Green v. Lombard

³ Digges, J., delivered the opinion of the Court. Judge E. Mackall Childs, sitting by special assignment in the Circuit Court for Baltimore County, after receiving reams of testimony, concluded that Samuel A. Green, Jr., breached his fiduciary duties as substitute committee for the estate of Miss Winifred Waterman, a woman under disability who is now in her mid-eighties, and that consequently he should not only be removed from that position of trust but in addition should be surcharged for losses and certain expenses which the estate sustained due to his misdeeds. Green does not take issue on this appeal with either the trial court’s conclusion that he be removed as committee or the chancellor’s findings of fact; accordingly, since Green’s defrocking as committee is not challenged and as the record is replete with evidence to support the chancellor’s factual determinations which we do not find to be clearly erroneous (Maryland Rule 1086) we will not reassess these aspects of the trial court’s decision. What is before us then are: the contentions of Green that certain aspects of the surcharge are substantively incorrect or are procedurally barred; and the assertions of the appellees, Julia W. Lombard and Mimi Worthington Foster, two nieces of Miss Waterman, who cross-appeal on her behalf and urge that under the facts and the law a more substantial surcharge should have been adjudged. 1 Before discussing the specific events which form the basis for or against the various surcharges, we set the stage by summarizing the chancellor’s determinations concerning Green’s stewardship as committee for Miss Waterman’s estate. ⁴ After a proceeding under a writ of de lunático inquirendo conducted in 1937, at which Miss Waterman was found to be of unsound mind, the court entrusted her assets, shown to be $116,836.95 at the first audit, to Henry K. Ravenal as the committee for her estate.

Mr. Ravenal, who during his entire term of service neither requested a counsel fee nor charged a commission in excess of five percent, served faithfully and well until his death in the winter of 1958, at which time the estate’s corpus was valued at $195,127.90. Soon thereafter, in March of 1959, a substitute committee, George T. Worthington, III, was entrusted with the Waterman estate. The integrity of the first committee, however, was not to be emulated by the substitute as considerable indiscretion, it was subsequently discovered, keynoted Worthington’s tenure. It was in the wake of service by these two committees, one honorable and one not, that Green, after Worthington resigned, took up the reins of managing Miss Waterman’s estate in the spring of 1963.

Almost before Green had finished buttoning his newly-entrusted committee cloak he began to make thousands of dollars of mortgage loans from the Waterman estate, mostly on properties located along Charles Street in Baltimore City, to one of his own clients, Baltimore Property Management, Inc. (BPM), a corporate alter ego of King W. White, its president and Green’s longtime personal friend. As time passed Green lent BPM and White personally larger and larger sums of the estate’s money (determined by Judge Childs to eventually reach a total of $162,234.64), none of which loans to BPM were secured by White’s personal guarantee. 2 To make matters even worse, many of the basic facts concerning the loans were not brought to the attention of the court either before or after they were made, as Green was required to do by various statutes; the information about those that were turned out to be largely incomplete, ⁵ inaccurate, or suspiciously self-serving. Not only were the mortgage loans imprudent and the all too infrequent accountings to the court concerning them sketchy and inaccurate but, as if to add insult to injury, Green, without discussing his unacceptable activities, successfully petitioned the court each year for the maximum commission allowed a committee as well as for substantial attorneys’ fees for himself and his various associates. Bearing in mind that a committee acts in a capacity demanding unreproachable integrity and fidelity, and which in a very general way entails three duties: “1.

To carry out the trust; 2. To use care and diligence; 3. To act with good faith,” 4. Pomeroy, Equity Jurisprudence, § 1061 (5th ed. 1941), it is painfully obvious even from this abbreviated factual exposition, that Green was an unfaithful fiduciary.

When a committee acts improperly, and this indiscretion is brought to the attention of the court, it becomes the duty of that court to assess the damage his misdeeds have caused and then to impose the appropriate sanction, including surcharging if that becomes necessary, so that the fiduciary personally is made responsible for repairing the harm he has wreaked upon the estate. Stone v. Stone, 230 Md. 248 , 186 A. 2d 590 (1962). Accordingly, we now turn to evaluate which duties Green breached and the price he must pay for his improprieties. While administering a trust which involves investment, a fiduciary’s duty to the estate requires that he “exercise the care and skill of a man of ordinary prudence dealing with his own property.” Code (1957, 1969 Repl.

Vol., 1973 Cum. Supp.) Art. 93A, § 212. 3 Although that standard has only been statutorily mandated since July 1, 1969, it has long been engrained in Maryland law. Goldsborough v. DeWitt, 171 Md. 225, 258 , 189 A. 226 (1937) (executor); Zimmerman v. Coblentz, 170 Md. 468, 484 , 185 A. 342 (1936) (trustee); Fox v. Harris, 141 Md. 495, 496 , 119 A. 256 (1922) (trustee); Gilbert v. Kolb, 85 Md. 627, 634 , 37 A. 423 (1897) (trustee); Gray v. ⁶ Lynch, 8 Gill 403, 430-31 (1849) (trustee). This standard is not at variance with that used throughout the country.

