Allied Investment Corp. v. Jasen

CATHELL, Judge. Allied Investment Corporation and Allied Venture Partnership, petitioners, appeal from the decision of the Circuit Court for Montgomery County dismissing, under Maryland Rule 2-322, their complaint against Peter O. Jasen, respondent, for declaratory judgment and an equitable accounting. Although the facts are somewhat torturous, the business transactions at issue here, stripped of their factual complexity, are relatively simple. A guarantor of loans pledged to the lenders, petitioners, as collateral, all of his interests in a limited partnership and shares in a corporation, including the right to the proceeds from both.

Security interests were documented by way of promissory notes and collateral assignments. The original borrower was replaced by a successor, but the guarantee remained and, despite certain modifications, the obligation of the guarantor remained essentially the same. While the partnership and corporate interests remained as collateral for the loans, the guarantor sold, or purportedly sold, the same interests to respondent. Respondent then ⁵⁵² notified petitioners that the assignment of collateral to them was null and void.

The lenders replied to respondent that their collateral interests were valid. Petitioners filed suit against respondent requesting a declaratory judgment that (1) the collateral assignment to them of the partnership interest, including the proceeds, was valid, and (2) the collateral assignment of the shares of corporate stock to them was valid. Petitioners filed in the same suit a third count for an equitable accounting. The trial court did not address any of petitioners’ claims, finding that the suit was, in effect, an action for conversion and that the statute of limitations had expired with respect to such an action.

The Court of Special Appeals affirmed. We shall reverse. I. Facts William H. Miller, acting as President of NNS Corporation, borrowed $1,000,000 from petitioners and DC Bancorp, on May 30, 1989. Mr. Miller guaranteed payment of the loan personally, providing collateral in part through a security interest in his limited partnership share in the Ashmere Chesapeake Limited Partnership (Ashmere Partnership), his fifty percent stock ownership of Ashmere Chesapeake Corporation (Ashmere Corporation), and the proceeds emanating from both.

Petitioners and DC Bancorp subsequently purchased other previously-made loan obligations of NNS Corporation from other lenders not relevant to this proceeding. Payment of those loans also had been guaranteed personally by Mr. Miller. NNS Corporation later sold its assets to another firm, after which petitioners and DC Bancorp entered into a Modification of Loans Agreement on February 20, 1991. Mr. Miller again guaranteed the modified loans personally with, among other things, his interests in the Ashmere Partnership and the Ashmere Corporation (hereinafter collectively referred to as the Ashmere Interests) and the proceeds from those interests.

Mr. Miller also entered into a promissory note with petitioners ⁵⁵³ and DC Bancorp, which provided a security interest in “all of [his] assets, funds, property and other rights owned.” DC Bancorp later assigned all of its interests in these loan transactions to petitioners. In an agreement dated March 20, 1991, Mr. Miller purported to sell his portion of the Ashmere Interests to respondent, a limited partner in the Ashmere Partnership and a holder of Ashmere Corporation stock. Petitioners allege that respondent “had knowledge of Miller’s prior execution of the Collateral Assignment” of his share of the Ashmere Interests and their proceeds. Respondent sent a letter to petitioners on March 25, 1991, stating that Mr. Miller’s assignment of Miller’s portion of the Ashmere Interests as collateral was “null and void.” Petitioners responded by a letter dated March 27, 1991, that the collateral assignment was valid.

The parties exchanged further letters without resolution of the matter. Petitioners filed a complaint in the Circuit Court for Montgomery County on January 28, 1997. The first count in the complaint requested the court to enter a declaratory judgment that Mr. Miller had validly pledged as secured collateral his share of the Ashmere Partnership and the proceeds resulting from that interest. The second claim requested a declaratory judgment that petitioner had a secured interest in Mr. Miller’s shares of the Ashmere Corporation along with all distributions, dividends, and proceeds arising from that ownership.

The third count requested an equitable accounting of the proceeds, distributions, and dividends of the Ashmere Interests, if any, received by respondent after March 1, 1991. Respondent moved to dismiss the complaint for failure to state a claim pursuant to Maryland Rule 2-822. Respondent argued that counts one and two of the complaint were actually a tort claim for conversion and therefore subject to the general three-year statute of limitations. 1 See Md.Code (1974, ⁵⁵⁴ 1998 RepLVoL), § 5-101 of the Courts & Judicial Proceedings Article. The circuit court agreed and dismissed counts one and two with prejudice.

