Klein v. Whitehead

Wilner, J., delivered the opinion of the Court. Charles Parsons was a man of modest means, who “was looking for something a little better than what I had.” He found instead something a lot worse than what he had, a discovery which ultimately required him to declare bankruptcy. The method by which he proceeded from the status of modest means to that of no means prompted this lawsuit by appellant Gerald Klein, the trustee in bankruptcy, against those persons whom Mr. Klein believes were responsible for the decline in Mr. Parsons’ fortunes. Unfortunately, the factual basis of Mr. Klein’s claim is somewhat complex, requiring a detailed recitation of what occurred.

In November, 1972,t Mr. Parsons earned his living as a truck-driver and through his ownership of a small home heating oil delivery business. His total assets, including his house and business, amounted, at best, to $6,500. With these ³ resources, on November 4, 1972, he signed a contract to purchase a restaurant business, known as Carter’s Scales and Restaurant, from one Paynter Dukes for $75,000. He gave a deposit of $500, the balance of $74,500 being due in cash at time of settlement (on or before 30 days) “contingent upon the purchaser being able to secure suitable financing.” When it became apparent that Mr. Parsons would be unable to obtain conventional financing from a bank, the real estate agent, Monroe Haltaman, contacted Edgar Dryden, one of the appellees here. 1 Mr. Dryden was an international vice-president of the Plumbers and Pipe Fitters Union who lived on the Eastern Shore and, according to his testimony, had bought and sold property and “loaned a couple of people money” in the past.

In an attempt to induce Dryden to put up the necessary funds to complete the purchase, Haltaman arranged a meeting between Parsons and Dryden, who theretofore had never met. Dryden, at the time, was not told about the November 4 contract. He and Parsons met on several occasions to discuss the venture and Dryden’s financing of it; and, according to Dryden, “I told him that if I got in this venture at all there had to be certain safeguards, there had to be some control over the salaries....” Dryden further indicated that he would “have a document prepared by my attorney to present on the day of ratification” presumably incorporating these safeguards and controls. On the evening of November 24, 1972, Mr. Haltaman arrived at the Dryden home, during the course of a party, with a new contract of sale, already signed by Dukes (the seller) and by Mr. and Mrs. Parsons.

This contract showed a purchase price of $65,000 (a $10,000 reduction), no contingencies with respect to financing (“cash at the time of settlement”), and Ruth and Edgar Dryden as buyers., along with Charles and Doris Parsons. Settlement was to be held ⁴ the following Monday (November 27) in the law office of Don Richardson, who, at that point, represented Dukes. Dryden testified that he asked Haltaman why he (Dryden) should sign the contract, to which the agent responded, “Well, the Dukeses don’t think it would be a viable contract unless you sign it. They want someone else to sign on there.

It won’t be any responsibility of yours to sign it except let the Dukeses know that it will go through with.” Upon that basis, according to Dryden, and in the belief that it was the Parsonses and not the Drydens who were actually buying the business, Mr. and Mrs. Dryden then and there signed the contract. At that point, Dryden was under the impression that Parsons would put up $20,000 and that he (Dryden) would finance the balance of $45,000. According to Dryden, “after I signed the Contract I began to think that night, and I called my attorney [Lloyd Whitehead, another of the appellees] and told him I made a boo-boo and I’d like to get out of it.” As a result, Whitehead arranged a meeting, in Whitehead’s office, among Richardson, Dukes, Parsons, Dryden, and Whitehead for the purpose of attempting to extricate Dryden from the contract. This attempt was unsuccessful.

