was erroneous and illegal and contrary to the intent and direction of the testator; (2) that the question of-liability was never considered or acted upon by the court or heard upon its merits; (3) that the funds in the hands of the trustees are protected from execution by reason of the spendthrift trust set up in item 39 of the will, and (4) that the appellants are entitled to payment of $4,000 under item 19 of the will, heretofore charged against these legatees as an advancement. The appellees filed a demurrer and answer, and set up a plea of res adjudícala.. After testimony and hearing the chancellor passed the decree appealed from, allowing execution and disallowing the counterclaim. 1.

The theory upon which the auditor apportioned the tax is based upon the applicable Federal and Maryland Statutes. Section 826 (c) of the Internal Revenue Code, 26 U. S. C. A., Int. Rev. Code, Sec. 826 (c), as it stood at the time of the testator’s death, provided: “If any part of the gross estate consists of proceeds of policies of insur ⁵⁰⁶ anee upon the life of the decedent receivable by a beneficiary other than the executor, the executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds, in excess of $40,000, of such policies bear to the net estate.” Section 126, Article 81, of the Maryland Code, 1939, places a similar obligation upon the transferees of property required to be included in the gross estate “except in a. case where a testator otherwise directs [by] will.” The appellants’ whole case rests upon the contention that, by the general scheme of the will, an intention on the part of the testator to relieve these particular legatees may be inferred. It is perfectly clear, of course, ■that the language dealing with payment of taxes on particular legacies is not broad enough to cover taxes on property passing outside the will, but subject to Federal Estate Tax as a part of the gross estate.

The stock legatees are expressly charged only with “a proportionate part” of the total estate tax. 2. In the view we take of the case, however, it is unnecessary to pass upon the correctness of the charges set up in the auditor’s account. That account, including the apportionment of the Federal Estate Tax, was filed on May 21, 1943. Notices in the usual form were sent out by the auditor.

Mrs. Fetting and Miss Roney were represented by competent counsel, and they did not at any time deny full knowledge of the fact that they were charged with tax liability in the auditor’s account. No exceptions were filed and the account was finally ratified and confirmed. In Miller’s Equity Procedure, Sec. 552, p. 650, it is said: “An order finally ratifying and confirming an auditor’s report and account is an order in the nature of a final decree from which an appeal will lie. It is in every sense a judgment of the Court; for although it may not constitute a part of the final judgment on the whole case, it is nevertheless always considered as. a judgment conclusive of the matter to which it relates, .subject only ⁵⁰⁷ to be reheard or revised for such causes as would induce the