State v. Hogg

RODOWSKY, Judge. This action is brought in the name of the State of Maryland Deposit Insurance Fund Corporation (MDIF), a unit of the Department of Licensing and Regulation (DLR) of the State of Maryland. The defendants are certain individuals who had been officers and directors of the former Maryland Savings-Share Insurance Corporation (MSSIC). MDIF is the surviving corporation of a special statutory merger with MSSIC.

MDIF seeks money damages to compensate for harm allegedly caused by the defendants’ breaches of duty to MSSIC. The defendants assert by way of answer and counterclaim that the harm complained of resulted wholly or partly from the negligence of state employees in the Division of Savings and Loan Associations (DSL), also a unit in DLR. A motion to dismiss the counterclaim as barred by sovereign immunity was denied by the circuit court. From that denial this appeal was noted.

We must first decide whether there is a final judgment. If the' appeal is properly before us, we must further decide whether, in principle, a recoupment defense is precluded by sovereign immunity and, if not, whether the defendants’ position here is a recoupment defense. ⁴⁵¹ This case arises out of the 1985 savings and loan crisis in Maryland. 1 At that time MSSIC was an insurer of accounts in certain savings and loan associations in Maryland. MSSIC was a nonstock, nonprofit corporation created by Ch. 131 of the Acts of 1962. 2 It is the State’s position, unchallenged by the defendants, that MSSIC was not an agent of the State. 3 By mid-May of 1985 approximately $630 million had been withdrawn from MSSIC insured accounts in the preceding three months, including $116 million withdrawn by depositors on May 13 when two large associations were placed in conservatorship. See Chevy Chase Sav. & Loan, Inc. v. State, 306 Md. 384, 392 , 509 A.2d 670, 674 (1986).

An extraordinary session of the Maryland General Assembly was convened on May 17 to respond to the crisis. One response was the creation of MDIF in DLR by Ch. 6 of the Acts of the First Special Session of 1985, now codified as Md. Code (1980, 1986 Repl.Vol.), § 10-102 of the Financial Institutions Article (FI). Chapter 6, an emergency bill approved May 18, 1985, merged MSSIC into MDIF by uncodified § 4 which reads in relevant part: [U]pon the effective date of this Act: (i) [MSSIC] shall be and is hereby merged into [MDIF], with [MDIF] as the surviving corporation, without need of the execution or filing of any confirmatory or other articles or instru ⁴⁵² ments; and (ii) all of the assets ... all of the liabilities, including but not limited to taxes, incurred losses, and other insurance liabilities, and all of the rights, powers, duties, obligations and functions of [MSSIC] are hereby transferred to [MDIF], to the extent consistent with this act____ FI § 10-121(a), enacted by ch. 12 of the Acts of 1986, provided that “[notwithstanding any other provision of law, and except as otherwise expressly provided in this section, [MDIF] retains and may raise the defense of sovereign immunity in any action.” Uncodified § 8 of ch. 12 in part states that “[t]he General Assembly did not intend waiver of immunity by any of the Acts of the First Special Session of 1985.” According to a January 1986 report prepared by the Department of Fiscal Services eleven savings and loan associations, previously insured, by MSSIC and then in receivership, conservatorship, or subject to withdrawal limits, had a combined assets/liability deficit of over $400 million. Crediting against that deficit only the MSSIC insurance fund and $60 million from a recovery, but without taking any credit for assets in the eleven associations or for any recovery on various possible causes of action, the report projected the State’s potential obligation for the deficit to be $172.4 million.

Department of Fiscal Services, Analysis of Funding State Liability for Savings and Loan Obligation (January 22, 1986). The instant case is part of the State’s effort to reduce its exposure. MDIF here claims against twenty-six former officers and directors of MSSIC who had been elected at various times from savings and loan industry positions. The theory of the suit, which sounds in negligence and in breach of fiduciary duties, is that the defendants violated duties owed to MSSIC and that MSSIC’s rights arising out of those violations were acquired by MDIF in the merger.