Dryden stated that, “I was informed by Mr. Richardson and the Dukeses that they were not going to let me off the hook if I did not proceed with the contract” and that, if there was a default, he would be sued “for the total amount of the money.” At that point, Dryden still believed that Parsons would come up with $20,000, and that his obligation was for $45,000. He contacted the Truckers & Savings Bank (the same bank that had originally rejected Parsons’ application) and arranged for a $25,000 mortgage loan to the Parsonses, secured by the property to be purchased and the guarantee by Dryden and his wife, and a $20,000 personal loan to him, the proceeds of which he would, in turn, lend to the Parsonses. On December 1, 1972, the parties gathered again in Mr. Whitehead’s office, for settlement. 2 At this point, Dryden ⁵ first learned that Parsons was able to produce only $8,500 — not the expected $20,000. 3 As a result of the shortfall, settlement was temporarily postponed, and Dryden and the Parsonses paid another call on the banker. He agreed to lend Dryden an additional $11,500 on an open promissory note, and Dryden agreed to re-lend this money to Parsons.

Appropriate notes and other loan documents from Dryden to the bank and from the Parsonses to Dryden, evidencing this transaction, were executed. Everyone then returned to Whitehead’s office, where Whitehead read, and the parties ultimately signed, a document prepared by Whitehead entitled “Agreement of Sale.” This Agreement, in its first six paragraphs, recites essentially the background to that point — the contract entered into by Parsons to buy the restaurant, his inability to finance the purchase, and the Drydens’ role as financiers. Paragraph 7 obligated Parsons to devote full time to the business, and to keep it open 24 hours a day, seven days a week. Paragraphs 8 and 9 provided for a weekly salary of $75 to Doris Parsons and $125 to Charles, until such time as “all indebtedness against the said business is paid”, at which point Charles’ salary would increase to $200.

In the interim, the $75 differential (between $125 and $200) was to be paid “toward the reduction of indebtedness over and above the first and second mortgage”. In succeeding paragraphs, the written approval of Dryden was required for any purchases in excess of $25 and for “any financial commitments [by Parsons] personally or major purchases ... as this may adversely affect the credit of PARSONS and may endanger the security of DRYDEN who has guaranteed certain indebtedness of PARSONS and who is owed money by PARSONS____” These restrictions would last only so long as Parsons was indebted to Dryden. Paragraph 13 obligated Parsons to procure a life insurance ⁶ policy on his life for $65,000, payable to his creditors, including Dryden and the bank. Paragraph 14 obligated Dryden to conduct a semi-annual audit of the business, and entitled him to 40% of any profits earned by the business.

Paragraph 15 provided that, if Parsons desired to “eliminate DRYDEN from the business” or if Parsons defaulted on his obligations, the business would be appraised by three appraisers (two appointed by Dryden), all indebtedness would be paid, and Dryden would be paid an amount equal to 40% of the difference. The next two paragraphs required Parsons to open and maintain four checking accounts and to attempt to negotiate with a major oil company to “get gasoline services into the business.” Finally, paragraph 19 provided that “as long as DRYDEN is owed any money by PARSONS or has guaranteed any indebtedness of PARSONS”, Whitehead would be “Attorney for this business” subject to replacement by Dryden. All legal fees of the business were to be paid by the business. Along with this agreement, the following other documents were also duly executed in implementation of the various transactions: (1) Deed to the restaurant property from Dukes to Charles and Doris Parsons (the Drydens not being parties to the deed); (2) Mortgage for $25,000 from Mr. and Mrs. Parsons to the Truckers & Savings Bank, secured by the restaurant property, payable over a 10-year period, with interest at the rate of 8% per annum, in monthly installments of $303.32; (3) Second mortgage for $20,000 from the Parsonses to the Drydens, also on the restaurant property, payable in 120 monthly installments of $264.31, interest being at the rate of 10% per annum; (4) Note for $13,476, payable in 48 monthly installments of $280.75, from the Parsonses to the Drydens secured by a chattel mortgage on the inventory and furnishings of the business; 4 ⁷ (5) Settlement sheet showing the “Purchaser” to be “Mr. & Mrs. Charles Parsons”; (6) Promissory note from the Parsonses to Whitehead’s firm for $980.62 to cover the settlement costs; and (7) Promissory note from the Parsonses to Whitehead’s firm for $1,000 to cover Whitehead’s fee for legal services.

