Royal Ins. Co. v. Drury

• Decision Date: 13 March 1926
• Docket Number: 43.
• Citation: 132 A. 635,150 Md. 211
• Parties: ROYAL INS. CO. v. DRURY ET AL.
• Court: Maryland Court of Appeals

132 A. 635

150 Md. 211

ROYAL INS. CO. v. DRURY ET AL.

No. 43.

Court of Appeals of Maryland

March 13, 1926

Appeal from Baltimore City Court; Joseph N. Ulman, Judge.

Suit by D. H. Roland Drury and another, as first mortgagees and trustees, against the Royal Insurance Company, a body corporate incorporated under the laws of England. Judgment for plaintiffs, and defendant appeals. Reversed, and new trial awarded.

Argued before BOND, C.J., and PATTISON, ADKINS, OFFUTT, DIGGES PARKE, and WALSH, JJ.

W Calvin Chesnut, of Baltimore (James K. Cullen, of Baltimore on the brief), for appellant.

William Stanley and Raymond S. Williams, both of Baltimore (Stanley & Stanley and Hershey, Donaldson & Williams, all of Baltimore, on the brief), for appellees.

WALSH J.

The chief question to be determined in this case is whether or not the final ratification of a sale of property made under a power of sale contained in a deed of trust, to the holders of the notes secured by the deed of trust, effects "any change of ownership" in the property within the meaning of that phrase as used in the "standard mortgage clause," now customarily attached to fire insurance policies covering mortgaged property.

In the fall of 1920, Mr. R. E. Walker, president of the Brightwood Sanitarium Company, after a casual meeting with Mr. D. H. Roland Drury in Washington, D. C., asked him if he could secure a $15,000 loan on a 50-acre tract of ground and the building thereon, owned by the sanitarium and situated on the Baltimore and Washington boulevard, about six-tenths of a mile from the main road leading to Laurel. After some discussion, Drury, who had for many years been engaged in the real estate and loan business in Washington, agreed to try to raise the money and Walker agreed to pay him a $7,500 bonus if he obtained it. Drury thereupon investigated the property and on November 17, 1920, the sanitarium company executed a deed of trust conveying the property to Drury and B. Erlie Talbott, the appellees, to secure the payment of 10 negotiable promissory notes of varying amounts, totalling $22,500, made payable to Mildred B. Drury, the wife of D. H. Roland Drury, or order, 6 months after date. These notes were indorsed without recourse by Mrs. Drury, and sold at a discount to the following persons, who still hold them: Thomas B. Harney, Martha G. Harney, Evelyn S. McLachlen, Thomas P. Hickman, John P. Cochran, John H. Drury, and Emma Goldman. The actual amount received in cash by D. H. Roland Drury from the purchasers of the notes was $19,365, out of which he retained a commission of $4,375.50 and turned over the balance of $14,989.50, less expenses to the Maryland Title Insurance Company on December 16, 1920, with instructions to pay it to the sanitarium company when the title to the property should be found good, and the deed of trust reported to be a first deed of trust of record. Due to difficulties with the title, the deed of trust was not actually recorded until June 3, 1921, 6 1/2 months after it was executed in November, 1920. The sanitarium company expected to issue $40,000 in bonds, from the proceeds of which the loan obtained from Drury was to be paid, and this Drury loan was wanted for the purpose of enabling the company to complete the purchase of the property and begin building operations pending the issuance and sale of the bonds. Some work was done on the foundation of the proposed new building and a large amount of material was delivered on the ground, but, upon the failure of the company to issue and sell the bonds, the work ceased, the material, which had not been paid for, was taken away by the materialmen, and the whole project collapsed. In October, 1921, Drury, who had been unable to get possession of the insurance policy which Mr. Walker, president of the company, had told him was in existence, applied to A. H. Baker & Co., an insurance agency in Washington, for a policy on the residence building on the property. This application was made to Mr. Baker over the telephone, and Drury, who sometimes solicited insurance for this agency, and who received a commission on the policies subsequently issued on the risk involved in this case, gave him at that time a description of the property, the name of the owner, and the names of the trustees under the deed of trust. A one-year policy for $10,000 was thereupon issued upon the property by Baker & Co., as agents for the Firemen's Insurance Company of Newark, N. J., in which policy the sanitarium company was described as owner, and a standard mortgage or trustee clause in favor of Drury and Talbott, trustees, was attached. At the time this policy was issued no foreclosure proceedings had been instituted under the deed of trust, though the notes were unpaid and overdue. However, on November 18, 1921, the trustees docketed suit against the sanitarium company and advertised the property for sale under the terms of the deed of trust. Prior to the date set for the sale a preliminary injunction restraining it was obtained at the instance of certain alleged creditors of the company, and the controversy thus begun was not settled until the injunction was dissolved by a decree of this court rendered on November 17, 1922. See Kinsey v. Drury, 119 A. 646, 141 Md. 684.

