Ali v. CIT Technology Financing Services, Inc.

EYLER, JAMES R., J. This appeal is from a judgment entered by the Circuit Court for Prince George’s County against Ahmed M. Ali, appellant, and in favor of CIT Technology Financing Services, Inc., appellee, in the amount of $190,725.85 in damages and $21,977.95 in prejudgment interest. Appellant contends that the trial court should have dismissed the suit because it was barred by the applicable statute of limitations; the trial court erred when it calculated the amount of damages; and the trial court erred when it calculated pre-judgment interest. We shall vacate the judgment, affirm as to liability, but remand to the circuit court for assessment of damages. Factual and Procedural Background In June, 1997, appellee’s predecessorAessor entered into an equipment lease with appellant.

The lease required appellant to pay $3,275.60 per month for 60 months. The total amount of rental payments due under the lease was $196,536. In May, 1999, appellant defaulted. Appellee sent a letter dated August 10, 2000, demanding that appellant pay $158,760.86 by August 20, 2000.

Presumably, appellee calculated this amount under the terms of the lease, which allowed appellee to “declare all Rental Payments due hereunder due and payable,” and to take possession of the equipment. The amount claimed by appellee was for the accelerated rental payments, late charges, and the value of the unreturned equipment. Appellant failed to pay all or any portion of that amount by August 20, 2000. On June 11, 2001, appellant filed a chapter 11 petition in bankruptcy in the United States Bankruptcy Court for the District of Maryland.

Appellee could not pursue its claim ²⁷³ outside of the bankruptcy proceeding because of the automatic stay provision in 11 U.S.C. § 362 . In 2002, appellee filed a claim in the bankruptcy proceeding for unsecured debt in the amount of $158,760.86, and in 2003, a claim for administrative expenses in the amount of $85,165.70, which included the cost of appellant’s post-petition use of the equipment. In July, 2003, appellee moved to lift the stay. In September 2003, the bankruptcy court granted the motion and provided in its order that the stay of § [ ]362 of the Bankruptcy Code is terminated and, with respect to the Lease Equipment, [appellee] is authorized to exercise all of its rights under the Lease and applicable non-bankruptcy law including, without limitation, foreclosure, sale and repossession; and it is further [ordered], that [appellant] shall surrender the Lease Equipment ... to appellee ... within 10 days of the date hereof [and] that [appellant] shall allow [appellee] ... access to the Lease Equipment to the extent necessary to carry out the rights granted to [appellee]....

Appellant continued to possess the equipment without making any monthly payments to appellee. In August of 2004, the parties entered into a stipulation and proposed consent order that allowed appellee a general unsecured claim in the amount of $190,725.86, allowed appellee an administrative claim in the amount of $53,200, and authorized appellant to execute all documents necessary to consummate the transactions referred to in the stipulation. The bankruptcy court executed the consent order, thus allowing both claims. 1 The transactions referred to in the stipulation related to the administrative claim. These transactions included a payment schedule, a confessed judgment note, a transfer of the equipment’s title to appellant, and appellant’s grant of a security ²⁷⁴ interest in the equipment to appellee.

Appellant paid appellee approximately $26,200 under the note but failed to pay the remainder of the money due. In accordance with a confession of judgment provision in the note, appellee obtained a confessed judgment for $30,400 against appellant in a separate action, which is not before us. Appellee did not recover any portion of the unsecured claim by way of a distribution in the bankruptcy proceeding. On July 12, 2006, the bankruptcy court dismissed appellant’s bankruptcy case without discharge of debts.

In January, 2007, appellee filed this suit against appellant for breach of the lease. In March, 2008, appellee filed an amended complaint, in which it added a count seeking to enforce the stipulation and consent order. On April 16, 2008, the circuit court heard the case nonjury. Appellee argued that appellant had breached the lease and that appellee was entitled to the accelerated amount of unpaid rental payments, 18% interest, the value of the equipment, and reasonable attorney’s fees.

