Three Garden Village Ltd. Partnership v. United States Fidelity & Guaranty Co.

RODOWSKY, Judge. The substantive legal issue in this case is whether a commercial, blanket, fidelity bond issued to a corporation covers embezzlements by the corporation’s sole stockholder, officer and director. There are, however, procedural complications. The trial court granted summary judgment against the insurer in favor of the claimants on the bond, and denied summary judgment for the insurer.

The insurer seeks to overturn both rulings. Because the record presently reveals no breach by the insurer of the express, written contract, the circuit court erred in granting summary judgment against the insurer. Nevertheless, we do not direct entry of summary judgment for the insurer for two reasons. The first recognizes the trial court’s discretion to deny, or defer entry of, a summary judgment which otherwise might be appropriately entered.

Second, there is a theory of estoppel alleged in the complaint which has not been adjudicated in the trial court. Accordingly, we shall remand for further proceedings. ¹⁰⁰ This action was initiated by two of the petitioners, Three Garden Village Limited Partnership (Three Garden) and First Baltimore Asset Management, Inc. (First Baltimore). First Baltimore’s business was property management, including rent collection and property maintenance and repair. Three Garden owned a large apartment project in Baltimore County and engaged First Baltimore to manage the property.

First Baltimore also managed property in northern Virginia owned by the third petitioner, Yorkville Corporation (Yorkville). First Baltimore managed two apartment complexes in Baltimore City respectively owned by Ready Avenue Limited Partnership (Ready) and Union Avenue Limited Partnership (Union). Ready and Union are not parties to this action, but they became claimants against the bond in issue here. The defendants are the respondents, United States Fidelity and Guaranty Company (USF & G) and Riggs, Counsel-man, Michaels & Downes, Inc. (RCM & D).

USF & G had issued through RCM & D, one of its general agents, a commercial, blanket, fidelity bond under which First Baltimore was the named insured. The dispute involves the issuance, legal effect, and continuation in force of that policy. We state the facts of the dispute most favorably to USF & G, the party which opposed the grant of the principal summary judgment involved in this appeal. First Baltimore was incorporated in 1981 by Thomas Stitt (Stitt) and Albert DeSalvo (DeSalvo).

Stitt owned forty-nine percent of the stock, and DeSalvo owned fifty-one percent. Both worked in the business. First Baltimore specialized in managing rehabilitated properties occupied by low to middle income residents. Some or all of the properties had benefited, or continued to benefit, from one or more forms of subsidy provided by the United States Department of Housing and Urban Development (HUD).

In the latter part of 1983 Joseph Payne Hindsley (Hindsley), a representative of RCM & D, was advising First Baltimore concerning its property, casualty and workers’ compensation insurance needs. At that time First Balti ¹⁰¹ more asked Hindsley if First Baltimore could obtain $1 million of fidelity coverage. Hindsley consulted with Robert J. Noeth (Noeth), manager of the bond department at RCM & D. In written memoranda Hindsley advised Noeth that there were six employees at First Baltimore, three of whom were clerical employees and three of whom were principals. Noeth made a longhand notation on one of the memos that each principal held an equal ownership interest in the corporation. 1 In late May 1984, Stitt, on behalf of First Baltimore, signed an application to USF & G for a commercial, blanket bond in the amount of $1 million.

The application was prepared for his signature by RCM & D. A question on the application asking the identity of any shareholder owning more than ten percent of the applicant’s stock was left unanswered. The application reflected a total of eight employees of whom one was described as president, one as vice president and one as comptroller. Because issuance of $1 million of coverage exceeded RCM & D’s authority from USF & G, Noeth presented First Baltimore’s application to Theodore G. Parks (Parks), an assistant vice president of USF & G. In a face-to-face meeting Noeth told Parks that three individuals equally owned First Baltimore. Parks approved the policy.

In that meeting Noeth also told Parks that RCM & D had been informed that HUD required the bond. Noeth testified further on deposition as follows: “Q. ... When you told him that HUD required the bond, what, if anything, else did you tell him about HUD and what part they played in this business and why they required this bond? “A. Because they were I believe insuring all of the mortgages. ¹⁰² “Q. Was there any discussion with Mr. Parks whereby he understood that the business of First Baltimore was basically as property managers pursuant to which they were routinely entrusted with the monies that belonged to other persons or partnerships and that they held the money in a trust capacity for them or in a fiduciary capacity? Did he understand that? “A. Yes, he did. “Q. Was that specifically discussed? “A. Yes, because I mentioned that out of that trust before funds were paid to the mortgagees that various expenses were paid for maintenance, et cetera.” The policy was issued effective July 1, 1984.

