Royal Insur. Co. v. Drury

²¹⁴ Walsh, J., delivered the opinion of the Court. The chief question to be determined in this case is whether or not the final ratification of a sale of property made under a power of sale contained in a deed of trust, to the holders of the notes secured by the deed of trust, effects “any change of ownership” in the property within the meaning of that phrase as used in the “standard mortgage clause,” now customarily attached to fire insurance policies covering mortg'aged property. In the fall of 1920 Mr. R. E. Walker, president of the Brightwood Sanitarium Company, after a casual meeting with Mr. D. H. Roland Drury in Washington, D'. C., asked him if he could secure a $15,000 loan on a fifty-acre tract of ground and the building thereon, owned by the sanitarium and situated on the Baltimore and Washington Boulevard, about six-tenths of a mile from the main road leading to Laurel.

After some discussion, Drury, who had for many years been engaged in the real estate and loan business in Washington, agreed to try to raise the money and Walker agreed to pay him a $7,500 bonus if he obtained it. Drury thereupon investigated the property 'and on November 17th, 1920, the Sanitarium Company executed a deed of trust conveying the property to Drury and B. Erlie Talbott, the appellees, to secure the payment of ten negotiable promissory notes of varying amounts, totalling $22,500, made payable to Mildred B. Drury, the wife of D. II. Roland Dlury, or order, six months after date. These notes were endorsed without recourse by Mrs. Drury, and sold at a discount to the following persons, who still hold them: Thomas B. Harney, Martha G. Harney, Evelyn S. MbLachlen, Thomas P. Hickman, John P. Cochran, John H. Drury and Emma Goldman.

The actual amount received in cash by D. II. Roland Drury from the purchasers of the notes was $19,365, out of which he retained a commission of $4,375.50 and turned over the balance of $14,989.50, less expenses, to the Maryland Title Insurance Company on December 16th, 1920, with instructions to pay it to the Sanitarium 'Company when the title ²¹⁵ to the property should be found good, and the deed of trust reported to be a first deed of trust of record. Due to difficulties with the title, the deed of trust was not actually recorded until June 3rd, 1921, six and a half months after it wras executed in November, 1920. Tbe Sanitarium Company expected to issue $40,000 in bonds, from tbe proceeds of which the loan obtained from Drury was to be paid, and this Drury loan was wanted for tbe purpose of enabling the company to complete the purchase of the property aud begin building operations pending the issuance and sale of the bonds.

Some work was done on the foundation of the proposed new building and a larg’e amount of material was delivered on the ground, but, upon the failure of the company 1o issue and sell the bonds, the work ceased, the material, whicli had not been paid for, was taken away by tbe material men, and the whole project collapsed. In October, 1921, Drury, who had been unable to get possession of tbe insurance policy which Mr. Walker, president of the company, had told him was in existence, applied to A. LC. Baker & Company, an insurance agency in Washington, for a policy on the residence building on the property. This application was made to Mr. Baker over the telephone, and Drury, who sometimes solicited insurance for1 this agency, and who received a commission on the policies subsequently issued on the risk involved in this case, gave him at that time a description of the property, the name of the owner, and the names of the trustees under the deed of trust.

A one-year policy for $10,000 was thereupon issued upon the property by Baker & Company, as agents for the Firemen’s Insurance Company of Newark, New Jersey, in which policy the Sanitarium Company was described as owner, and a standard mortgage or trustee clause in favor of Drury and Talbott, Trustees, was attached. At the time this policy was issued no foreclosure proceedings had been instituted under the deed of trust, though the notes were unpaid 'and overdue. However, on November 18th, 1921, the trustees docketed suit against the Sanitarium Company and advertised the ²¹⁶ property for sale under the terms of the deed of trust. Prior to the- date set for the sale a preliminary injunction restraining it was obtained 'at the instance of certain alleged creditors of the company, and the controversy thus begun was not settled until the injunction was dissolved by a decree of this Court, rendered on November 17th, 1922.

(See Kinsey v. Drury, 141 Md. 684 .) The $10,000 policy expired in October, 1922, and on September 18th, 1922, Baker & Company sent Drury two $5,000 policies covering the property from October 19th, 1922, to October 19th, 1923, in place of the $10,000 policy. One of these $5,000 policies was issued by the same company which issued the $10,000 policy, while the other was issued by the Boyal Insurance Company, Limited, an English corporation, the appellant in this case. No additional information was given Baker & Company by Drury at the time these policies were issued, and, like the original $10,000 policy, they were each issued to the Sanitarium Company as owner, with a standard mortgage clause in favor of the appellees attached. After this Court dissolved the above mentioned injunction, the property was again advertised, 'and was actually sold on December 22nd, 1922, to the holders of the notes under the deed of trust, for the sum of $15,000, which sum was about $10,000 less than the total amount due for principal, interest and taxes under the deed of trust.