The $10,000 policy expired in October, 1922, and on September 18, 1922, Baker & Co. sent Drury two $5,000 policies covering the property from October 19, 1922, to October 19, 1923, in place of the $10,000 policy. One of these $5,000 policies was issued by the same company which issued the $10,000 policy, while the other was issued by the Royal Insurance Company, Limited, an English corporation, the appellant in this case. No additional information was given Baker & Co. by Drury at the time these policies were issued, and, like the original $10,000 policy, they were each issued to the sanitarium company as owner, with a standard mortgage clause in favor of the appellees attached.

After this court dissolved the above-mentioned injunction, the property was again advertised, and was actually sold on December 22, 1922, to the holders of the notes under the deed of trust, for the sum of $15,000, which sum was about $10,000 less than the total amount due for principal, interest, and taxes under the deed of trust. Drury and Talbott, the trustees, reported this sale to the court on December 27, 1922, setting out in the report that the property had been sold to Thomas R. Harney, Martha G. Harney, Evelyn S. McLachlen, John B. Cochran, Thomas P. Hickman, John H. Drury, and Emma Goldman, and also stating that, as these purchasers were the holders of the notes secured by the deed of trust, the trustees had not required them to make the initial payment of $1,500 called for in the advertisement of sale; the trustees "being satisfactorily assured that said purchasers will duly settle for said property upon the ratification of said sale by this honorable court." The report of sale also stated; "Taxes and insurance adjusted to the day of sale." On January 30, 1923, this sale was finally ratified and confirmed, but no deed for the property has yet been given by the trustees to the purchasers, nor have the purchasers paid anything on the purchase price. The testimony shows that the trustees intended to accept the notes held by the purchasers as part payment on the purchase price, collecting in cash only such sum as would be needed to pay the costs of the case, and it also appears that all the purchasers were solvent and able to pay their full share of the purchase price without regard to the notes held by them.

Shortly after the sale of the property, the same parties who had sought to enjoin the sale had themselves made parties to the foreclosure suit, and filed claims against the proceeds of the sale, but these claims were disallowed in the lower court, and this decision of the lower court was affirmed by this court on June 1, 1924. See Kinsey v. Drury, 126 A. 125, 146 Md. 227.

On Sunday night, May 20, 1923, nearly 4 months after the final ratification of the sale of the property, it was totally destroyed by fire of unknown origin. At the time of the fire, the property was occupied by a Mr. Kinsey and his family, who had lived in the house since March, 1921, and who, after the sale of the property, were permitted to remain in it, without paying rent, by Drury and Mr. Clark; the latter being one of the attorneys for the trustees in the foreclosure proceedings. After the fire the Brightwood Sanitarium made no claim for any insurance, nor has it yet made such claim, but Drury reported the loss to Baker & Co., the agents for the companies, and it was referred by the companies to their respective adjusters, Mr. Harry S. Gardner, of Baltimore, representing the appellant, and Rose & Smith, of Baltimore, representing the Firemen's Insurance Company of Newark, N. J. After about a year of correspondence and other negotiations, the details of which will be adverted to later, Drury and Talbott, as first mortgagees and trustees under the deed of trust, entered suit against the Royal Insurance Company to recover on the $5,000 policy issued by that company on September 18, 1922, and, the verdict and judgment below being in favor of the trustees and against the insurance company, the latter appealed. The appeal brings up for review the action of the learned court below in sustaining demurrers to two equitable pleas filed by the appellant after all the testimony had been taken, its ruling on one question of evidence, and its action in refusing the defendant's first, second, third, fourth, fifth, seventh, eighth, ninth, and tenth prayers, and in granting the plaintiff's first prayer and an instruction drawn by the court.

We will first consider the rulings on the...