Jones v. Calvin B. Taylor Banking Co.

Smith, J., delivered the opinion of the Court. This case arises in part because of the willingness and desire of a bank in a rural area to do that which it reasonably could to foster economic development in its community. Appellee (Bank) is located at Berlin in Worcester County. Sometime in 1960 Atlantic Trailer Corporation (Atlantic), a manufacturer of mobile homes and trailers, moved from the Baltimore area to Berlin.

It employed approximately 100 people, a substantial number in a town having a 1960 population of 2,046. Appellants, J. Walter Jones (Jones) and Wade H. Gowl (Gowl), were president and vice-president, respectively, of Atlantic. In February, 1961, Atlantic was having difficulty obtaining essential supplies. Its officers came to the Bank seeking assistance in obtaining relief from their credit problems.

They conferred with Reese F. Cropper, executive vice-president of the Bank. He testified in part as follows: “[In] February, after they had operated a few months and were manufacturing mobile homes, all during those several months, from 1960, Mr. Jones and Mr. Gowl personally came to my desk and said that they were experiencing some difficulty of obtaining supplies, that they were short of operating capital to the extent that they would like to originate a plan whereby the bank could be of assistance to them -with suppliers by establishing the bank as an escrow agent and, whereby, they would take orders, sell the trailers to their dealers, and on order, and that they would like for us to act as an escrow agent or intermediary that could get their ⁴³² suppliers to preship supplies to their plant to go into these trailers, subject to the order and certification of origin that was existing with the bank, and wanted to know if I would agree that the bank would help in their dilemma. “I knew that they were short and tight for operating funds. They were an employer of one hundred people in our territory and we naturally were anxious to maintain an industry there that would continue that employment as well as try to. help Mr. Gowl and Mr. Jones and the Atlantic Trailer Corporation. “I agreed that we would assist them by going into this arrangement, but I told them that there would be some liability and trouble and that we would have to have some guarantee that.—or some contingency that we should have in connection with it, and they voluntarily offered to put up their personal note, in addition to what liability that the Atlantic Corporation may have had for the bank to guarantee and stand between its suffering any loss whatsoever from any transaction in this connection or any other situation that they may be dealing with back in this type position. “They were willing that day personally to guarantee the bank against any loss. There were no limitations mentioned nor were there any limitations mentioned to us, nor has there ever been any limitations of their personal liability to us for any loss or out-of-pocket money that we may lose as a result of our operations with the Atlantic Trailer Corporation.” At one point on redirect examination of Mr. Cropper the record is as follows: “Q. Now, Mr. Noppinger used the language that this note was to protect you from any loss with respect to dealings with Atlantic Trailer; was the note intended to secure anything more than any loss that might be incurred in connection with this financing transaction!

A. Oh, yes, sir. It was understood that anything •—• because of the knowledge that they had of their capital ⁴³³ chart, they were striving to get funds back quickly from their sales. “They were hounded by suppliers’ refusal and, they were searching for every way possible to obtain the return of funds for sales that would relieve this capital shortage situation, which they were frank to admit. And, this note was offered voluntarily and the amount was arrived at, I think, as agreeable between all of us, that they would give this to guarantee the bank against anything that they may do or would do that would protect them against the loss from any situation, including the checks that they were then operating with or the account or the agreement as made in the escrow situation.” Pursuant thereto the note of Jones and Gowl dated February 20, 1961, in the amount of $10,000.00 payable on demand was delivered to the Bank. Thereafter there were 46 transactions handled under this unique arrangement.

Illustrative of the procedure followed is a letter addressed by Gowl to Mr. Cropper of the Bank on May 17, 1961, relative to the Trinity High School transaction, concerning which more will be said. That letter said: “In accordance with our agreement reached with your bank on Saturday, February 18th, 1961, we are enclosing Trinity High School purchase letter dated May 12, 1961, covering two (2) mobile classroom trailers in the amount of $13,760.00. We hereby assign the accounts receivable over to the Calvin B. Taylor Banking Company to be placed in a special account to be used only for those checks held by you in escrow. We have notified Trinity High School of this assignment and it is our understanding that you will notify the following suppliers of Atlantic Trailer Corporation that you have received from us checks made out to them in the amounts indicated and that the total of these checks do not exceed the amount of the accounts receivable assigned for this purpose. “The mobile classroom trailer referred to on the en ⁴³⁴ closed purchase letter has been shipped with terms based on Net on Delivery.

