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REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 0160 September Term, 2004

FARMERS BANK OF MARYLAND, ET AL. v. CHICAGO TITLE INSURANCE COMPANY, ET AL.

Hollander, Adkins, Bishop, John J., Jr., (Retired, Specially Assigned) JJ.

Opinion by Adkins, J.

Filed: July 7, 2005

In this case we study negligence and the economic damages rule, negotiable instruments and the loss allocation rules of the Uniform Commercial Code regarding drawers, drawees, and depositary banks. question We decide that it is necessary to address the novel of whether a drawer can sue a depositary bank in

negligence, because the Uniform Commercial Code's loss allocation rules are largely inapplicable. We decide that it can, under the

particular circumstances of this case. FACTS AND LEGAL PROCEEDINGS In November 1997, Mark Shannahan, a customer of Farmers Bank of Maryland ("Farmers"), refinanced his Annapolis home ("the First

property") through Armada Mortgage Corporation ("Armada").

Equity Title Corporation ("First Equity"), an agent of Chicago Title Insurance Company,1 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

For purposes of this appeal, we shall use "First Equity" to refer to Chicago Title Insurance Company, as well as its agent, First Equity Title Corporation.

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$50,000.00, 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 $40,000.00, 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. This

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 $40,000.00 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

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Check 1 stated that "[t]he enclosed check is to pay this account in full." It 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: (1) a check made payable to Shannahan in the amount of $87,464.11 (representing Shannahan's "cash-out" from the

refinancing)("cash-out check"); and (2) a check 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. This letter,

unfortunately, was never delivered to Farmers. On December 3, 1997, Shannahan took the cash-out check and Check 2 to the West Street branch of Farmers. Upon arrival at the

bank, Shannahan deposited the cash-out check into his personal account at Farmers. In addition, Shannahan indorsed Check 2 and

directed the bank to deposit that check into his personal account as well. Shannahan did not give Farmers First Equity's

instructions that Check 2 be used to pay off, and then close out, the line of credit. After the teller discussed the deposit of Check 2 into

Shannahan's account with the bank manager, who in turn allegedly discussed the situation with a loan officer, Shannahan was allowed to deposit Check 2, made out to Farmers, into his personal account.

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Then Farmers placed its indorsement on the back of Check 2, and the funds were subsequently withdrawn from First Equity's checking account at Allfirst Bank ("Allfirst"). 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.2 At this 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 in the Circuit Court for Anne Arundel County. Both banks filed a Counter-Complaint for Interpleader

against First Equity. After a bench trial, the circuit court ruled in favor of First Equity and ordered Farmers to release the lien of its IDOT from the property. Farmers filed a timely appeal.

The circuit court also ruled that Allfirst was not liable for debiting funds from First Equity's checking account when it

processed Check 2. issue.

First Equity filed a cross-appeal on this

Appellant Farmers asks us to decide

Armada, the refinancing lender, also desired to foreclose, as the mortgage was in default. 4

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I. Whether the lower court erred in finding that Farmers negligently failed to apply the proceeds of a check issued by First Equity and made payable to Farmers to an outstanding balance on a line of credit, absent a finding of a duty owed by Farmers to First Equity[.] II. Whether the lower court erred in failing to consider whether First Equity's contributory negligence barred the relief it obtained. Appellee/cross-appellant First Equity asks us to decide: III. Whether the lower court erred in finding that Allfirst Bank did not violate Md. Code (1975, 2002 Repl. Vol.), section 4-401 of the Commercial Law Article ("UCC") when it debited Check 2 from First Equity's account. Appellant briefs, Farmers make and no cross-appellee claims against Allfirst each filed separate Both are

but

other.

represented by the same counsel. CIRCUIT COURT'S DECISION After a trial on the merits, the circuit court made the following findings and conclusions: Although Shannahan was in possession of [Check 2,] the instrument was payable to [Farmers] and not to bearer. Therefore, Shannahan was not a holder of the instrument and thus was unable to properly negotiate the check to the credit of his personal account. MD Code Ann., Com. Law I

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