MDIF’s first amended complaint, consisting of forty-seven pages, enlarged the number of parties defendant from an original group of ten persons. It alleges that the defendants failed ⁴⁵³ to utilize their power and positions to correct unsafe and unsound practices of member associations. Subdivisions of that pleading present more particular allegations concerning First Progressive and Old Court, Merritt Commercial, First Maryland, and Community savings and loan associations. Many issues have been joined by the defendants’ answers. 4 There is a general denial, as permitted by Maryland Rule 2-323(d), which is analogous to the former general issue plea.

Fifteen defenses are specially raised, including contributory negligence, assumption of risk, estoppel, waiver, unclean hands, and in pari delicto. Defendants sued in the initial complaint filed a counterclaim on October 7, 1986. That counterclaim names DLR and the State of Maryland as counterdefendants, in addition to the named plaintiff, MDIF. That counterclaim alleges that DLR, acting through DSL and the Board of Savings and Loan Commissioners, had a “duty to obtain all material information about MSSIC’s member associations and to share with MSSIC all material information____” It further alleges that DLR “[b]y virtue of its regular practice of transmitting information to MSSIC ... about MSSIC’s member associations” assumed the duty to exercise reasonable care to obtain and transmit to MSSIC all material information about MSSIC’s members.

The counterclaim characterizes the alleged negligent breach of those asserted duties as primary and active, and requests indemnification. Alternatively, the counterclaim requests contribution from the counterdefendants if the counterclaimants are adjudged liable for the harm to MSSIC alleged in the complaint. Consequently, one of the theories embraced in the counterclaim is that negligence on the part of the State’s agents ⁴⁵⁴ was a concurrent proximate cause of the harm to MSSIC which is the subject of the MDIF complaint. 5 The counterdefendants moved to dismiss the counterclaim of October 7, 1986, principally on the ground of a sovereign immunity bar. 6 When evaluating this motion to dismiss the circuit court treated all other counterclaiming defendants, whether they had joined in the October 7 counterclaim or not, as bound by the determination of the motion to dismiss the October 7 counterclaim. The circuit court held that the State was the real party in interest with respect to the claim asserted by MDIF and refused to dismiss as to the State and MDIF but did order DLR dismissed. 7 That court further held, in substance, that the counterclaim was purely defensive, in the nature of recoupment, and that recoupment was not barred by sovereign immunity.

An appeal in the names of MDIF and the State was noted from the order and a petition by those appellants for the writ of certiorari was filed. We granted the petition prior ⁴⁵⁵ to consideration of the appeal by the Court of Special Appeals. I Appellants submit that the challenged order is appealable under the collateral order doctrine. We have said that the requirements of that doctrine are: “[T]he order must [(1)] conclusively determine the disputed question, [(2)] resolve an important issue[, (3) be] completely separate from the merits of the action, and [ (4) ] be effectively unreviewable on appeal from a final judgment.” [Clark v. Elza, 286 Md. 208, 213 , 406 A.2d 922, 925 (1979) (quoting Coopers & Lybrand v. Livesay, 437 U.S. 463, 468 , 98 S.Ct. 2454, 2458 , 57 L.Ed.2d 351, 357-58 (1978) (footnote omitted)).] Here the trial court clearly rejected any sovereign immunity bar to the counterclaim and thereby decided an important issue.

Further, MDIF and the State contend that their absolute immunity prevents the defendants from so much as undertaking to demonstrate the alleged negligence of DSL and DLR personnel for recoupment purposes. The immunity, as asserted, would operate whether or not negligence or other breach of duty on the part of anyone, plaintiff or defendant, caused the financial collapse of MSSIC and is thus completely separate from the merits of the case. With respect to whether the denial of the motion to dismiss the counterclaim would be effectively unreviewable after final judgment, MDIF and the State correctly emphasize that the policy underlying the State’s sovereign immunity not only protects the public treasury but also protects the State and its instrumentalities from standing trial. This is illustrated by Nixon v. Fitzgerald, 457 U.S. 731 , 102 S.Ct. 2690 , 73 L.Ed.2d 349 (1982), where the Court held appeal-able under the collateral order doctrine an order denying former President Nixon’s motion for summary judgment because he asserted an absolute immunity, as President, ⁴⁵⁶ from the plaintiff’s claim.

