Silverman v. Maryland Deposit Insurance Fund Corp.

RODOWSKY, Judge. Appellants are fiduciaries who deposited trust funds in Old Court Savings and Loan, Inc. (Old Court), a Maryland chartered association, where deposits were then insured by Maryland Savings-Share Insurance Corporation (MSSIC). Both Old Court and MSSIC became insolvent. One of the appellees, State of Maryland Deposit Insurance Fund Corporation (MDIF), is a governmental corporation and agency of the State of Maryland which has assumed the insurance obligations of MSSIC.

A dispute exists between appellants and MDIF, acting through its director, the other appellee, Lloyd W. Jones (Jones), over the method of computation of the amount of insurance payable by MDIF to appellants. Appellees successfully argued in the Circuit Court for Baltimore City, and argue here, that their contract constructions are correct and, in any event, that sovereign immunity as to MDIF, and a statutory immunity as to Jones, prevent courts from considering whether appellees have misconstrued the insurance plan they administer. We shall hold, as explained below, that the constructions by the appellees are generally correct, but that appellants are permitted to attempt to show that Old Court has mistakenly or unauthorizedly recorded the number of appellant’s deposit accounts. This is another lawsuit arising out of the 1985 savings and loan crisis in Maryland.

The development of the crisis is described in detail in W. Preston, Report of the Special Counsel on the Savings & Loan Crisis (1986) (Preston). Aspects of the response by the State of Maryland to the crisis may be found in Md.Code (1980, 1986 Repl.Vol., 1988 Cum.Supp.), §§ 9-701 through 9-712 of the Financial Institutions Article (FI), relating to receiverships and conservatorships of state chartered savings and loan associations, and in FI §§ 10-101 through 10-121, relating to MDIF. Aspects of the State’s response to the crisis also have been ³⁰⁹ described in United Wire, Metal & Machine Health & Welfare Fund v. Board of Savings & Loan Ass’n Comm’rs, 316 Md. 236 , 558 A.2d 379 (1989); State v. Hogg, 311 Md. 446 , 535 A.2d 923 (1988); United Wire, Metal & Machine Health & Welfare Fund v. State Deposit Ins. Fund, 307 Md. 148 , 512 A.2d 1047 (1986); and Chevy Chase Savings & Loan v. State, 306 Md. 384 , 509 A.2d 670 (1986).

We shall not recount that history here. Procedurally we have here two appeals in one record. Each action below was a complaint for declaratory judgment, mandamus and other appropriate relief against MDIF and Jones. In one action the plaintiffs are the trustees of United Wire, Metal & Machine Pension Fund (Pension Fund) and in the other action the plaintiffs are the trustees of United Wire, Metal & Machine Health & Welfare Fund (Welfare Fund).

We shall refer to Pension Fund and Welfare Fund collectively as United Wire. United Wire had in excess of $16 million on deposit at Old Court when Old Court failed. MDIF’s role in the factual background of this appeal is twofold. It is the court appointed receiver of Old Court and it is the insurer of accounts at Old Court.

The latter capacity results from the statutory merger of MSSIC into MDIF which expressly included the transfer to MDIF of all of the assets and all of the liabilities, including insurance liabilities, of MSSIC. See Acts of the First Special Session of 1985, Ch. 6, § 4 (uncodified). Funds for the payment of MDIF’s outstanding liabilities as insurer are or may be made available from the assets of MSSIC and from public funds which have been or in the future may be appropriated pursuant to the policy declared in FI § 10-116. It reads: “It is the policy of this State that funds will be appropriated to [MDIF] to the extent necessary to protect holders of savings accounts in member associations, and to enable [MDIF] to meet its obligations under a hardship withdrawal plan or partial distribution of assets.” In general, and grossly oversimplified, the limit of MSSIC’s insurance liability was $100,000 per account, as ³¹⁰ opposed to $100,000 per depositor.

Old Court’s records reflected some $8.4 million of deposits by Pension Fund in forty-three accounts. MDIF determined that nearly $700,-000 of Pension Fund’s total deposits were uninsured. Old Court’s records reflected some $8.5 million of deposits by Welfare Fund in twenty-nine accounts. MDIF determined that some $5.6 million of Welfare Fund’s total deposits were uninsured.

