Gotham Hotels, Ltd. v. Owl Club, Inc.

Smith, J., delivered the opinion of the Court. Appellant, Gotham Hotels, Ltd. (Gotham), sought unsuccessfully in the Circuit Court of Baltimore City to circumvent the holding of the Court of Appeals in Owl Club v. Gotham Hotels, 270 Md. 94 , 310 A. 2d 534 (1973). It will be equally unsuccessful here. The factual background must be briefly recounted for a clear understanding of the matter.

Gotham owned the Belvedere Hotel in Baltimore, a formerly renowned hostelry which had fallen upon hard times. It leased the hotel to The Snowden Corporation (Snowden). Snowden sublet a portion of the premises including The Owl Room to appellee, Owl Club, Inc. of Baltimore (Owl). Owl sued Gotham and Snowden in the Superior Court of Baltimore City.

Summons for Gotham was laid in the hands of its corporate resident agent. Judge McWilliams said for the Court in Owl Club, 270 Md. at 96 , that an officer of the resident agent testified that the suit papers were forwarded to its New York office, which in turn forwarded them to Gotham’s attorney. Owl ¹⁶⁰ moved for a judgment by default when a responsive pleading was not entered within the time specified in the Maryland Rules. Judgment by default was entered on the same day, September 14, 1972, which was several weeks after the time for pleading expired.

Owl requested that the case be set down for an inquisition on the default judgment. Notice of this hearing was mailed by the Baltimore City assignment commissioner to the resident agent. The resident agent also forwarded this notice to its New York office which said it forwarded the notice on to Gotham. No appearance was made on behalf of Gotham at the inquisition.

Judgment in the amount of $110,000 was entered in favor of Owl against Gotham on October 26,1972. There was testimony in Owl Club that when the vice-president of the insurance company which held the first mortgage on the Belvedere called one of Gotham’s vice-presidents a few days after the extension of the judgment as a result of a news account he had read in the local press relative to the judgment, he is said to have been informed by that Gotham vice-president that the judgment was worth about 30 cents, the price of bus fare in Baltimore. Owl directed the issuance of the writ of fien facias on the judgment on December 15, 1972, as a result of which a sheriffs sale of the hotel was scheduled for January 16, 1973. On the morning of January 16 Gotham filed a petition in the Superior Court of Baltimore City.

Claiming that it had no knowledge of the litigation until December 28, 1973, it alleged that the “judgment was obtained by way of fraud, and/or was predicated upon mistake and/or was based upon or affected by irregularity.” It claimed to have “a complete, meritorious, legal defense” to Owl’s suit and said that “the case ha[d] never been heard on the merits.” The judgment was ordered stricken. On appeal Judge McWilliams said for the Court: “In the case at bar Judge Carter held a hearing but,. as we have indicated, Gotham failed to establish the essential requirements [for striking a judgment], one of which, and the only one we shall ¹⁶¹ dwell upon, is the need to show that it had acted in good faith and with ordinary diligence. We find it impossible to attribute good faith and ordinary diligence to a defendant whose estimate of the worth of a $110,000 judgment is 30 cents, particularly at a time when it had at least 20 days of the 30 day period in which to file a motion to set it aside. That it waited until the morning of the day of sale does not diminish the lack of diligence.” Id. at 102 .

Owl Club was decided by the Court of Appeals on October 29, 1973. On February 13, 1974, Gotham filed its bill of complaint in the Circuit Court of Baltimore City in which it prayed that Owl might be perpetually enjoined from enforcement of its judgment, asserting that the judgment was “based on fraud, concealment and misrepresentation as practiced before both the Superior Court of Baltimore City and the Court of Appeals of Maryland.” A demurrer interposed by Owl was sustained with leave to amend. A demurrer to an amended bill of complaint was sustained without leave to amend. This appeal followed.

