Grinder v. Bryans Road Building & Supply Co.

Rodowsky, J., delivered the opinion of the Court. The liability of an undisclosed principal has been called an "anomaly” from the standpoint of the law of contracts. 1 Here we focus on a particular aspect of the anomaly. Where the creditor obtains a final judgment against one of the parties to the agency relationship, after learning of the existence and identity of the principal, the creditor is precluded from obtaining judgment against the other party. This is so even if the first judgment is unsatisfied.

Reexamination of this rule of law convinces us that it is unsound and should no longer be followed. We adopt the rule that, absent other defenses, the third party may ordinarily proceed against the agent, or the previously undisclosed principal, or both, until the performance is satisfied. This appeal arises out of a common business situation. G. Elvin Grinder (Grinder) of Marbury, Maryland is a building contractor.

He did business as an individual and traded as "Grinder Construction.” Grinder maintained an open account, on his individual credit, with Bryans Road Building & Supply Co., Inc. (the Plaintiff). On May 1, 1973 G. Elvin Grinder Construction, Inc., a Maryland corporation (the ⁶⁸⁹ Company), was formed. Grinder owned 52% of the stock. On May 1, 1978 the Plaintiff sued Grinder, individually and trading as Grinder Construction, on the open account, on which the balance represented exclusively purchases made after May 1, 1973.

A motion for summary judgment, with supporting affidavits and exhibits, accompanied the declaration. In his affidavit in opposition to the requested summary judgment Grinder swore that the purchases were made by the Company, acting either through him as president, or through others as agents for the Company, and that all purchases were used entirely on construction projects of the Company. As a result the Plaintiff on August 15, 1978 filed an amended declaration which joined the Company as an additional defendant. On February 23, 1979 the Plaintiff moved for summary judgment against the Company, predicating its motion on the sworn admissions of Grinder, the president of the Company, in his affidavit.

This motion was not opposed and summary judgment was entered against the Company in the amount of $5,912.68 on May 28, 1979. 2 At trial on the merits of the claim against Grinder, the Plaintiffs position was that it had never been advised that the Company was making purchases, that the purchases were made on the account of Grinder, the individual, and that he was liable for the balance. Grinder testified that the Plaintiff had been advised to convert the account to a corporate account. His counsel argued that the Plaintiff was estopped to deny that the account was a corporate one because the Plaintiff had taken summary judgment against the corporation. The trial court found as a fact that Grinder ⁶⁹⁰ had not notified the Plaintiff either that the billing on the open account should be transferred to a corporation or that Grinder’s individual liability should be terminated.

In its oral opinion from the bench, the trial court further found that the Company had received the assets for which the individual agent was billed, that the Plaintiff was unaware of the principal-agent relationship and that it was relying on the credit of the agent. In an application of pure legal reasoning, untainted by citation to the precedents, the trial court held that merely taking summary judgment against the principal did not estop the Plaintiff from obtaining judgment against the agent, Grinder. Judgment nisi was entered against Grinder on June 4, 1979. Three days thereafter, Grinder filed a "motion to strike and enter judgment” which the court in effect treated as a motion for new trial under Md. Rule 567 by deferring entry of final judgment.

Grinder’s supporting statement of authorities referred to E. J. Codd Company v. Parker, 97 Md. 319 , 55 A. 623 (1903) and thereby, for the first time, injected the concept of election into the case. In Codd the creditor, upon finding that it had been dealing with an agent, made claim against the principal in a proceeding in equity where an auditor’s account was finally stated and ratified but under which no dividends were paid to the creditor. In a subsequent action by the creditor against the agent, in which the agent by special plea had set up the defense of election based upon the prior judgment against the principal, judgment went for the agent and was affirmed on appeal. This Court said ( 97 Md. at 325 , 55 A. at 624 ): And the general principle appears to be established that where an agent contracts in his own name, without disclosing his interest, though in fact for the exclusive benefit of another person, who is afterwards discovered, the creditor may sue either, but after he has elected whom to sue and has sued either the agent or the principal to fínal judgment, he cannot after that sue the other, whether the first suit has been successful or not. [Emphasis in text.] ⁶⁹¹ At a hearing on July 2, 1979, the trial court struck the judgment against Grinder and entered judgment in his favor against the Plaintiff for costs.