Then, in Mitchell v. Forsyth, 472 U.S. 511 , 105 S.Ct. 2806 , 86 L.Ed.2d 411 (1985), the Court entertained under the collateral order doctrine an appeal from the denial of a defendant’s motion for summary judgment predicated on the qualified immunity of public officials exercising discretionary functions. Mitchell explained that [t]he entitlement is an immunity from suit rather than a mere defense to liability; and like an absolute immunity, it is effectively lost if a case is erroneously permitted to go to trial. Accordingly, the reasoning that underlies the immediate appealability of an order denying absolute immunity indicates to us that the denial of qualified immunity should be similarly appealable: in each case; the district court’s decision is effectively unreviewable on appeal from a final judgment. [Id. at 526-27, 105 S.Ct. at 2816 .] This Court recognized a similar rule in Public Serv. Comm’n v. Patuxent Valley Conservation League, 300 Md. 200 , 477 A.2d 759 (1984), where an order permitting the individual commissioners of the Public Service Commission to be deposed in an administrative appeal from a Commission decision was immediately appealable because “the claim that Commission members should not be routinely subjected to extensive probing of their individual decisional thought processes would irretrievably be lost.” Id. at 207 , 477 A.2d at 763 .

From the standpoint of being “effectively unreviewable” the erroneous rejection of sovereign immunity in bar of a claim is similar to the erroneous denial of the protection against standing trial for the second time which is embraced in the privilege against former jeopardy. In that instance, an order denying a double jeopardy defense is immediately appealable. See Abney v. United States, 431 U.S. 651 , 97 S.Ct. 2034 , 52 L.Ed.2d 651 (1977). Likewise, an order improperly failing to recognize the bar of sovereign immunity to a claim would effectively escape review if the sovereign were forced to stand trial on that claim and await ⁴⁵⁷ final judgment before obtaining appellate review.

Consequently, the collateral order doctrine permits immediate review here to determine whether the denial of the motion to dismiss the counterclaim erroneously deprived the State and its instrumentality, MDIF, of the protection of sovereign immunity. II The defendants argue that their counterclaim is a shield and not a sword. The counterclaim seeks no monetary relief in excess of that which may be awarded to MDIF. In their brief and at oral argument the defendants have unequivocally renounced affirmative relief in excess of the plaintiffs claim.

Defendants submit that, by initiating an action for money damages, a sovereign who has not by statute consented to suit against it, consents to a reduction of its claim for any amount payable to the defendants by a private party in the position of the sovereign which arises out of the same transaction or occurrence sued upon. This principle, which we shall call “recoupment,” does not offend Maryland’s sovereign immunity. Initially we emphasize that the label of the pleading which the State sought to have dismissed is not controlling. One must analyze the issues raised by the defendants’ counterclaim to determine if it is effectively a suit against the sovereign rather than a matter of defense.

For example, where a plaintiff who was a builder sought specific performance of the contractual promise by the defendant, an owner, to mortgage realty in a specified amount reflecting the price of improvements, the owner’s counterclaim which sought to reduce the amount of the mortgage by the cost of repairing construction defects raised a matter of defense which could properly have been raised by answer so that the owner need not have counterclaimed. See Higgins v. Barnes, 310 Md. 532 , 530 A.2d 724 (1987). Similarly where the plaintiffs sought a declaratory judgment that certain county action was invalid and the county, by counterclaim, sought a declaration of validity, the purported ⁴⁵⁸ counterclaim was no more than an answer denying the relief requested in the complaint. See East v. Gilchrist, 293 Md. 453 , 445 A.2d 343 (1982).

Although it has not been frequently addressed, the availability of a recoupment defense to a claim by Maryland, absent a statutory waiver of sovereign immunity, was implicit in State v. Baltimore & O.R.R., 34 Md. 344 (1871), aff'd, 21 Wall. 456 , 22 L.Ed. 678 (1875). There the State filed an indebitatus assumpsit action against the railroad for $500,000, representing one-fifth of the moneys received by the defendant for the transportation of passengers on its Washington branch from January 1, 1860, to January 1, 1870. The railroad filed the general issue and a special plea of set-off to which a demurrer was sustained. 8 Judgment on verdict for the defendant was reversed and a new trial awarded, but the rejection of the plea of set-off was affirmed. The Court reasoned as follows: This immunity belongs to the State by reason of her prerogative as a sovereign, and on grounds of public policy.