Whitehead stated that, at the time of settlement, he had made it clear to Parsons that Dryden travelled extensively as part of his job with the union, that he was “strictly doing the financing” and that “he was not participating in the restaurant. He didn’t want to run a restaurant.” Parsons testified that he understood that to be the case — that he and his wife would operate the restaurant, and that Dryden’s role was simply to provide enough money to enable him (Parsons) to purchase the business. Less than three weeks later, the repayment schedules on the second mortgage and the note to Dryden were modified, apparently by agreement between Dryden and Parsons. Payments on the second mortgage were increased from $264.31 per month ($3,168 per year) to $4,000 per year, and payments on the note were increased from $280.75 per month ($3,362 per year) to $75 per week ($3,900 per year). 5 This new arrangement was evidenced by a written memorandum dated December 20, 1972, from Dryden to Parsons.

It soon became apparent that the operation would not be as successful as was anticipated, and with that realization the relationship between the parties began to deteriorate. The Parsonses failed to make their payments regularly, they incurred additional debts without prior consultation, Mr. Parsons ceased working full time at the restaurant and took a part-time job driving a truck, and, at one point, they attempted to sell a truck owned by the business that was pledged as collateral to Dryden under the chattel mortgage securing the $13,476 note. On the other hand, Dryden began to interject himself more and more into the operation of the ⁸ business. In June, 1973, he closed the four checking accounts, then requiring the joint signatures of Parsons and Dryden, and deposited the funds in four new accounts requiring the signatures of himself and the bookkeeper for the business, Sandra White.

The effect of this, obviously, was to eliminate Parsons as an authorized signatory on any of the business bank accounts. 6 The decline in the fortune of the business, and with it the tolerance of Dryden and Parsons toward the actions and inactions of the other, continued. At one point, Parsons consulted Mr. Richardson, the attorney who had represented Dukes, but Dryden refused to deal with Richardson. Although payments on the first mortgage to the bank were kept current, payments on the two obligations to Dryden, and payments to general creditors, were irregular. At several points, Dryden warned Parsons that if things did not straighten out, he would foreclose, but Parsons stated that he “didn’t pay any attention” to those warnings.

Finally, in March, 1974, Dryden turned the matter over to Whitehead, and directed him to institute legal actions on the notes due him. Pursuant to this direction, Whitehead filed four actions in the Circuit Court for Wicomico County on behalf of the Drydens. They were: (1) Civil Case No. 8439, filed March 19, 1974, wherein the Drydens obtained a judgment by confession against the Parsonses for $10,626 (plus interest, costs, and “collection charges” of 20%), the amount alleged to be due and owing on the $13,476 note. A writ of fiere facias to seize certain chattels owned by the business was issued and levied.

(2) Civil Case No. 8440, also filed March 19, seeking and obtaining an attachment against a bank account of the Parsonses at the Farmer’s Bank of Willards. (3) Chancery No. 16,486, filed March 20, foreclosing on the chattel mortgage securing the $13,476 note. ⁹ (4) Chancery No. 16, 487, also filed March 20, foreclosing on the second ($20,000) mortgage, and seeking the appointment of a receiver to operate the business until a foreclosure sale was made and ratified. The Affidavit of Indebtedness filed in this proceeding showed a balance due on this mortgage of $19,503.58. Parsons was duly served with all of the necessary papers pertaining to these actions, and he promptly consulted Mr. Richardson.

He reviewed these papers, and his own records (including records prepared by an accountant retained by Parsons) with Mr. Richardson, explaining what he had paid on these various obligations. Richardson contacted Whitehead and offered, on behalf of Parsons, to bring the payments current (although Parsons had not given him any funds with which to carry out that offer), but Whitehead replied that the entire debt had been accelerated. No tender of payment was ever made by or on behalf of Parsons. Richardson stated that he made no effort to stay or defend the foreclosure proceedings because Parsons told him he was going to refinance the venture and pay Dryden what was owed.

The key part of this testimony was as follows: “Q. Did it occur to you to take the position with the Circuit Court for Wicomico County that you questioned whether your clients were actually in default or not? A. Well, Mr. Parsons kept telling me that he wasn’t in default and, of course, the papers showed otherwise. I never did file any papers to stay the foreclosure proceedings. Q. You considered doing so?