The circuit court also dismissed count three because the dismissal of counts one and two left “no basis” for an equitable accounting. On appeal, the Court of Special Appeals affirmed, holding that Mr. Miller’s assignment of his Ashmere Interests to respondent amounted to a claim for conversion that was time-barred by the statute of limitations. Allied Inv. Corp. v. Jasen, 128 Md.App. 88, 99-100 , 716 A.2d 1085, 1090 (1998).

That court also held that count three was properly dismissed because the statute of limitations had “extinguished the underlying rights the equitable remedy of accounting” pertained to and because the doctrine of laches applied. Id. at 110-11, 716 A.2d at 1095-96 . We granted a writ of certiorari to address the following issues presented by petitioners: 1. Whether Maryland law recognizes a claim for conversion of an intangible limited partnership interest which is not merged into or identified with some tangible document of title, but with respect to which any dividends, profits or other distributions which may have issued have been received and retained by the defendant!)] 2.

Whether Maryland law recognizes a claim for conversion of corporate stock represented by a certificate which remains in the plaintiffs possession, but with respect to which any dividends, profits or other distributions which may have issued have been received and retained by the defendant!)] ⁵⁵⁵ 3. Whether an assertion of a claim to an intangible asset, with no accompanying assertion of dominion or control over any tangible object or document into which the intangible asset is merged or identified, gives rise to a claim for conversion under Maryland law[.] II. Dismissal A. Standard of Review In reviewing a motion to dismiss for failure to state a claim under Maryland Rule 2—322(b)(2), trial and appellate courts must assume the truth of all well-pleaded, relevant, and material facts in the complaint and any reasonable inferences that can be drawn therefrom. Bobo v. State, 346 Md. 706, 708 , 697 A.2d 1371, 1372 (1997) (citing Stone v. Chicago Title Ins.

Co., 330 Md. 329, 333 , 624 A.2d 496, 498 (1993); Odyniec v. Schneider, 322 Md. 520, 525 , 588 A.2d 786, 788 (1991)); Board of Educ. v. Browning, 333 Md. 281, 286 , 635 A.2d 373, 376 (1994) (citing Faya v. Almaraz, 329 Md. 435, 443 , 620 A.2d 327, 331 (1993)). “Dismissal is proper only if the alleged facts and permissible inferences, so viewed, would, if proven, nonetheless fail to afford relief to the plaintiff.” Bobo, 346 Md. at 709 , 697 A.2d at 1373 (citing Morris v. Osmose Wood Preserving, 340 Md. 519, 531 , 667 A.2d 624, 630 (1995)). Thus, an appellate court reviewing a dismissal must determine whether the trial court was legally correct. Id. B. Dismissal of Declaratory Judgment Actions Section 3-406 of the Courts & Judicial Proceedings Article provides: Any person interested under a ... written contract, or other writing constituting a contract, or whose rights, status, or other legal relations are affected by a ... contract ... may have determined any question of construction or validity arising under the ... contract ... and obtain a declaration of rights, status, or other legal relations under it. ⁵⁵⁶ Section 3-407 allows a contract to “be construed before or after a breach of the contract.” Granting a motion to dismiss a declaratory judgment action without declaring the rights of the parties rarely is appropriate.