It is a “Comprehensive Dishonesty, Disappearance and Destruction Policy — Form A” in which only “Insuring Agreement I[,] Employee Dishonesty Coverage — Form A” is designated as effective. There is no expiration date. The policy remains in effect unless and until cancelled by either party. The premium for the First Baltimore policy was calculated to include the assumed three owners among the total number of employees whose defalcations would be covered.

The premium was calculated for, and remained fixed for, a three year period but was payable in annual installments. Under the policy USF & G agreed with First Baltimore to pay First Baltimore for: “I. Loss of Money, Securities and other property which the Insured shall sustain ... resulting directly from one or more fraudulent or dishonest acts committed by an Employee, acting alone or in collusion with others.” The policy defines “Employee” to mean “any natural person (except a director or trustee of the Insured, if a corporation, who is not also an officer or employee thereof in some other capacity) while in the regular service of the Insured in the ordinary course of the Insured’s business during the Policy Period and whom the Insured compensates by salary, wages or commissions and has the right to govern and direct in the ¹⁰³ performance of such service, but does not mean any broker, factor, commission merchant, consignee, contractor or other agent or representative of the same general character.” (Emphasis added). In August 1985 Stitt purchased DeSalvo’s stock in First Baltimore, and DeSalvo completely terminated his relationship with First Baltimore. By that time the comptroller position identified on the application was no longer filled.

Thereafter Stitt was the sole shareholder, director and officer of First Baltimore. By early November 1985 Hindsley was aware of the fact that DeSalvo had left First Baltimore and was living in New York. In December 1985 the general partner of Three Garden wanted assurance from First Baltimore that its fidelity bond protected Three Garden in the event of misappropriation of Three Garden funds held by First Baltimore in a fiduciary capacity. Stitt wrote to Hindsley requesting that a copy of the fidelity bond be sent to Three Garden listing Three Garden as an additional insured with First Baltimore, as their interests might appear.

Hindsley consulted with Noeth. They concluded that Three Garden could not be named as an additional insured because fidelity bonds could not be written in that manner. They also concluded that the existing bond protected Three Garden, even if Stitt were to embezzle Three Garden funds, because the bond did not exclude coverage for the principals of First Baltimore. On December 31 Hindsley wrote Stitt, as president of First Baltimore, and advised: “As respects your Fidelity Bond, it is not possible to name a client such as 3 Garden Village as an additional insured.

Your bond, however, does respond for the acts of you and your employees in managing funds entrusted to you by your client projects.” Beginning in January 1986 and ending in late July 1986 Stitt made a series of misappropriations from the accounts of First Baltimore’s customers which are the subject of this ¹⁰⁴ litigation. 2 The funds taken belonged to Three Garden ($123,499.90), Yorkville ($139,000), Union ($10,000), and Ready ($4,256.46). The bulk of the funds were used as a deposit, later forfeited, in an attempt to purchase an apartment complex in a receivership sale. RCM & D billed, and First Baltimore remitted, the third annual premium on the policy in June 1986. In August 1986 Three Garden discovered the embezzlement of its funds in a review of First Baltimore’s reports and accountings.

Three Garden telephoned Noeth at RCM & D to verify coverage. Noeth telephoned Parks at USF & G. At that time Parks first learned that Stitt was the sole owner of First Baltimore. Parks informed Noeth that USF & G would not confirm that any coverage existed. On September 8, 1986, Noeth, as attorney in fact for USF & G, sent written notice to First Baltimore that the policy was cancelled effective September 25 in accordance with its terms. 3 The day after the cancellation notice was sent Hindsley wrote to the claims manager at USF & G expressing Hindsley’s opinion that the policy covered the loss.

The instant petitioners made claim against USF & G which denied coverage primarily because Stitt, at the time of the loss, was not an “employee” of First Baltimore as defined in the policy. Stitt engaged personal counsel and, thereafter, seems fully to have cooperated with the petition ¹⁰⁵ ers in pressing their claims. First Baltimore was eventually placed in receivership. Three Garden and First Baltimore, the latter asserting in its name the losses sustained by Ready and Union, sued USF & G and RCM & D in the Circuit Court for Baltimore City.