These determinations by MDIF were explained in its letters dated October 21, 1987, to United Wire and were based in part on information submitted by United Wire to MDIF. United Wire then filed the instant complaints against MDIF, as insurer and as receiver, to which Jones was added by amendment as a defendant, both individually and as Director of MDIF. The complaints raise claims under state nonconstitutional law and under federal and state constitutional law to which the defendants responded by motions to dismiss or, in the alternative, summary judgment. United Wire’s nonconstitutional claims were rejected both on immunity grounds and on the merits.

The constitutionally based claims were rejected on the merits. United Wire appealed, and we issued the writ of certiorari on our own motion prior to consideration of the matter by the Court of Special Appeals. United Wire raises the following issues. We have revised the order of presentation of these issues because we choose to address the merits first, and to consider sovereign immunity only as to any meritorious claims.

I. Whether the lower court erred in dismissing the trustees’ claim that MDIF and Jones are violating the trustees’ rights under the statutory scheme: A. Whether in addition to insurance of $100,000 for each beneficiary of the Pension Fund, the trustees are entitled to insurance of $100,000 for each Pension Fund account. B. Whether the trustees are entitled to insurance of $100,000 for each beneficiary of the Welfare Fund. C. Whether the trustees are entitled to be reimbursed for loss up to $100,000 per account after liquidation proceeds have been applied to each account. D. Whether the trustees have the right to prove at trial the correct number of accounts which they would have held in Old Court but for the mistakes of Old Court. ³¹¹ II.

Whether the lower court erred in holding that sovereign immunity bars this action.

III

Whether the lower court erred in dismissing the trustees’ claims under the Constitution and 42 U.S.C. § 1983 : A. Whether MDIF and Jones are taking the trustees’ property without just compensation. B. Whether MDIF and Jones are depriving the trustees of property without due process of law. C. Whether the trustees have stated a valid claim against Jones under 42 U.S.C. § 1983 . I Statutes and MSSIC by-laws govern the specific contentions of United Wire concerning computation of the amount of insurance payable.

Chapter 6 of the Acts of the First Special Session of 1985, § 6 (uncodified) provided that “any account established on or before [May 18, 1985] shall be subject to the same terms and conditions of insurance under [MDIF] as that account was subject under [MSSIC].” The overarching limitation on MSSIC’s insurance liability was set forth in Md.Code (1980), FI § 10-105(b) which read: “The amount of loss to be protected against for each separate savings account may not exceed the limit established from time to time in [MSSIC’s] bylaws, rules, and regulations. This limit may not exceed by more than $10,000 the amount of prevailing insurance available from the Federal Savings and Loan Insurance Corporation [FSLIC].” The parties and the circuit court have accepted that the amount MSSIC established as its limit is $100,000. 1 ³¹² A With respect to Pension Fund’s deposits at Old Court, MDIF, in its October 21, 1987, letter to Pension Fund, took the position that there was insurance “for the greater of (1) up to $100,000 per account, or (2) aggregating the accounts, up to $100,000 per participant or beneficiary of the [Pension] Fund based on the ascertainable interest of each such participant or beneficiary, plus up to $100,000 to the extent of the amount in the accounts not attributable to such ascertainable interests.” The ratio of the total value of all accrued benefits of participants in the Pension Fund to the total assets of the Pension Fund was .905271195 as of December 31, 1985. MDIF has aggregated the Pension Fund accounts, applied the foregoing percentage to the total on deposit of $8.4 million and considered the product, some $7.6 million, to be insured. Pension Fund does not challenge this approach to that point.

MDIF further considers that it additionally insures $100,000 of the approximately $800,000 difference. MDIF says that the remaining $700,000 is uninsured because it is not attributable to ascertainable interests. Pension Fund submits that it, as the fiduciary of these trust accounts, is also insured in each and every account, over and above the beneficiaries of ascertainable interests, for a separate and additional $100,000 per account. Resolution of the dispute turns on the construction of by-law § 3-703 which reads in full as follows: “Member.

As used in this rule, the word ‘member’ may mean an individual, a partnership, an association, a corporation, an estate, a trust, a pension fund, an agent for any public authority having official custody of public funds, or any other legal entity. A trust or estate or pension fund shall be considered separate and distinct from any beneficiary thereof for the purpose of this rule. Any one fiduciary may represent and act for any number of estates or trusts or beneficiaries, and each such separate estate or trust or beneficiary shall be regarded as a distinct member under this Rule. In the event a fiduciary invests in one free share account funds of more than one ³¹³ trust or estate or beneficiary which are commingled, each such trust or estate or beneficiary will be considered a member for an amount determined by apportioning the total amount of the free share account to the trust or estate or beneficiary having an interest therein upon the same ratio as the interest of such trust or estate or beneficiary bears to the total commingled funds made by the fiduciary.” In accordance with § 3-703 MDIF has aggregated the deposits in Pension Fund’s accounts and applied the apportionment formula to determine the amount thereof representing the interest of beneficiaries, called by MDIF, ascertainable beneficiaries.

