Federal Sav. and Loan Ins. Corp. v. Quality Inns, Inc.

• Decision Date: 30 May 1989
• Docket Number: 88-1567 and 88-1725,Nos. 88-1566,s. 88-1566
• Citation: 876 F.2d 353
• Parties: FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for San Marino Savings and Loan Association, Plaintiff-Appellee, v. QUALITY INNS, INC.; Quality Hotels and Resorts, Inc., Defendants-Appellants, and Quality Inns International, Inc., Defendant. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for San Marino Savings and Loan Association, Plaintiff-Appellant, v. QUALITY INNS, INC.; Quality Hotels and Resorts, Inc.; Quality Inns International, Defendants-Appellees. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for San Marino Savings and Loan Association, Plaintiff-Appellee, v. QUALITY INNS, INC.; Quality Hotels and Resorts, Inc., Defendants-Appellants, and Quality Inns International, Defendant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 353

876 F.2d 353

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for San Marino Savings and Loan Association, Plaintiff-Appellee, v. QUALITY INNS, INC.; Quality Hotels and Resorts, Inc.,

Defendants-Appellants,

and

Quality Inns International, Inc., Defendant.

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for San Marino Savings and Loan Association, Plaintiff-Appellant, v. QUALITY INNS, INC.; Quality Hotels and Resorts, Inc.;

Quality Inns International, Defendants-Appellees.

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for San Marino Savings and Loan Association, Plaintiff-Appellee, v. QUALITY INNS, INC.; Quality Hotels and Resorts, Inc.,

Defendants-Appellants,

and

Quality Inns International, Defendant.

Nos. 88-1566, 88-1567 and 88-1725.

United States Court of Appeals Fourth Circuit.

Argued Dec. 7, 1988.

Decided May 30, 1989.

David F. Albright, Sr. (Harry M. Rifkin, Semmes, Bowen & Semmes, on brief), for appellants/cross-appellees.

Michael H. Krimminger, Daniel M. Litt (Melrod, Redman & Gartlan; Dorothy L. Nichols, James L. Blair, Federal Home Loan Bank Bd., on brief), for appellee/cross-appellant.

Before HALL and MURNAGHAN, Circuit Judges, and BUTZNER, Senior Circuit Judge.

BUTZNER, Senior Circuit Judge:

This appeal arises from an action brought by the Federal Savings and Loan Insurance Corporation (FSLIC), in its capacity as receiver for San Marino Savings and Loan Association, seeking to recover damages from Quality Inns, Inc., Quality Hotels and Resorts, Inc. (Quality), and Quality Inns International, Inc. ¹ Quality appeals the district court's judgment finding Quality liable to the FSLIC for breach of fiduciary duty and the dismissal of its counterclaim. In its cross-appeal, the FSLIC claims the court awarded insufficient damages. We affirm the court's judgment concerning Quality's liability to the FSLIC in all respects except its measure of the prejudgment interest owed to the FSLIC. We vacate the district court's order dismissing Quality's counterclaim.

I

The facts are fully reported in the district court's opinion. ² For the purpose of this appeal they can be briefly summarized. On August 2, 1983, San Marino loaned American Resort Services, Inc. (ARS), $27,000,000 for the construction of Silver Creek Ski Resort. The loan agreement allocated $900,000 of the loan to line item "09-016 Furniture and Fixtures." Quality had previously agreed with ARS to provide design and purchasing services for the project. The day the loan documents were executed Quality further agreed with ARS to assist the construction lender, San Marino, in the administration of the loan. One week later Quality entered into an agreement with San Marino to inspect and approve construction progress for the lender.

Quality assigned one of its employees to be the project manager. In addition to serving as an inspector for San Marino, the project manager reviewed and approved all loan disbursement requests submitted by ARS, analyzing each request by line item before forwarding it to San Marino.

On January 31, 1984, ARS requested a disbursement of $1,205,242. Included within this draw, the seventh draw, was a request for $719,732, all of the remaining funds allocated under line item 09-016 to purchase furniture and fixtures. Quality and ARS knew that the money disbursed under line 09-016 was for the purchase of furniture for the condominiums. The project manager reduced the request, approved a draw for $1,021,480, and asked that the money be sent to ARS and Quality. San Marino then wire transferred $1,021,480 to an account bearing ARS's name. All persons authorized by ARS as signatories to this account were officers or employees of Quality.

Quality was entitled to pay itself a fee of $25,000 out of the seventh draw. ARS instructed Quality to transfer $358,509 from the draw to ARS and deposit $719,732 into an escrow account. But after Quality transferred the money ARS requested and took its fee, only $637,971 was left. Quality used the $637,971 to reimburse itself for unpaid invoices and operating expenses allegedly owed by ARS. Neither ARS nor San Marino authorized Quality to pay itself $637,971 from these funds, and ARS demanded that Quality return the money.

