Fay v. Fay

193 A. 674, 172 Md. 570, 1937 Md. LEXIS 267

• Court: Court of Appeals of Maryland
• Decided: June 16, 1937
• Docket: [No. 19, April Term, 1937.]
• Status: Published

Opinions

Offutt, J.,

delivered the opinion of the Court.

Irene A. Fay, guardian, under an appointment of the Orphans’ Court of Baltimore City, of Frederick Fay and Woodrow Fay, her minor children, without having first obtained the consent of that court, deposited in the Baltimore Trust Company funds which her two wards would be entitled to receive as they severally reached their respective majorities. As a result of the failure of the Baltimore Trust Company, the amounts due its several depositors were not paid in full, but, in lieu of pay ment, certificates of deposits, for the balances respectively due them, were issued, one of which was issued for the balance due on the fund deposited for the use of Frederick) Fay. When Frederick Fay reached his majority, his guardian filed a final account in which she craved allowance on that certificate of deposit, which stood in his name, for $282.52. Frederick Fay excepted to the account on the ground that, because the guardian had not obtained an order of the Orphans’ Court authorizing the deposit before she made it, that she was not entitled to an allowance for the certificate of indebtedness, but that he was entitled to receive from her the amount thereof in cash. The court sustained the exceptions and directed the guardian to pay to Frederick Fay the amount due under the certificate of indebtedness in cash. The appeal is from that order.

It appeared that the Orphans’ Court had repeatedly passed orders both before and after the deposit in this case was made authorizing fiduciaries to deposit funds in that bank, and that it had repeatedly authorized withdrawals from these particular funds, and was therefore cognizant of the fact that the deposit had been made.

The appellee contends that the deposits were made at the risk of the guardian, and that she personally is answerable to the! beneficiary for the full amount thereof, for the reason, and only for the reason, that before making the deposits she failed to procure an order of the Orphans’ Court authorizing her to make them. That proposition is based upon an extremely legalistic application of a purely ritualistic formula to the facts of the case, so as to impose liability, although it cannot be denied that, had application been made, the deposit would have been authorized and the loss would have resulted precisely as it did without such prior authorization. Such a conclusion is not required by any express statutory mandate, is contrary to the realities of the situation, and would relieve fiduciaries of the responsibility of exercising reasonable prudence and discretion in the administration of estates, at the expense of beneficiaries, for, if depositaries can only be selected by the orphans’ court, an administrator or guardian must be relieved from responsibility for making a deposit if he first secured the approval of the court, but he is responsible if he makes a deposit of estate funds without first securing such approval, even though in making it he exercised the utmost vigilance, care, and prudence.

That conclusion is said to be required by the construction placed upon chapter 315 of the Acts of 1831 (Code, art. 93, sec. 251) in Bacon v. Howard, 20 Md. 191. The statute provides: “The orphans’ court may, in their discretion, and whenever it shall seem proper to them, either ex officio or upon application, order any administrator to whom they may have granted administration, or any guardian whom they may have appointed or whose bond they may have approved, to bring into court, or place in bank, or invest in bank or other incorporated stock, or any other good security, any money or funds received by such administrator or guardian; and the court shall direct the manner and form in which such money or funds shall be placed in bank or invested, and the same shall at all times be subject to the order and control of the court; and if the administrator or guardian shall not, within a reasonable time to be fixed by the court, comply with the order, his administration or guardianship may be revoked.”

It is apparent, from an examination of its language, that by its own terms that statute is applicable only to a case where the court has ordered an administrator, or guardian, to bring into court money or funds of the estate. Its apparent purpose was to give the court the power to intervene when its attention was directed to circumstances which indicated that the security of an estate was being endangered by the conduct or the incompetence of the fiduciary. In Bacon v. Howard, supra, the court said: “From the earliest period of the testamentary system, it has been the sedulous purpose of the Legislature to hold persons standing in a representative position to a just accountability; while at the same time, ample provision is made in that system for their official protection,” And later, “whatever force this suggestion might have in the absence of positive legislation, we must determine that the Act of 1831, ch. 315, was intended to add a. further safeguard to the due proper administration of personal estates, and to hold executors, administrators and guardians to such accountability in case of investment or deposit, so that no' exercise of private judgment, though made in good faith, would relieve their official responsibility.” It also stated that it would be in direct conflict with the spirit and intent of the testamentary law to deprive those interested in the administration of personal estates or the management of guardianships “of the safeguards provided for their protection.” It then went on' to say that to “allow an administrator toi select for himself (without the sanction of the Orphans’ Court) a depositary for1 the assets of an estate, and in case of loss, to claim an exemption or credit for the loss, though he may have acted in good faith, would be to substitute his private judgment for that of the orphans’ court, and leave the parties interested, to the pecuniary ability of the depositary.” Finally, it reached the conclusion that the intention of the act was to hold executors, administrators, and guardians to such accountability in case of deposit, so that no exercise of private judgment, though made in good faith, would relieve their official responsibility.