Parties having claims or demands against her, must present them through another department of the Government—the Legislature—and cannot assert them by suit in the courts. For the same reason a right of set-off against the State does not exist. This is in the nature of a cross-suit, the object of which is to prevent circuity of action, and it does not exist where the subject matter of the set-off could not form the ground of an independent suit. It is a remedy conferred by statutes, which do not apply to the State, as she is not expressly embraced by their provisions.

It is very clear that the subject matter of defense alleged in the plea cannot constitute a ground for recoupment, because the alleged cross-claim does not arise in any manner out of the contract or transaction which ⁴⁵⁹ constitutes the cause of action, but is an entirely separate and distinct claim, having no connection therewith. [Id. at 374-76 (citations omitted).] The clear implication of this reasoning is that, had the defense been one of recoupment, sovereign immunity would not have prevented the defendant from asserting it. The interpretation is supported by commentators on Maryland common law pleading who have cited State v. Baltimore & O.R.R. for the proposition that set-off is not available against the sovereign and who similarly imply that recoupment would be available. See 1 J. Poe, Pleading and Practice in Courts of Common Law §§ 613-16 (H. Tiffany 5th ed. 1925); H. Ginsberg & I. Ginsberg, Pleading at Law in Maryland, at 122-23 (2d ed. 1937); A. Fisher, Essentials of Maryland Pleading, at 63-64 (J. Gorter & M. Fisher 2d ed. 1922). Further, our interpretation is consistent with the argument made by the State in that case. 9 Maryland’s counsel submitted in part: A set-off is a cross-suit or action, and cannot be maintained against the State, for the same reasons which forbid an original suit.

Whether the action be original or cross, it is equally an attempt to coerce the sovereign to do justice, and the principles of the common law do not permit a sovereign State to be thus subjected to coercion by its own tribunals. It is presumed to be always ready to do justice voluntarily. [ 34 Md. at 351 .] The State relies on D.E. Foote & Co. v. Stanley, 117 Md. 335 , 82 A. 380 (1911) to demonstrate that sovereign immunity in Maryland precludes recoupment. The 1910 session of the General Assembly had enacted two bills imposing charges on fresh oysters when unloaded from vessels. This Court declared that the bill later signed was unconstitutional.

See D.E. Foote v. Clagett, 116 Md. 228 , 81 A. 511 ⁴⁶⁰ (1911). Commission merchants then challenged the earlier enactment as an unconstitutional burden on interstate commerce. By cross bill the State, which contended the charges were legitimate inspection fees, sued for fees due and owing from the plaintiffs. In their answer to the cross bill the plaintiffs sought credit for the charges paid under the statute previously invalidated.

This Court held that the earlier of the two enactments was constitutional, a holding which the Supreme Court of the United States reversed. D.E. Foote & Co. v. Stanley, 232 U.S. 494 , 34 S.Ct. 377 , 58 L.Ed. 698 (1914). Addressing the matter of credits, this Court said: The claim of the [commission merchants] to set off, or recoup, against the amount claimed by the State in this case, the excess payment made by them in the former case, can not be allowed, not being provided for by any statute. To allow such a claim would infringe upon the immunity of the State from suit in its own Courts. “It must be presented to another department of the government, the legislature.” State v. B. & O.R.R., 34 Md. 374 . [D.E. Foote & Co. v. Stanley, supra, 117 Md. at 347 , 82 A. at 384 .] Essentially the commission merchants sought a refund for their account of moneys which had been demanded by the State as an ostensibly valid, public charge, which the commission merchants paid under a mistake of law and for which there was no refund statute.

