Folly Farms I, Inc. v. Trustees of Clients' Sec. Trust Fund of Bar of Maryland

• Decision Date: 05 June 1978
• Docket Number: No. 10,10
• Citation: 282 Md. 659,387 A.2d 248
• Parties: FOLLY FARMS I, INC., et al. v. TRUSTEES OF the CLIENTS' SECURITY TRUST FUND OF the BAR of MARYLAND. Misc.
• Court: Maryland Court of Appeals

Page 659

282 Md. 659

387 A.2d 248

FOLLY FARMS I, INC., et al. v. TRUSTEES OF the CLIENTS' SECURITY TRUST FUND OF the BAR of MARYLAND.

Misc. No. 10.

Court of Appeals of Maryland.

June 5, 1978.

John H. Zink, III, Towson, for claimants.

Richard A. Reid, Towson, for respondent.

Argued before SMITH, DIGGES, LEVINE, ELDRIDGE, ORTH and COLE, JJ.

SMITH, Judge.

In the second trip of this controversy to this Court we are obliged to determine whether claimants, Folly Farms I, Inc. et al. (Folly Farms or the claimants), are entitled to reimbursement from the Clients' Security Trust Fund of the Bar of Maryland. ¹ We shall consider whether the defalcation arose from an attorney-client relationship and whether the claimants were guilty of negligence. If the claim did not arise from such a relationship, or if the claimants were negligent, their claim for reimbursement by the Trustees of the Clients' Security Trust Fund (the trustees) must be denied. We shall hold that the trustees erred when they declined to approve the claim.

1. Background

The concept of a fund established by the legal profession to reimburse clients in the few cases in which attorneys betray their trust and misappropriate funds began in New Zealand, and then spread to other English-speaking countries. ² Reginald Heber Smith, The Client's Security Fund: "A Debt of Honor Owed by the Profession," 44 A.B.A.J. 125, 127 (1958), and Time, Sept. 16, 1966 at 69. Mr. Smith said, "Among the English-speaking and among the common law countries of the world, the United States is the laggard." A.B.A.J. at 127 (italics removed). In Maryland a voluntary plan was established by the Bar Association of Baltimore City, followed by one set up by the Montgomery County Bar Association. After spirited debate the Maryland State Bar Association approved a proposal in July 1964 which would have requested the General Assembly to enact a bill establishing such a fund. See 69 Trans.Md.St.B.A. 209-34 and 365-71 (1964). Thereafter, a revised plan was submitted to the State Bar in January 1965 and unanimously approved. See 70 Trans.Md.St.B.A. 9-16, 339-42 (1965). It called for a legislative enactment authorizing this Court to promulgate rules and regulations for the creation and operation of such a fund. Subsequently, the General Assembly enacted Chapter 779 of the Acts of 1965, which became Md.Code (1957, 1976 Repl.Vol.) Art. 10, § 43. Under it this Court may require payment of a sum not to exceed $20 per year as a condition precedent to the practice of law. The general purpose of the fund, as set forth in the statute, is "for . . . maintaining the integrity and protecting the good name of the legal profession by reimbursing, to the extent deemed proper and reasonable by the trustees, losses caused by defalcations of members of the bar of the State of Maryland, acting either as attorneys or as fiduciaries (except to the extent to which they are bonded) . . . ." On March 28, 1966, this Court adopted what is now Maryland Rule 1228. This was followed immediately by the appointment of trustees. The fund became fully operative on July 1, 1966, when the trustees began to collect assessments. The annual assessment for lawyers admitted to practice five or more years prior to the beginning of the fiscal year was initially set at $15. This has since been reduced to $10.

Under Rule 1228 i, "(t)he trustees are invested with the power to determine whether a claim merits reimbursement from the trust fund . . . ." No claimant has any right in the trust fund as beneficiary or otherwise. In exercising their discretion, the trustees are to consider a number of factors, including the amounts available and likely to become available to the trust fund for payment of claims, the size and number of claims likely to be presented, the total amount of losses caused by defalcations of any one attorney, the unreimbursed amounts of claims recognized by the trustees in the past as meriting reimbursement but for which reimbursement has not been made in the total amount of the loss sustained, the amount of the claimant's loss as compared with the amount of the losses sustained by others who may merit reimbursement from the trust fund, the degree of hardship the claimant has suffered by the loss, and any negligence of the claimant which may have contributed to the loss. Rule 1228 j 2 provides for judicial review. Under this rule a claimant aggrieved by a final determination of the trustees may file exceptions with this Court within 15 days. The rule provides:

"The decision of the trustees shall be deemed prima facie correct and the exceptions shall be denied unless it is shown that the decision was arbitrary or capricious, or unsupported by substantial evidence on the record considered as a whole, or was not within the authority vested in the trustees, or was made upon unlawful procedure, or was unconstitutional or otherwise illegal."