As construed by the appellee, that language means that good faith, prudence, and care on the part of such a fiduciary in selecting a depositary are wholly immaterial, but that the fiduciary may secure complete protection and immunity from responsibility by securing the approval of the orphans’ court, because, in such a case, the judicial judgment of the court would be not only substituted for the “private judgment” of the fiduciary, but also for the protection of the bond, which is given, not to insure the faithful discharge by the court of its duties, but to secure the faithful performance by the fiduciary of his duties. That conclusion is contrary to the common law, and, when the constitution of the orphans’ court in this state is considered, it is apparent that no such forced construction of the statute is required or justified.

As pointed out above, under the terms of the statute, the power granted to the court by it to select a depositary does not arise until the court directs the fiduciary to bring into court funds of the estate. In this case no such direction was given, although the court’s attention was repeatedly called to the fact that the moneys of the estate were deposited with the Baltimore Trust Company. Until it had ordered the fund to be brought into court under that statute, the court was under no duty, nor had it the power, to select a depositary. If it decided that the depositary was unsafe, its duty under the statute was first to require the fiduciary to bring the fund into court, and then to direct the “manner and form” in which it should be placed in bank.

But, apart from that, when the constitution of the orphans’ courts of this state is considered, it is hard to believe that the Legislature ever intended to make their judgment an indispensable prerequisite to the valid selection of a depositary, or to transfer to them the duty of exercising care and prudence in making such a selection, which the law in the first instance places upon the fiduciary, or to deprive estates of the protection of bonds given to insure the faithful discharge of that duty. Its only apparent purpose was to give it the power, when a doubt arose as to the security of the funds of estates, to intervene, and, after a careful investigation, to select a depositary, but to leave undisturbed the general rule that a fiduciary must at all times exercise in the management of the estate the care, vigilance, and prudence which a person of ordinary care and prudence would be expected to exercise.

Judges of the orphans’ court are not required to be trained in law or in finance, they need have no knowledge of securities or investments, or of the standing or safety of banks or other depositaries^ nor have they the machinery to acquire such knowledge; they may be engaged in industry, trade, agriculture or nothing at all. There is no reason to assume that they have any greater knowledge of the soundness and security of financial institutions because they are judges than they would have if they were not judges, which is merely that of the average man. Their terms are short, so that even the knowledge which might result from experience is often lost by their retirement as soon as it becomes useful.

Apart from the case of Bacon v. Howard, supra, no support for the rule announced seems to be found in the adjudicated cases of either America or England. In Johnson v. Webster, 168 Md. 568, 580, 179 A. 831, reference is made to that case, but the reference was interpolated merely by way of illustration, and the decision in Bacon v. Howard had no bearing on any question involved in Johnson v. Webster.

Cases supporting the rule that, in the absence of a statute requiring an administrator or guardian to secure an order of court authorizing him to deposit. funds of the estate in a particular depositary, he is liable to the beneficiary, for loss resulting from the failure of the depositary, only in cases where he has failed to exercise the care, diligence and prudence which would be expected of a reasonably capable businessman under the circumstances, are collected in a note to 60 A. L. R. 484, at page 488. The annotator, after reviewing cases from nineteen American states, England and Canada, and after stating that the liability of an executor or administrator is that of an ordinary bailee for hire, says: “Accordingly, it is generally held that, with reference to funds coming into their hands, executors and administrators, as trustees, are bound to the observance of fidelity and such diligence as men of ordinary intelligence observe in managing affairs of their own; in other words, they must exercise that degree of care and prudence that ordinarily prudent men exercise in regard to their own affairs. If the executor or administrator, therefore, in good faith deposits funds of the estate to the credit of the estate in a reputable bank, selected by him with that degree of care which the law exacts, he is ordinarily not liable for any loss which may occur through failure of the bank.”

An examination of the statute appears to demonstrate that it has no application to such a case as this, and, if the construction placed upon it nearly seventy-five years ago in Bacon v. Howard was erroneous, this court is not required by any principle of stare decisis to make the error immortal.

The fallacy of the reasoning that the judgment of the court affords greater security than the “private” judgment of the fiduciary is demonstrated in this case by the fact that the very court from which this appeal is taken did, before and after this deposit was made, approve the particular bank in which it was made, as a depositary, so that its judgment and the private judgment of the guardian were identical. It is not apparent, therefore, that the case of a beneficiary is improved, or that he is left any the less to the pecuniary ability of the depositary, when it is selected by the orphans’ court, than where it is selected by the fiduciary, except that the fiduciary is answerable for any failure to exercise reasonable care, prudence and diligence, while the court is not so answerable. Roth v. Shupp, 94 Md. 55, 60, 50 A. 430; 33 C. J. 981-983.

