Review of Maryland Law- State Courts: July 14, 2005

Daily Record, The (Baltimore), Jul 14, 2005 by Staff Reports

Banking

Negligence action by drawer against depository bank

BOTTOM LINE: A drawer bank may bring a negligence action against the depository bank for its violation of the standard of ordinary care in the handling of a check, but contributory negligence may bar the claim.

CASE: Farmers Bank of Maryland v. Chicago Title Insurance Company, No. 0160, September Term, 2004 (filed July 7, 2005) (Judges Hollander, ADKINS & Bishop (retired, specially assigned)).

FACTS: In November 1997, Mark Shannahan, a customer of Farmers Bank of Maryland, refinanced his Annapolis home (the property) through Armada Mortgage Corporation (Armada). First Equity Title Corporation, an agent of Chicago Title Insurance Company, conducted Shannahan's settlement. A later title examination revealed the existence of two liens on the property that had to be satisfied in order to give Armada first priority after refinancing. One such lien, the subject of this litigation, was an Indemnity Deed of Trust (IDOT) granted by Shannahan for the benefit of Farmers.

Before settlement, First Equity received from Armada two payoff statements which had been completed by a loan assistant for Farmers. One payoff statement indicated the existence of a loan dated November 21, 1996, in the original high credit amount of $50,000, with a balance as of October 23, 1997, of $45,104.47. On this first payoff statement, the loan assistant made a circled notation of 2nd DOT above the high credit amount.

The second payoff statement indicated the existence of a line of credit loan dated March 25, 1970, in the original high credit amount of $40,000, with a balance as of October 23, 1997, of $40,760.83 (line of credit debt). On this second payoff statement, the loan assistant made a circled notation of 3rd DOT above the high credit amount.

When comparing the title examination with the payoff statements, First Equity initiated an inquiry with the title examiner to determine the existence of the 3rd DOT. The title examiner reported that a review of the Land Records of Anne Arundel County did not reveal the existence of a third deed of trust. That report caused First Equity to mistakenly believe that the balance of the debt secured by the IDOT was only $45,575.70.

Neither the title examiner nor First Equity correctly read the language in the IDOT providing that the $40,000 line of credit Shannahan maintained at Farmers was also secured by the lien of the IDOT. First Equity believed that line of credit debt to be unsecured. Accordingly, on December 1, 1997, First Equity issued a check in the amount of $45,575.70 (Check 1) and mailed it directly to Farmers along with a copy of the first payoff statement and instructions to pay off the 2nd DOT. The letter accompanying Check 1 did not request that the IDOT be released. It also did not mention the $40,760.83 line of credit.

Following settlement, First Equity delivered two checks to Shannahan, one made payable to Shannahan in the amount of $87,464.11 (representing Shannahan's cash-out from the refinancing)(cash-out check), and a second made payable to Farmers in the amount of $40,760.83 (representing the outstanding balance of the line of credit)(Check 2). First Equity gave Check 2 to Shannahan along with a letter instructing Farmers to pay off, and then close out, the line of credit. That letter, unfortunately, was never delivered to Farmers.

On December 3, 1997, Shannahan took the cash-out check and Check 2 to Farmers and deposited the cash-out check into his personal account. In addition, Shannahan indorsed Check 2 and directed the bank to deposit that check into his personal account as well. Shannahan did not give the bank First Equity's instructions that Check 2 be used to pay off, and then close out, the line of credit.

Shannahan was allowed to deposit Check 2, made out to Farmers, into his personal account. Farmers then placed its indorsement on the back of Check 2, and the funds were subsequently withdrawn from First Equity's checking account at Allfirst Bank. Check 2 was deposited into Shannahan's account before Farmers negotiated Check 1.

Around July 1998, Farmers initiated foreclosure proceedings with respect to the IDOT because the line of credit balance was in default. At that time, First Equity learned that Farmers still had a lien on the property because, according to Farmers, Shannahan had not paid off the line of credit, which was secured by the IDOT. First Equity then notified Allfirst about Check 2 and requested that Allfirst recredit its account. Allfirst refused to do so.

First Equity subsequently filed a declaratory judgment action against Farmers and Allfirst. Both banks filed a counter-complaint for interpleader against First Equity. The circuit court ruled in favor of First Equity and ordered Farmers to release the lien of its IDOT from the property. The circuit court also ruled that Allfirst was not liable for debiting funds from First Equity's checking account when it processed Check 2. First Equity filed a cross- appeal on this issue. The Court of Special Appeals affirmed in part and reversed in part and remanded.