Home Federal Savings & Loan Ass'n v. Spence

McWilliams, J., delivered the opinion of the Court. In this litigation, a by-product of the duplicity of a Washington County developer, a client seeks to recover damages from an attorney because, says the client, the attorney has been negligent. What happened will more easily be recounted and more readily understood if, first, we identify the participants. Home Federal— The appellant, Home Federal Savings and Loan Association, 122 West Washington Street, Hagerstown, Washington County.

Spence— R. Noel Spence, an appellee, a member of the law firm of Kaylor, Spence and HoVermale, also appellees. We shall treat Spence as the only appellee. He has practiced law in Hagerstown since 1960. Home Federal, from time to time, beginning in 1964, employed him to examine titles and conduct settlements. ⁵⁷⁷ Miller— Franklin R. Miller, in 1965, after 35 years of service, the executive vice president of Home Federal.

Funkhouser— E. N. Funkhouser, the president of Home Federal in 1965. Later he became chairman of the board. He had been a director for 50 years. Mobley— E. Leister Mobley, in 1965, was a director of Home Federal and a member of its executive committee.

At the time of trial, 1969, he was the president. Stouffer— Herman F. Stouffer, a developer and builder. He carried on his business in Washington County, Frederick County, and the Pennsylvania counties of York and Franklin. Holiday-Holiday Acres, Inc., a corporation wholly owned by Stouffer.

Stains— George Stains and Lois, his wife, contract purchasers from Holiday of an improved lot on Mohawk Drive in Greenvale Village. Eyler— Curtis L. Eyler and Ruth Y., his wife, purchasers from Holiday of an improved lot on Mohawk Drive in Greenvale Village. Norris— Edward E. Norris and Barbara L., his wife, purchasers from Holiday of an improved lot on Ottawa Drive, Greenvale Village. Hartman— Donald Hartman and Katherine A., his wife, contract purchasers from Stouffer of an improved lot on Ottawa Drive, Greenvale Village.

Of Stouffer’s activities prior to 1960 the record tells us nothing except that Miller had known him as early as 1957. From 1960 on Stouffer’s business seems to have ⁵⁷⁸ flourished and he was thought to be a great success. On. many occasions Home Federal loaned him money to buy properties and to build houses. In the years between I960' and 1965 he enjoyed the respect and confidence of Miller-who considered him one of Home Federal’s best customers.

Miller customarily acted for Home Federal in its. dealings with Stouffer. No doubt much of Miller’s confidence in Stouffer’s integrity and stability was generated by financial - statements Stouffer had filed with Home Federal, suggesting a net worth of nearly $2,000,-000. And too there is in the record evidence of private transactions between them suggesting that Miller may have been under- some obligation to Stouffer. The record does not reveal the reasons for Stouffer’s downfall but it is clear that in the late spring or early summer of 1965 .his “empire” began to come unstuck.

The first visible symptom was a shortage of cash which he undertook to alleviate by an elaborate scheme for the kiting of “rubber” checks. We shall not prolong this opinion by reciting the details of his knavery. That he got by with it, even for a time, was due in large part either to Miller’s incredible gullibility or to his childlike faith in Stouffer’s stability, or perhaps to both. In either case, by mid-October Stouffer had gotten $166,635.66 from Home Federal and it had nothing to show for it except a clutch of worthless checks.

When Miller realized that Stouffer was not noticeably interested in settling up he became somewhat uneasy. He pressed Stouffer to redeem the checks or else come up with some collateral. Stouffer offered only promises none of which he kept. His faith- shaken and no doubt thoroughly frightened, Miller went to Funkhouser, both friend and protector it seems, and related the melancholy details of his predicament.

They decided to keep- mum in respect of the other directors and together they went after Stouffer. It can be inferred from the record that Stouffer had neither the cash to redeem the checks nor any unencumbered property with which to secure their payment. They learned, however, that he held contracts ⁵⁷⁹ of sale on houses he had sold some months earlier, at least four of which were subject to construction mortgages. Stouffer agreed to hand these over to Miller and Funkhouser, probably because the contracts were not otherwise readily marketable except at a heavy discount, if indeed they were marketable at all.

The immediate assignment of the contracts was obviously the easiest way to acquire Stouffer’s equity therein. Why this was not done the record does not disclose. A probable explanation is that Miller (and Funkhouser) knew the directors would take a very dim view of such an arrangement if it ever came to light. They wanted cash and they hit upon a scheme to provide it.

Stouffer agreed to cooperate. Stouffer, carrying out his part of the scheme, went to his purchasers, nine in all, and told them Home Federal would loan each of them enough money to enable each one to obtain the title to his property. He saw to the filing of the applications for a loan and Miller shepherded them through Home Federal’s routine. Early in December Miller forwarded the applications to Spence for title examination and settlement and, at the same time, he notified each applicant to get in touch with Spence and arrange for settlement.

