Security Ins. Co. of New Haven-The Connecticut Indem. Co. v. Mangan, HAVEN-THE

• Decision Date: 31 May 1968
• Docket Number: HAVEN-THE,No. 241,241
• Parties: , 5 UCC Rep.Serv. 621 SECURITY INSURANCE COMPANY OF NEWCONNECTICUT INDEMNITY COMPANY v. John W. MANGAN et al.
• Court: Maryland Court of Appeals

Page 241

250 Md. 241

242 A.2d 482, 5 UCC Rep.Serv. 621

SECURITY INSURANCE COMPANY OF NEW HAVEN-THE CONNECTICUT INDEMNITY COMPANY v. John W. MANGAN et al.

No. 241.

Court of Appeals of Maryland.

May 31, 1968.

George Molnar, Silver Spring (George H. Eggers, Silver Spring, on the brief), for appellant.

No brief filed on behalf of appellees.

Before HAMMOND, C. J., and MARBURY, BARNES, FINAN and SINGLEY, JJ.

SINGLEY, Judge.

On 26 July 1965, Eldorado Dev., (sic) Inc. (Eldorado), borrowed $1,976.21 from The National Bank of Washington (the Bank) the finance the purchase of an automobile. The borrowing was evidenced by Eldorado's note, signed by John W. Mangan and his wife, Helen H. Mangan, in their respective capacities as president and secretary-treasurer of Eldorado. The note called for 17 monthly payments of $110.00 each and a final payment of $106.21. ¹ The note was secured by a chattel mortgage ² on the 1963 Cadillac purchased by Eldorado. The chattel mortgage was signed 'Eldorado Dev. Inc. by John W. Mangan Helen H. Mangan,' without any indication of the capacity in which they signed, but the corporate seal was affixed. The acknowledgment identifies Mr. Mangan as the attorney in fact for Eldorado, and refers to an appended certification signed by Mr. Magan as president and Mrs. Magan as secretary, which designated Mr. Mangan the attorney in fact of Eldorado, for the purpose of acknowledging the chattel mortgage.

The Bank did not record its chattel mortgage, ³ and Eldorado, after making three monthly payments, defaulted. The Cadillac was executed upon and sold by another of Eldorado's creditors; the Bank stamped the note with a rubber stamp 'Nat'l Bk. of Washington Jan. 13, 1966 P1-L Washington, D. C.' and on 19 January 1966, returned the note to the Mangans, with a brief transmittal letter, signed by a vice president of the Bank which read: 'Dear Mr. & Mrs. Mangan: Enclosed please find your cancelled note, since the Insurance Company honored our claim for the balance due on your note.' At the trial below, the Bank's assistant cashier offered the following explanation:

'Q. Do you have any idea what happened to the original promissory note?

A. Yes it was sent to the Mangans at the time the note was paid in full by the insurance company.

THE COURT: Was that done intentionally?

THE WITNESS: I think it was an error, sir.'

On 5 May 1966, the appellant Security Insurance Company of New Haven-The Connecticut Indemnity Company (Security) describing itself as 'Subrogee of The National Bank of Washington' (as required by Maryland Rule 243 a) ⁴ brought suit against Mr. and Mrs. Mangan in the Circuit Court for Montgomery County. Apparently under the misapprehension that the Bank had made the loan to the Mangans as individuals, the declaration alleged:

'That the defendants did borrow from the National Bank of Washington a certain sum of money of finance the purchase of an automobile. That thereafter, the said automobile was seized by a creditor of the defendants and sold; that thereafter, the defendants did default in their payments to The National Bank of Washington.

'Under a policy of insurance the plaintiff, Security Insurance Company of New Haven-The Connecticut Indemnity Company, a corporation, did pay to The National Bank of Washington the net sum due by defendants to the National Bank of Washington and is subrogated to this extent against the defendants.

'Plaintiff claims the sum of $1,584.64 ⁵ of the defendants.'

Filed an exhibit was a copy of the 'chattel mortgage non filing insurance proof of loss' which had been sent to Security by the Bank.

On 6 June 1966, the Mangans demurred, assigning among other grounds the failure of Security to allege the existence of an agreement of subrogation and the discharge of the obligation by the Bank. On 12 August 1966, the Mangans filed a general issue plea and a motion for summary judgment supported by an affidavit that they were not individually liable on the note.

Thereafter, on 6 March 1967, with leave of court, Security filed an amended declaration, joining Eldorado as a defendant. General issue pleas were filed by the Mangans and Eldorado. When the case came on for trial, one witness, the assistant cashier of the Bank, testified for Security. Security did not offer in evidence the insurance contract upon which its rights as a subrogee were apparently founded. ⁶ The lower court entered judgment for the Mangans and Eldorado; denied Security's motion for a new trial; and entered judgment in favor of the defendants for costs. This appeal followed.

