Noma Electric Corp. v. Fidelity & Deposit Co.

Henderson, J., delivered the opinion of the Court. This appeal is from a judgment rendered by the court sitting without a jury in a case arising out of certain “primary commercial blanket bonds” issued by the appellee to the appellant’s predecessor corporation, Triumph Explosives, Inc., under which the appellee agreed to indemnify the insured against all losses up to $50,000 incurred by it as the result of the dishonesty of the insured’s employees. The bonds covered the period from January 1, 1941, through December 31, 1942. Suit was filed in 1950.

One of the numerous defenses set up by the appellee was that by entering into a settlement with one of the defalcating employees, under which he was released upon the payment of a certain sum, the surety was released. There is very little dispute as to the facts. Gustav H. Kann, president of Triumph, and Joseph Ben Decker, its executive vice-president, pursuant to a conspiracy between them and other employees, fraudulently and without authority from the board of directors, drew large sums from the corporate funds and bank accounts during the period covered by the bonds. The plaintiff made a tentative claim for loss under the bonds on September ⁴¹⁰ 23, 1943, amounting to over $314,000.

At that time the plaintiff requested an extension of time for filing claim and bringing suit, and suggested that it be allowed to negotiate for settlement. On October 2, 1943, the defendant agreed to an extension of the time for filing claim but stated, in regard to the proposed negotiations for recovery: “Our general information is Mr. Gustav H. Kann’s financial standing is such that he can absorb the entire alleged loss. We know nothing about Mr. Decker’s financial standing, but you have in mind of course that whatever negotiations you might have with either or both of them should not affect our Company’s rights over and against either or both of them.” On August 31, 1945, without the knowledge or consent of the defendant, the plaintiff made a settlement with Kann, whereby, upon the payment by him of $65,000, it released him from all liability. In May, 1949, without the knowledge or consent of the defendant, it made a settlement with Decker’s widow (he having died) of all claims against her for property allegedly transferred to her by Decker, for $35,000.

It then obtained, without opposition, a judgment against his estate for a sum amounting to about $400,000. As the estate is without assets, it appears that no part of this judgment is now collectible. It is clear that Kann and Decker were jointly and severally liable for the defalcations. Cf.

Western Maryland Dairy v. Chenowith, 180 Md. 236, 243 , 23 A. 2d 660 , and Etgen v. Washington Co. B. & L. Association, 184 Md. 412, 418 , 41 A. 2d 290 . The release to Kann had the effect of destroying the subrogation rights of the insurer against Kann for the whole amount claimed. The appellant does not deny that this was the effect of its release, and that if only a single tortfeasor were involved, it would be a good defense to the action. Packham v. German Fire Insurance Co., 91 Md. 515 , 46 A. 1066 , 50 L. R. A. 828; Railway Co. v. Assurance Corp., 163 Md. 97 , 161 A. 5 ; Harter v. American Eagle Fire Insurance Co., 6 Cir., 60 F. 2d 245 ; Aetna Casualty & Surety ⁴¹¹ Co. v. Phoenix National Bank & Trust Co., 285 U. S. 209 , 52 S. Ct. 329 , 76 L. Ed. 709 ; 6 Appleman, Insurance, § 4093; 5 Joyce, Insurance (2nd ed.) § 3544a.

But it contends that this is altered by the provisions of Article 50, Section 23, of the Code of 1951, which provides that “a release by the injured person of one joint tortfeasor, whether before or after judgment, does not discharge the other tortfeasors unless the release so provides * * The release in the instant case expressly reserves the right against Decker. We find nothing in this statute dealing specifically with rights of subrogation; the statute merely deals with rights of contribution. It has been held that the release of one tortfeasor, which impairs the right of contribution of another, operates to discharge the insurer of the second tortfeasor. American Automobile Insurance Co. v. Mack, D. C. Ky., 34 F. S. 224, 226.

Of course, the release of Kann did not release Decker, or the insurer’s subrogation rights against him. But the insurer complains of the loss of its rights against Kann, who it claims was fully able to pay the loss, whereas Decker’s estate is hopelessly insolvent. The appellant relies upon McShane v. Howard Bank, 73 Md. 135 , 20 A. 776 , 10 L. R. A. 552. In that case, however, only one officer was covered, and it was held that settlement and release of another officer did not affect any right of subrogation, for none existed, their liabilities being several.

In the instant case, the liability being joint, the release of Kann necessarily affects the subrogation right as against him. The appellant argues, however, that the insurer being equally liable for Decker’s defalcations, it is immaterial