See 2 Scott, On Trusts, § 174 (3d ed. 1967); 5 Bogert, Trusts & Trustees, § 541 (2d ed. 1965); Restatement, Second, of Trusts, § 174 (1959). Our predecessors, when considering this duty with respect to the making of mortgage loans concluded, in Gilbert v. Kolb, supra, that the fiduciary must “use due diligence (1), to see that the title was valid, and (2), that the value of the property at the time of the loan is such as would in all probability be adequate security for the repayment of the loan whenever the mortgage should be called in.” 85 Md. at 634-35 . As far as Green’s investment activities with BPM and White are concerned, he clearly violated his duty to the estate. He failed to “see that the title was valid” and in fact has been unable to produce any certificate of title or title insurance, which, until 1970, Rule V74 d 2 specifically required him to obtain.

Furthermore, and of much greater importance, Green did not fulfill the second prong of his duty as delineated in Gilbert in that he failed to obtain adequate security for the mortgage loans to BPM and White. This is evidenced by the fact that the original Charles Street mortgage loans were from 90 to 106 percent of the price paid by BPM, the mortgagor, only a short time before the loans were extended to purchase and improve the various tracts; such an amount in an arm’s length transaction, is a prime indicator of the realty’s fair market value in the absence of a definitive showing to the contrary. Gilbert v. Kolb, supra; 3 Scott, On Trusts, § 229 (3d ed. 1967) (50 to 662/3 percent ordinarily permissible); 7 Bogert, Trusts & Trustees, § 674 (2d ed. 1965) (40 to 50 percent ordinarily permissible); Restatement, Second, of Trusts, § 229, comment a (1959) (50 to 662/3 percent ordinarily permissible). Green attempts to defend against this failure to secure adequate security by proffering appraisals which state that the Charles Street tracts are worth far more than their purchase prices.

But this answer is to no avail, as not ⁷ only were some of the appraisers not informed of the purchase price but the employment of all of them was actually procured by the borrower, White; 4 thus since the appraisals were not independently prepared, they must be considered suspect. Cf. Webb & Knapp v. Hanover Bank, 214 Md. 230, 246 , 133 A. 2d 450 (1957). The record also clearly supports the chancellor’s finding that not only did Green fail to use the requisite care in regard to the BPM and White mortgage loans, but he failed in at least two other responsibilities relative to his role as the estate’s investment administrator.

A fiduciary is required, when he sees that a loan is no longer worthwhile, to promptly salvage the investment as best he can. As stated in Zimmerman v. Coblentz, 170 Md. 468, 476 , 185 A. 342 (1936): “authority to invest in the specified form ... is not authority to continue the investment under all circumstances. On the contrary, there is a duty on a trustee to present to the court forthwith any known condition, or condition which reasonable watchfulness would discover, and which might render it advisable that the investment be changed, and obtain its further order. Jones v. Stockett, 2 Bland 409, 426.” Green not only was tardy in informing the court when the mortgagor defaulted, but, when for a prudent investor the writing was on the wall as to the loan’s poor health, he poured even more money into the investment. 5 Secondly, ⁸ Green failed to “diversify investments so as to minimize the risk of large losses.” 3 Scott, On Trusts, § 228 (3d ed. 1967); see 6 Bogert, Trusts & Trustees, § 612 (2d ed. 1965); Restatement, Second, of Trusts, § 228 (1959).

While diversification is not under all circumstances required, York v. Md. Trust Co., 149 Md. 608 , 131 A. 829 (1926), a prudent man, considering the size and content of Miss Waterman’s estate, the needs of the beneficiary and other relevant matters, would in all probability have concluded, as did Judge Childs, that Green should not have placed so many eggs in the BPM mortgage basket. See Pennsylvania Co. for Insurance on Lives & Granting Annuities v. Gillmore, 142 N.J.Eq. 27, 59 A. 2d 24, 33-34 (1948) (overinvestment in mortgages). Green, within one year of taking office, invested 61 percent of the gross estate in mortgage loans to BPM and White, his client and friend, with 41 percent secured by the Charles Street properties, and subsequently increased and re-increased the amount of those loans. Another area of responsibility in the exercise of which Green was extremely remiss, is the fiduciary duty to keep full, accurate and precise records.

This record-keeping function is required by statute, rule and case law. Code (1957, 1969 Repl. Vol., 1973 Cum. Supp.) Art. 93A, § 209 (b)(d) (effective July 1, 1969); 6 Code (1957, 1966 Repl.

