National Surety Co. v. State Ex Rel. Morgan

Offutt, J., delivered the opinion of the Court. On November 1st, 1913, Howard A. Kelly and Susie Kelly, his wife, executed to Jacob A. Doxen, an attorney at law practicing in Harford County, a mortgage for twenty-three hundred dollars on property in that county, and on March 25th, 1916, Doxen assigned that mortgage for value to John T. Morgan, by a short assignment endorsed on the original mortgage, and mailed it to Morgan, who for some unexplained reason did not record it until 1925. In the meantime Doxen, who also collected the interest on other mortgages for Morgan, sent him regularly the interest on the Kelly mortgage to and including November 1st, 1924, as though it were a valid subsisting lien. But on April 20th, 1916, Kelly and his wife had conveyed to Doxen all their property, including the mortgaged property, in trust to convert it into cash, and apply the proceeds to the payment of the debts due by them “without preference or priority, except such as by law provided,” and on April 21st, 1916, the Circuit Court for Harford County, on a bill filed to enforce it, assumed jurisdiction of the trust, and Doxen qualified as trustee by filing a bond with appellant as surety for four thousand dollars, which contained the following condition: “That if the above ⁷³ bounden, Jacob A. Doxen. do and shall well and faithfully perform the trust reposed in him, by said deed, or that may be reposed in him by any future decree or order in the premises, then the above obligation to be void.” On April 27th, 1916, Doxen filed answers for all of the defendants and, in his own individual answer, he stated under oath that he held the Kelly mortgage, and filed a certified copy thereof, which did not however show the assignment to Morgan, because that assignment had not then been recorded.

The property was sold by Doxen as trustee, and in due course the sale was ratified, and the proceeds thereof distributed by an auditor’s account, which was also finally ratified and confirmed on July 23rd, 1917. In that audit there was distributed to Jacob A. Doxen individually $2,395.92 in payment and satisfaction of the Kelly mortgage, which he had in that proceeding claimed as his own, although in fact he had assigned it to Morgan prior to the institution of the suit. Erom the date of the assignment until some time in 1925, Morgan, who had no actual knowledge of the sale o£ the mortgaged property, had no reason to suspect that Doxen was not honest, but during that year he learned that Doxen had been indicted on several criminal charges and had absconded, and he then promptly consulted Major Robert H. Archer to learn the state in which Doxen had left the matters which he was handling for him. As a result of that visit the assignment was immediately recorded, and Morgan learned for the first time that the mortgaged property had been sold, and that, it had been again mortgaged by the purchaser for an amount somewhat in excess of the Kelly mortgage.

Not having received any part of the principal of his mortgage, or any interest thereon since November 1st, 1924, Morgan, on March 4th, 1926, brought suit against Doxen and the appellant on the bond to which we have referred, on the theory that Doxen’s failure to pay to Morgan the money audited to Doxen in satisfaction and discharge of the Kelly mortgage constituted a breach of the condition of the bond. ⁷⁴ The case was tried before the court sitting as a jury, and at the conclusion of the trial the appellant prayed the court to rule as a matter of law that there was no evidence in the case legally sufficient! to entitle the plaintiff to recover and that its verdict should be for that defendant. The court refused that prayer, and that ruling is the subject of the first and only exception found in the record. After the refusal of that prayer, the case proceeded to a judgment for the plaintiff, from which judgment this appeal was taken. The facts of the case> which are undisputed, are in substance as we have stated them, and the only question presented by the appeal is whether they constitute a cause of action.