The Plaintiff timely filed an order to "[e]nter an appeal to the Court of Special Appeals from the judgment entered in this action on July 2, 1979.” The intermediate appellate court, in an opinion by Judge Wilner which closely reasoned within the letter of our decisions involving the election rule, remanded without affirmance or reversal under Md. Rule 1071. Bryans Road Building & Supply Co. v. Grinder, 46 Md. App. 10 , 415 A.2d 615 (1980). Relying on the language of Codd, supra, and of Hospelhorn v. Poe, 174 Md. 242, 259 , 198 A. 582, 590 (1938), that court held that election does not occur until the creditor takes a final judgment against the one he chooses to hold to the exclusion of the other. It reasoned that the judgment of May 28,1979 against the Company was not a final judgment because there were multiple claims in the case and the summary judgment had not been certified as final pursuant to Md. Rule 605 a.

Thus, the Plaintiffs election was still open at the point of judgment nisi against Grinder. Recognizing that neither party, nor the court, had fully appreciated the problem until both judgments had been entered, the Court of Special Appeals concluded that "it would be a triumph of legal fiction over justice for [it] to assume, as ultimately did the trial court, that [Plaintiff] made a knowing election in favor of’ the judgment against the Company. 46 Md. App. at 20 , 415 A.2d at 621 . It therefore remanded to permit the Plaintiff to make an election. 3 ⁶⁹² This disposition by the Court of Special Appeals leaves the Plaintiff with a judgment either against Grinder or against the corporation, but not against both. But, in its cross-petition for certiorari, which we granted, the Plaintiff argues that it should be entitled to a judgment against both.

That was, of course, the original decision by the trial court. The Plaintiff preserved this argument in its brief to the Court of Special Appeals. Grinder has raised a procedural question which is directed at the remand by the Court of Special Appeals. He contends the Plaintiffs order for appeal limited review to the judgment for costs against it rendered on July 2, and that the Plaintiff could not appeal from the summary judgment against the Company because it was in the Plaintiffs favor.

Without intimating whether ⁶⁹³ these arguments have merit or not in relation to the remand to permit an election, it is clear that the judgment of July 2 was against the Plaintiff and that the order for appeal, even if limited to it, would bring up the question whether the Plaintiff ought to be permitted to take judgment against the agent, in addition to its unsatisfied judgment against the principal. Reexamination of the election rule, at least to some degree, is therefore squarely presented. Following adoption of the election rule in Codd in 1903, this Court next considered the subject in the 1938 Hospelhorn decision. That litigation involved statutory assessments by the receiver of the insolvent Baltimore Trust Company against its shareholders.

One of the cases (Hospelhorn v. Boyce, 174 Md. 275 , 198 A. 597 (1938)) involved shares carried on the books of the bank in the name of an employee of a brokerage house which was not disclosed as principal. At issue on demurrer was the alleged misjoinder of principal and agent since, under the election rule, their liability is viewed as alternative and not joint. This Court held the joinder to be proper, but said the plaintiff would have to elect against which of the joined defendants he would take his final judgment. The reasons given in support of joinder are a blend of the intricacies of common law pleading and of practicality.

We said that "[t]here is but one contract to be performed in respect of the one subject matter involved, and the principal and agent constitute but one party of the contract.” Hospelhorn v. Poe, supra, 174 Md. at 257, 198 A. at 590 . Further, because the creditor could simultaneously sue both principal and agent separately until final judgment against one, there was no sound reason why they could not be sued jointly. It was said that the case was not one of consensual contract, but of quasi contract based on a statutory obligation which bound the defendants alternatively, so that the common law prerequisite of a joint promise did not apply; that joinder was justified as a means of satisfying the agent’s liability for the statutory assessment by enforcing against the principal the agent’s right of indemnification; and that joinder would permit the election to be made after a determination that a relationship of ⁶⁹⁴ previously undisclosed principal and agent in fact existed so that the case was one involving alternative remedies in reference to which an election was necessary. Id. at 259-61 , 198 A. at 590-92.

Of course, joinder of alternative claims, which was so troublesome at the time of Hospelhorn, is today resolved by Md. Rule 313 c 1. But our modern pleading rule does not reach the underlying problem, that of an election occurring by final judgment. There is an exception to the election rule applicable where the creditor takes judgment against the agent before knowledge of the identity of the principal, in which case the principal is not discharged and judgments against both may stand, with but one satisfaction allowed. This exception was applied as an alternative ground of decision in Wheaton Lumber Co. v. Metz, 229 Md. 78, 82 , 181 A.2d 666, 669 (1962).