A. I did, however, at one point. Q. And decided against that step? A. Yes, sir, because Mr. Parsons was trying to refinance the whole mortgages and the notes, and everything else ... that Mr. Dryden had. Q. But, at least, you considered and weighed the merits of filing some action to enjoin these proceedings, did you not?

A. Yes, sir. ¹⁰ Q. And after giving the matter some thought decided not to do so? A. Well, I thought it was going to be paid off, Mr. Goldsborough. Q. You thought it would be futile? A. No, I thought it was going to be paid off.

I thought all of the indebtedness were going to be paid off by the Parsonses. Q. Did you ever take any steps, on behalf of your clients, to challenge the legitimacy of the foreclosure proceedings after the fact? A. No, sir. Q. You didn’t raise any objection to the ratification ... of the Receiver’s report?

A. No. because it wouldn’t have made any difference. The Parsonses didn’t have any money to pay the deficiency, so I just wasting my time.” Richardson did file, in No. 8439 (the confessed judgment action), a claim on behalf of Mr. and Mrs. Parsons for their $1,000 statutory exemption from the levy of the writ of fi fa, and a claim with respect to certain of the property levied upon on behalf of one of their children. There being no defense to the foreclosure actions, a sale-of the mortgaged property was held on April 13, 1974, with Parsons in attendance. Dryden purchased the real estate securing his second mortgage for an amount equal to $21,931 over the balance due on the first mortgage.

The chattels were sold to various bidders. As a result, a deficiency of $2,038 was ultimately reported with respect to the second (real estate) mortgage, and a deficiency of $8,928 was reported with respect to the chattel mortgage. No exceptions were filed either to the reports of sale or to the auditors’ reports, and, as a result, all of them were, in due course, ratified by the court. The Parsonses had lost everything; and a year later, in April, 1975, they filed a voluntary petition in bankruptcy.

In January, 1976, Mr. Klein filed this action in the Circuit Court for Worcester County against Whitehead, his law firm, ¹¹ and the Drydens. The Declaration contained four counts; but the basis of them all was the assertion that the business was a partnership, that the defendants stood in a fiduciary relationship with Mr. and Mrs. Parsons (Whitehead and his firm as legal counsel, the Drydens as partners), and that they fraudulently and deliberately conspired to deprive the Parsonses of their property, thus breaching their respective fiduciary obligations. Reciting some of the history set forth above, Klein charged the defendants in Count I with civil conspiracy to cheat and defraud the Parsonses, and, through them the bankruptcy estate, alleging that they conspired to deprive the Parsonses of their property by fraud and deception and by failing to carry out their fiduciary obligations. Count II, based upon the same facts alleged in Count I, charged Whitehead and his firm with professional malpractice.

Count III charged all defendants with fraud and deceit, independent of the conspiracy; and Count IV charged them with misappropriation. The only relief sought was damages in the amount of $1,430,000. Whitehead’s firm and Mrs. Dryden were dismissed preliminarily. The case against Whitehead and Mr. Dryden proceeded to trial; however, at the end of the trial the court concluded that Klein was barred from prosecuting the action by the doctrine of collateral estoppel and directed a verdict in favor of both defendants.

The correctness of that action is what is before us. The proper application of the law often comes down simply to understanding the relationships among several independent principles — recognizing the similarities and the distinctions between them. This is not always an easy thing to do. Concepts that are quite different — that stand on separate bases and that mean different things — often overlap with each other.

When this occurs, the terms used to denote these separate concepts sometimes begin to be used interchangeably, as though they meant the same thing, one being but a synonym for the other; and thus confusion comes about as the differences in the concepts themselves become blurred. ¹² So it is. with the doctrines known as res judicata, collateral estoppel, and collateral attack. See, for example, 46 Am.Jur.2d Judgments, § 397. All three of these derive immediately from the larger jurisprudential demand that properly entered judgments be regarded as final, a concept which itself emanates from, and is required by, the societal need for certainty in the law. These three doctrines, though related, are different; they apply in different circumstances and they prevent different things.

