Seaboard Surety Co. v. Boney

ADKINS, Judge. Both parties in this appeal are fellow victims of Lance O. Brown, a disbarred attorney who cross-breached his fiduciary duties to them. We must decide which one bears the risk of the losses caused by Brown’s misconduct. Seaboard Surety Company, appellant and cross-appellee, is the assignee of the guardianship estate of John W. Berger (the “Estate”).

In his capacity as guardian of the Estate, Brown made an improper loan of $60,000 in Estate funds (the “Loan”) to his client, Ernest D. Boney, appellee and cross-appellant. The purpose of the Berger Loan was to enable Boney to repurchase his house, which had been sold at foreclosure due to Brown’s misconduct and legal malpractice. To obtain the Loan, Boney executed a promissory note and deed of trust in favor of the Estate (the “Note and Deed of Trust”). Brown’s misdeeds were discovered shortly after the Loan.

A substitute guardian replaced Brown and initiated foreclosure proceedings against Boney’s house. In response, Boney filed a counterclaim seeking to cancel or modify the Note and Deed of Trust on the basis of Brown’s fraud and malpractice. The Estate settled its claim against the guardianship bond issued by Seaboard, and then assigned its rights against Boney and Brown to Seaboard. The Circuit Court for Anne Arundel County concluded there were grounds to cancel or modify the Note and Deed of Trust, citing Brown’s fraud against Boney and Brown’s capacity as guardian of the Estate at the time the Loan was made.

After trial, the court entered an award of restitution in favor of Seaboard, but for an amount far less than the principal and interest due on the Note and Deed of Trust. As a result, Boney was excused from paying approximately $50,000 of the balance due under the Note, and Seaboard was left to seek ¹⁰⁶ recovery of that difference from Brown, without any foreclosure rights or other security. We shall vacate the judgment, because we conclude that the risk of loss must fall on appellee Boney, as the principal of a fraudulent agent, and as the party who enabled his attorney’s misconduct toward an innocent guardianship estate. FACTS AND LEGAL PROCEEDINGS This case revolves around a regrettable web of ineptitude and fraud, at the center of which sits attorney Brown.

Brown had a wealthy elderly client named John W. Berger. When Berger became incompetent, the Circuit Court for Baltimore City appointed Brown guardian of Berger’s Estate, in April 1994. Appellant Seaboard issued a fiduciary bond to secure Brown’s faithful performance of his duties as guardian of the Estate. At the same time, one of Brown’s clients was appellee Boney.

Since 1992, Brown had been representing Boney in an effort to recover insurance proceeds alleged to be due as a result of a fire in a house that Boney owned as tenants by the entireties with his estranged wife, and in contemplated divorce proceedings. The fire insurer refused to cover the loss, alleging that Mrs. Boney had committed arson. Brown negotiated a settlement with the insurance company, which paid off the Boneys’ $42,000 first mortgage. A second mortgage of approximately $11,000 remained.

Brown advised Boney to stop paying the second mortgage as part of a plan to eliminate Mrs. Boney’s one half marital property interest in the house. By letting the second mortgage go to foreclosure, and then purchasing the house at the foreclosure sale through a straw purchaser, who then would reconvey the property to a newly formed corporation owned by Boney, Boney hoped to take the property “out of consideration” as marital property. Boney gave Brown $9,000 to hold toward a negotiated pay-off of the second mortgage. Boney also authorized Brown to find a lender for the additional money necessary to buy the house at foreclosure, believing ¹⁰⁷ that the loan would be in Brown’s name, and that he would reimburse Brown.

To implement this plan, Boney stopped making second mortgage payments, and, through Brown, formed Arrow Housing Company to receive title from the straw purchaser. The second mortgage holders foreclosed. At the foreclosure auction held in 1995 (the “First Foreclosure”), Brown was the high bidder, for $56,000, on behalf of Boney’s sister, who was acting as the straw purchaser. The source of the funds that Brown presented to make the purchase was the Berger Estate.