The claim tracked the language in the lease. In the alternative, appellee argued that the court should find liability and assess damages based on appellant’s failure to fulfill the terms of the stipulation and order. Appellant acknowledged breach of the lease, but argued that the suit was barred by limitations, the stipulation and order could not be the basis for liability, and the dollar amount in the stipulation and order did not reflect credit for all payments. Appellee introduced into evidence, inter alia, the lease, and presented testimony relating to the breach of lease, the consequences of its breach, and the amounts due under the lease, which included the remaining lease payments, taxes, late charges, the value of the equipment, and attorney’s fees.

Appellee also introduced evidence of the amount of attorney’s fees incurred by appellee during the bankruptcy proceeding and thereafter, until the date of trial. Additionally, appellee introduced the stipulation and consent order. In an order dated May 27, 2008, and docketed May 30, 2008, the circuit court found that appellant, in May 1999, had ²⁷⁵ defaulted under the lease. The court held that the three year period of limitations contained in Maryland Code (2006 Repl.

Vol.), § 5-101 of the Courts and Judicial Proceedings Article (“CJP”) was tolled during the pendency of the bankruptcy proceeding, because federal bankruptcy law incorporated relevant State statutes, including the tolling provision in § 5-202 of the same Article. Section 5-202 provides: If a debtor files a petition in insolvency which is later dismissed, the time between the filing and the dismissal is not included in determining whether a claim against a debtor is barred by the statute of limitations. The court, implicitly referring to the stipulation and consent order, also stated, in pertinent part, “[t]he parties rejected the lease, by agreement, in August, 2004. The parties further agreed that [appellee’s] debt to [appellant] was $190,725.85.

Prejudgment interest accruing from the date of dismissal of the bankruptcy matter is $21,977.95. [Appellant] remains free to retrieve the property, and no reason for its failure to do so was proffered.” This timely appeal followed. Issues Presented Appellant presents the following questions, quoted from his brief: I. Whether the [court] erred in granting judgment in favor of appellee because the applicable statute of limitations had expired?

II

Whether the [court] erred in granting judgment for an amount which exceeded the amount actually owing under the lease?

III

Whether the [court] erred in granting an award of prejudgment interest without any calculation of interest having been submitted and subjected to challenge? Standard of Review Because the trial was nonjury, ²⁷⁶ we give deference to the factual findings of the trial judge and will reverse only for clear factual error. A factual finding is clearly erroneous if there is no competent and material evidence in the record to support it. The legal conclusions reached by the circuit court are not accorded deference on appeal, however, and instead are reviewed de novo.

Hoang v. Hewitt Ave. Ass., LLC, 177 Md.App. 562, 576 , 936 A.2d 915 (2007) (citations omitted). Discussion I. Statute of Limitations A. Contentions In this case, the applicable period of limitations is three years. CJP § 5-101. 2 The parties agree that the statute of limitations began to run in May 1999 when appellant defaulted under the lease.

In June 2001, when the petition in bankruptcy was filed, approximately 25 months had passed, leaving 11 months to file suit. The automatic stay was in effect from June 2001 until September 2003. See 11 U.S.C. § 362 . Appellant argues that, while the period of limitations may have been tolled under federal law, by operation of 11 U.S.C. § 108 (c), 3 it was tolled only during the time the automatic stay was in effect.

According to appellant, appellee was free to take action in September 2003, when the stay was lifted, but did not file suit until January 2007, almost five and one-half years after the default. Appellant, after observing that CJP § 5-202 was enacted in 1814 when there was no federal ²⁷⁷ bankruptcy statute and state insolvency laws governed, argues that those insolvency laws have since been repealed and CJP § 5-202 is irrelevant and of no effect today. Appellant also argues that, by its plain language, the statute applies only to insolvency proceedings, which do not include bankruptcy proceedings. Appellee contends that CJP § 5-202 is still good law, that the statute’s effect was to toll the statute of limitations during the pendency of the bankruptcy proceeding, and that limitations resumed running when the bankruptcy court dismissed the bankruptcy petition, in July 2006.

Thus, appellee concludes that the suit in January, 2007 was timely. B. Historical Perspective We pause to briefly review the history of state insolvency laws and federal bankruptcy law because it provides a context for understanding CJP § 5-202. In England, prior to the birth of the United States, a “bankruptcy” proceeding was involuntary, applied only to traders for commercial purposes, and the proceeding was one in which debts were discharged. Bankruptcy was punishable, at times, by death.