Unfortunately, the distinctions between and among them are not often clearly understood. In this case, the lower court reached the right result for the wrong reason. Part of the confusion emanates from the somewhat murky nature of appellant’s causes of action. Though based upon different legal theories, in each case he asserts that the Parsonses (and, through them, he) were injured because of the various proceedings instituted by Whitehead on behalf of, at the behest of, and in complicity with, the Drydens, that these proceedings were instituted and prosecuted to judgment fraudulently, and that the various judgments, orders, and decrees rendered by the court, and the actions taken to execute and implement them, were procured by fraud.

He does not attempt in this proceeding to have any of the prior judgments stricken or any of the actions taken pursuant to them set aside. Nor does he ask, directly, to be excused or exempted from the actual operation of those judgments or actions. The relief sought is civil damages arising from the consequences of those judgments and implementing actions, and he therefore, of necessity, gives at least de facto recognition to them. But, on the other hand, he quite clearly asserts, at least twice in his brief, the right “to bring this action and collaterally attack the prior judgments for fraud....” It is evident — and indeed it was conceded by appellant at oral argument — that every ground alleged in this action to justify his “collateral attack” and to support his claim for damages could have been raised by the Parsonses as a defense in the proceedings from which the earlier judgments arose.

His assertions that the obligations were not truly in ¹³ default, that if in default there were funds available to cure the default, that any default arose through the fraud, deceit, conspiracy, or breach of fiduciary obligations on the part of Whitehead and the Drydens — all these could have been asserted to defend against the two foreclosures and to vacate the judgment entered by confession. It is equally clear, however, that, though these issues might have been raised in the earlier proceedings, in fact they were not; and thus, except to the extent that a resolution of some of them may be said to be implicit from the judgments, decrees, and orders entered by the court, they have not heretofore been adjudicated. The question now is whether they may be raised in this proceeding, and, if not, why not. We start by considering the relationship between res judicata and collateral estoppel.

Both are branches of a doctrine known as estoppel by judgment; res judicata is a direct estoppel, and collateral estoppel is what its name says it is. The distinction between the two was first discussed in depth by the Court of Appeals in LeBrun v. Marcey, 199 Md. 223 (1952) where, quoting from two earlier Supreme Court cases, 7 it noted, at 226: “The scope of the estoppel of a judgment depends upon whether the question arises in a subsequent action between the same parties upon the same claim or demand upon a different claim or demand. In the former case a judgment upon the merits is an absolute bar to the subsequent action. In the latter the inquiry is whether the point or question to be determined in the later action is the same as that litigated and determined in the original action---In the former case, the judgment, if rendered upon the merits, constitutes an absolute bar to a subsequent action.

It is a finality as to the claim or demand in controversy, concluding parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat ¹⁴ the claim or demand, but as to any other admissible matter which might have been offered for that purpose. . . . But where the second action between the same parties is upon a different claim or demand, the judgment in the prior action operates as an estoppel only as to those matters in issue or points controverted, upon the determination of which the finding or verdict was rendered. In all cases, therefore, where it is sought to apply the estoppel of a judgment rendered upon one cause of action to matters arising in a suit upon a different cause of action, the inquiry must always be as to the point or question actually litigated and determined in the original action, not what might have been thus litigated and determined. Only upon such matters is the judgment conclusive in another action.” This distinction, based upon whether the second action is the same as or different from the first, was restated, more succinctly, in Sterling v. Local 438, Etc., 207 Md. 132 (1955), cert. denied 350 U. S. 875 (1955).

At page 140, the Court held: “Estoppel by judgment, which is res judicata, may be direct or collateral. If the second suit is between the same parties and is upon the same cause of action, a judgment in the earlier case on the merits is an absolute bar, not only as to all matters which were litigated in the earlier case, but as to all matters which could have been litigated. If, in a second suit between the same parties, even though the cause of action is different, any determination of fact, which was actually litigated in the first case, is conclusive in the second case.” Unfortunately, in two subsequent cases, 8 the Court used some very broad language to describe res judicata that led it in a third case 9 to overlook the