Security contends that the lower court erred in holding (1) that the Mangans were not personally liable on the note and (2) that Security was required to prove its subrogation agreement in order to enforce its rights as a subrogee.

The first contention may readily be disposed of. Nowhere in the record is there evidence that the obligation was anyone's but Eldorado's. Eldorado was the obligor on the note and mortgagor on the chattel mortgage. The Mangans' signatures appear on the note only in their capacities as officers of Eldorado and the fact that they signed in their representative capacities is clearly set forth in the chattel mortgage. UCC § 3-403(3), Code (1957, 1964 Replacement Volume), Art. 95B, § 3-403(3). Admittedly, the loan was described as having been made to 'John W. & Helen Mangan' in the proof of loss which the Bank filed with Security and as having been made to 'John W. & Helen H. Mangan T/A Eldorado Dev., Inc.,' on the Bank's ledger card, but the fact that these characterizations were adopted by the Bank (in our view, erroneously) and without factual support, cannot be regarded as sufficient to charge the Mangans with individual liability.

With respect to its second contention, Security argues that it was not required to prove its subrogation agreement in order to enforce its rights as a subrogee, but need only have proved that it was not a volunteer and that it made payment under circumstances entitling it to reimbursement. This argument ignores the distinction between conventional subrogation on the one hand, and legal (or equitable) subrogation, on the other and overlooks the principle that an insurer is not necessarily entitled to subrogation as a matter of legal right but may, in fact, be denied subrogation under the terms of its contract or by a course of action or of inaction pursued by its insured.

'There are known to the law two kinds of subrogation, one of which is termed 'conventional,' and the other, in contradistinction, 'legal,' or, by reason of its origin and basis, 'equitable.' Some authorities have regarded assignments as a third type. ⁷ * * * Legal subrogation is a creature of equity not depending upon contract, but upon the equities of the parties. In its most usual aspect, it arises by operation of law where one having a liability or a right or a fiduciary relation in the premises pays a debt owing by another under such circumstances that he is in equity entitled to the security or obligation held by the creditor whom he has paid. Conventional subrogation, as the term implies, is founded upon some understanding or agreement, express or implied, and without which there is no 'convention.' It occurs where one having no interest or any relation to the matter pays the debt of another, and by agreement is entitled to the rights and securities of the debtor so paid. The contract right of subrogation is somewhat broader than legal subrogation, for the right is granted irrespective of whether the payment was necessary for the protection of the person seeking subrogation.' (footnotes omitted). 50 Am.Jur. Subrogation § 3 at 679-80 (1944).

See, 83 C.J.S. Subrogation § 1 at 575-578 (1953); Sheldon, Subrogation § 248 at 285-86 (1st Ed. 1882).

The decisions of this Court have consistently recognized this distinction.

'Legal subrogation (as distinguished from conventional and statutory subrogation) arises by operation of law when there is a debt or obligation owed by one person which another person, who is neither a volunteer nor an intermeddler, pays or discharges under such circumstances as in equity entitled him to reimbursement to prevent unjust enrichment.' (Citing cases and texts.) Maryland Title & Escrow Corporation v. Kosisky, 245 Md. 13, 20, 225 A.2d 47, 50 (1966).

'Although it is difficult to lay down a general rule applicable to all cases in which subrogation is sought, the essential elements necessary for legal subrogation (as distinguished from conventional and statutory subrogation) are: (1) the existence of a debt or obligation for which a party, other than the subrogee, is primarily liable, which (2) the subrogee, who is neither a volunteer nor an intermeddler, pays or discharges in order to protect his own rights and interests. See 50 Am.Jur. (Subrogation) § 10; 83 C.J.S. Subrogation, § 3, 5. If these requirements are met, legal subrogation exists by operation of law without the consent of the creditor. Mullen (The Equitable Doctrine of Subrogation, 3 Md.Law Rev. 201), at p. 203.' Schnader Inc. v. Cole Build. Co., 236 Md. 17, 23, 202 A.2d 326, 330 (1964).

There are important differences between conventional subrogation and legal subrogation. A conventional surbrogee is ordinarily a complete stranger to the transaction. Since the conventional subrogee is bound by agreement, the volunteer or intermeddler never figures in conventional subrogation, so long as the conventional subrogee confines himself to his contractual obligation. A conventional subrogee may maintain an action for a pro tanto recovery, which a legal subrogee, who must pay in full in order to establish his rights, can never do. Neptune Insurance Company v. Dorsey, 3 Md.Ch. 334 (1850). The conventional subrogee is not necessarily entitled to subrogation as a matter of legal right if there are intervening equities, Reconstruction Finance Corp. v. Maryland...