Three Garden Village Ltd. Partnership v. U.S. Fidelity & Guar. Co.

• Decision Date: 21 December 1989
• Citation: Three Garden Village Ltd. Partnership v. U.S. Fidelity & Guar. Co., 567 A.2d 85, 318 Md. 98 (Md. 1989)
• Parties: THREE GARDEN VILLAGE LTD PARTNERSHIP et al. v. UNITED STATES FIDELITY & GUARANTY COMPANY. 22 Sept. Term 1989.
• Court: Maryland Court of Appeals

Page 98

318 Md. 98

567 A.2d 85

THREE GARDEN VILLAGE LTD PARTNERSHIP et al. v. UNITED STATES FIDELITY & GUARANTY COMPANY.

22 Sept. Term 1989.

Court of Appeals of Maryland.

Dec. 21, 1989.

Price O. Gielen (Melnicove, Kaufman, Weiner & Smouse, P.A., Baltimore, Elliott B. Adler, Robert W. Hesselbacher, Jr., Laxalt, Washington, Perito & Dubuc, all on brief), Washington, D.C., for petitioner.

Howard G. Goldberg (Douglas N. Silber, Smith, Somerville & Case, all on brief), Baltimore, for respondent.

Argued before MURPHY, C.J., and ELDRIDGE, COLE, RODOWSKY, McAULIFFE, ADKINS and BLACKWELL, JJ.

RODOWSKY, Judge.

The substantive legal issue in this case is whether a commercial, blanket, fidelity bond issued to a corporation covers embezzlements by the corporation's sole stockholder, officer and director. There are, however, procedural complications. The trial court granted summary judgment against the insurer in favor of the claimants on the bond, and denied summary judgment for the insurer. The insurer seeks to overturn both rulings. Because the record presently reveals no breach by the insurer of the express, written contract, the circuit court erred in granting summary judgment against the insurer. Nevertheless, we do not direct entry of summary judgment for the insurer for two reasons. The first recognizes the trial court's discretion to deny, or defer entry of, a summary judgment which otherwise might be appropriately entered. Second, there is a theory of estoppel alleged in the complaint which has not been adjudicated in the trial court. Accordingly, we shall remand for further proceedings.

This action was initiated by two of the petitioners, Three Garden Village Limited Partnership (Three Garden) and First Baltimore Asset Management, Inc. (First Baltimore). First Baltimore's business was property management, including rent collection and property maintenance and repair. Three Garden owned a large apartment project in Baltimore County and engaged First Baltimore to manage the property. First Baltimore also managed property in northern Virginia owned by the third petitioner, Yorkville Corporation (Yorkville). First Baltimore managed two apartment complexes in Baltimore City respectively owned by Ready Avenue Limited Partnership (Ready) and Union Avenue Limited Partnership (Union). Ready and Union are not parties to this action, but they became claimants against the bond in issue here.

The defendants are the respondents, United States Fidelity and Guaranty Company (USF & G) and Riggs, Counselman, Michaels & Downes, Inc. (RCM & D). USF & G had issued through RCM & D, one of its general agents, a commercial, blanket, fidelity bond under which First Baltimore was the named insured. The dispute involves the issuance, legal effect, and continuation in force of that policy. We state the facts of the dispute most favorably to USF & G, the party which opposed the grant of the principal summary judgment involved in this appeal.

First Baltimore was incorporated in 1981 by Thomas Stitt (Stitt) and Albert DeSalvo (DeSalvo). Stitt owned forty-nine percent of the stock, and DeSalvo owned fifty-one percent. Both worked in the business. First Baltimore specialized in managing rehabilitated properties occupied by low to middle income residents. Some or all of the properties had benefited, or continued to benefit, from one or more forms of subsidy provided by the United States Department of Housing and Urban Development (HUD).

In the latter part of 1983 Joseph Payne Hindsley (Hindsley), a representative of RCM & D, was advising First Baltimore concerning its property, casualty and workers' compensation insurance needs. At that time First Baltimore asked Hindsley if First Baltimore could obtain $1 million of fidelity coverage. Hindsley consulted with Robert J. Noeth (Noeth), manager of the bond department at RCM & D. In written memoranda Hindsley advised Noeth that there were six employees at First Baltimore, three of whom were clerical employees and three of whom were principals. Noeth made a longhand notation on one of the memos that each principal held an equal ownership interest in the corporation. ¹

In late May 1984, Stitt, on behalf of First Baltimore, signed an application to USF & G for a commercial, blanket bond in the amount of $1 million. The application was prepared for his signature by RCM & D. A question on the application asking the identity of any shareholder owning more than ten percent of the applicant's stock was left unanswered. The application reflected a total of eight employees of whom one was described as president, one as vice president and one as comptroller.