But the check that Brown presented bounced, due to insufficient funds. Nevertheless, Brown misled Boney to believe that everything was taken care of. The Boney house was re-advertised, and a second foreclosure sale scheduled for April 3, 1996 (the “Second Foreclosure”). Brown did not tell Boney about the bounced check, re-advertisement, or second foreclosure sale.

On the morning of the sale, Brown telephoned Boney, and told him to go to Annapolis to bid on his house. But by the time Boney got there, the house had been resold for $30,000 to bona fide purchasers, the Shapiros. By this time, Boney was aware of Brown’s failures in the First Foreclosure as well as in other legal matters that Brown handled for him. Brown reassured Boney that he would buy back the house, and “take care of the damage.” In an attempt to do so, Brown negotiated to purchase the house back from the Shapiros for $65,518.

Boney agreed to Brown’s proposal to buy out the Shapiros. At the June 14, 1996 settlement, Brown presented two checks totaling $60,000. Again, Brown improperly used funds from the Berger Estate as the source of those funds. This time, however, the checks did not bounce.

Relying on Brown’s promises to straighten everything out, and believing that Brown would reimburse him for any damages that he had caused, Boney signed the Note for $60,000 and the Deed of Trust. The Note required Boney to make 12 monthly payments of $660 (totaling $7,920) to the Estate, and to pay the ¹⁰⁸ balance at the end of one year. But Brown led Boney to believe that he only had to make the 12 monthly payments, and that he would not be responsible for the balance. Boney believed that the total amount of his payments would be approximately the difference between the $9,000 that he had originally deposited with Brown to resolve the second mortgage and the amount necessary to buy the house back at the First Foreclosure Sale.

In accordance with the plan to eliminate Mrs. Boney’s marital property interest, Arrow took title to the house. The settlement proceeds were used to pay off the second mortgage; pay title, attorney, and recording fees; repay the Shapiros’ deposit; and pay the Shapiros a $20,000 premium. Although it had cost far more than the face amount of his first and second mortgages, Boney had his house back, free from his ex-wife’s marital claims, albeit still fire damaged. Brown’s improper use of Estate funds to make the Loan came to light when an auditor appointed by the Baltimore City Circuit Court reported that Brown had misappropriated and misused Estate funds in various respects, including writing checks to himself; withdrawing Estate funds for personal use; making both the Loan and an unsecured $10,000 loan to an acquaintance; liquidating tax-free municipal bonds to purchase an $800,000 annuity for Berger, who was 91 at the time; and purchasing an investment condo for a price well above appraised value.

The total amount of loss to the Estate exceeded $600,000.00. On September 6, 1996, the court removed Brown as Berger’s guardian, for cause, and substituted Shawn R. Harby as guardian of the Estate. Meanwhile, after making the first two monthly payments on the Note, Boney realized that Brown was not going to “straighten things out.” When he stopped paying on the Note, Harby demanded payment. Boney made additional payments in February and March 1997, but none after that.

Boney paid a total of approximately $8,900 on the Note. In December 1996, Harby filed a claim against appellant Seaboard’s guardian bond, in the Circuit Court for Baltimore ¹⁰⁹ City. One year after the Loan, on June 13, 1997, Harby also initiated foreclosure proceedings against the Boney house under the Deed of Trust, in the Circuit Court for Anne Arundel County. The principal and interest due on the Note was $62,937.36.

Boney counterclaimed, seeking to cancel or modify the Note and Deed of Trust as a result of Brown’s fraud and legal malpractice. Boney also filed a third party complaint against Brown and a claim against the Client Security Trust Fund. Brown filed for bankruptcy protection, thereby staying Boney’s civil claims against him. On August 6, 1997, Brown pled guilty to theft and fraudulent misappropriation of fiduciary funds.

Brown was imprisoned and disbarred as a result of his thefts from the Estate and from others. On December 6, 1998, Mr. Berger died. Harby continued the Estate claims as personal representative of the Estate. The Estate’s claim against Seaboard’s guardian bond eventually settled for $544,995.26.

This amount was equal to the Berger loss plus interest and expenses, minus net proceeds from sale of the investment condominium. As a result of the settlement, the Estate assigned to Seaboard all of its claims against Brown and Boney. At the bench trial on Boney’s counterclaim for cancellation and modification of the Note and Deed of Trust, the parties stipulated facts and submitted other documentary evidence. The circuit court rendered its decision orally from the bench, finding that Boney was the victim of fraud and legal malpractice by his attorney, Mr. Brown.