Drury and Talbott, the trustees, reported this sale to the Court ou December 27th, 1922, setting out in the report that tho property had been sold to Thomas B. Harney, Martha G-. Harney, Evelyn S. McLachlen, John B. Cochran, Thomas P. Hickman, John H. Drury and Emma Goldman, and also stating that, as these purchasers were the holders of tho notes secured by the deed of trust, the trustees had not required them to make the initial payment of $1,500 called for in the advertisement of sale, the trustees “being satisfactorily assured that said purchasers will duly settle for said property upon the ratification of said sale by this Honorable ²¹⁷ Court.” The report of sale also stated: “Taxes and insurance adjusted to the day of sale.” On January 30th, 1923, this sale was finally ratified and confirmed, but no deed for the property has yet been given by the trustees to the purchasers, nor have the purchasers paid anything on the purchase price. The testimony shows that the trustees intended to accept the notes held by the purchasers as part payment on the purchase price, collecting in cash only such sum as would be needed to pay the costs of the case, and it 'also appears that all the purchasers were solvent and able to pay their full share of the purchase price without regard to the notes held by them. Shortly after the sale of the property, the same parties who had sought to enjoin the sale had themselves made parties to the foreclosure suit, and filed claims against the proceeds of the sale, but these claims were disallowed in the lower court, and this decision of the lower court was affirmed by this Court on June 1st, 1924.

(See Kinsey v. Drury, 146 Md. 227 .) On Sunday night, May 20, 1923, nearly four months after the final ratification of the sale of the property, it was totally destroyed by fire of unknown origin. At the time of the fire, the property was occupied by a Mr. Kinsey and his family, who had lived in the house since March, 1921, and who, after the sale of the property, were permitted to remain in it, without paying rent, by Drury and Mr. Clark, the latter being one of the attorneys for the trustees in the foreclosure proceedings. After the fire the Brightwood Sanitarium made no claim for any insurance, nor has it yet made such claim, but Drury reported the loss to Baker & Company, the agents for the companies, and it was referred by the companies to their respective adjusters, Mr. Harry S. Gardner, of Baltimore, representing the appellant, and Kose and Smith of Baltimore, representing the Firemen’s Insurance Company of Newark, New Jersey. After about a year of correspondence and other negotiations, the details of which will be adverted to later, Drury and Talbott, as first mort ²¹⁸ gagees and trustees under the deed of trust, entered suit against the Royal Insurance Company to recover on the $5,000 policy issued by that company on September 18, 1922, and the verdict and judgment below being in favor of the trustees and against the insurance company, the latter appealed.

The appeal brings up for review the action of the learned court below in sustaining demurrers to two equitable pleas filed by the appellant after all the testimony had been taken, its ruling on one question of evidence, and its action in refusing the defendant’s first, second, third, fourth, fifth, seventh, eighth, ninth and tenth prayers, and in granting 'the plaintiff’s first prayer and an instruction drawn by the court. • We will first consider the rulings on the prayers. The Court’s instruction was as follows: “The court instructs the jury that by the proper construction of the mortgage clause in the policy sued on in favor of Drury and Talbott, Trustees, as interest may appear, the defendant insurance company must be held to have intended to insure and did insure any person or persons who, from time to time might be the holders of any of the notes secured by deed of trust to said trustees, and, therefore, the judicial sale of the property finally ratified January 30, 1923, to the persons who were then the holders of the notes secured by the deed of trust to said trustees was not a change of ownership within the meaning of the mortgage clause annexed to the policy sued on, and the interest of the trustees in the loss or damage by fire to said property still existed at the time of the fire, therefore the plaintiff is not precluded from recovering on said policy by reason only of said final ratification of said judicial sale.” The defendant’s second, eighth, ninth and tenth prayers asked the court in various ways to rule that the final ratification of the judicial sale of the property to the note holders effected a change in the ownership' of the property, of which the defendant had no notice, and thus rendered the policy ²¹⁹ void, and the' defendant’s third and seventh prayers asked the court to rule -as a matter of law that the ratification of the sale extinguished the mortgage or trust interest which the plaintiffs had in the property and hence they could not recover. These six prayers of the defendant and the court’s instruction will be considered together, as they all present substantially the same questions, namely, did the ratifica,tion of the sale effect “any change of ownership” within the meaning of that phrase as used in the standard mortgage clause attached to the policy sued on in this case, and did it extinguish the interest which the plaintiffs had in the property ? The suit is based on the fire insurance contract, the policy having been filed with the declaration, and this policy, we are advised in the brief, is the standard Yew York form of 1886 and is not the more recent Yew York: form effective in Yew York on January 1st, 1918, and, since January 1st,, 1924, in general use in Maryland.