Count I of the complaint, as amended, alleges a breach by USF & G of the express contract of insurance. Count II alleged a spurious tort claim on which USF & G obtained a summary judgment which is not questioned on this appeal. Count III essentially alleges an estoppel resulting in coverage for those property owners from which Stitt embezzled. That count imputes the knowledge of RCM & D and its personnel to USF & G and alleges justifiable reliance by the plaintiffs.

Counts IV and V claim only against RCM & D, alternatively in contract and in tort, and essentially allege insurance broker malpractice. USF & G impleaded Stitt as a third party defendant. USF & G also filed a counterclaim. Its first count sought rescission of the insurance policy.

The second count sought a declaratory judgment that the insurer had no liability under the policy. Joined as an additional counterclaim defendant to that count was Yorkville which had filed suit against USF & G in Virginia. Yorkville counterclaimed against the respondents, alleging the same theories of liability as had been stated by Three Garden and First Baltimore in their complaint. USF & G moved for summary judgment against the petitioners on the ground, inter alia, that Stitt was not at the time of the misappropriations an “employee” of First Baltimore within the policy definition.

The circuit court denied that motion. There is no record of the argument on this motion. It was denied by a written order which does not state the reasons for the ruling. Thereupon Three Garden, First Baltimore and Yorkville moved for summary judgment.

Their grounds were that “the material facts are, as USF & G asserted in its motion for summary judgment, undisputed, and the Court’s denial ¹⁰⁶ of USF & G’s motion for summary judgment resolves the legal issues in favor of” the movants. At oral argument on petitioners’ motion before the same judge who had denied USF & G’s motion, counsel for Three Garden stated that, at the prior hearing, the court had suggested that petitioners move for summary judgment. The court then commented in part: “I remember the issue. The whole issue was the definition of employee.” Further, when counsel for USF & G was arguing that there were numerous factual issues relating to the estoppel theory, the following colloquy took place. “THE COURT: The main thing is the definition of employee of the contract. “[COUNSEL FOR USF & G]: That is one issue. “THE COURT: What other issues make a difference?” At the conclusion of the hearing the trial court announced that the “correct decision” was to grant summary judgment in favor of the petitioners and against USF & G and, in order to be consistent, to grant summary judgment in favor of RCM & D on a motion which it had filed.

No other or further explanation of the trial court’s reasoning appears in the record. 4 In a written order, filed in the case file and noted and summarized on the docket, the circuit court implemented the ruling which it had made from the bench. Judgment was entered against USF & G in favor of Three Garden and Yorkville for the amount of loss which they had respectively demonstrated and in favor of First Baltimore against USF & G for the amount of loss sustained by Ready and ¹⁰⁷ Union. Judgment was entered in favor of RCM & D. The order did not expressly address petitioners’ estoppel claims, which seemingly were considered to be moot as a result of the money judgments entered. There was no disposition of the third party claim against Stitt.

The trial court, however, certified its judgments for immediate appeal pursuant to Maryland Rule 2-602. Those judgments had terminated the action as to all original plaintiffs and as to RCM & D. USF & G appealed from the judgments entered against it. The petitioners, as a protective measure in the event judgment against USF & G were reversed, appealed from the entry of judgment in favor of RCM & D. The Court of Special Appeals reversed the judgments in favor of the petitioners holding, “as a matter of law, that Stitt was not an 'employee’ as that term was used in the fidelity bond.” United States Fidelity & Guar. Co. v. Three Garden Village, 77 Md.App. 640, 653 , 551 A.2d 881, 887 (1989).

The intermediate appellate court concluded that the trial court had erred “when it denied USF & G’s motion for summary judgment.” Id. (footnote omitted). Because the merits of the petitioners’ claim against RCM & D had never been evaluated, the Court of Special Appeals also reversed judgment in favor of RCM & D, without intimating any opinion on the merits. Id. at 653-54 , 551 A.2d at 887 .

We granted the petitioners’ request for a writ of certiorari. I The principal issue before us is the grant, and subsequent reversal, of summary judgment for the petitioners against USF & G. The trial court seems to have concluded that the policy applied to the losses because Stitt was an employee of First Baltimore. At least the court did not intimate any other reason for its grant of summary judgment. It is important that we identify the basis relied upon by a trial court in granting summary judgment because, in the event that basis is erroneous, “the appellate court will ¹⁰⁸ not ordinarily undertake to sustain the judgment by ruling on another ground, not ruled upon by the trial court, if the alternative ground is one as to which the trial court had a discretion to deny summary judgment.” Geisz v. Greater Baltimore Medical Center, 313 Md. 301 , 314 n. 5, 545 A.2d 658 , 664 n. 5 (1988).

