Court Opinion

ID: 3486332
Source: CourtListenerOpinion
Date Created: 2016-07-05 21:13:04.336023+00
Date Added: 2024-06-11T14:13:54.242299
License: Public Domain

The record in these appeals makes three bulky volumes. It is impracticable as it is futile to give a detailed presentation and analysis of the facts which have prevented the writer *Page 683 
of this dissent from an agreement with the major conclusions of the majority of the court. The writer is convinced by the record that the purchase of substantially all of the assets of the People's Banking Company of Smithsburg by the Central Trust Company of Maryland on June 29th, 1931, was procured by the fraud of the trust company practiced upon the bank by falsely and wilfully misrepresenting to the bank that the trust company was then solvent and in a strong and prosperous financial condition. The transfer of the assets of the bank, the deceived seller, to the trust company, the buyer, which had procured the sale and transfer by its actual fraud, was, upon the discovery of the fraud by the seller, incontestably voidable by the seller so long as the assets sold and transferred were held by the trust company, and the seller's right of rescission had not been lost by laches.
Furthermore, with respect to a non-negotiable chose in action, the debtor under the obligation has the right to avoid a contract of assignment of such chose in action on the ground of fraud as against a third party, who, without notice, in good faith, and for a valuable consideration, has acquired title to either a non-negotiable chose in action or a negotiable chose in action, after maturity, because the assignee or transferee succeeds, in either of these instances, to the rights of the assignor only and, so, cannot enforce or retain a right or title which his assignor could not enforce or retain against the original debtor.Central Bank of Frederick v. Copeland, 18 Md. 305; Butler v.Rahm, 46 Md. 541, 549; Cumberland etc. Co. v. Parish,42 Md. 508, 613, 614; Steele v. Sellman, 79 Md. 1, 6, 28 A. 811;Goldsborough v. Cradie, 28 Md. 477, 487; Timms v. Shannon,19 Md. 296, 314; Harwood v. Jones, 10 G.  J. 404, 420, 421;Tyler v. Abergh, 65 Md. 18, 20, 3 A. 904; Kemp's Excx. v.McPherson, 7 H.  J. 320, 336; Estep v. Watkins, 1 Bland, 486;Avirett v. Barnhart, 86 Md. 545, 39 A. 532; Hunter v. Chase,144 Md. 13, 123 A. 393; Schenuit v. Finance Corp., 148 Md. 403, 414, 130 A. 331.
The doctrine thus stated was not invariably confined to the case of the original debtor party to the non-negotiable chose *Page 684 
in action enforcing his equity against an assignee, but in England, and some of the courts of this country, it also applies when the same non-negotiable chose in action has been successively assigned and there were subsisting equities between the original assignor or any subsequent assignor and his immediate assignee in favor of the prior assignor. Pomeroy'sEquity Juris, secs. 707, 708.
The theory stated is founded upon the fact that the holder of a non-negotiable chose in action cannot transfer anything but the beneficial interest he possesses. So, the measure of the assignor's subsisting beneficial interest is the limit of his capacity to transfer. When, therefore, the original assignment is procured by fraud, and a second assignment is then made by the guilty assignee to a purchaser for value and without notice, the innocent assignee, for value, obtains the thing assigned, subject to the equities subsisting against his assignor by reason of the fraud whereby his assignor procured the title to the chose assigned. There is no injustice in enforcing these subsisting equities against an innocent assignee for value and without notice, since the purchaser of a non-negotiable chose in action is, by the nature of the thing assigned, charged with the knowledge that the title he acquires is subject to the subsisting equities of the owner from whom his immediate assignor acquired his beneficial interest by assignment. Supra. See Byles v.Tome, 39 Md. 461; Eversole v. Maull, 50 Md. 95, 104; Farmers' Merchants' Nat. Bank v. Anderson, 152 Md. 641, 137 A. 367; Compare Ohio Life Ins.  Trust Co. v. Ross, 2 Md. Ch. 25, andNat. Bank of Bristol v. Balto.  O.R. Co., 99 Md. 661,59 A. 134.
However, a contrary view has been adopted. The non-apparent equitable rights of a prior assignor have been called latent, and the theory that such latent equities cannot prevail against the title of a second or subsequent assignee of a non-negotiable chose in action, and that an assignee only takes subject to the equities in favor of the debtor party, has had strong support in the decisions of the courts of the United States, and is now embodied in the American Law Institute Restatement of the Law ofContracts, sec. 174, as *Page 685 
the preferable doctrine. The prevailing opinion of this court adopts this view, which the writer accepts because of the desirability of uniformity of decision on this controversial point. Selected Readings on the Law of Contracts, 734, 735, 736.