Under Maryland common law that kind of payment is considered to be voluntary and is not recoverable. The history of the Maryland voluntary payment rule was fully reviewed for the Court by Judge Singley in Rapley v. Montgomery County, 261 Md. 98 , 274 A.2d 124 (1971), and was recently exemplified by Washington Suburban Sanitary Comm’n v. Mitchell & Best, 303 Md. 544 , 495 A.2d 30 (1985) where we denied refunds of unauthorized connection charges imposed by the WSSC. Even though WSSC is a state agency, and enjoys sovereign immunity, see Katz v. Washington Suburban Sanitary Comm’n, 284 Md. 503 , 397 A.2d 1027 (1979), we ⁴⁶¹ predicated our holding on the absence of any statute altering the Maryland voluntary payment rule as to the WSSC connection charges, and not on the sovereign immunity of WSSC. Further, Mitchell & Best listed Maryland voluntary payment cases going back to 1846 ( 303 Md. at 572 n. 9, 495 A.2d at 44 n. 9), but none of those cases rested on sovereign immunity.

Consequently, to the extent that D.E. Foote v. Stanley, supra, employed a sovereign immunity rationale to reject recoupment by the commission merchants for moneys voluntarily paid by them under the invalid law, it is disapproved. Recoupment against Maryland was allowed in Maryland Port Admin, v. SS Am. Legend, 453 F.Supp. 584 (D.Md. 1978). In that case the Maryland Port Administration (MPA), a State agency, sued in admiralty for property damage against, inter alia, the respective owners of two ships who, in turn, counterclaimed.

MPA moved for summary judgment on the counterclaims asserting the bars both of sovereign immunity and of the eleventh amendment. Judge Harvey denied summary judgment to MPA on the following reasoning: The Court would note at the outset that by filing suit as a plaintiff, a state waives its immunity and Eleventh Amendment protection with respect to a counterclaim arising out of the same event which is the subject of the state’s claim. This type of waiver, however, is limited to a counterclaim asserted defensively in recoupment, for the purpose of defeating or diminishing a state’s recovery, but not to a counterclaim asserted for the purpose of obtaining an affirmative judgment. [Id. at 590 (citation omitted).] With respect to the national sovereign, it seems to be settled that the United States of America, when suing as a plaintiff in the federal courts, is subject to recoupment without regard to any statutory waiver of sovereign immunity. See United States v. United States Fidelity & Guar.

Co., 309 U.S. 506, 511 , 60 S.Ct. 653, 656 , 84 L.Ed. 894, 898 (1940); Bull v. United States, 295 U.S. 247, 262 , 55 S.Ct. ⁴⁶² 695, 700, 79 L.Ed. 1421, 1429 (1935) (assessment of tax liability equated with the Government’s initiating summary proceeding for collection); Frederick v. United States, 386 F.2d 481, 488 (5th Cir.1967); Federal Deposit Ins. Corp. v. Shinnick, 635 F.Supp. 983, 985 (D.Minn.1986); United States v. Yonkers Bd. of Ed., 594 F.Supp. 466, 469 (S.D. N.Y.1984); Federal Sav. & Loan Ins. Corp. v. Williams, 599 F.Supp. 1184, 1209 (D.Md.1984); In re Am. Export Lines, Inc., 568 F.Supp. 956, 961 (S.D.N.Y.1983); In re Franklin Nat’l Bank Sec. Lit., 445 F.Supp. 723, 737 (E.D. N.Y.1978); United States v. Frank, 207 F.Supp. 216, 221 (S.D.N.Y.1962).

Bull v. United States, supra, illustrates the rationale of the federal cases. There a partner in a firm, the annual accounting period of which was the calendar year, died in February. Under the partnership agreement the decedent’s estate continued to share in profits through December. The Commissioner of Internal Revenue collected estate tax based on those profits earned by the firm after the decedent’s death which were distributed to the estate.

Later the Commissioner demanded income tax on that same distribution. The estate paid the income tax and then sued in the Court of Claims for a refund of the amount which should have been credited against the income tax liability for the estate tax erroneously assessed and collected. The Court of Claims held that limitations barred any refund but the Supreme Court reversed, saying: “No direct suit can be maintained against the United States. But when an action is brought by the United States, to recover money in the hands of a party who has a legal claim against them, it would be a very rigid principle, to deny to him the right of setting up such a