MDIF attributes the excess, which in reality is part of an overfunding of Pension Fund’s liability, to one unascertained beneficiary class which is entitled to an additional $100,000 of insurance. Pension Fund’s argument is that it is by definition a “member” and that insurance should also be payable to it, on each account, as a member. This argument relies on by-law § 3-701 which in relevant part reads: “A free share account is hereby defined ... as the total interest of a member of an association in the share capital of such association____ [T]he term ‘share capital’ shall mean the aggregate payments made by a member upon the shares of an association ... plus dividends credited thereto less redemptions and repurchase payments. The withdrawal value of a free share account shall be the share capital of a member____” If § 3-701 applied here, Pension Fund’s maximum insurance would be $100,000 per account.

Section 3-703, however, establishes a special rule for situations where there are multiple, identifiable, beneficial interests in an account(s). Each separate, beneficial interest is treated as a distinct member, thereby producing in the aggregate more insurance. Pension Fund’s argument essentially seeks to have it both ways by aggregating beneficiaries in all accounts and then treating the accounts as separate and looking to Pension Fund as a member for each. We hold that the more particular provisions of § 3-703 govern and that MDIF has correctly applied the by-law.

This conclusion is reinforced by former FI § 10-105(b) which limited the amount of MSSIC insurance to no more ³¹⁴ than $10,000 over FSLIC coverage. In the FSLIC program a “trust estate” includes “the interest of a beneficiary in an irrevocable express trust[.]” 12 C.F.R. § 561.4 (a) (1988). Trust estates in the same trust, invested in the same association account, are separately insured under the FSLIC program if the value of the trust estate is capable of determination. See 12 C.F.R. § 564.2 (c)(1). 2 FSLIC insurance with respect to any remaining amounts is determined by 12 C.F.R. § 564.10 which in part provides: “All trust estates for the same beneficiary invested in accounts established pursuant to valid trust arrangements created by the same settlor (grantor) shall be added together and insured up to $100,000 in the aggregate, separately from other accounts of the trustee of such trust funds____” Assuming that there are forty-four Pension Fund accounts at Old Court, Pension Fund’s argument would produce $4,300,000 more of MSSIC/MDIF insurance than FSLIC would provide, and the overarching limitation of former FI § 10-105(b) would be violated.

B Welfare Fund makes an argument similar to that of Pension Fund, discussed in part I A, supra. Relying on by-law § 3-703, Welfare Fund submits that there is $100,-000 of insurance for each beneficiary of the Welfare Fund ³¹⁵ because each beneficiary is a member. Welfare Fund does not inform us how the number of beneficiaries is to be determined. Welfare Fund further argues, either in explanation of its “each beneficiary” argument or in rebuttal to MDIF’s argument, that the interest of beneficiaries “can be calculated using sound actuarial and accounting principles, and the trustees [of Welfare Fund] intend to prove as much at trial.” United Wire brief at 18.

Welfare Fund did not present any evidentiary material on summary judgment illustrating these calculations. More particularly, Welfare Fund does not argue that its computations would be based on present-worth tables. MDIF’s position is that Welfare Fund’s accounts are insured up to $100,000 per account. The circuit court ruled that MDIF’s position was correct as a matter of law.

The difference in MDIF’s application of MSSIC by-law § 3-703 to Welfare Fund’s accounts, as opposed to the application to Pension Fund’s accounts, is that the interest of beneficiaries in the former cannot be ascertained by the use of present-worth tables. That limitation is a restriction on FSLIC insurance found in 12 C.F.R. § 564.2 (c)(1). See supra note 2. The total value of accrued benefits of participants in Pension Fund could be calculated using present-worth tables, but present-worth tables do not predict who will need sick benefits or for what duration.

Unable to compute the interest of each beneficiary in Welfare Fund in the manner required for FSLIC insurance, MDIF determined its insurance was $100,000 per Welfare Fund account. Were MDIF to attempt to devise some method of valuing beneficial interests in Welfare Fund beyond that method specified for FSLIC insurance, MDIF would exceed the overarching limitation on MSSIC coverage of former FI § 10-105(b). The circuit court granted judgment on the basis of the foregoing legal argument by MDIF and we agree. C The next issue between the parties is whether MDIF correctly applies the liquidating dividend from the Old Court receivership in computing the amount of insurance to be paid.