The mortgages were non-negotiable choses in action, which the trust company had procured from the bank by fraudulent misrepresentations. The proof that the trust company procured the assignments through fraud casts upon the pledgee the burden of showing that these mortgages had been assigned to it without any knowledge of the fraud and for a valuable consideration, and in good faith.
On June 29th, 1931, the bank transferred its assets to the trust company, and on September 3rd, 1931, the trust company closed its doors. It was insolvent before June 29th, 1931, and has so continuously remained. During this entire period its insolvent condition was easily susceptible of ascertainment by suitable inquiry or by an examination of its assets and liabilities. Without making such an inquiry or examination, the surety companies required and obtained on August 10th, 1931, from the trust company, the pledge of securities to indemnify the sureties against loss on account of the depository bonds theretofore given by the trust company to the State of Maryland to cover deposits of the State of Maryland made in the trust company.
The securities were listed, and the first item was a number of mortgages, whose aggregate principal amount was $130,150, which had been acquired by the trust company as part of the assets of the bank; the second item was another group of mortgages, whose aggregate principal amount was $50,150, which had been acquired by the trust company as part of the assets of the Sykesville National Bank; the third item was a further group of mortgages whose aggregate principal amount was $51,000, which the trust company had acquired from the Washington Trust Company of Ellicott City. The other collateral pledged embraced unlisted stocks and bonds whose value was not given, but had been represented to the sureties as possessing a large value, which did *Page 686 
not materialize. The mortgages pledged had a principal value of $231,300, and were given to secure depository bonds to cover a maximum aggregate of $325,000 to the state.
The trust company had been the depositary of the funds of the State, and to secure the payment of these funds had delivered to the State its bonds of indemnity, with corporate sureties. These bonds were not expressly limited in duration, but it was the custom of the treasury to require the surety to furnish yearly a certificate to the effect that the premium on the bond had been paid by the depository, and that the bond would be continued in force for another year from its anniversary date. On May 28th, 1931, the state treasurer addressed a letter to the trust company stating that the funds on deposit were $330,661.03; that the amount of the six depository bonds to secure this sum was $345,000; and that the bond of $75,000, with the Fidelity 
Deposit Company as surety, would have to be renewed in full for another year before its anniversary date of July 1st, 1931. At that time the Fidelity  Casualty Company was the surety on a bond of $100,000, whose premium was prepaid to January 6th, 1932; the Maryland Casualty was surety on a bond of $20,000, whose premium was paid to June 20th, 1931; and the United States Casualty Company was the surety on two bonds, of which one was for $20,000, with premium paid to June 20th, 1931, and the other was for $100,000, with premium paid to November 7th, 1931. In addition to its mentioned bond of $75,000, the Fidelity  Deposit Company was surety on bonds of $25,000, with premium paid to December 23rd, 1931, and of $5,000, with premium paid to February 18th, 1932. Furthermore, the Fidelity  Deposit Company was the surety on a private bond of $75,000 given by the trust company to Washington Railway  Electric Company and the Potomac Electric Power Company. With three depositary bonds, aggregating $115,000, having anniversary dates on June 20th, and July 1st, 1931, the question of securing the sureties' continuation certificate for another year was immediate. The sureties knew that the Fidelity 
Casualty Company had declined in December, *Page 687 
1930, to renew its bond of $100,000 so as to run for the year ending January 6th, 1932, until the trust company had previously pledged with the assurer collateral to indemnify the surety. They further knew that there had been a number of bank failures throughout the country, and that, consequently, the surety companies had adopted the policy of not renewing depositary bonds. The Fidelity  Deposit Company declined to renew its policy of $75,000 on July 1st, and the United States Casualty Company did not renew its policy of $20,000 by July 1st.
Under these circumstances, Emory L. Coblentz, president of the Central Trust Company, went on July 9th or 10th, 1931, to the offices of the Fidelity  Trust Company for the purpose of obtaining a renewal certificate of the $75,000 bond, which should have been renewed on July 1st, and renewal certificates for the other bonds on their respective anniversary dates. On this occasion the trust company offered to give collateral for these renewal certificates, as it had done in January, 1931, when the Fidelity  Casualty Company had exacted this indemnity. The executive officers of the Fidelity  Deposit Company took the position that, if they accepted collateral, it would inure to the benefit of all the sureties, and that the trust company would have to furnish satisfactory collateral to cover all the depositary bonds. The president of the trust company agreed to pledge the collateral; requested the Fidelity  Deposit Company to assist in obtaining the co-operation of the other bonding companies; and stated that he would submit a list of securities for approval.