Because issuance of $1 million of coverage exceeded RCM & D's authority from USF & G, Noeth presented First Baltimore's application to Theodore G. Parks (Parks), an assistant vice president of USF & G. In a face-to-face meeting Noeth told Parks that three individuals equally owned First Baltimore. Parks approved the policy.

In that meeting Noeth also told Parks that RCM & D had been informed that HUD required the bond. Noeth testified further on deposition as follows:

"Q. ... When you told him that HUD required the bond, what, if anything, else did you tell him about HUD and what part they played in this business and why they required this bond?

"A. Because they were I believe insuring all of the mortgages.

"Q. Was there any discussion with Mr. Parks whereby he understood that the business of First Baltimore was basically as property managers pursuant to which they were routinely entrusted with the monies that belonged to other persons or partnerships and that they held the money in a trust capacity for them or in a fiduciary capacity? Did he understand that?

"A. Yes, he did.

"Q. Was that specifically discussed?

"A. Yes, because I mentioned that out of that trust before funds were paid to the mortgagees that various expenses were paid for maintenance, et cetera."

The policy was issued effective July 1, 1984. It is a "Comprehensive Dishonesty, Disappearance and Destruction Policy--Form A" in which only "Insuring Agreement I[,] Employee Dishonesty Coverage--Form A" is designated as effective. There is no expiration date. The policy remains in effect unless and until cancelled by either party. The premium for the First Baltimore policy was calculated to include the assumed three owners among the total number of employees whose defalcations would be covered. The premium was calculated for, and remained fixed for, a three year period but was payable in annual installments.

Under the policy USF & G agreed with First Baltimore to pay First Baltimore for:

"I. Loss of Money, Securities and other property which the Insured shall sustain ... resulting directly from one or more fraudulent or dishonest acts committed by an Employee, acting alone or in collusion with others."

The policy defines "Employee" to mean

"any natural person (except a director or trustee of the Insured, if a corporation, who is not also an officer or employee thereof in some other capacity) while in the regular service of the Insured in the ordinary course of the Insured's business during the Policy Period and whom the Insured compensates by salary, wages or commissions and has the right to govern and direct in the performance of such service, but does not mean any broker, factor, commission merchant, consignee, contractor or other agent or representative of the same general character."

(Emphasis added).

In August 1985 Stitt purchased DeSalvo's stock in First Baltimore, and DeSalvo completely terminated his relationship with First Baltimore. By that time the comptroller position identified on the application was no longer filled. Thereafter Stitt was the sole shareholder, director and officer of First Baltimore. By early November 1985 Hindsley was aware of the fact that DeSalvo had left First Baltimore and was living in New York.

In December 1985 the general partner of Three Garden wanted assurance from First Baltimore that its fidelity bond protected Three Garden in the event of misappropriation of Three Garden funds held by First Baltimore in a fiduciary capacity. Stitt wrote to Hindsley requesting that a copy of the fidelity bond be sent to Three Garden listing Three Garden as an additional insured with First Baltimore, as their interests might appear. Hindsley consulted with Noeth. They concluded that Three Garden could not be named as an additional insured because fidelity bonds could not be written in that manner. They also concluded that the existing bond protected Three Garden, even if Stitt were to embezzle Three Garden funds, because the bond did not exclude coverage for the principals of First Baltimore. On December 31 Hindsley wrote Stitt, as president of First Baltimore, and advised:

"As respects your Fidelity Bond, it is not possible to name a client such as 3 Garden Village as an additional insured. Your bond, however, does respond for the acts of you and your employees in managing funds entrusted to you by your client projects."

Beginning in January 1986 and ending in late July 1986 Stitt made a series of misappropriations from the accounts of First Baltimore's customers which are the subject of this litigation. ² The funds taken belonged to Three Garden ($123,499.90), Yorkville ($139,000), Union ($10,000), and Ready ($4,256.46). The bulk of the funds were used as a deposit, later forfeited, in an attempt to purchase an apartment complex in a receivership sale.

RCM & D billed, and First Baltimore remitted, the third annual premium on the policy in June 1986.

In August 1986 Three Garden discovered the embezzlement of its funds in a review of First Baltimore's reports and accountings. Three Garden telephoned Noeth at RCM & D to verify coverage. Noeth telephoned Parks at USF & G. At that time Parks first learned that Stitt was the sole owner of First Baltimore. Parks informed Noeth that USF & G would not confirm that any coverage existed. On ...