Fidelity Bank v. Tiernan

• Decision Date: 29 June 1977
• Citation: 249 Pa.Super. 216,375 A.2d 1320
• Parties: The FIDELITY BANK, Trustee of the Estate of George H. Tiernan v. Walter F. TIERNAN and Margaret R. Lynagh, Appellants.
• Court: Pennsylvania Superior Court

375 A.2d 1320

249 Pa.Super. 216

The FIDELITY BANK, Trustee of the Estate of George H. Tiernan v. Walter F. TIERNAN and Margaret R. Lynagh, Appellants.

Superior Court of Pennsylvania.

June 29, 1977

Argued Dec. 12, 1975.

Joseph W. Fullem, Jr., Philadelphia, for appellants.

Paul Maloney, Philadelphia, for appellee.

Before WATKINS, President Judge and JACOBS, HOFFMAN, CERCONE, PRICE VAN der VOORT and SPAETH, JJ.

SPAETH Judge.

Four members of the court are in agreement that the judgment of the lower court cannot stand. The President Judge and I would enter judgment n.o.v. Judge HOFFMAN and Judge CERCONE, however would only grant a new trial; they do not find it necessary to decide the issue that the President Judge and I regard as dispositive. In these circumstances, so that there may be an order supported by a majority of the court the President Judge and I concur in the granting of a new trial. The reasons for a new trial are stated in Judge HOFFMAN's opinion; the reasons for judgment n.o.v., in this opinion.

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George Tiernan died in 1933, leaving the residue of his estate to the Fidelity Bank in trust, to be divided into two equal shares, one for his son Walter, and the other for his son Arnold. With respect to each son, the Bank was to pay income on the son's share to the son for his life, and on the son's death to his widow, and on her death to "all my grandchildren then living . . ., said income to be paid until each of said grandchildren shall attain the age of twenty-five years . . .. As each grandchild attains the age of twenty-five years, his or her share of principal shall be promptly distributed to him or her ." (Record 128a-129a)

Walter died a widower in 1963. At that time "all (of George's) grandchildren" were: Walter's two children, Walter F. and Margaret; and Arnold's three children, Arnold G., Elizabeth, and Edith. All of these grandchildren were over 25. Accordingly, on Walter's death the Bank should have divided the principal of his trust into five equal parts, and distributed one part to each grandchild. Instead the Bank divided the principal, which amounted to some $62,000, into two equal parts, and distributed one part to each of Walter's children, Walter F. and Margaret. Thus, Walter F. and Margaret each received some $31,000; they should each have received only some $12,000, with Arnold's children, Arnold G., Elizabeth, and Edith, also each receiving some $12,000.

This improper distribution of the principal of Walter's trust was accomplished informally, that is, instead of filing its account for audit by the Orphans' Court the Bank procured the signatures of Walter F. and Margaret to a "Receipt, Release and Waiver of Audit." This document, which was prepared by the Bank, opens by reciting, "We, the undersigned, being the sole parties in interest in this Trust . . . ." As just noted, this recitation was not accurate. The document goes on to provide that "for the purpose of inducing the Trustee (the Bank) to make a distribution without a Court audit," Walter F. and Margaret:

1. Acknowledge that we have examined the Trustee's account and approve the same . . . .

2. Acknowledge receipt of principal in the amount of $62,225.12 . . . .

3. Agree to indemnify the Trustee against all liability, loss or expense which may be incurred as the result of the settlement of this Account, or of the distribution being made upon this Receipt and Release to the extent of our share, and

4. Waive an accounting of this Trust in the Orphans' Court . . . .

(Record 134a)

Arnold died in 1968, survived by his widow and three children. This time, however the Bank filed a formal account in the Orphans' Court. The Orphans' Court adjudicated the account on December 10, 1971, awarding the principal of Arnold's trust back to the Bank in further trust for Arnold's widow. Incident to this proceeding, evidently in August 1971 (Record 137a-138a, 156a), the overpayment to Walter's children was discovered.