Imprisonment for nonpayment of debts was common. England had a separate insolvency system for discharging persons from imprisonment for debts, upon surrendering all property to the creditors. Charles Warren, Bankruptcy in United States History 7 (1935); See David A. Skeel, Jr., Debt’s Dominion: A History of Bankruptcy Law in America 27 (2001). Thus, the concept of “bankruptcy” was involuntary, included the discharge of debts, and was limited to traders.

In this country, the appropriateness and composition of bankruptcy and insolvency laws was debated throughout the late 1700s, so much so that the topic was discussed during the Federal Convention of 1787. See Warren, supra at 3-4. As a result of the debate at the Federal Convention, Clause 4 of Section 8 of Article I of the Constitution was added, providing ²⁷⁸ Congress with the power “[t]o establish ... uniform laws on the subject of bankruptcies throughout the United States.” The meaning of this clause, including whether it was limited to bankruptcy as the term was originally used, and the extent of Congress’ power, including its preemptive effect, was debated for the next one hundred years. See Skeel, supra, at 23-47 (2001); see generally Warren, supra.

In general, the nation debated whether the clause only applied to merchants and traders, like bankruptcy laws in England, or whether it applied to all classes of people, including corporations, like many state insolvency laws. Warren, supra, at 6. The nation debated various other issues, including whether the clause only allowed for involuntary bankruptcy, as in England, or whether the clause allowed for both voluntary and involuntary bankruptcy, like many state insolvency laws; whether debts incurred prior to the effective date of the law could be discharged; and the availability of state exemptions. See id.

In the late 1700s, only a few states had insolvency laws, but many more were enacted in the 1800s. There was no clear line of demarcation between bankruptcy and insolvency as there had been in England. Id. at 7, 13. Generally, the state laws extended to all debtors but did not discharge debts.

Rather, they provided for release from imprisonment, staying proceedings by creditors, and appraising the debtor’s assets to protect fair value. Id. See John L. Dorsey, A Treatise on the American Law of Insolvency 5-6 (1832); Warren, supra, at 6-7, 13, 146-49. The question of the extent of Congress’s power, i.e., whether it preempted the field, was a continuing issue.

In any event, the intensity of bankruptcy and insolvency debate was tied to the ebb and flow of the economy throughout the 1800s: proponents called for national bankruptcy laws during periods of recession and depression, but such movements lost momentum in prosperous times. See Skeel, supra, at 24-28. All the while, states enacted insolvency laws, generally granting rights to debtors, to fill the void left by the lack of a national bankruptcy law. Id. ²⁷⁹ For example, Congress passed the first national bankruptcy bill in 1800 following the burst of a real estate bubble, commercial losses due to the capture of ships by the French, and rampant business failures in New York, Philadelphia, and, notably, Baltimore.

Bankruptcy Act of 1800, ch. 19, 2 Stat. 19 ; Warren, supra, at 18. This first national bankruptcy bill lasted only three years. Act of Dec. 19, 1803, ch. 6, 2 Stat. 248 . Congress repealed the bill in 1803 because the public generally was dissatisfied with the bill.

Warren, supra, at 19-20. In part, the public was dissatisfied with the bill because debtors fraudulently manipulated the bill to avoid paying creditors. Id. Following the repeal of the Bankruptcy Act of 1800, states continued to enact and maintain insolvency laws.

Shortly after the repeal of the federal statute, a federal court held a Pennsylvania insolvency law unconstitutional because it purported to discharge prior debts and because it was preempted by the authority given to Congress. Id. at 22-23. A New York court reached a different conclusion with respect to a New York statute. Id.

In 1819, the United States Supreme Court, in an opinion by Chief Justice Marshall, held that New York’s insolvency law was unconstitutional as applied to prior contracts. Sturges v. Crowninshield, 4 Wheat. 122 , 17 U.S. 122 , 4 L.Ed. 529 (1819); Warren, supra, at 24. A Louisiana insolvency law also was declared invalid the same day. M’Millan v. M’Neill, 4 Wheat. 209 , 17 U.S. 209 , 4 L.Ed. 552 (1819); Warren, supra, at 24.