We hold that MDIF does correctly apply the dividend under the clear terms of MSSIC by-law § 2-704. The parties’ positions are best presented by an illustration. ³¹⁶ We assume a $150,000 account in an insolvent association and a sixty percent dividend from net assets (gross price realized on assets less costs of administration). MSSIC By-Law United Wire MDIF § 2-704 Total account deposit 150,000 Total account deposit 150.000 Dividend (90,000) Dividend (90.000) Loss 60,000 "Gross Loss” 60.000 (F) Insurance Limit 100,000, Excess of Acct. Dep.

Over Ins. Limit (50.000) (G) Ins. Payable 60,000 "Net Insurable Loss” 10.000 (H) United Wire contends that its method is consistent with the application of salvage to insured losses. Even if valid in other contexts, that argument cannot overcome the precise language of MSSIC by-law § 2-704 which the MDIF position faithfully tracks.

Section 2-704 in relevant part provides: “Insurance Liability Determined. Upon the occurrence of an event of a default ... the limit of the Corporation’s insurance liability shall be determined as provided herein. Such determination shall be made in the following manner: “(F) The net assets of a member in default shall then be allocated to all free share accounts of such member in the same ratio that the total of such net assets bears to the total of all free share accounts of such member, and the difference between each such free share account and the amount of the net assets so allocable shall be determined. As used in these By-Laws and the Rules and Regulations of this Corporation, such difference shall be defined as the ‘gross loss’ for each free share account of each member in default. “(G) There shall be subtracted from the gross loss, as defined in sub-paragraph (F) of this Section, any amount by which the free share account for which insurance was provided by the Corporation exceed[s] the insurance liability limit as defined by Section 2-702, and the resulting amount shall be defined herein as the ‘net loss’ for each free share account for each member in default. “(H) From the net loss, as determined in accordance with sub-paragraph (G) of this Section, there shall be ³¹⁷ subtracted any insurance applicable to the free share account which sustained such loss as written pursuant to the National Housing Act, as amended, and the difference shall be referred to in these By-Laws and the Rules and Regulations as the ‘net insurable loss’ of each free share account of a member in default. “(I) Such loss shall be evidenced by a certificate signed by the Chairman____” D Count I of each of the United Wire complaints alleges that the number of United Wire accounts on the books of Old Court is incorrect.

The specific allegations are: “8. Interest on each account was payable monthly, and was paid by mailing a separate, monthly check for each of the accounts. “9. Receipt of checks for each account each month imposed an undue administrative burden upon [United Wire]. In an effort to alleviate this burden, [United Wire] requested that the checks be combined so that fewer checks would be received.

Old Court agreed to combine the checks. “10. At no time did the trustees authorize Old Court to reduce the number of accounts. However, on information and belief, Old Court purported to reduce the number of accounts on its books to [forty-three as to Pension Fund and twenty-nine as to Welfare Fund]. “11. In purportedly reducing the number of accounts, Old Court acted contrary to the authorization of the trustees.” Noting that the Legislature gratuitously allowed preMDIF accounts to be insured on the MSSIC formula, the circuit court held that MDIF’s only duty was to insure the registered accounts in existence at the time Old Court was placed into conservatorship 3 and, in support, cited Md.Regs.

Code (COMAR) tit. 9, § 06.07.04C (1988). 4 The regulation ³¹⁸ was first adopted on an emergency basis effective March 19, 1987. See 14:8 Md.Reg. 937; 14:9 Md.Reg. 1077. The circuit court found nothing in the statutes relating to MDIF “to impose an affirmative duty on MDIF to ascertain the existence of any pre-May 18, 1985, accounts which were not currently acknowledged by MDIF.” The circuit court concluded that United Wire failed to establish any duty on MDIF and thus failed to state a valid claim for relief. United Wire argues that it should be allowed to prove that Old Court made a mistake so that the account records can be reformed and that MDIF, as insurer, can be required to recognize the reformed accounts in its determination of the amount of insurance.

MDIF, in response, argues that any mistake by Old Court may be the basis for a claim against Old Court, but not a basis for MDIF insurance, because MDIF has no obligation to do other than look at the face of the Old Court records as they existed when MDIF was created in order to determine the number of accounts for insurance purposes. United Wire has sued MDIF in its capacity as receiver for Old Court and as successor to MSSIC. Resolution of the instant problem involves MDIF in both capacities. Resolution of the problem also involves two contracts, one between Old Court, as depository, and United Wire, as depositor, and the other between Old Court, as insured, and MSSIC, as insurer, to which United Wire is a third party beneficiary.