Stouffer had assured Miller that he would see to the release of the construction mortgages so that Home Federal would wind up with first liens. The amount of each loan would then be sent back to Home Federal by Spence and applied by Miller to the liquidation of Stouffer’s checks and then, barring bad luck, the entire contretemps could be swept under the rug. We shall be concerned with only four of the properties and we think it will be less confusing if we discuss them separately. STAINS Just when Holiday became the owner of this lot the record does not reveal.

It is quite clear, however, that in February 1965 Holiday borrowed $15,600 from Home Federal to build a house on it. Miller himself inspected the house on 8 September and immediately thereafter au ⁵⁸⁰ thorized the disbursement of the remaining balance of the $15,600 construction loan. Neither the date of the sale from Holiday to Stains nor the purchase price is disr cernible from the record. Indeed the whole transaction seems a bit daft.

Stains applied for a loan of $15,500 to purchase his property. He stated in his application that there was a $15,000 mortgage already on the property. Miller, however, insisted that, although he concurred in the directors’ approval of Stains’ application, he did not know that Home ' Federal already had a $15,600 mortgage on the property. Of course, Stouffer promised Miller he would secure the release of the construction mortgage but, we suspect, he had no intention of doing so.

Spence, after conducting the settlement and recording the deed and mortgage, returned the $15,500 to Miller along with a letter,, dated 16 December, certifying that the Stains’ mortgage was “a valid and subsisting first lien.” EYLER In Eyler’s application for a loan of $17,900 the stated purpose was to “pay off a mortgage.” The mortgage, on twhich there was a balance of $7,800, was dated June 1861. In its brief Home Federal insists that Eyler applied for a loan “to purchase [his] property.” The very odd thing here is that Eyler obtained a deed to his property from Holiday on 12 August 1965. Obviously he still owed Holiday or Stouffer around $10,000. We can only guess that Holiday or Stouffer held his note and that it represented a part of the purchase price of his house.

Since Miller testified to an “understanding” that whatever was required to pay off the 1961 mortgage “would come from Stouffer and not from” Home Federal, we must assume that he was aware of its existence. Spence, as directed, returned the $17,900 to Miller and certified the mortgage to be a valid and subsisting first lien. NORRIS Norris, like Eyler, obtained his deed from Holiday on 12 August 1965: He stated in his application that the pur ⁵⁸¹ pose of the loan was “to pay off a mortgage” but Home Federal, in its brief, again insists that the purpose was “to purchase the property.” Norris asked for a loan of $20,500 and since the balance due on the 1961 mortgage to Weaver Brothers was about $11,500, it can be assumed he owed Holiday or Stouifer about $10,000. The same assumption that Miller was aware of the existence of the construction mortgage must be made because he testified that “it [was his] expectation on this mortgage that Mr. Stouifer would produce the funds to pay off the balance.” Spence returned the $20,500 to Miller along with the certification that Home Federal’s mortgage was a valid first lien.

HARTMAN Hartman purchased his lot from Stouifer who, in July 1965, had encumbered it with an $11,700 mortgage to Loyola Federal Savings and Loan Association. The purchase price and the terms of the sale to Hartman are not in the record. Hartman applied to Home Federal for a loan of $17,600. Spence, after the closing, returned the $17,600 to Miller, with the same certification.

A few months later Loyola foreclosed its mortgage. Home Federal bought the property at the foreclosure sale for $13,-100. Subsequently it sold the property for $17,600. What follows is an excerpt from the cross-examination of Miller : “Q. Would you recollect, Mr. Miller, testifying in deposition to the effect that actually Home Federal wound up with about even with the board on Hartman?

A. Yes sir. “Q. In other words, after application of the pledged savings account on the Hartman mortgage loans and the consequent resale of the property, Home Federal came out even, give or take a couple of dollars? A. Yes sir.” While the record is far from clear in this regard it does appear that Hartman, before the foreclosure, gave Home ⁵⁸² Federal a deed for his property and that his mortgage to Home Federal was released when it sold the property. Although Miller insisted he was not aware of it, Spence had represented Stouffer in various matters for several years before 1965. He said Stouffer, in the beginning, “was in a rather tight financial situation.” Later, he continued, Stouffer “apparently became very successful in his business ventures, and became a very substantial developer.” On a number of occasions he disbursed funds “upon Mr. Stouffer’s assurance” that the release [of the construction mortgage] would be forthcoming,” and the release always arrived “within a few days.” Spence said he knew the construction mortgages on the four properties had not been released of record.

He did not mention this in his certifications because, he said, he “spoke to Mr. Stouffer in regard to the securing of these releases and * * * [he] was assured by him that checks had either already been sent to secure them or that the releases would be secured by him and delivered to * * * [Spence] for recording.” Spence was entirely ignorant of Stouffer’s “precarious” financial condition