LEVIN, SUBSTITUTE RECEIVER OF MONUMENTAL CITY SAVINGS & LOAN ASSOCIATION, INC. v. Security Financial Ins. Corp.

Barnes, J., delivered the opinion of the Court. This case calls upon us to determine whether certain funds in the hands of the receiver of an insolvent insurer, Security Financial Insurance Corporation (SFIC), are subject to the claims of all receivers representing the creditors of insolvent savings and loan associations or are required to be repaid to the receivers of those associations which originally had transferred the funds to the insurance company. SFIC insured savings share accounts with all of the savings and loan associations involved. Three distinct parties or groups of parties are involved in the dispute: ■ 1.

The receivers of Military Savings and Loan Association, Inc. (Military), and of First Guarantee Savings and Loan Association, Inc. (First Guarantee). Military and First Guarantee claim that the funds transferred by them to SFIC were held by it in a fiduciary capacity, and therefore, should be returned to them. 2. The receivers of Commercial Savings and Loan Company, Monumental City Savings and Loan Association, Inc. and First Fidelity Savings and Loan Association, Inc. These receivers claim that the funds constitute general assets of SFIC and are, therefore, available for distribution to all of the insolvent associations which are creditors of the insurance company. 3. The receiver of Security Financial Insurance Company.

The SFIC receiver states that he is essentially a stakeholder of the funds in dispute, but supports the position of his accountant that the funds had been sufficiently segregated to identify them as “Trust Funds.” ⁷¹⁵ At various times prior to the insolvency of SFIC, Military and First Guarantee, and a number of other associations not involved in this case, had transferred substantial amounts of money to the insurance company pursuant to the terms of similar, but separate, formal agreements. Based on the provisions of the agreements, Military and First Guarantee filed separate proceedings to secure the refund of their monies. By order of the Circuit Court for Baltimore City, the two cases were consolidated and were considered as claims duly filed in the receivership proceeding of SFIC. The matter was referred to an auditor (John P. O’Ferrall).

After taking testimony, the auditor filed a report stating that the funds deposited by Military and First Guarantee could be traced and identified; and that Military and First Guarantee were entitled to have the monies so transferred returned upon the liquidation of the assets comprising the fund. The receivers of Commercial, Monumental and First Fidelity excepted to the report. The Circuit Court for Baltimore City (Cardin, J.) overruled the exceptions and ratified the auditor’s report. The three receivers appealed.

Under the agreements, payments were made by Military and First Guarantee into a “Trust Fund” to be held by Security Financial Insurance Corporation as “Trustee.” The “Trust Agreements” establishing each fund called for an initial payment by the associations of an amount equal to the 5% of the then outstanding shareholders’ savings accounts on deposit with the association into the “Trust Fund.” The agreements required further payments, computed on a monthly basis, of amounts sufficient to maintain the ratio of 5% of the outstanding shareholders’ savings accounts on deposit with the associations. The purpose of the funds, as stated in both agreements, was “to establish a revocable trust of certain funds and/or securities to better indemnify its [the transferor association’s] savings account shareholders and to also increase the liquidity of said association and to set up a reserve fund for contingencies.” Nevertheless, SFIC as “Trustee” was given the power and authority under the agreements to “reinvest” the monies in the fund, in its sole discretion, restricted only to the type ⁷¹⁶ of investments which, the associations themselves could make under the law. 1 “Supplemental Agreements” further provided that the associations were to be paid an amount of interest on the funds deposited with SFIC equal to 3% per annum, with the sole discretion abiding in the “Trustee” to raise or lower the interest rate. Under the agreements, Military and First Guarantee were not permitted to withdraw their contributions, in whole or in part, except in the event that their available cash, or withdraw-able funds in bank or available from banks, was reduced to an amount equal to less than 1% of the then outstanding shareholders’ accounts; in such event, each association could withdraw only an amount necessary to raise its available cash to an amount equal to 1% of its then outstanding shareholders’ accounts. This limited right of withdrawal could be exercised only once in any given six-month period.

Moreover, in the event of such withdrawal, the association was required to pledge and post with the “Trustee,” mortgages and other securities equal in value to the amount of the cash withdrawal. Article Fifth of the agreements provided for termination of the “Trusts” upon termination of the insurance policies to which the agreements referred. However, SFIC was given absolute discretion to retain, after such termination, any amount of cash or securities deposited under the agreements to protect SFIC (as insurer or as “Trustee”) against continuing liability either under the insurance policy or under the “Trust Agreements.” ⁷¹⁷ Any amount not used for payment of reserved claims or losses was to be “returned forthwith by the said Trustee” to Military and First Guarantee. Although the agreements made no specific provision for the segregation of the funds of the associations, SFIC maintained special trust accounts in local banks and kept separate accounts, relating to the funds, in its books and records.

