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Rupp v. M. S. Johnston Co.

Decided: July 10, 1961.

RUPP ET AL., TRUSTEES, ETC., ET AL.
v.
M. S. JOHNSTON COMPANY, INC.



Appeal from the Circuit Court for Frederick County; Schnauffer, C. J.

Henderson, Hammond, Prescott, Horney and Marbury, JJ. Henderson, J., delivered the opinion of the Court.

Henderson

The James T. Galloway Company was incorporated in 1957 by James T. Galloway and Alfred F. Flynn, Jr., who took equal shares of its stock. K & G Construction Company had been incorporated the previous year, under a similar stock arrangement, and had been engaged in the construction of cottages on a fifty-acre tract of land near Frederick. Galloway and Flynn were officers of both companies. In the latter part of 1959, Galloway and Flynn decided to build an apartment project on a portion of the tract. In September, 1959,

the Galloway Company applied to Metropolitan Life Insurance Company, through a mortgage brokerage firm, Weaver Bros., Inc., for a twenty-year first mortgage loan on the project, when completed, and received a commitment. On December 29, 1959, K & G Company conveyed the site, about ten acres, to the Galloway Company. A few days later Weaver Bros., Inc., acting for the Galloway Company, applied to the Maryland Trust Company (later merged with Baltimore National Bank) for a one-year construction mortgage. A deed of trust to Rupp and Tinley to secure a loan of $300,000 was executed and then recorded on January 27, 1960. Construction proceeded in due course, and a first advance payment became due and was made on February 23, 1960. Pursuant to the loan agreement, payments were to become due from time to time, according to the stages of construction, upon certification that the proper stage had been reached and that there were no intervening liens. Payment was made by crediting the amount of each advance to the checking account of the Galloway Company. In most cases the amount so credited was withdrawn by the Galloway Company and deposited to the credit of K & G Company in another bank and ultimately disbursed by K & G Company as purchasing agent for the Galloway Company.

M. S. Johnston Company, Inc., submitted to Galloway a proposal to furnish air conditioning and heating units for the apartment project on March 28, 1960. This was on a printed form with a clause retaining title until payment. The document was executed on March 30, 1960, and signed by the vendor and K & G Construction Company only, as vendee. Mr. Lusby, the engineer and salesman of the vendor, made inquiry as to the credit of the two companies, which he knew were somehow related, but did not inquire as to which company held title to the tract where the construction was in progress, although this was a matter of public record. He made no inquiry and received no information as to the recorded deed of trust. Apparently he chose to deal with K & G Company because he was familiar with its previous work in constructing cottages. The heading of the contract listed the names of both companies, but it was signed by only one.

Lusby did not record the conditional contract of sale until July 21, 1960. In the meantime, some sixteen units had been installed and billed to K & G Company on June 29, 1960. Between that date and August 1, 1960, four payments were made to the Galloway Company by Baltimore National Bank pursuant to its loan agreement.

Failing to obtain payment, the vendor offered its conditional sales contract for record. It was indexed against K & G Company. No memorandum was furnished, pursuant to the provisions of Code (1957), Art. 21, sec. 66. The clerk, however, made entries in the conditional sales docket showing the date, names of vendor and vendee, entered the word "equipment" under the heading "Description", and the amount. There was no reference to the place where the "equipment" was located. There was, however, a reference to the file (by number) where the document itself was placed. The instrument itself was not transcribed or recorded in any other fashion. There was a cross-index reference entered in the land records under the name of K & G Construction Company, the vendee.

On August 12, 1960, K & G Company paid $2,000 on account to its indebtedness of some $14,000 to the vendor. Shortly thereafter the officers of the Bank learned that the project was in difficulty. Mr. Rupp, the officer in charge of the account, was informed by Weaver Bros., Inc., that an additional $60,000 would be needed to bring utilities to the site. Interest on the loan was overdue and unpaid. After investigation, during which it developed that various suppliers were unpaid and the matter could not be worked out, default was declared, suit for foreclosure was instituted on October 14, 1960, and sale advertised for November 2, 1960.

The appellee filed a petition to intervene, claiming title to the sixteen units it had installed. The chancellor, after hearing, found in favor of the petitioner and pursuant to agreement of the parties, permitted the units to remain in the premises and be sold by the trustees. The order appealed from provided that $7,500 out of the proceeds should be paid to the petitioner ahead of all other claims and costs.

The appellants contend (1) that the Bank is ...


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