On February 3, 1984, the Federal Home Loan Bank appointed the FSLIC conservator of San Marino, and on December 6, 1984, it was appointed receiver. Subsequently, Silver Creek defaulted on its loan, and the FSLIC purchased the property. Claiming that Quality had misappropriated the $719,732 allocated in the seventh draw for condominium furnishings, the FSLIC brought this action.

II

Quality contends that the district court erred in finding that Quality was San Marino's agent for purposes of seeing that the money disbursed in the seventh draw was spent as authorized. Our review of the record shows that the district court's findings are adequately supported by the evidence.

Quality's president sent a letter to San Marino confirming that Quality's role as inspector of the Silver Creek project would be "to inspect, photograph, validate materials on site and approve construction progress for San Marino." In addition to these duties, Quality, acting as the "bank inspector of construction," approved all draw requests, including the seventh draw, submitted by San Marino. Quality received a fee of $75,000 from San Marino for its services. As San Marino's agent, Quality owed a fiduciary duty to San Marino to approve the seventh draw only if the disbursement of funds was justified. Quality contends that, regardless of any duty it owed to San Marino in approving the seventh draw, once the money was disbursed, Quality's duty to San Marino ended.

As the district court noted, "[i]f the funds had been disbursed directly to ARS, ARS would have been responsible for assuring that the Furniture and Fixtures money from the Seventh Draw was spent on furnishings for the condominium rooms." 674 F.Supp. at 528. But this is not what happened. The money was disbursed to ARS and Quality and deposited in an account controlled by Quality. The district court properly found that once Quality exercised control over the funds, which it had approved for San Marino to disburse for furniture and fixtures for the condominiums, Quality's duty as San Marino's agent required Quality to spend the funds only on furniture and fixtures.

Quality contends that it did not owe this duty to San Marino because it did not control the furniture funds. It points out that the money was wired to an account bearing ARS's name and ARS's federal tax identification number. In addition, although officers and employees of Quality were the sole signatories to the account containing the funds, ARS could change this at any time by corporate resolution.

We are not persuaded by Quality's argument. The evidence establishes that Quality's employees were the sole signatories of the account at all relevant times and that they drew on the funds in the account for unauthorized expenditures. The district court properly concluded that the evidence established an agency, and consequently a fiduciary, relationship between Quality and San Marino under Maryland law. See Ramsburg v. Sykes, 221 Md. 438, 442, 158 A.2d 106, 108 (1960); Restatement (Second) of Agency Sec. 1(1), 13 (1958).

III

Quality also asks the court to reduce its liability by some $605,000. First, Quality contends that it should be credited for the $300,000 worth of furniture ultimately placed in the condominiums by ARS. When the FSLIC foreclosed on Silver Creek it took title to all real estate and personalty of the project, including the furniture. Quality argues that allowing the FSLIC to take the furniture as well as the $300,000 gives the FSLIC a double recovery.

There is no double recovery. ARS never paid for the furniture, and the vendor filed a claim in the bankruptcy proceedings. The FSLIC paid $400,000 into the registry of the bankruptcy court to be distributed to ARS's unsecured creditors, including the furniture vendor. If Quality had not misappropriated the money in escrow and applied the money to purchase furniture, the FSLIC would have acquired the furniture at the foreclosure sale without liability for the vendor's claim.

Quality also argues that Quality and ARS were joint tortfeasors and that the furniture obtained by ARS constitutes a partial satisfaction from one tortfeasor which must be regarded as a partial satisfaction against Quality. Furthermore, Quality argues that mutual covenants not to sue executed by FSLIC and ARS also released Quality on the theory that the release of one joint tortfeasor releases all joint tortfeasors.

The district court found that ARS and Quality were not joint tortfeasors and that under South Carolina law, which governed the release, Quality was not exonerated for its breach of fiduciary duty. See Bartholomew v. McCartha, 255 S.C. 489, 491-92, 179 S.E.2d 912, 914 (1971). We find no error of fact or law in the district court's disposition of this issue. See 674 F.Supp. at 529-30.

Quality also argues that its liability should be reduced by the $305,165 it spent on ski equipment, restaurant equipment, food, motor parts, and miscellaneous goods, purchased for the project with the funds in question. The district court found that Quality was liable for the $305,165 because it was not entitled to draw on these funds, designated for furniture for the condominiums, to reimburse itself for the purchase of these items. 674 F.Supp. at 529. Quality contends that the district court was bound by the FSLIC's judicial admission in its complaint and interrogatory answers that the money was for "furniture, fixtures, and equipment for the Project." Accordingly, argues Quality, since it spent $305,165 on equipment for the project, a permissible purpose, its liability should be reduced by this amount. At the very least it asks this court to remand the case because the district court failed to explain...