A tough recession in the 1820s revived the debate concerning a national bankruptcy statute. Warren, supra, at 25-45. The debate came to a head in 1827, when a heated effort to enact a national bankruptcy statute was defeated. Id. at 40-45.

At that time, whether state insolvency laws could apply to prior contracts and whether they were preempted in any event were still open questions. Following the defeat of a national statute, state insolvency laws gained momentum. Id. at 51-52. The Supreme Court bolstered this momentum with its 1827 ruling in Ogden v. Saunders, 12 Wheat. 213 , 25 U.S. 213 , 6 L.Ed. 606 (1827), upholding the states’ power to pass ²⁸⁰ insolvency laws that applied to future contracts.

In that time period, the state laws varied widely with respect to the type of property subject to the insolvency proceeding, treatment of preferences, availability of stays, availability of discharge from imprisonment, 4 the discharge of debts, and availability of an appraisal remedy. Id. at 36. None of the state laws discharged a debtor from debts due to citizens of states other than the state in which the law in question was enacted. Id. at 91.

Nevertheless, another depression renewed the debate over a national bankruptcy statute, and Congress passed such a statute in 1841. Bankruptcy Act of 1841, ch. 9, 5 Stat. 440 ; Warren, supra, at 72. Unlike the previous statute, the 1841 statute provided for voluntary bankruptcy and extended to classes of debtors other than traders and merchants. See Bankruptcy Act of 1841, ch. 9, 5 Stat. 440 Warren, supra, at 72-79.

Although the bill was enacted, and was generally successful, opposition grew because it was expensive to administer, paid very small dividends to creditors, and many viewed it as duplicating state insolvency proceedings. Warren, supra, at 81-82, 84-85. Consequently, Congress repealed the law a little over one year after its enactment. Act of Mar. 3, 1843, ch. 82, 5 Stat. 614 .

In the decade that followed, states, including Maryland in 1854, passed additional laws related to insolvency. Skeel, supra, at 25; see also Warren, supra, at 91. In what was becoming a pattern, Congress passed yet another bankruptcy statute in 1867 following economic and political turmoil. Bankruptcy Act of 1867, ch. 176, 14 Stat. 517 ; Warren, supra, at 95-105.

Shortly after Congress enacted the statute, however, opponents began calling for its repeal. Warren, supra, at 109. Like its predecessors, the statute was repealed, but this time it lasted 11 years—until 1878. Id. at 122.

During all of this time, bankruptcy and insolvency proceedings continued to be separate concepts generally, the ²⁸¹ distinction turning on the ability or lack thereof to discharge debts, although the concepts were increasingly blurred and the terms were not used consistently. By the late 1800s, it was clear that many state insolvency laws were unconstitutional due to the prohibition against states passing “law[s] impairing the obligation of con-tracts____” U.S. Const, art. I, § 10; see also Warren, supra, at 88. Nevertheless, despite that and preemption issues, many state insolvency laws remained active simply because they were not challenged.

Warren, supra, at 148. The financial crisis of 1893 produced yet another national bankruptcy statute in 1898. The 1898 statute applied to all classes of debtors, and provided for voluntary and involuntary bankruptcy. See Act of July 1, 1898, ch. 541, 30 Stat. 544 ; Warren, supra, at 140-41.

In 1902, not long after the passage of the 1898 national bankruptcy statute, the Supreme Court made clear that Congress possessed plenary power over bankruptcies, broadly defined. Hanover Nat’l Bank v. Moyses, 186 U.S. 181 , 22 S.Ct. 857 , 46 L.Ed. 1113 (1902). After over 100 years of uncertainty about the scope of Congress’ power in the context of bankruptcies, it was clear that Congress not only possessed plenary power over bankruptcies as originally understood in 1786, but it also possessed plenary power, as presently understood, over a wide range of activities that were, at one time, the subject of insolvency proceedings. Since then, bankruptcy law has been stable and has withstood complete repeal, although it has been amended and replaced on several occasions, perhaps most notably in the 1930s and the 1970s.