Our most recent holding which applies the election rule as Maryland law is Garfinkel v. Schwartzman, 253 Md. 710 , 254 A.2d 667 (1969), a suit for real estate broker’s commissions in which the undisclosed principal seller and his agent to sell were joined. Judgment in favor of the broker against the principal was affirmed. On the broker’s cross-appeal from a directed verdict in favor of the agent we said, on the authority of Hospelhorn, that the broker had his judgment against the principal and could not recover his commissions from both. Traylor v. Grafton, 273 Md. 649 , 332 A.2d 651 (1975) presented the contrast between the election rule, in force in Maryland, and the Pennsylvania rule, discussed infra, under which judgments against both principal and agent are permitted, with one satisfaction.

That case involved a contract made in Pennsylvania to purchase Pennsylvania realty. Pennsylvania law applied and notice of intention to rely upon the law of Pennsylvania was given. See Md. Code (1974,1980 Repl. Vol.), § 10-504 of the Courts and Judicial Proceedings Article.

On the foregoing review of the Maryland precedents, we could dismiss the Plaintiffs request for reexamination of the election rule because it is too deeply embedded in our law to ⁶⁹⁵ change. But a reading of these cases makes plain that we are not dealing with a rule in reliance on which people order their affairs or structure their business transactions. It is not a rule with respect to which predictability of the result of its application should remain stable in order to protect past transactions. Indeed, from the standpoint of the principal and agent, the rule predicts only that an election must be made, but because the election is that of the creditor, the result of the election is not necessarily predictable.

As Grinder would urge in the instant matter, the election could occur by operation of law and unintentionally from the creditor’s standpoint. It is, as Judge Wilner characterized it, a "technicality.” Bryans Road Building & Supply Co. v. Grinder, supra, 46 Md. App. at 14 , 415 A.2d at 617 . We shall therefore pursue the requested reexamination of the rule and attempt to fathom the reason underlying it. In adopting the rule in Maryland Codd did not expressly articulate the underlying reason, but referred to authorities, the principal one of which is Priestly v. Fernie, [1865] 3 Hurlstone & C. 977 [Exchequer of Pleas], 140 Rev. R. 793. 4 In Priestly the suit was against the owner of a ship based on a bill of lading signed by the master of the vessel. 5 Judgment had been obtained in Australia against the master, on which a later judgment in England was based.

The master was imprisoned for the debt and subsequently obtained a discharge in bankruptcy. Judgment was for the owner. The ⁶⁹⁶ court had "no doubt” that "where the agent, having made a contract in his own name, has been sued on it to judgment. . . no second action would be maintainable against the principal.” Id. at 982, 140 Rev. R. at 797-98. The underlying theory was that the agent makes one contract only which the merchant may say binds the agent because the contract is made in his name or may say binds the principal because made for him.

The reasons for the election rule, and specifically for the holding in Priestly, are furnished in the opinion of the Lord Chancellor, Earl Cairns, in the decision of the House of Lords in Kendall v. Hamilton, 4 App. Cas. 504, 514-15 (1879). They are (1) "it would be ... contrary to justice that the creditor should be able to sue first the agent and then the principal, when there was no contract, and when it was never the intention of any of the parties that he should do so” (a windfall); (2) because the agent has a right of action for indemnity against his principal, "if the principal were liable also to be sued, he would be vexed with a double action” (vexation); and (3) the creditors "exhausted their right of action, not necessarily by reason of any election between two courses open to them, which would imply that, in order to an election, the fact of both courses being open was known, but because the right of action which they pursued could not, after judgment obtained, co-exist with a right of action on the same facts against another person” (merger). It is clear that the merger analysis is not the basis of the Maryland decisions. The recognition in Wheaton Lumber Co. v. Metz, supra, that recovery of judgment against the agent before knowledge of the identity of the principal does not discharge the principal, is inconsistent with the concept that there is but one cause of action which merges into the judgment first obtained.

Nor is a justification for the election rule based on an avoidance of double litigation against the principal 6 fully consistent with our prior cases. Both Codd and Hospelhorn ⁶⁹⁷ state the rule to be that the legal effect of an election is not given until a final judgment is entered. Commencement and prosecution of the first suit, short of final judgment, does not trigger the rule. If separate suits are involved and the first is against the agent, but is abandoned by the creditor prior to final judgment in order for him to sue the principal, the agent could make claim for indemnification for the reasonable cost of defense.

Restatement (Second) of Agency § 438, Comment e (1957). Conversely, if the first action is pursued to judgment against the principal, but that judgment proves uncollectible, and a second action is brought against the agent, there is a hollow ring to the argument that the agent should be exonerated because he might seek indemnification from the principal whose non-payment precipitated the creditor’s second suit. In any event, prevention of vexatious double litigation against the principal as an explanation for the election rule is greatly undercut by modern practice. If the agent is sued first, he may implead the principal as a third party defendant on the indemnification claim.