On March 10, 1972, the Bank filed a formal account in the Orphans' Court of Walter's trust. On October 19, 1972, the Orphans' Court adjudicated that account. The adjudication held that "(t)he testator's will . . . clearly and plainly pertinently provides for the distribution of income after the death of Walter and after the death or remarriage of his wife . . . equally to all of the testator's then living grandchildren . . .." (Record 139a; emphasis in original.) Accordingly the court ordered the Bank to distribute the principal of Walter's trust equally to all five grandchildren. Since the Bank had already distributed the principal to Walter's two children, this meant that it was surcharged some $36,000 ($12,000 for each of Arnold's three children), with interest from July 19, 1963, which was the date of the Receipt, Release and Waiver of Audit and distribution to Walter's children. (Record 145a)

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The foregoing facts presented the Bank with a choice. First, the Bank could proceed against Walter F. and Margaret in assumpsit for breach of their express promise, made in Paragraph 3 of the Receipt, Release and Waiver of Audit, "to indemnify the (Bank) against all liability, loss or expense which may be incurred as the result of the settlement of this account . . . ." Second, the Bank could proceed against Walter F. and Margaret for restitution. As a matter of pleading, this would also be in assumpsit. 1 Standard Pennsylvania Practice (Rev. ed. 1960) ch. 3, § 29; Restatement of Restitution § 5 (1937). As a matter of theory, however, it would differ from the proceeding on the Receipt, Release and Waiver of Audit in that it would not depend upon proof of breach of an express promise but on whether as a matter of equity it was unjust for Walter F. and Margaret to retain the benefit they had received as a result of the Bank's overpayment to them. Restatement of Restitution, Part I, Introductory Note, and § 1. Or third, the Bank could combine these two proceedings, for example by suing in Count 1 of its complaint for breach of the express promise to indemnify and in Count 2 for restitution. Pa.R.Civ.P. 1020(a), (c).

In fact the Bank chose the first of these three possible procedures, and on April 4, 1972, it filed a praecipe for summons, followed on May 5, 1972, by a complaint in assumpsit for breach of the express promise to indemnify. (Record 1a, 3a-4a) Paragraph 1 of the complaint pleads George Tiernan's will. Paragraphs 2 and 3 identify his five grandchildren (Walter's two children, and Arnold's three). Paragraph 4 pleads the Receipt, Release and Waiver of Audit. Paragraph 5 states that the principal of Walter's trust "should have been divided among all five of the grandchildren." Paragraph 6 states that "(a)s a result of the distribution" made pursuant to the Receipt, Release and Waiver of Audit, Walter F. and Margaret each "received $19,003.19 more than the amount to which they were entitled." And paragraph 7 quotes the express promise made by Walter F. and Margaret in Paragraph 3 of the Receipt, Release and Waiver of Audit to indemnify the Bank. Wherefore judgment is demanded in the sum of $38,006.38.

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It is important to understand that in deciding to sue for breach of the express promise to indemnify, able counsel gave the Bank its best chance. There are two reasons why this is so.

First, the scope of the material evidence would be narrower, and this would favor the Bank. In a suit for restitution, the respective equities of the parties would become material, for whether it is unjust for one to retain a benefit will depend upon all the circumstances. Thus the right to restitution may be lost because of ones delay, Restatement of Restitution § 64, or because of laches, id, § 148, or because of a change in the circumstances of the person who has received the benefit, id. § 69. It could be anticipated that factors such as delay and change of circumstances might favor Walter F. and Margaret, and in fact they did testify to that effect. (Record 52a-53a; 62a-64a) If the suit were for breach of the express promise to indemnify, however, such testimony should be immaterial, for the issues would not be equitable but would rather concern only the meaning and validity of the promise.

Second, and more decisive than these evidentiary considerations, a suit for restitution would be barred by the statute of limitations, whereas it is at least arguable that a suit for breach of the express promise to indemnify would not be.

That a suit for restitution would be barred may be seen from Montgomery's Appeal, 92 Pa. 202 (1879). The administrators of the estate of William Montgomery overpaid his widow Matilda. The overpayments occurred during 1870 and 1871; they were made voluntarily by the administrator, and "(n)o refunding bond, or agreement to repay, was asked for . . .." Id. at 204. In 1876 one of the administrators, A. J. Montgomery, made a voluntary assignment in trust for creditors. Pursuant to this assignment certain land was sold in which Matilda had an interest. The auditor, however, refused to pay the amount of this interest to Matilda, arguing that she was indebted to A. J. Montgomery because of the overpayment he had made her when he was one of the administrators of her husband's estate; as it happened, the overpayment exceeded the amount of her interest in the land sold in settlement of Montgomery's assignment for creditors. The lower court upheld the auditor. On Matilda's appeal, the Supreme Court reversed. The Court held that the creditors (whose rights the auditor represented) were not entitled to set-off against Matilda

for the reason that A. J. Montgomery could not himself recover the money back (i. e., the overpayment he had made to Matilda). The payment was voluntary, and it is barred by ...