Post v. Bregman, 349 Md. 142, 160 , 707 A.2d 806, 814 (1998); Broadwater v. State, 303 Md. 461, 465 , 494 A.2d 934, 936 (1985); State v. Burning Tree Club, Inc., 301 Md. 9, 17-18 , 481 A.2d 785, 789 (1984); Borders v. Board of Educ., 259 Md. 256, 258-59 , 269 A.2d 570, 571 (1970); Woodland Beach Property Owners’ Ass’n v. Worley, 253 Md. 442, 447-48 , 252 A.2d 827, 830 (1969); Hunt v. Montgomery County, 248 Md. 403, 408-10 , 237 A.2d 35, 37-39 (1968). “Ordinarily the only place a [dismissal] has in the declaratory process is to challenge the legal availability of the remedy sought to be used.” Hunt, 248 Md. at 408 , 237 A.2d at 37 . This Court has said that [t]he test of the sufficiency of the [complaint for declaratory judgment] is not whether it shows that the plaintiff is entitled to the declaration of rights or interest in accordance with his theory, but whether he is entitled to a declaration at all; so, even though the plaintiff may be on the losing side of the dispute, if he states the existence of a controversy which should be settled, he states a cause of suit for a declaratory decree. Shapiro v. Board of County Comm’rs, 219 Md. 298, 302-03 , 149 A.2d 396, 399 (1959). As an example of when a claim for declaratory judgment would not be available, we have said that as a general rule, courts will not entertain a declaratory judgment action “if there is pending, at the time of the commencement of the action for declaratory relief, another action or proceeding involving the same parties and in which the identical issues that are involved in the declaratory action may be adjudicated.” Post, 349 Md. at 160 , 707 A.2d at 814 (quoting Waicker v. Colbert, 347 Md. 108, 113 , 699 A.2d 426, 428 (1997)); see also Turnpike Farm Ltd. Partnership v. Curran, 316 Md. 47, 49 , 557 A.2d 225, 226 (1989); Northern Assurance Co. v. EDP Floors, Inc., 311 Md. 217, 223 , 533 A.2d 682, 685 (1987).

That ⁵⁵⁷ a separate claim exists upon which suit could be brought, however, ordinarily does not defeat a party’s right to seek and obtain a declaratory judgment prior to filing the other claim. See § 3-409(c) of the Courts & Judicial Proceedings Article (“A party may obtain a declaratory judgment or decree notwithstanding a concurrent common-law, equitable, or extraordinary legal remedy----”); Post, 349 Md. at 160 , 707 A.2d at 814-15 (“The existence of another remedy, at law or in equity, does not ordinarily defeat a party’s right to seek and obtain a declaratory judgment.”) (citing Turner v. Manufacturers’ Cas. Ins. Co., 206 Md. 601 , 112 A.2d 670 (1955); Glorius v. Watkins, 203 Md. 546 , 102 A.2d 274 (1954)); Gloyd v. Talbott, 221 Md. 179, 183 , 156 A.2d 665, 666 (1959) (“The existence of a remedy at law or in equity is not a bar to declaratory relief.”). 2 The Court of Special Appeals held below that the trial court properly dismissed Allied’s declaratory judgment action because ... it is not “an available or appropriate type of remedy.” Although couched in terms of declaring the “validity and priority” of Allied’s interest in the Ashmere Partnership and Corporation, Allied’s complaint is, in effect, one for conversion....

Allied apparently did not merely want the court to construe the “validity and priority” of its claim, but instead wanted its property back. Allied wanted the court to order Jasen to disgorge the distribu ⁵⁵⁸ tions, dividends, and other payments he may have received over the past six years, all of which assertedly were Allied’s property upon Miller’s default. Such goals are inconsistent with the purpose of the Declaratory Judgment Act, but entirely consistent with a claim for conversion. Allied Inv.

Corp., 123 Md.App. at 99-100 , 716 A.2d at 1090 (footnote omitted) (quotation omitted). We disagree. Counts one and two of the complaint seek a declaration that petitioners have a valid security interest in the Ashmere Interests and their proceeds. Count one, in its request for relief, seeks a declaratory judgment: a.

Declaring that William H. Miller’s execution of the Collateral Assignment of Ashmere Manor Interests in his capacity as president of Ashmere Chesapeake Corporation was effective to confer the consent of Ashmere Chesapeake Corporation, the general partner of Ashmere Chesapeake Limited Partnership, to William H. Miller’s pledge of his partnership interest in Ashmere Chesapeake Limited Partnership, and the proceeds thereof, in favor of Allied Investment Corporation, Allied Venture Partnership and DC Ban-corp Venture Capital Company; b. Declaring that pursuant to the May 30,1989 Collateral Assignment of Ashmere Manor Interests, William H. Miller’s obligations to Allied Investment Corporation and Allied Venture Partnership under the Modification of Loans Agreement of February 20, 1991, and the accompanying Guaranty and Promissory Note from William H. Miller, are secured by a security interest in William H. Miller’s. partnership interest in Ashmere Chesapeake Limited Partnership, together with all rights of William H. Miller to distributions, dividends, or other payments arising from William H. Miller’s partnership interest in Ashmere Chesapeake Limited Partnership; and c. Granting such other and further relief as this Court deems just and appropriate. Count two seeks a declaratory judgment: ' a.