See Shillman v. Hobstetter, 249 Md. 678 , 241 ³¹⁹ A.2d 570 (1968). If Old Court breached a contractual or other legal duty to United Wire by reducing, without authorization, the number of accounts, Old Court could be responsible in damages to be measured by the loss of any additional insurance recovery from MDIF. Those damages, however, would represent only a part of the total deposits of United Wire in Old Court. In the Old Court receivership the participation of United Wire in the liquidating dividend will be in the ratio which the total United Wire deposits bear to the total claims in the receivership.

Whether United Wire would be entitled to damages from Old Court is immaterial. 5 United Wire, however, seeks, not damages, but reformation of the United Wire-Old Court contract. The United Wire allegations, quoted above, state a claim for reformation. 6 Thus the question becomes whether MDIF, as insurer, would be obliged (sovereign immunity aside) to honor a reformation judgment against Old Court, represented by MDIF as receiver. MDIF’s insurance obligation is on the same terms and conditions as was MSSIC’s. The problem before us is the same as if only Old Court had failed and MSSIC was faced with United Wire’s contentions. 7 Under the Old Court-United Wire contract, Old Court did certain recordkeeping which affects United Wire’s rights as a third party beneficiary of the Old Court-MSSIC contract of insurance.

Under ordinary contract principles, United Wire is entitled to ³²⁰ demonstrate an Old Court error in recordkeeping and reform the Old Court-United Wire contract, in order to affect insurance, particularly where the insurer, MSSIC, is a party to the action through MDIF’s joinder in dual capacities. Indeed, in the context of group life insurance coverage, where records maintained by the insured employer determine rights of employee participants, mistakes by the employer have, in effect, been corrected as a predicate to recognizing a claim. See Murdock v. Equitable Life Assurance Soc’y of U.S., 714 F.2d 474 (5th Cir.1983) (where group policy provided the change of beneficiary would be effective only when written change was designated on the insurance records of the employer at the employer’s home office, new beneficiary was allowed to show that secretary employed by the employer-insured failed for more than six weeks prior to death of participant to mail change of beneficiary to home office); Confederation Life Ass’n v. Allinson, 95 R.I. 402 , 187 A.2d 528 (1963) (where group life policy on state employees required the change of beneficiary be deposited with employer at Division of Accounts and Controls, new beneficiary entitled to show change of beneficiary form was mislaid in interdepartmental mail). Under MDIF’s argument MSSIC by-law § 2-703 limits the determination of the number of accounts to the formal record on the date of the event of default by Old Court.

The principal effect of that provision under the facts here is to make the appointment of a conservator for Old Court an event of default. 8 We find nothing in the text of MSSIC ³²¹ by-law § 2-703 which would make formal account registration conclusive of insurance coverage. MDIF also submits that COMAR § 09.06.07.04C, see supra note 4, while not directly applicable, is a proper interpretation of by-law § 2-703. The regulation, however, makes the account records of an insured association conclusive only as to the existence of relationships, for example, a deposit made as a trustee, agent, custodian or executor. The problem here concerns the number of accounts into which the total deposits should have been divided, and not the relationships of the depositor to claimant beneficiaries.

COMAR § 09.06.07.04C(2)(a) is almost verbatim 12 C.F.R. § 330.1 (b)(1) (1988), relating to the Federal Deposit Insurance Corporation (FDIC) and to 12 C.F.R. § 564.2 (b)(1) relating to FSLIC. Jones v. Federal Deposit Ins. Corp., 748 F.2d 1400, 1405 (10th Cir.1984) described the operation of the FDIC regulation to be as follows: “The bank records, if accurate and complete in reflecting the intention of the depositor conveyed to the bank, are conclusive in the interpretation of the account status. If a depositor challenges the bank records ... as to their correctness, there exists a presumption of correctness which may be overcome by proof that the records do not properly and accurately reflect the instructions of the depositor to the bank.” Jugum v. Federal Sav. & Loan Ins.

Corp., 637 F.Supp. 1045, 1049 (W.D.Wash.1986) held that the FSLIC regulation applied only to the question of the relationships specified therein and not to questions of joint versus individual ownership. Further, even if we were to read COMAR