See generally Skeel, supra, at 48-238. Modern bankruptcy practice has included voluntary and involuntary proceedings and liquidation, rehabilitation, and reorganization measures for individuals and business entities, including corporations. C. The Maryland Statute Although it is clear now that Congress has plenary power over bankruptcies, as broadly and presently defined, Congress ²⁸² has not abrogated all state law on the subject. For example, 11 U.S.C. § 108 (c) provides: (c) Except as provided in [ 11 U.S.C. § 524 ], if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement jaeces a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under [ 11 U.S.C. §§ 1201 , 1301], and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of— (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) 30 days after notice of the termination or expiration of the stay under [ 11 U.S.C. §§ 362 , 922, 1201 or 1301], as the case may be, with respect to such claim.

(Emphasis added). In essence, subsection (c) provides that if state law fixes a period for commencing a civil action in a nonbankruptcy court against the debtor, and the period has not expired before the date of filing of the petition in bankruptcy, then the period does not expire until the later of (1) the end of that period, including any suspension of such period occurring on or after the commencement of the case, or (2) thirty days after the stay is lifted. As an aside, the courts that have interpreted section 108(c) are not in agreement as to its meaning, specifically, whether it tolls a statute of limitations during the existence of a stay with a minimum of thirty days after the stay is lifted, e.g., Kertesz v. Ostrovsky, 115 Cal.App.4th 369 , 8 Cal.Rptr.3d 907 (2004), or whether it does not toll but provides a minimum of thirty days after a stay is lifted. E.g., National Bank of Commerce Trust & Savings Ass’n, 256 Neb. 679 , 592 N.W.2d 477 (1999).

We need not decide that issue because, in either event, the complaint was not timely. Thus, the outcome on the limitations issue turns on the effect of CJP § 5-202 because, absent CJP § 5-202, the ²⁸³ complaint was filed too late. If the period of limitations was tolled during the pendency of the bankruptcy proceeding, the complaint was timely. Appellant’s arguments are interrelated.

Appellant’s primary argument is that CJP § 5-202 was enacted in 1814 when no federal bankruptcy law existed, that its intent was to apply to state insolvency proceedings, and that it is archaic and of no effect. In 1805, Maryland enacted an insolvency law. 5 Under that law, an insolvent was defined as a person unable to liquidate his debts. Ch. 110 of the Acts of 1805; Dorsey, supra, at 18. A debtor could file a petition, and offer his property to creditors.

Dorsey at 31. A judge, after determining that the debtor had not acted fraudulently, in bad faith, or the like, and had complied with all requirements contained in the law, could discharge the debtor from prison and also from certain debts, the latter with the consent of certain creditors. Id. at 3, 31, 77. Maryland amended its insolvency laws from time to time.

One such amendment, which is relevant to our analysis, occurred in 1814. At that time, the General Assembly enacted ch. 122, Acts of 1814. Section 1 of that statute limited the ability of courts to continue pending petitions from one court session to another. Section 2 provided that, upon dismissal or withdrawal of a petition, or a decision adverse to the petitioner, it was not necessary for a creditor to revive any judgment suspended by the petition.

Section 3 provided: “That the time intervening between the petitioning of any of said debtors and the time that any of said petitions may be dismissed, shall not be computed on any plea of limitation so as to defeat any claim of any person against such debtor.” Ch. 122 of the Acts of 1814; Dorsey, supra, at 67-68. We conclude from the historical context that the General Assembly enacted this provision to address the public’s complaint that debtors manipulated the bankruptcy and insolvency processes to avoid paying creditors by entering bankruptcy, waiting for the stat ²⁸⁴ ute of limitations to expire, and subsequently dismissing the bankruptcy proceeding. See also Dorsey, supra, at 15. We also conclude that, at the time of its enactment, this section clearly referred to state insolvency proceedings because no federal bankruptcy statute existed.