On July 11th the trust company wrote a letter in reference to the collateral and stated, through its president: "In looking over the securities which we have, I find, as I rather expected, that all of the quickly marketable securities have been used for direct borrowing purposes." The letter then suggests as collateral one thousand shares of the Continental Life Insurance Company of Richmond, an unlisted stock, whose par value was $10 a share, and mortgages on real estate. In addition to the revelation that the trust company *Page 688 
has used all of its "quickly marketable securities" for the purpose of "direct borrowing," it disclosed that the trust company had pledged its similar mortgage liens, which are not liquid assets, with life insurance companies. As a result of communication over the telephone, the president of the trust company wrote on July 15th to the Fidelity  Deposit Company, and inclosed a list of mortgages, aggregating $130,150, on land in the vicinity of Smithsburg, that had been taken over by the trust company "when it assumed" the "deposits a week or two ago" of the People's Banking  Trust Company of Smithsburg. The letter, also, proposed to increase the pledge of the life insurance stock to two thousand shares, which the writer valued at $50 a share, and expressed the opinion that, with the $50,000 (estimated) collateral given in January, 1931, to the Fidelity  Casualty Company, the new collateral was ample.
These communications were received by George L. Radcliffe, first vice-president of the surety company, who, on the assurances of the two letters and the conversations over the telephone, authorized on July 16th the execution of the renewal certificate of the $75,000 bond, dating the certificate back so as to cover the period for July 1st to June 30. Radcliffe sent Paul L. Wellener, a vice-president in charge of the depository department, to New York to confer with the two surety companies there. Wellener reported to Radcliffe on his return on July 23rd, and the next day Radcliffe wrote to Coblentz a long letter in which he reported considerable uneasiness among the insurers; and that one of them was preparing to take immediate steps to retire, that there was some reluctance to accept mortgages, but that the companies finally agreed to accept them as collateral, but felt that the assignments should be recorded; and that the arrangement made contemplated the trust company putting up one hundred per cent. of value in collateral for every dollar of state suretyship outstanding; and that the collateral deposited should be satisfactory in character and value to the Safe Deposit  Trust Company, which should have the details in charge. *Page 689 
Two of the concluding paragraphs of the letter should be quoted:
    "One of the New York companies was particularly reluctant to agree definitely to carry on, because they have experienced the cancellation of a considerable amount of reinsurance which they had heretofore depended upon, and this company in question did not feel that it could afford to increase its liability, even though it might be protected by collateral.
    "We feel reasonably assured, however, that if you can send us adequate collateral for the full amount of suretyship outstanding that there will be no further cancellations at this time on the part of anybody. Naturally we acted merely in the capacity of a messenger in dealing with the New York Companies, and we cannot guarantee that they will continue their suretyship indefinitely, but certainly if collateral is put up promptly, we believe there will be no disturbance of the situation while your own problem remains acute." (Italics the writer's.)
The following day, July 25th, Coblentz wrote to Radcliffe acknowledging the receipt of this letter by the trust company, and promising to submit the list and stating:
    "I did not expect we would be required to put up 100% in value of collateral for every dollar of State suretyship outstanding, for this gives no credit whatever to any of the bank's other assets.
    "* * * What we will offer you as collateral security may not be stock exchange collateral, but I assure you it is good and will protect everybody absolutely.
    "* * * It would be helpful to our general situation, if you would not record the assignments, but we must, of course, submit this decision to your judgment."
After July 25th the details of the transaction were in charge of Wellner and other officers of the Fidelity  Deposit Company. The continuation certificate of the bond of the United States Casualty Company for $20,000, extending the bond for another year from June 30th, 1931, was *Page 690 
delivered by messenger to the treasurer on July 30th, 1931. The agreement in writing was not executed, however, until August 10th, and the assignments of the mortgages are dated on August 19th, 1931. These fifty mortgages date from August, 1913, to February, 1931.
The facts here narrated, together with those which are set forth in the opinion of the majority of the court, force the writer, notwithstanding his respect for the judgment of his associates, to conclude that the Fidelity  Deposit Company, and the surety companies for which it was agent, are charged with knowledge of the insolvency of the trust company at the time of the pledging of the collateral. It is quite true that certain officers of the trust company, and George W. Page, state bank commissioner, and William J. Gerbig, one of the state bank examiners, testified that the trust company was solvent in June, 1931, but the facts of this record quite deprive such expressions of opinion of any evidential weight. Nor does the belief of Wellener, the vice-president, nor that of Nathan D. Mobley, an officer of the United States Casualty Company, that the trust company was solvent in July, 1931, relieve their companies of the effect of the facts within the knowledge of the surety companies.