The amended bill of complaint recites the filing of suit by Owl on July 24, 1972, “wherein [Owl] alleged certain damages arising from a lease as between it and The Snowden Corporation . . . and arising from certain acts by [Gotham]”; that Snowden was not served, “however, a default judgment was rendered against Gotham on September 26, 1972”; that on October 26, 1972, in the Superior Court of Baltimore City an inquisition was held “to determine damages suffered by the Owl Club as against [Gotham] allegedly in default,” at which inquisition “it was shown that the resident agent of Gotham . . . had been served in Maryland,” and “[d]amages allegedly suffered by Owl Club were assessed to be One Hundred Ten Thousand Dollars”; that on January 16, 1973, a hearing was held on Gotham’s motion to set aside this judgment and inquisition prior to an attempt to sell the Belvedere “wherein Gotham introduced the fact that at the inquisition, a lease, as ¹⁶² between Snowden Corporation and Gotham was introduced — however, a subsequent lease between the Snowden Corporation and Owl Club was never introduced into evidence nor alluded to, and that the fact that the . . . Owl Club had no contract, agreement or understanding of any kind with Gotham was improperly and fraudulently concealed from the Superior Court,” as was “the fact that the Snowden Corporation was in default on its obligations to Gotham” (followed by a lengthy quotation from the opinion of the trial judge setting aside the judgment); that following the striking of the judgment an appeal was entered to the Court of Appeals of Maryland “and that body saw fit to reverse [the trial judge’s] opinion with regard to the striking of the judgment,” but “[n]owhere in its opinion did the Court of Appeals of Maryland address itself to the leases in question, and the fraud and concealment practiced by the Owl Club as discussed by [the trial judge] and as alleged by Gotham”; that Gotham’s motion for reargument in the Court of Appeals was denied and it “has, therefore, exhausted all remedies and actions at law”; that “[i]n anticipation of Owl’s defense of res judicata” Gotham “contends that those equitable defenses not raised before the Superior Court of Baltimore City or in the Court of Appeals of Maryland, which remain available to it in . . .a Court of Equity, are: (a) [t]he power of the Equity Courts to enjoin judgments obtained by fraud where the fraud is demonstrated to have been extrinsic, i.e., fraud practiced upon the unsuccessful party and preventing him thereby from presenting his case; (b) [t]hat it is a generally accepted principle of equity that extrinsic or collateral fraud practiced in another Court on which a judgment was based may, in the discretion of the Equity Court, result in equitable relief where the unsuccessful party was prevented from protecting his rights in the action before the judgment was rendered; (c) [t]hat the actions described above and frauds as practiced by the Owl Club constitute cause for the invocation of equitable relief on the theory that the .conscience of the Equity Courts and the general principles of equity have been so obviously violated.” This was followed in ¹⁶³ the bill of complaint by three paragraphs devoted to a review of the opinion of the Court of Appeals; the allusion by the trial judge in his opinion to New Freedom Corporation v. Brown, 260 Md. 383 , 272 A. 2d 401 (1971), an equity case, which said, “ ‘however, originally, there was no determination on the merits and in such circumstances an enrolled decree may be set aside on a petition filed in the original proceedings if there is a showing that the decree was entered by surprise or mistake or if the circumstances are such as to satisfy the Court in the exercise of a sound discretion that the decree should be set aside’ ”; and the statement that the Court of Appeals in its opinion in Owl Chib did not address itself to the relief sought by Gotham since it “did not find that good faith had been practiced.” Gotham in its argument to us sees three questions, (1) whether “the Circuit Court for Baltimore City err[ed] in finding in its Order that the fraud, if any, committed by Owl Club, if proven, would not meet the standard required to invoke equitable relief and did not constitute an action on the part of the Defendant that prevented Gotham Hotels from presenting its defense”; (2) whether that court erred “in not permitting the presentation of a defense on the merits by [Gotham] before rejecting equitable relief”; and (3) whether that court erred “in not addressing itself to and not finding that general maxims of equity are violated if the Owl Club, Inc. of Baltimore is allowed to pursue its judgment.” The contentions of Gotham may be boiled down into two, that equity will act to set aside a judgment in an action at law not tried on its merits if it was procured by fraud and that in this instance extrinsic fraud was present. One of the earlier cases involving equity and fraud relative to a judgment at law is Marine Insurance Company of Alexandria v. Hodgson, 11 U. S. (7 Cranch) 332 , 3 L. Ed. 362 (1813).

A vessel there had been insured by an insurance company for a voyage “from St. Domingo to her port of discharge in the Chesapeake.” It was captured. The owner obtained a judgment in the amount of $8,000 under the insurance policy. The insurance company brought suit in ¹⁶⁴ equity to obtain an injunction against enforcement of the judgment, claiming that the agent for the insured misrepresented the age and tonnage of the vessel. The Court said that “[tjhere [was] reason to believe that she was not worth more than $3,000.” Upon the basis of a valuation of $10,000 she had been insured for $8,000, in accordance with the company’s practice of not insuring any vessel for more than four-fifths of her real value.