The appellant’s liability is measured by the terms of the bond, which in substance provided that it should be effective if Doxen failed to well and faithfully perform the trust reposed in him by the deed, or that might be reposed in him by any “future order or decree in the premises.” The trust reposed in Doxen by the deed was to sell all the property of the grantors and apply the proceeds, after deducting the costs of administration, to the payment of all their debts according to their legal priority, and the only order or decree passed in the case which is material to the question before us was an order of July 23rd, 191J, ratifying an audit which distributed to Doxen, as an individual, $2,395.92, on account of the Kelly mortgage. From this statement it is apparent that what happened was that Doxen, after he sold the Kelly mortgage to Morgan, knowing that the assignment of it had not been recorded, fraudulently filed it as his own, in the equity proceeding in which he qualified as trustee to' sell the property of the Kellys for the benefit of their creditors, and that, when the amount of the mortgage debt and interest was audited to him in that proceeding as the record holder thereof, instead of applying that money to the satisfaction of the mortgage debt and interest, he, fraudulently appropriated it to his own use. As we understand it, appellant’s contention is that Morgan’s loss was not directly due to any breach of trust by Doxen, but to his fraudulent act as an individual in asserting that he was the owner of the Kelly mortgage, and ⁷⁵ that since the bond only covered his acts as trustee, appellant, the surety thereon, is not liable. That contention is, we think, too refined.

It is true that Doxen’s act in filing the mortgage as his own, and in withholding the fact that Morgan really owned it, was fraudulent and dishonest, but the principal purpose of such a bond, and indeed the only reason for it, is to protect those who may be interested in the trust fund from just such acts. If that protection can be whittled away by any such theory as that Doxen the individual could perpetrate frauds resulting in the waste and wrongful conversion of the trust estate, to which Doxen as trustee must be officially blind, the protection afforded by such bonds would be flimsy indeed. The sole purpose of the Kelly deed was to devote all the property of the grantors to the payment of all of their debts, or if it proved insufficient to pay all such debts, then to apply it to the payment of such debts pro rata, according to their legal priority, and it conveyed to Doxen all the property of the grantors upon the expressed and specified trust to carry out and effect that purpose. And when Doxen as trustee under that bond received a fund sufficient to satisfy in full the mortgage debt of the grantors, and that fund was audited to him as an individual, but for that specific purpose, and when he, knowing that he as an individual had no interest in the mortgage, and knowing too that it was held by another, and that it was due and payable, instead of applying the fund to the satisfaction of the mortgage debt, converted it to his own uses, it cannot reasonably be said that he did not commit a breach of trust.

The grantors gave him all their property to pay their debts, and when he accepted the property, instead of paying their debts with it, used it for his own purposes and left them stripped of their property, but still owing their debts, he did indeed perpetrate a fraud, but one which itself was a violation of the trust which he had accepted. And whilst that fraud necessarily involved personal delinquency, nevertheless it was so intimately connected with his official delinquency that they cannot well he distinguished. For if some person, other than Doxen, had been the trustee, and such person knew, as Doxen knew, that his claim to the ⁷⁶ mortgage debt was fraudulent, be would not in the honest administration of the trust have paid the money to satisfy the mortgage debt to Doxen, at least without obtaining a release of the mortgage. And it was only through the abuse of his official powers as trustee that Doxen was enabled to keep the fund which should have extinguished the mortgage in his possession without formally releasing it.

The only authority cited by the able and learned counsel for the appellant in conflict with that conclusion is National Surety Co. v. State Sav. Bank, 156 Fed. 21 , but assuming that it is in point, we are unable to follow the reasoning of the majority of the court in that case. The facts involved were these. Under a Minnesota statute it was the duty of the auditor of Eamsey County to issue orders for the refund of taxes to the holders of certain certificates.

One Bourne, the-deputy auditor, being duly authorized to sign such refund orders, drew upon the county treasurer seven spurious refunding orders in favor of fictitious persons, and had them authenticated by the chairman of the board of county commissioners. He then forged assignments of the myths on the-back of the orders and sold them to the State Savings Bank, which collected them from the county treasurer. When the-fraud was discovered, the county sued the surety on the-auditor’s bond for the amount paid to the bank, and recovered judgment therefor. The surety paid the judgment and brought suit in the- United States Circuit Court for the District of Minnesota against the bank to recover what it had paid the county, on the theory that