It is to be observed that this suit was not brought by the Brightwood Sanitarium Company, the original owner named in the policy. That company apparently made no claim to any right to the insurance money, nor could it have successfully made such a claim. The policy sued on provided, inter alia, that it should be void “if the interest of the insured be other than unconditional and sole ownership,” or if, “with knowledge of the insured, foreclosure proceedings be commenced or notice given of sale of any property covered by this policy by virtue of any mortgage or trust deed.” It is not denied that the appellant had no notice of the foreclosure proceedings, the sale, or its final ratification, prior to the fire, and hence, aside from, other possible reasons, the policy was avoided so far as the Sanitarium Company is concerned, by its failure to give notice as required by the policy. Skinner & Sons Co. v. Houghton, 92 Md. 68 ; Frontier Mtge.

Corp. v. Heft, 146 Md. 1 ; Linthicum Heights Co. v. Firemen's Ins. Co., 134 Md. 62 ; Brewer v. Herbert, 30 Md. 301 . ²²⁰ It accordingly follows that the appellees áre not claiming this insurance money by reason of any rights to it received by them from the Sanitarium Company, but are claiming it in their own right by virtue of the provisions of the standard mortgage clause in their favor, attached to the policy, and this is the position of their counsel. This mortgage clause reads as follows: “MORTGAGE CLAUSE. “Loss or damage, if any, under this policy, shall be payable to D. H. Roland Drury and B. Erlie Talbott, as first mortgagee (or trustee), as interest may • appear and this insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property nor by any change in the title or ownership of the property, nor by the occupation of the premises for purposes more hazardous than are permitted by this policy; provided, that in case the mortgagor or owner shall neglect to pay any premium due under this policy the mortgagee (or trustee) shall on demand pay the same. “Provided also, that the mortgagee (or trustee) shall notify this company of any change of ownership or occupancy or increase of hazard which shall come to the knowledge of said mortgagee (or trustee) and, unless permitted by this policy, it shall be noted thereon and the mortgagee (or trustee) shall, on demand, pay the premium for such increased hazard for the term of the use thereof; otherwise this policy shall be null and void. “This company reserves the right to cancel this policy at any time as provided by its terms, but in such case this policy shall continue in force for the benefit only of the mortgagee (or trustee) for ten days after notice to the mortgagee (or trustee) of such cancellation and shall then cease, and this company shall have the right, on like notice, to cancel this agreement, ment. ²²¹ “Whenever this company shall pay the mortgagee (or trustee) any sum for loss or damage under this policy and shall claim that, as to the mortgagor or owner, no liability therefor existed, this company shall to the extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all securities held as collateral to the mortgage debt, or may at its option, pay to the mortgagee (or trustee) the whole principal due or to grow due on the mortgage with interest, and shall thereupon receive a full assignment and transfer of the mortgage and all such other securities; but no subrogation shall impair the right of the mortgagee (or trustee) to recover the full amount of their claim. “Attached to and forming part of Policy Ro. 413761 of the Royal Insurance Company of Liverpool, England. ' “Dated......................... “A. II. Baker, Agent.” We will first consider the appellant’s contention that the final ratification of the sale of the property to the note holders effected a “change of ownership’’ within the meaning of that phrase as set out in the mortgage clause just quoted.

Whatever the rule may be elsewhere, it has been repeatedly decided and is now definitely established in Maryland that, in equity, “from the time the owner of an estate enters into a binding agreement for its sale he holds the same in trust for the purchaser, and the latter becomes a trustee of the purchase money for the vendor, and being thus, in equity, the owner, the vendee must bear any loss which may happen, and is entitled to any benefit which may accrue to the estate in the interim between the agreement and the conveyance.” Brewer v. Herbert, supra; Skinner & Sons Co. v. Houghton, supra; Swartz v. Realty Co., 106 Md. 290 ; Linthicum Heights Co. v. Firemen’s Ins. Co., supra. It was also stated in Brewer v. Herbert, supra, that: “Where sales axe made under authority of a court, the contract is ²²² not regarded as consummated until it has received the court’s sanction or ratification, and, therefore, any loss happening before confirmation falls upon the vendor. Ex parte Minor, 11 Ves. 559 ; Wagner vs. Cohen, 6 Gill, 102 .