Declaring that William H. Miller’s obligations to Allied Investment Corporation and Allied Venture Partnership ⁵⁵⁹ pursuant to the Modification of Loans Agreement of February 20,1991, and the accompanying Guaranty and Promissory Note from William H. Miller, are secured by a security interest in William H. Miller’s stock in Ashmere Chesapeake Corporation, together with all rights of William H. Miller to distributions, dividends or other payments arising from William H. Miller’s stock in Ashmere Chesapeake Corporation; and b. Granting such other and further relief as this Court deems just and appropriate. Nowhere in the language of these two claims do petitioners seek reimbursement for any property rights or proceeds that respondent may have received after his purported purchase of the Ashmere Interests. Nor do the two claims allege a conversion of those interests.

Thus, petitioners’ complaint cannot be dismissed for stating a time-barred conversion claim because, quite simply, their complaint does not state a claim for conversion. Petitioners’ “legal relations are affected by a ... contract” and section 3-406 of the Courts & Judicial Proceedings Article authorizes them to “have determined any question of construction or validity arising under the ... contract ... and obtain a declaration of rights, status, or other legal relations under it” by the circuit court. Thus, claims one and two are strictly requests for declaratory judgment. We note further that even if petitioners could allege a conversion, the potential existence of a conversion claim does not bar them from filing an action for declaratory judgment.

As section 3-409(c) of the Courts & Judicial Proceedings Article and Post, 349 Md. at 160 , 707 A.2d at 814-15 , make clear, the availability of a concurrent legal or equitable remedy ordinarily does not prevent a party from seeking and obtaining a declaratory judgment. Regardless of whether the circumstances in this case could constitute a conversion claim, time-barred or not, petitioners have never made a claim and their complaint does not set forth such a claim now. Thus, they may seek a declaratory judgment pertaining to whether they have a secured interest in the Ashmere Interests. The ⁵⁶⁰ lower courts incorrectly viewed petitioners’ claims for declaratory judgment as solely a tort claim for conversion.

III

Conversion Despite the availability of concurrent remedies, the well-pleaded facts of petitioners’ complaint could not state a claim for conversion in any event. Thus, petitioners’ request for declaratory judgment is not barred by the statute of limitations, as the lower courts have determined, by equating it to a conversion claim, “A ‘conversion’ is any distinct act of ownership or dominion exerted by one person over the personal property of another in denial of his right or inconsistent with it.” Interstate Ins. Co. v. Logan, 205 Md. 588, 588-89 , 109 A.2d 904, 907 (1954) (citing Martin v. W.W. Lanahan & Co., 133 Md. 525 , 105 A. 777 (1919); Merchants’Natl Bank v. Williams, 110 Md. 334 , 72 A. 1114 (1909)). The original common law rule was that a claim for conversion could not be sought unless the plaintiffs property was tangible.

That rule has been modified over time and certain intangible property interests may now be recovered through a conversion claim. As explained in W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 15, at 91-92 (5th ed.1984): Intangible rights of all kinds could not be lost or found, and the original rule was that there could be no conversion of such property. But this hoary limitation has been discarded to some extent by all of the courts. The first relaxation of the rule was with respect to the conversion of a document in which intangible rights were merged, so that the one became the symbol of the other—as in the case of a ... stock certificate.

This was then extended to include intangible rights to which a tangible object, converted by the defendant, was highly important.... In all of these cases the conversion of the tangible thing was held to include conversion of the intangible rights, and to carry damages for it. The final step was to find conversion of the rights themselves where there was no accompanying conversion of anything tangible.... ⁵⁶¹ The process of expansion has stopped with the kind of intangible rights which are customarily merged in, or identified with some document. [Footnotes omitted]. Section 242 of the Restatement (Second) of Torts (1965) recognizes this development in the law of conversion: § 242.

Conversion of Documents and Intangible Rights (1) Where there is conversion of a document in which intangible rights are merged, the damages include the value of such rights. (2) One who effectively prevents the exercise of intangible rights of the kind customarily merged in a document is subject to a liability similar to that for conversion, even though the document is not itself converted. Comment e to section 242, which was quoted by the Court of Special Appeals below, states: It was first held that the conversion of a document in which intangible rights were merged permitted recovery of