The “Trustee” agreed to “account for all funds, securities or other property, real or personal” received under the agreements “at such reasonable times as may be requested” by the associations. Auditor O’Ferrall found it unnecessary to determine the nature of the “Trust Agreements” in question. His articulate opinion states: “The facts as developed in the proceedings before the Auditor indicates [sic] that regardless of the nature of the trust agreements, Security Financial treated these funds as trust funds throughout its entire existence and segregated them from its general assets in all of its accounting. * * * Whether the trust, itself, could be determined as a valid trust or not does not affect the claims of First Guarantee and Military. The fact that the monies were segregated and can be traced shows that Security Fniancial treated the funds deposited as the property of First Guarantee and Military rather than one or more of its general assets.

To permit the claims of First Guarantee and Military to prevail in these proceedings, it is only necessary to find that Security Financial received the deposits of First Guarantee and Military and that Security Financial still has in its possession the deposit of First Guarantee & Military. * * (Emphasis supplied). While we cannot agree with the Auditor’s overly-broad conclusion that the mere segregation of the funds plus their traceability will permit an original owner of property to recover it from his insolvent transferee, we affirm the orders of the Circuit Court for Baltimore City, denying the appellants’ exceptions to the Auditor’s report. ⁷¹⁸ (1) Identification of the trust property, either in its original or altered form, is essential to its recovery by the cestui que trust. County Comm'rs of Frederick County v. Page, 163 Md. 619 , 164 Atl. 182 (1932). But a right of recapture in the original owner cannot exist until he shows that he still retains an interest in the property or fund.

The initial question in this case is whether Military and Financial Guarantee retained interests in the funds transferred to SFIC or whether SFIC was entitled to both the control and the equitable benefit of them. The appellants, in considering the latter proposition, argue that the funds were, in reality, transferred to SFIC as loans and not in trust, and that Military and First Guarantee and SFIC stand, therefore, in a debtor-creditor relationship. The legal distinction 'between debt and trust is often an important one. As Scott, The Law of Trusts, section 12.6 (2d Ed. 1956) points out: “The distinction between a trust of money and a debt is of importance where one person pays over money to another who becomes insolvent.

If the money is held in trust, and the trustee becomes insolvent, the beneficiary is entitled to the money if he can identify it in the hands of the trustee or if he can trace it into a product. He need not share it with the creditors of the trustee, and if the trustee is bankrupt, the money does not become part of the estate to be distributed to creditors.” If one person pays money to another, it depends upon the manifested intention of the parties whether a trust or a debt is created. Where the language of the parties does not clearly show their intention, all the circumstances must be considered in order to determine whether a trust or a debt was intended. Restatement of Trusts, section 12 (comment g) ; Kitten v. Houser, 239 Md. 79 , 210 A. 2d 527 (1965); Dunlop Sand & Gravel Corp. v. Hospelhorn, 172 Md. 279 , 191 Atl. 701 (1937) ; Doty v. Ghinger, 166 Md. 426 , 171 Atl. 40 (1934).

The “Trust Agreements” outlined above represent the principal manifestation of the intention of the parties with respect to the funds transferred to SFIC. An agreement substantially ⁷¹⁹ identical to those before us has been considered by the State Attorney General in ruling that deposits by savings and loan associations to the SFIC “Trust Fund” were not authorized, under Maryland laws limiting the investments of associations, either as investments or as a portion of the required reserves. 46 Ops. Att’y Gen. 30 (1961). It was noted in that opinion that some of the provisions of the agreement “cast doubts as to whether it constitutes, in fact, a trust relationship” and that the transfer of funds under the agreement had many of the elements of “an unsecured loan” to SFIC “at an interest rate to be fixed at the whim of the borrower, for such term as the borrower deems appropriate, for the sole benefit of the borrower.” The Attorney General, however, expressly refrained from ruling on the nature of the agreement or the parties’ rights under it, and did not say that a debtor-creditor relationship existed.

As viewed by the Attorney General, the transfer was illegal because the associations received no security in return for the funds placed with SFIC. We believe the “Trust Agreements” strongly evidence an intention on the part of the appellee-associations and SFIC to create an express trust. The agreements provided that the funds were to be held in trust by SFIC “for the benefit” of the associations, and that the purpose of the “trusts” was “to better indemnify the savings account shareholders and to also increase the