If the parties are sued jointly, the agent may cross-claim for indemnity. The one contract-no windfall rationale for the election rule was well stated in Tabloid Lithographers, Inc. v. Israel, 87 N.J. Super. 358, 365 , 209 A.2d 364, 368-69 (1965) as follows: There is no reasonable basis for giving plaintiff a cause of action against both the agent and the principal when plaintiff contracted for only one. Giving plaintiff an alternative right to go directly against the principal is an additional advantage to the creditor. It permits the creditor to reach directly the agent’s right to exoneration or indemnification.

It puts the parties in the same position as if the agent had disclosed that he was acting for another. But since the creditor did not extend credit to the principal, he has the option of insisting on his original debtor or accepting the substitution of the principal for the agent. Before doing so, he can draw credit reports on both the agent and the principal. After ⁶⁹⁸ suit had been started he can explore the facts in discovery proceedings.

He need not elect even up to the trial. But the entry of judgment against either one is a recorded public act of election and should be binding. It is neither unjust nor unreasonable to treat it so. The leading decision espousing the opposite, but minority, view is Beymer v. Bonsall, 79 Pa. 298 (1875).

There the buyer, with knowledge of the principal, had taken judgment against the agent for breach of a contract to sell petroleum. When the judgment remained unsatisfied, the buyer sued the principal and obtained judgment. In affirming, the Supreme Court of Pennsylvania, without citation of any authority, concluded (id. at 300): Undoubtedly an agent who makes a contract in his own name without disclosing his agency is liable to the other party. The latter acts upon his credit and is not bound to yield up his right to hold the former personally, merely because he discloses a principal who is also liable.

The principal is liable because the contract was for his benefit, and the agent is benefited by his being presumedly the creditor, for there can be but one satisfaction. But it does not follow that the agent can afterwards discharge himself by putting the creditor to his election. Being already liable by his contract, he can be discharged only by satisfaction of it, by himself or another. So the principal has no right to compel the creditor to elect his action, or to discharge either himself or his agent, but can defend his agent only by making satisfaction for him.

Under the Pennsylvania rule, the liability of the agent and previously undisclosed principal is joint and several. Joseph Melnick Building & Loan Ass’n v. Melnick, 361 Pa. 328, 335 , 64 A.2d 773, 777 (1949). The Restatement of Agency has adopted the position that an undisclosed principal is discharged if, with knowledge of his identity, the creditor recovers judgment against the ⁶⁹⁹ agent, but that the principal is not discharged if judgment against the agent is taken without knowledge of the principal’s identity. Restatement (Second) of Agency §§ 210, 337 (1957); Restatement of Judgments § 100 (1942).

Comment a to § 210 frankly acknowledges the inconsistency of the theories. It recognizes that the rule of discharge "cannot properly rest upon a normal doctrine of election — that is, a definitive choice between alternatives — since only a judgment against the agent destroys the claim ... .” It acknowledges that the exception for lack of knowledge seems to reject merger by judgment or that the contract is one by which the creditor is to have the liability of the principal or agent but not of both. Discharge of the principal is stated to be apparently inconsistent with "the basic reason underlying the liability of the undisclosed principal,” namely that he is liable because of the agency relation, while the agent is liable because of his promise. "From this it is not possible to find a joint promise,” but because of the lack of knowledge exception "it is difficult to conceive of a promise in the alternative.” Discharge by judgment, however, "represents the prevailing judicial viewpoint . ...” How the American Law Institute arrived at the position stated in the Restatement is set forth in the explanatory notes, found in Temporary Draft No. 4 of March 1929, to § 435 of Restatement of Agency, for which Professor Seavey was Reporter.

We quote liberally therefrom. The majority of cases is in accordance with the rule as stated in this Section. The minority view is that a judgment against the agent, although with knowledge of the principal’s identity, should not discharge the principal from liability. The Reporter, his Advisers, and some members of the Council, believe that the minority is correct, and should be recognized as law because more consistent, more just and more desirable from a business standpoint, if the state of the authorities permits.

The undisclosed principal is made liable originally upon the transaction, because he initiated it; because he ⁷⁰⁰ profits by it; because it is his business, conducted under his control. Policy requiring that he be liable, he should be discharged only if the debt is paid. There is doubt, however, as to the advisability of a statement contrary to the decisions of a number of very strong courts. The doctrine of undisclosed principal came into the law during the period of mercantile expansion in which Lord Mansfield made business customs legally respectable and harmonized the law with mercantile desires.

Some of the judges who came later did not fully understand the implications. The result is the subsequently adopted English view that there is but one obligation: and that this obligation is destroyed by obtaining a judgment against