But where a loss occurs after confirmation, by which the contract is consummated; it falls upon the vendee, even though no purchase money has been paid, and the vendor remains in possession.” In Hanover Fire Ins. Co. v. Brown, 17 Md. 64, the Court held that an advertisement of sale under a power contained in a mortgage was practically equivalent, so far as the policy in that case was concerned, to a decree for a. sale, and it further held that before the ratification, of the sale the loss falls upon the purchaser. And in Bowdoin and Brown v. Hammond, 79 Md. 173, 178, 179, the Court said: “Where property is sold under a decree of the court, and a loss occurs before the sale is ratified, the loss falls upon the owner and not upon the purchaser, for the reason that the contract of sale is not a complete sale until it has received the sanction of the court. As we said in Hanover Fire Insurance Co. v. Brown, 77 Md. 64 , the court in such a case is the vendor acting through its, agent, the trustee who has been appointed to -make the sale.

He reports to the court the offer of the bidder for the property, and if the offer is accepted, the sale is ratified, and, thereupon, and not before, the contract of sale becomes complete.” And to the same effect see the recent decision of this Court in Fine v. Beck, 140 Md. 317 . In other words,, it is the established law of Maryland that the ratification of a judicial sale is the equivalent of a valid contract of sale, and that in both instances equity considers that the beneficial interest and ownership in the property involved is vested in the purchaser, and the purchaser suffers any loss which happens, and receives any benefit which accrues, to the property, between the datej of the ratification, or execution, and the final transfer of the legal title. This brings us to a consideration of the effect which the application of this principle has on recoveries under fire ²²³ insurance policies issued to the vendor and covering the subject-matter of the sale or contract, where the loss occurs after the ratification of the sale, or the execution of tho contract. In Skinner & Sons Co. v. Houghton, supra, the loss occurred after the execution of a binding contract of sale, and the policy, which had been issued in the name of the vendor, provided that it would be void “if any change, other than by the death of an assured, take place in the interest, title or possession of the subject of insurance” without permission of the insurer.

In holding that the contract of sale effected “a change in the interest” of the subject of insurance, Judge Boyd, who delivered the opinion of the Court, said: “Can it be doubted that there was a change in the interest in this property? As long as the insured has made no change in his estate in the property, a company may be perfectly satisfied to continue the insurance, but if he makes such a change as to divest himself of all interest in the property, excepting a vendor’s lien for the purchase-money, and has a responsible party bound for the payment of that, he does not have the same motive for the protection of the property that he had before. In short, the insurer’s risk is or may be increased by the change of the interest of the insured. As was said by Judge Alvey in Bowman v. Insurance Co., 40 Md. 631 : ‘The great purpose of all such provisions in policies of insurance is to enable the insurer to determine the extent of the risk, and the nature and extent of the interest of the insured in the premises.’ ” And later on in the opinion, after discussing the provision that the policy would be void “if the interest of the insured be other than sole and unconditional ownership,” and citing a number of cases holding that the vendee under a valid contract of sale, and not the vendor, is the owner, and is sometimes considered the “sole owner,” the Court said: “When we remember the manifest object of such provisions and the explicit language used in these policies, we cannot escape the conclusion that a sale, such as was made by Jlrs.

Houghton, did render the policies ²²⁴ void. It may be that great hardship is sometimes imposed on innocent persons, by reason of such provisions in insurance policies, but that does not justify courts in refusing to enforce contracts, as made by the parties, if lawful. When the provisions are reasonable and tend to prevent incendiarism or carelessness, which may inflict losses upon other persons whose properties are in the vicinity, their language should at least be given its usual and ordinary meaning. WTien a sale of property is thus made it is a simple matter to obtain the consent of the insurer, if his risk is not materially increased, and if it is so increased why should he be subjected to a hazard that he has not assumed ?

Until the offer of the Houghtons had been accepted, a different condition existed, but after it was, there w;as then a binding agreement on the one part to sell and on the other to purchase, and there was hence a change of interest in the subject of insurance.” And in Linthicum Heights Co. v. Firemen’s Ins. Co., supra, in which a similar decision was made, the Court quoted extensively from the Houghton case and re-affirmed and approved the doctrine announced in that case. In the present case the mortgage clause provides that, to the extent of the interest of the mortgagee (or trustee) only therein, the insurance shall not be invalidated “by any change in the title or ownership' of the property * * * provided also that the mortgagee or trustee shall notify this company of any change of ownership or occupancy or increase of hazard which shall come to the knowledge of said mortgagee (or trustee) ■ and unless permitted by this policy it shall be noted thereon; * * * otherwise this policy shall be null and void.” It accordingly follows, from the decisions heretofore cited, that, in the absence of a waiver, there can be no recovery in this case unless it can be held that the final ratification of the trustees’ sale, though it changed the “interest” of the insured, did not effect “any change of ownership,” or unless it can be held that the purchase of the property by the note-holders under the deed of trust in some way prevented there being “any change of ownership.” ²²⁵ We are of the opinion that the ratification of the sale did cause some “change of ownership.” The word