We anticipate with reasonable certainty receipt of this check during the period between July 6th and July 13th, 1961.” The procedure adopted called at the same time for a letter to go out from the Bank to various suppliers illustrated by a letter to Brady Plywood Corporation dated March 29, 1961, which read as follows: “On this date we have received from Atlantic Trailer Corporation a check listing your company as payee in the amount of $2800.00. This check will be held in escrow by the Calvin B. Taylor Banking Company and applied against McCarthy Trailer Sales order for serial number 61-2970. All the monies to be received from this accounts receivable have been assigned to this Bank for special payments such as yours. The total of all checks to Atlantic suppliers charged against this accounts receivable does not exceed the amount of the accounts receivable. “We have been informed that payment is anticipated between April 17th and April 24th.” At the same time there would be delivered to the Bank checks as illustrated by the following letter from Atlantic to the Bank dated May 17,1961: “We are enclosing herewith our check number BS-1182 listing Jalousies of Ohio Company as payee in the amount of $5346.10.

We ask that you hold this check in escrow to be released upon receipt of check covering Trinity High School purchase letter assigned to your Bank under our letter of 17 May 1961.” As a part of the transaction Atlantic prepared the letters from the Bank to the suppliers. Normal procedure was for all of the papers relative to one transaction to be delivered at one time. Checks from the customers of Atlantic went to Atlantic with the understanding that Atlantic would see to their deposit in the escrow account. Thereafter, the Bank mailed checks to the suppliers that had been previously delivered to the Bank. ⁴³⁵ The transactions continued up through June 19, 1961.

Mr. Cropper testified that there came the time when suppliers began to call the Bank asking where their checks were. In response to a question as to what evidenced the beginning of trouble for the Bank, Mr. Cropper testified: “A. The suppliers began to call us as to where their checks were. We told them that they had the checks, we were waiting for the funds to come from the dealer who was to receive the trailer. “We W'ould then check with Atlantic Trailer. We would find they, in some cases, had received the check but had not brought it in on the escrow account to us.

Therefore, we were not able to disburse the checks.” In June, 1961, the Bank itself began to notify the purchaser of the assignments and to direct the purchaser to make payment pursuant to the assignment to the Bank. This was done with reference to the Trinity High School transaction. Thereafter the Bank was notified by the Trinity High School officials that the trailers were not delivered and finished according to the contract, that they were sitting on the high school grounds and the school would not accept them until they were put into condition in accordance with the contract. Atlantic executed a deed of trust for the benefit of creditors.

The Circuit Court for Worcester County assumed jurisdiction thereunder on August 9, 1961. It was at approximately this time that the Trinity High School officials gave notice to the Bank. The Bank authorized the school officials to complete the trailers, the cost thereof to be deducted from the original purchase price. This amount was $2166.63.

Accordingly, the Bank received the sum of $11,093.75 from Trinity High School. It charged $307.71 for its expenses against this balance and then divided the remaining sum ratably among the three creditors for whom it had been previously issued checks, issuing its own cashier’s check therefor. This was accomplished on November 3, 1961. On August 9, 1961, at the time the Bank learned of the deed of trust for the benefit of creditors there was the sum of $2328.08 on deposit in the escrow account.

Atlantic was buying ⁴³⁶ the land on which it was operating from a corporation known as Peninsula Industries, Inc. The land was being purchased on a land installment contract. The contract had been assigned to the Bank as collateral for certain other obligations. Atlantic was in arrears in its payments under the contract on August 9. The Bank closed out the escrow account by charging that account with an offset and crediting an obligation evidenced by the note of Peninsula Industries, Inc., giving credit to Atlantic simultaneously on its land installment contract.

On December 8, 1961, a petition was filed against Atlantic in the United States District Court for the District of Maryland asking that it be adjudged a bankrupt. It was so adjudged on February 1, 1962, and Joseph A. Waldman, Esq., was named trustee in bankruptcy on February 27, 1962. The trustee demanded restitution from the Bank of the sum of $2328.08, above mentioned, which it had applied from the escrow account and also demanded payment to the trustee of the entire amount of $13,760.00 owing under the Trinity High School contract. The theory of the trustee was that the allowance to Trinity was unauthorized and that payment of the sum of $307.71 to the Bank and the payment of the aggregate sum of approximately $11,000.00' to the Department of Employment Security and two other creditors pursuant to the prior assignment was a preferential treatment in contravention of the deed of trust for the benefit of creditors and recoverable under the bankruptcy act.

Because of certain conflicts of interest the Bank’s regular counsel was not available to them. Accordingly, the Bank retained John W. T. Webb, Esq., of the then firm of Webb & Travers, as counsel in September of 1962. The Bank refused to make the payment demanded by the trustee in bankruptcy. That trustee then filed suit against the Bank in the Circuit Court for Worcester County on July 31,