He signed a note and a deed of trust for $60,000 and he did not receive $60,000. However, the second mortgage which he did owe ... was satisfied and paid off in the course of this proceeding. The fcjourt finds that as a result of the fraud by Mr. Brown, who was at the time the substitute guardian of the property for John Berger as well as also being the attorney at law on behalf of Ernest Boney in June of 1996, that ¹¹⁰ equity requires that there be cancellation or modification of those instruments: the note and the deed of trust. Seaboard’s counsel objected that canceling or modifying the Note and Deed of Trust “unjustly enriche[d] Mi*.

Boney, given the amount of funds that were paid off on his behalf.” When she requested that the court “explain [its] reasoning with regard to Mr. Brown’s fraud being imputed to my client,” the court replied that the fact that Brown was acting in his capacity as guardian of the Estate at the time of the Loan “weighted] heavily in this decision.” Modifying the Note, the court entered judgment on the counterclaim in favor of Seaboard for $9,589.70, which is the difference between the amount Boney owed on the second mortgage on the date of the Second Foreclosure sale ($22,-489.70), minus the amount Boney delivered to Brown to pay toward the second mortgage ($9,000), minus the amount of Boney’s payments on the Note ($3,900). Both parties were dissatisfied with the amount of the judgment. When Seaboard appealed, Boney cross-appealed. DISCUSSION Standard Of Review In an action tried without a jury, we “will review the case on both the law and the evidence.” Md.Rule 8-131 (c).

When the issue to which appellant excepts, and on which the court ruled, is a purely legal issue, there being no dispute of fact, the appellate court’s review is expansive. See In re Michael G., 107 Md.App. 257, 265 , 667 A.2d 956 (1995). “The clearly erroneous standard for appellate review ... does not apply to a trial court’s determinations of legal questions or conclusions of law based on findings of fact.” See Heat & Power Corp. v. Air Prods. & Chems., Inc., 320 Md. 584, 591 , 578 A.2d 1202 (1990). In such cases, we must determine whether the trial court was “legally correct.” See id. at 592 , 578 A.2d 1202 . ¹¹¹ Seaboard’s Appeal: Who Bears The Risk Of Losses Caused By A Guardian-Attorney’s Cross-Breaches Of Fiduciary Duty? When asked why Seaboard, rather than Boney, should be charged with the losses caused by Brown’s misconduct, the court explained that Brown’s status as guardian of the Estate “weighted] heavily in this decision.” In its appeal, Seaboard argues that the court erred when it relieved Boney from Brown’s fraud at its expense.

It contends that neither the Estate nor Seaboard, as its assignee, should be held responsible for the malpractice Brown committed as Boney’s attorney simply because Brown attempted to remedy that malpractice by cross-breaching his fiduciary duty to the Estate. In response, Boney contends that the trial court properly relieved Boney from the losses caused by Brown’s misconduct, because those losses were covered by Seaboard under its guardianship bond. The issue before us, then, is whether the circuit court erred in concluding that Boney could assert Brown’s fraud and misconduct as a defense to the Note and Deed of Trust. Essentially, we must determine whether Brown’s role as guardian of the Estate when he made the improper Loan and Seaboard’s role as surety under the guardian bond insulated Boney from the consequences of his attorney’s misconduct.

We hold that the trial court erred in modifying the Note on the basis of Brown’s fraud, and in treating Brown’s status as guardian of the Estate or Seaboard’s guardianship bond as grounds to do so. Applying established principles of agency, estoppel, guardianship, suretyship, and subrogation to the undisputed facts of this case, we conclude that, as between Seaboard and Boney, it is Boney who must bear the risk of losses caused by his attorney’s misconduct. A. Agency v. Guardianship Brown and appellee had an attorney-client relationship. That relationship was not only a fiduciary one, it was ¹¹² also an agent-principal relationship.