In the circumstances of that case the Court found no fraud to have been practiced. In the process of its opinion Mr. Chief Justice Marshall said for the Court, however: “Without attempting to draw any precise line to which courts of equity will advance, and which they cannot pass, in restraining parties from availing themselves of judgments obtained at law, it may safely be said that any fact which clearly proves it to be against conscience to execute a judgment, and of which the injured party could not have availed himself in a court of law; or of which he might have availed himself at law, but was prevented by fraud or accident unmixed with any fault or negligence in himself or his agents, will justify an application to a court of chancery. “On the other hand it may with equal safety be laid down as a general rule that a defense cannot be set up in equity which has been fully and fairly tried at law, although it may be the opinion of that court that the defense ought to have been sustained at law. “In the case under consideration the plaintiffs ask the aid of this court to relieve them from a judgment, on account of a defense which, if good anywhere, was good at law, and which they were not prevented, by the act of the defendants, or by any pure and unmixed accident, from making at law. “It will not be said that a. court of chancery cannot interpose in any such case. Being capable of ¹⁶⁵ imposing its own terms on the party to whom it grants relief, there may be cases in which its relief ought to be extended to a person who might have defended, but has omitted to defend himself at law. Such cases, however, do not frequently occur.

The equity of the applicant must be free from doubt. The judgment must be one of which it would be against conscience for the person who has obtained it to avail himself. “The court is of opinion that this is not such a case.” Id. 3 L. Ed. 336 -37. In Gott v. Carr, 6 Gill & Johns. 309 (1834), judgments had been entered before a justice of the peace in favor of the defendant against the plaintiff on three notes. The plaintiff appealed to the county court.

It reversed, entering judgments in favor of the plaintiff. The defendant then filed a bill in equity to prevent execution upon those judgments on the ground that there had been threats and fraud in the procurement of the notes; that the defendant was unable “to prove in a Court of Law the want of consideration for the notes, they being under seal,” and that the judgments “were founded upon the testimony of [an individual], . . . stated to have been interested in the event of the suits, but who [in the opinion of the Court of Appeals did] not appear to have had the slightest interest.” In the process of reversing the decision by the chancellor, Chief Judge Buchanan said for the Court: “The questions presented for the consideration of the Court, are: 1st. Do the judgments at law in favor of the appellant, Susanna J. Gott, bar the defendant from maintaining this suit? 2d. If they do not, is the defendant, upon the case made by the bill and answers, and the proof taken in the cause, entitled to a perpetual injunction of those judgments? “1.

As to the preliminary question. It is a salutary principle of law, that every person is bound to take care of and protect his own rights ¹⁶⁶ and interests, and to vindicate them in due season, and in the proper place. And that if a defendant having- the means of defense in his power in an action against him, in a competent tribunal, neglects to use them, and suffers a recovery to be had against him, he is forever precluded from obtaining relief in Chancery, in relation to the same matter. The application of this principle may not be universal; but the cases in which Chancery will furnish relief against recoveries suffered to be had at law, are exceptions.

The well settled general rule being, that a Court of equity will not relieve against a recovery in a trial at law, unless the justice of the verdict can be impeached by facts, or on grounds, of which the party seeking the aid of Chancery, could not have availed himself at law, or was prevented from doing it by fraud or accident, or the act of the opposite party, unmixed with any negligence or fault on his own part. “And Chancery will only sustain a bill invoking its aid upon some new matter of equity, not arising in the former case; or seeking some relief, to which the powers of the Court of law were not fully adequate. “It is a sound and useful rule in the administration of justice, for the prevention of negligence, and harassing and protracted litigation, and the consequent burdensome accumulation of costs. A material departure from, or relaxation of which, would prove vexatious in practice, and be felt as a public grievance, by the great delays, and sometimes abuse of justice, to which it would lead. The effect might often be to prevent the prosecution of a just claim, by an injured and oppressed party, for the want of adequate means to pursue it through a protracted litigation, with a more fortunate adversary, whose object was delay, when the unavoidable expenses of the controversy would sometimes exceed the amount in dispute; and ¹⁶⁷ when, although he should ultimately succeed, his success might in effect prove a loss, or