Nor does there seem to be any sound reason why fiduciaries answerable to an orphans’ court should be held to any different measure or kind of responsibility in depositing funds entrusted to their custody than trustees of a court of chancery who are liable only for a failure to exercise reasonable care, diligence and prudence. While not strictly analogous, the case of Zimmerman v. Coblentz, 170 Md. 468, 185 A. 342, lends some support to that view. In that case a beneficiary under the will of Cephas M. Thomas sought to hold Newton A. Fulton and Emory L. Coblentz, executors, for the loss resulting from the failure of the Central Trust Company, in which they had deposited the fund claimed by the complainant in that case. The money had originally been deposited in the Walkersville Savings Bank, which in May, 1930, came under the control and management of the Trust Company.

These questions arose in the case: One, whether Coblentz and Fulton held the fund as executors or as trustees, two, whether permitting the deposit to remain after the Savings Bank had become a part of the Trust Company was equivalent to a new or original deposit, and, three, if it was, whether the failure of the fiduciaries to secure the court’s approval of the depositary made them liable for the loss, irrespective of whether they had, in selecting it, exercised reasonable care, prudence and diligence. The court held that Fulton and Coblentz did hold the fund as executors, 170 Md. 468, at page 474, 185 A. 342, 345; that: “The continuation of this deposit after it had been taken over by the trust company in 1930, although it is a truth often, overlooked, amounted to a removal of the fund from the depositary authorized by the court, and involved a new set of risks” (Ibid.), but that Fulton, one of the executors, was not liable for the loss, although the court had passed no order authorizing the continuance of the deposit after the reorganization, because it declared that it would have authorized the deposit had it been asked to do so. It is true that, in that case, at the request of the executors, the Circuit Court for Frederick County in equity had assumed jurisdiction of the estate and that the executors had come under the control of that court, and that the court was dealing with what was a deposit in form but an investment in substance, but it is inconsistent with the reasoning of the opinion that executors holding funds as such must at all hazards obtain the approval of the orphans’ court of a depositary before the chancery court assumed jurisdiction, but that after that they might select a depositary without the approval of any court, if they exercised reasonable care, prudence, and diligence in making the selection, and the selection was one which the court would have approved had its approval been requested prior to the deposit.

It undoubtedly did decide that, after the chancery court assumed jurisdiction of the trusts created by the will, that the executors in making the deposit were only liable for a failure to exercise reasonable diligence, care, and prudence in selecting the depositary, but the reasoning which led to that conclusion would also support the conclusion that the same degree of care and diligence which would relieve an executor administering an estate under the direction of a court of chancery from liability for loss resulting from the failure of a depositary would also relieve him from such liability for a loss occurring under like circumstances while administering the estate in an orphans’ court.

In Woerner on The American Law of Administration, 1115, the general rule is stated in this language: “It has already been mentioned, that where an executor or administrator deposits money in bank in his own name, he thereby makes himself responsible for all losses by the failure of the bank. Yet trust funds should not be kept in the administrator’s house, unless the circumstances are such as to make it as safe there as anywhere. If deposited in a bank to the credit of the estate, for a reasonable time, not as a loan, but for safe keeping, he will not be liable for a subsequent loss occasioned by the failure of the bank, provided that at the time of the deposit it is in good reputation, and nothing occurs to indicate such weakness or insolvency as would induce a prudent person to withdraw the funds.” The same author in Woerner*s American Law of Guardianship, p. 206, says: “A guardian is not responsible for the loss of funds occurring by reason of the failure of a bank in which he had deposited the ward’s funds, unless by the exercise of reasonable diligence and prudence he might have known it to be in an unsafe condition.”

Cases such as Carlysle v. Carlysle, 10 Md. 440, which dealt with the investment of trust funds by a guardian, are not completely analogous to the mere deposit of funds for safekeeping, and are not therefore in conflict with the rule that where such a deposit is made the fiduciary, even though under the jurisdiction of an orphans’ court, is not responsible for the loss thereof resulting from the failure of the depositary, if in selecting it he exercised reasonable care, diligence, and prudence, and his private judgment was identical with that of the court.

The guardian was under a duty to deposit the money in bank. Dalrymple v. Gamble, 68 Md. 156, 167, 11 A. 718. Nevertheless the court in its discretion could have refused to select a depositary (Ex parte Walsh, 26 Md. 495, 498), so that its assent is not in all cases an; indispensable prerequisite to a valid deposit, although it may be regarded as essential to a valid investment, for there is this distinction between a deposit, which ordinarily is a mere incident of custody, and an investment, which involves converting the assets of the estate into a different form.

Since there is no statute covering the case requiring any different conclusion, and since it appears that the judgment of the Orphans’ Court and the “private” judgment of the guardian were identical, and it may be assumed from that fact that she did exercise reasonable care, prudence and diligence in selecting a depositary, the exceptions to the guardian’s account should have been overruled, and the account ratified.

The order from which the appeal was taken will therefore be reversed, the exceptions overruled and the account ratified.

Order reversed, exceptions to the guardian’s account of Irene A. Fay overruled, account ratified and confirmed, costs to be paid by the appellant.