At some point in time, the General Assembly placed the vast majority of insolvency laws in Art. 47, but placed the statute in question in Article 57, with other limitations statutes. At some point prior to 1860, the General Assembly slightly changed the wording of the provision to read: “The time intervening between the petitioning of an insolvent debtor, and the time when his petition may be dismissed, shall not be computed on any plea of limitation so as to defeat the claim of any person against such debtor.” 6 See Maryland Code of 1860, Art. 57, § 8. At a later point, the General Assembly moved this provision to Art. 57, § 9. Art. 57, § 9 remained unchanged until 1973, when the General Assembly recodified Art. 57, § 9 to CJP § 5-202.

Ch. 2, § 1 of the Acts of 1973 (1st Sp.Sess.). When doing so, the General Assembly changed the wording of the statute to its current form. A “Revisor’s Note” explained that “[t]his section is new language derived from Art. 57, § [ ]9.” Id. The preface to the bill further explained that the bill was meant “to revise, restate, and recodify the laws of this State pertaining to courts and proceedings therein....” Id.

CJP § 5-202 exists unchanged today. Two years later, in 1975, as part of a recodification of the laws relating to commercial law, the General Assembly repealed Art. 47—the article containing the insolvency laws—, except for Art. 47, §§ 8 and 14, which it recodified in Maryland Code (1975), §§ 15-101-102 of the Commercial Law Article (“CL”). Ch. 49, § 3 of the Acts of 1975. A General Revisor’s Note explained: In revising this subtitle, the Commission to Revise the Annotated Code concluded that the provisions of present ²⁸⁵ Art. 47, except those as revised and not contained in § § 15-101 and 15-102 of this subtitle, are preempted by the Federal Bankruptcy Act.

Accordingly, these provisions of Art. 47 are proposed for repeal. Id. A Revisor’s Note to § 15-101 further explained: While Art. 47 is proposed for repeal as obsolete, the two sections of Art. 47 nevertheless are contained elsewhere in the common law, as well as in Art. 23, § [ ]81, and therefore should be retained. This section [15-101] sets forth the law as it has been applied in insolvency proceedings, whether brought pursuant to Art. 23 or Art. 47.

Id. Although obviously belated, the repeal of Art. 47 reflected a recognition of the pervasive role of federal bankruptcy law, the limited role of states in bankruptcy, and the outdated nature of Maryland’s insolvency laws. The language of CL §§ 15-101, 15-102, 15-103 recognizes the pervasiveness of the federal bankruptcy statute, and supplements the federal statute with State procedures, but only to the extent not inconsistent with federal bankruptcy law. Other relevant State statutes are consistent with and supplemental to the federal bankruptcy code, such as those discussed in the next paragraph.

Appellant points out that CJP § 5-202 only applies when “a debtor files a petition in insolvency.” State laws that interact with federal bankruptcy law define the term insolvency and its variants for state law purposes. Those definitions include, either explicitly or implicitly, insolvency for purposes of bankruptcy under federal bankruptcy law. For example, CL (2002 Repl.Vol.), § 1-201(22) defines “insolvency proceedings” as “any assignment for the benefit of creditors or other proceedings intended to liquidate or rehabilitate the estate of the person involved.” 7 Bankruptcy certainly is a proceeding in ²⁸⁶ tended to liquidate or rehabilitate the debtor’s estate. Additionally, CL § 1-201(23) defines an “insolvent” as “[a] person ... who either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due or is insolvent within the meaning of the federal bankruptcy law.” 8 Title 15 of the Commercial Law Article addresses aspects of debt collection.

Section 15-101, which addresses preferences in proceedings involving an assignment for the benefit of creditors or receiverships, uses bankruptcy terms, including insolvency and void and voidable preferences, all as defined in the bankruptcy code. If the General Assembly had intended there be no tolling provision, it would have repealed the statute. Instead, unlike almost all of Art. 47, CJP § 5-202 and its predecessors, it survived many legislative sessions and many code revisions, including code revisions in 1939, 1951, 1957, and the more recent codification of CJP. By reenacting the statute and not changing its substance on multiple occasions, we can presume that the General Assembly intended that it remain in effect.

Federal bankruptcy law has expanded to include not only traditional bankruptcy but also traditional insolvency proceedings. Moreover, and very relevant to our analysis, is that the policy behind CJP § 5-202 appears to be applicable to bankruptcies. We conclude that the General Assembly, by retaining and reenacting the statute in question,