Vol., 1968 Cum. Supp.) Art. 16, § 135; Rule V74 (Code (1957, 1971 Repl. Vol., 1973 Cum. Supp.) (effective July 1, 1969)); 7 Rule V74 ⁹ (Code (1957, 1963 Repl.

Vol., 1969 Cum. Supp.)); Berlage v. Boyd, 206 Md. 521, 532 , 112 A. 2d 461 (1955), and cases cited therein; 2 Scott, On Trusts, § 172 (3d ed. 1967); 10 Bogert, Trusts & Trustees, § 962 (2d ed. 1965); Restatement, Second, of Trusts, § 172 (1959). Throughout Green’s tenure he maintained, what might be characterized as sloppy, incomplete and inaccurate records; 8 in fact, at trial he was unable to produce any records for the years 1967-70, which he attempted to justify by claiming that he destroyed all of his estate paperwork for those years because a trust clerk in the court told him that he no longer needed to keep it. As Judge Childs said: “it requires no citations to say that [Green] as an attorney of sixteen years’ experience was charged with knowledge of what the law requires of a guardianf; he] had no right to rely on the gratuitous advice of a clerk.” In addition to his investment and record-keeping failures, we agree with Judge Childs’ finding that Green remunerated himself and his associates substantially in excess of that which is proper.

If it is deserved or necessary in order to properly administer an estate, a committee may charge up to the maximum commission established by law, employ himself as attorney for the estate if one is required, Taylor v. Denny, 118 Md. 124, 130-34 , 84 A. 369 (1912); F. &P. Bank v. Martin, 3 Md. Ch. 224, 225 (1852), and acquire the services of outside counsel should that be necessary and desirable, Amer. Colonization Society’s Case, 132 Md. 524, 536-38 , 104 A. 120 (1918); 3 Scott, On Trusts, § 188.3 (3d ed. 1967); 6 Bogert, Trust & Trustees, § 555 (2d ed. 1965); Restatement, Second, of Trusts, § 188, comment c (1959). That which Green charged in each of these respects was undeserved, unnecessary and exorbitant. During Green’s approximately ¹⁰ ten-year tenure the estate paid out, as far as the record now discloses, 9 a total of $45,458.45 in commissions to Green, a total of $9,650 in counsel fees to this same fiduciary, and in addition a total of $8,921.50 to outside counsel employed by Green to perform services for the estate.

Although he always requested the maximum commission (10%) and hefty counsel fees, his petitions for these, except for the first two years, never explain why; in fact, for two years, 1971 and 1973, he took the full commission as well as attorney’s fees but without ever asking for or obtaining court authority. Subtracting from the total estate income that part which was derived from a separate trust Green did nothing to manage, 10 in every accounting period between January 1, 1963, and December 31, 1966, Green’s combined commission and counsel fee add up to a shade below half of the income his efforts yielded; in 1967 he received about 67 percent of what he produced; in 1968, 1969, 1971 and 1972 his remuneration exceeded the income from that part of the trust corpus he administered, with the 1970 figures merely a few dollars apart; however, it is true that in 1973 he received only 16 percent of what his efforts produced. Based on the evidence, including that which we have briefly related, Judge Childs summed up Green’s multitudinous transgressions as follows: “a) As guardian of Miss Waterman, the defendant [(Green)] failed in his duty to maintain accounts and records which were accurate, precise, complete and regular. b) He failed in his duty to exercise his powers as guardian with the care and skill that ordinary prudence required. ¹¹ c) He failed in his duty to furnish the court with complete and accurate information when requesting authorization to invest. d) He failed in his duty to report to the court the defaults under mortgages as soon as they occurred, thereby exposing the estate to the probability of greater loss than it would have sustained but for his failure to act. e) He either wilfully misrepresented material facts to the court leading to action by the court in reference to the fiduciary estate, or made said statements with such careless disregard for their accuracy as to constitute a wilful misrepresentation. f) He failed in his duty to require security for estate funds expended. g) He spent estate funds without sanction of the court. h) He failed in his duty to exercise good faith and loyalty to the fiduciary estate.” We think that this is an appropriate recapitulation which is amply supported by the evidence and certainly is not clearly erroneous. (Rule 1086).

From the storm raging about his regime as committee, Green seeks the shelter of several ex parte court orders, which on their face authorized him to make various expenditures and investments, asserting that these orders, as they “contained no reservation of equities or power of further direction,” Pinkston v. Swift, 231 Md. 346, 351 , 190 A. 2d 533 (1963), quoting Pugh v. Waclawski, 211 Md. 346, 350 , 127 A. 2d 376 (1956), were final decrees or at least orders in the nature of final decrees, such that they became enrolled thirty days after they were entered, dates which have long since passed. 11 Rule 671 a. While it is true that ¹² once enrolled, these equity decrees