If it be granted that the officers of the surety company did not have actual knowledge of the insolvency of the trust company in June, 1931, the collateral facts here stated within their knowledge put them on inquiry. The trust company sent them, about ten days prior to July 1st, 1931, with the September, 1930, state examiner's report, a June 2d 1931, balance sheet of the trust company, and a list of the stocks and bonds of the company. Although an examination was made on June 22-26, 1931, the surety company was not furnished the report of the examination. The stock and bond list was not checked nor verified with respect to the "market" values noted, although it required no special financial knowledge to perceive that a valuation was necessary before any weight could be attached to the figures. The bank examiner's report of September, 1930, was not a reliable guide to the *Page 691 
financial condition in June-August, 1931. Nor did the balance sheet of June 2d 1931, afford any reassurance in a banking situation which the Fidelity  Deposit Company characterized as "acute" on July 24th, 1931, while the matter of the bonds was in course of treaty.
Turning again to the examiner's report of 1930, it will be observed that the liability of the trust company for bills payable and on rediscounted paper was $1,010,029.18; that some of its directors were heavy borrowers and indorsers. Nineteen of the twenty-four directors owed an aggregate of $859,931.23 as makers and $10,443,782.88 as indorsers. Exclusive of duplications of $312,656.80 as makers, and $7,726,927.98 as indorsers, their net liability was $547,274.43 as makers and $2,716,854.90 as indorsers. The Blue Ridge Investment Company owed $1,792,762.22; the Central Securities Company, $2,375,569.36; the Guarantors' Investment Corporation, $1,021,287.82 — or a total for the three corporate borrowers of $5,189,619.40. The examiner noted in his report that these loans were "work out conditions and the greater portion of them represent their notes for other assets, which were originally included among the assets of the Trust Company." These assets were considered undesirable for the trust company to hold, and the corporations named had been formed to take them out of the trust company, as the surety company knew from a report made by its representative on December 20th, 1929. The report further showed that the trust company had 5,872 of its own stock pledged. One of its directors operated two syndicates for the sale of the trust company's own capital stock, carrying in one account 665 and in the other 2,668 shares. No interest was paid on the larger account. So, the examiner's report of June, 1930, showed a bad financial condition, and could not be accepted as establishing the financial condition of the trust company in June-August, 1931.
The obligation of the trust company was that it should safely keep and have forthcoming when required all of the deposits made by the State. The record establishes that, during the period from June 1st, to September 3rd, 1931, *Page 692 
the State could not have withdrawn its large deposit because of the insolvent condition of the trust company, and that the surety companies would be liable on their respective bonds on account of this insolvency.
Their course is consistent throughout with the belief that, because of the assured's financial condition, it was not a safe risk for them to continue on the depositary bonds of the trust company unless they were fully indemnified by the pledge of collateral in the amount of the bonds. With all their information on this subject, it would have been the duty of any reasonable man, in a similar situation, to follow the matter and ascertain the true state of facts. The exercise of proper diligence in inquiry would have certainly led to the discovery that the trust company was insolvent; and that the proposed assignment to them of the listed securities was, not only an impairment of the capital resources of the trust company, but also the wrongful conversion of the mortgages lately obtained from the bank through the fraudulent misrepresentations of the trust company. The neglect of the surety companies to make this inquiry undoubtedly charged them with the knowledge of what they would have obtained by the employment of reasonable diligence. Bank of Bristol v.Balto.  O.R. Co., 99 Md. 661, 676, 59 A. 134; 2 Pomeroy'sEquity, sec. 597.
The power conferred upon banks and trust companies to deposit securities for the purpose of securing deposits of the federal and state governments, and of the agencies of the first and the political subdivisions of the second, or to secure the sureties on bonds furnished to secure such deposits, was not intended to apply to the case at bar, and affords no protection to the surety companies, because the question is not one of authority to pledge, but a contest between a defrauded assignor and its fraudulent assignee and the latter's surety, which, with knowledge of the fraud, has received as collateral security the choses in action obtained from their first assignor through the fraud of its assignee. Acts of 1931, ch. 429.
The knowledge here imputed to the sureties would bar their *Page 693 
relief, and, so, would make unnecessary a reference to section 8 of article 90 of the Code. It would seem that, upon a surety giving notice of its desire to be relieved of its liability, the duty imposed by the words, "the State Treasurer may, in his discretion, immediately demand of such bank a new bond with good and sufficient surety or sureties," is simply to empower the officer either to demand or not to demand a new bond, as the treasurer may, in his discretion, determine. State v. Knowles,90 Md. 646, 655, 45 A. 877, 49 L.R.A. 695.