See Henley v. Prince George’s County, 305 Md. 320, 333 , 503 A.2d 1333, 1339-40 (1986); Metropolitan Mortgage Fund, Inc. v. Basiliko, 288 Md. 25, 27-29 , 415 A.2d 582, 583-84 (1980). For that reason we address only the “employee” issue and do not review petitioners’ alternate argument that they are entitled to summary judgment on estoppel grounds. The foregoing proposition also means that we do not review the denial of summary judgment for USF & G and do not evaluate all of the reasons advanced by USF & G for granting it summary judgment. Simply because summary judgment for petitioners was properly reversed, it does not follow that we can say that USF & G’s motion was improperly denied.

Even if the record before the circuit court at the time of USF & G’s motion would have supported summary judgment for USF & G, the trial court’s discretion to deny or defer ruling ordinarily prevents an appellate court from directing that summary judgment be granted. Without abusing its discretion, a trial court may decide, for example, that a party should be allowed a further opportunity to develop facts or to explore an alternate theory of claim or defense. See Metropolitan Mortgage Fund, supra. A The Court of Special Appeals was correct in reversing summary judgment in favor of the petitioners on the present record.

Under the policy USF & G agrees “to pay the Insured [i.e., First Baltimore] for ... Loss of Money which the Insured shall sustain ... resulting directly from one or more fraudulent or dishonest acts committed by an Employee[.]” “Employee” is a defined term. Under that special definition, as interpreted and applied in judicial ¹⁰⁹ decisions, and under the facts of this case, as developed to date, petitioners have not shown as a matter of law on undisputed material facts that Stitt was an “employee” at the time of the losses. Although Stitt was “in the regular service of the Insured in the ordinary course of the Insured’s business” and was compensated by the Insured, as the record now stands no other individual had “the right to govern and direct [Stitt] in the performance of such service[.]” Whether an individual is an “employee” within the above-quoted language as found in standard commercial fidelity bonds depends on the facts of a given case.

See generally W. Haug, The Commercial Blanket Bond Annotated, 1985 A.B.A. Tort and Ins.Prac.Sec.Pol.Annot. 32-40 (1985); Elliott, Who is an Employee Under Fidelity Coverage, 14 Forum 620 (1979). Where, as here, the dishonesty which causes the loss is that of a person who is the only officer, director and shareholder of the insured corporation, the cases are nearly uniform in holding that the standard commercial blanket bond does not cover. Cases of the instant type present the least complicated scenario for treating the embezzling employee as the alter ego of the insured corporation. One commentator expressed the concept as follows: “A corporate insured cannot recover on a fidelity bond for loss sustained due to its own fraud or wrongdoing.

A corporation can, however, only act through its agents and, thus, to establish that a loss sustained by a corporation was sustained due to its own fraud or wrongdoing, it must be shown that the acts of the agent were in fact the acts of the corporation. In this context, a direct alter ego defense would be best illustrated by a factual situation demonstrating that the corporate agent perpetrating the fraud was the insured’s sole shareholder, chairman and controlling member of the board of directors, as well as the president and chief executive officer, in sole and complete control of the corporation. In such a situation, the defrauding corporate agent would be the ‘alter ego’ ¹¹⁰ of the corporation in the sense he so owned and controlled the insured that his acts are in law the acts of the corporation so as to preclude coverage for the losses sustained.” Montgomery, The Alter Ego Type Defenses Reconsidered, 13 Forum 528 (1978). Employer’s Admin.

Servs., Inc. v. Hartford Accident & Indem. Co., 147 Ariz. 202 , 709 P.2d 559 (Ariz.Ct.App.1985), is highly analogous to the instant matter. The named insured, Employer’s Administrative Services (EAS), was wholly owned by two persons, Simmons and Lindstrom, who were also the sole officers and directors of EAS. That corporation administered group health plans for businesses which employed it to receive and disburse premiums, adjust and pay claims, and handle various administrative matters.

Simmons and Lindstrom misappropriated $162,000 from employer accounts. The receiver for EAS sued on the fidelity bond issued to EAS which insured against loss of money through any dishonest act by any employee whom EAS had the right to govern and direct in the performance of service for EAS. Summary judgment for the insurer was affirmed. The court held in part: “Simmons and Lindstrom were acting in concert and since together they constituted the totality of EAS’s officers, directors and shareholders, they were never subject to anyone’s governance and direction.

EAS did not govern and direct them. To allow recovery on EAS’s claim would in essence be