See, e.g., Advance Fin. Co. v. Clients’ Security Trust Fund, 337 Md. 195, 201 , 652 A.2d 660 (1995)(“agents are lawyers whose principals are clients”); Henley v. Prince George’s County, 305 Md. 320, 340, n. 5 , 503 A.2d 1333 , aff'd in part and rev’d in part on other grounds, 305 Md. 320 , 503 A.2d 1333 (1986) (“[independent contractors generally considered to be agents include attorneys ... and other similar persons who conduct transactions for their principal”). Because agents have the power to alter the legal relations of their principals, principals have the right to control their agents. See Green v. H & R Block, 355 Md. 488, 503-04 , 735 A.2d 1039 (1999).

A client’s right to select and direct his or her attorney is a fundamental aspect of attorney-client relations. Thus, the principal-agent relationship between a client and an attorney is always a consensual one. See Restatement (Second) of Agency, § 1(1) cmt. b; id. at § 401 cmt. a (1958). In contrast, the relationship between Brown and the Estate was an involuntary guardianship relationship.

A ward may not select, instruct, terminate, or otherwise control his guardian. See Md.Code (1974, 1991 Repl.Vol., 2000 Cum.Supp.), § 13 201(c) of the Estates and Trusts Article (“ET”) (guardian substitutes its discretion and judgment for that of incompetent ward); ET § 13-221 (guardian removable only by court order). A guardian is a fiduciary who has control over the ward’s property, -subject to court supervision, and is charged with preserving it “from being squandered or improvidently used.” Restatement (Second) of Contracts, § 13 cmt. a (1981). A guardian must “utilize his powers ... to perform the services, exercise his discretion, and discharge his duties for the best interest of the ... disabled person or his dependents.” ET § 13-206(c).

Thus, the fundamental duty of a guardian of property is to preserve the property in the guardianship estate for the benefit of the ward and other persons with an interest in that property. To ensure the faithful performance of that duty, the guardian must post a judicial bond covering the value of the property in the fiduciary estate. See Md.Rule 10-702(d). ¹¹³ Guardians are not agents of either their wards or the bonding surety, because guardians are not subject to their control. See Restatement (Second) of Agency, § 14F cmt. b.

Rather, the Court of Appeals has emphasized that the true guardian of every guardianship estate is the court itself, and that individuals who are appointed as guardians serve a unique role as agents of the court. Lest sight be lost of the fact, we remind all concerned that a court of equity assumes jurisdiction in guardianship matters to protect those who, because of illness or other disability, are unable to care for themselves. In reality the court is the guardian; an individual who is given that title is merely an agent or arm of that tribunal in carrying out its sacred responsibility. Kicherer v. Kicherer, 285 Md. 114, 118 , 400 A.2d 1097 (1979) (emphasis added).

B. Equitable Estoppel By Agency Seaboard argues that the difference in the natures of Brown’s relationships with Boney and with the Estate is outcome determinative, because Boney is legally responsible for Brown’s misconduct under established principles of agency law. We agree, and explain. A fundamental tenet of agency law is that a principal may be bound by even the wrongful acts of his agent. “The fact that the agent has wronged his principal through the agent’s unlawful act does not provide a predicate for insulating the principal against the harm caused by the agent at the expense of the innocent third party who had no responsibility for the conduct of the agent.” Rothman v. Fillette, 503 Pa. 259 , 469 A.2d 543, 546 (1983); see also Coan v. Consol. Gas Elec.

Light & Power Co., 126 Md. 506, 511 , 95 A. 151 (1915) (principal could not assert agent’s fraud as defense to third party’s claim for rescission of contract). This case falls within the parameters of the ancient maxim that “ ‘when one of two innocent persons must suffer by the fraud of a third, the loss ¹¹⁴ shall fall upon him, who has enabled such third person to do the wrong.’ ” Hall v. Hinks, 21 Md. 406, 418 (1864) (quoting Lupin v. Marie, 2 Paige Rep. 169, 172 , 1830 WL 2732 ). This aspect of agency is enforced through equitable estoppel, which has the effect of shifting to the principal the risk of loss arising from the agent’s fraud toward an innocent third party. In Chevy Chase