Pursuant to the authority granted to them, the trustees have adopted regulations approved by this Court concerning claims, by which they say they "will be guided, but not necessarily bound." The first of these guidelines provides:

"No claim will be recognized by the Trustees unless a fiduciary or client-attorney relationship existed with a member of the Bar of the Court of Appeals of Maryland when the loss was incurred and the said Maryland attorney defaulted."

2. Facts of this case

This case concerns the claims of four corporations, Folly Farms I, Inc.; Folly Farms II, Inc.; Folly Farms III, Inc.; and Folly Farms IV, Inc., to which we shall collectively refer as Folly Farms. Folly Farms filed a claim with the trustees on March 27, 1974, seeking reimbursement of losses caused by the defalcations of William L. Jacob (Jacob). ³ The claim was denied on the ground that the evidence furnished by the claimants revealed that the proximate cause of the defalcations stemmed from Jacob's having been made a corporate officer with the authorization to sign checks on behalf of the corporation. The matter reached this Court in Folly Farms I, Inc. v. Trustees, 278 Md. 297, 363 A.2d 479 (1976). We amended Rule 1228 effective September 15, 1976, to provide for the filing of exceptions to final decisions of the trustees which denied claims. We said in Folly Farms :

"In view of the amendment to the Rule during the pendency of this case, we think it appropriate in the circumstances to treat the petition filed by Folly Farms as an exception taken to the trustees' decision and, without denying or sustaining the exceptions, to vacate the trustees' decision and remand the matter to the trustees for further proceedings. In this connection, we note that the trustees' decision denying the claim is not supported by any definitive factual findings relative to the application of the criteria governing the exercise of the trustees' discretion specified in Rule 1228 i 3. We think that the trustees, on remand, should give further consideration to the claim and state with specificity the reasons underlying their final determination." Id. at 301, 363 A.2d at 481.

Upon the remand the trustees took testimony and then prepared a detailed and carefully reasoned opinion denying the claims.

Folly Farms owned land in Baltimore County. It was primarily concerned with the sale of undeveloped lots. Daniel B. Brewster, Esq., a practicing lawyer, was its president and sole stockholder. His law firm usually engaged the services of Jacob to examine titles to real estate. A half-interest in Folly Farms was sold by Brewster to another individual, Colonel Drummond, to whom later reference will be made. Brewster "retired" (as he put it) from the practice of law by virtue of the requirements of his duties in the Congress of the United States, first as a member of the House of Representatives and then as a United States Senator. Jacob was retained to represent the interest of the corporation at closings when lots were sold. The other part owner's health deteriorated, and Brewster's time was occupied from 1969 onward by legal difficulties arising from his indictment by a Federal grand jury in the District of Columbia. Jacob was made a corporate officer and given the authority to sign checks. The trustees said, "In the normal course of transactions, Mr. Knatz (, a realtor,) would sell a lot and then notify Mr. Jacob of the sale."

Five defalcations are involved in these claims. Four stemmed from settlements concerning sales to Hoffman, Stone, Hearn, and Easter. The trustees summarized the testimony relative to those matters:

"(a) The Hoffman transaction, according to the settlement sheet furnished by the Claimants, indicated that settlement took place at No. 6 Calvert Street, Baltimore, Maryland. It appears that this address is the address of a title company. Further, that the check would have been made payable to the Corporations and not to William L. Jacob, as attorney; further, that Jacob believed his procedure, under those circumstances, would be to endorse the corporate check and put it into his escrow account.

"(b) Settlement sheets submitted by the Claimants as to the Stone and Hearn settlements indicated that they were not closed by Jacob. Jacob testified that the settlement sheets were not in his handwriting, nor were the settlement sheets in the handwriting of his secretary. Further, Jacob did not remember how the checks were made payable, although he testified that he believed they were made payable to the Corporations and endorsed by him for deposit into his escrow account. Jacob testified that he attended settlements handled by outside attorneys in order to deliver the deed of the Corporations to the purchaser at settlement, and that he also looked over the documents and papers as attorney for the corporations.

"(c) No settlement sheet was produced on the Easter settlement, although Jacob had testified that all his records had been delivered to Mr. Staehlin, CPA, for the Corporations."

As the trustees put...