Bennett Heating & Air Conditioning, Inc. v. NationsBank

BLOOM, Judge. Appellants, Bennett Heating & Air Conditioning, Inc. and four other subcontractors, performed construction work on a commercial building located on property that was owned by appellee Ammendale Business Campus Limited Partnership (Ammendale LP). The property was subject to three deeds of trust securing loans made by Sovran Bank/Maryland, which is now known as NationsBank of Maryland, N.A. (NationsBank).

NationsBank foreclosed on the deeds of trust and sold the property. Appellants, who have never received payment for the work and materials they put into the construction of the commercial building on the property, brought an action in the Circuit Court for Prince George’s County against appellees, Nations-Bank, Ammendale LP, ELV/Ammendale I, Inc. (ELV/Ammendale), Carfax Enterprises Limited Partnership (Carfax), Banbury Associates Limited Partnership (Banbury LP), and Banbury Real Estate Investment, Inc. (Banbury Investment). 1 Appellants’ complaint was amended three times; the Third Amended Complaint sought to set aside the foreclosure sale on the basis of fraud (Count I) and asserted claims for breach of contract, unjust enrichment, and quantum meruit (Counts II through VIII). NationsBank and the other four appellees ⁷⁵⁴ collectively filed motions to dismiss most of the counts in the complaint, pursuant to Md. Rule 2-322(b), for failure to state a claim upon which relief could be granted. The circuit court granted those motions and entered a judgment dismissing the entire complaint.

Appellants timely noted a consolidated appeal to this Court, in which they present the following issues, which we have reordered: I. Whether the subcontractors’ Third Amended Complaint (Count I) states grounds to set aside the foreclosure sale.

II

Whether the subcontractors’ Third Amended Complaint (Counts II, III, IV, VI, and VIII) states a claim in quantum meruit against the defendants.

III

Whether the subcontractors’ Third Amended Complaint (Counts V and VII) states breach of contract claims against defendants Ammendale Business Campus Limited Partnership and ELV/Ammendale I, Inc. FACTS Appellants’ version of the facts, which we accept as true for purposes of reviewing the lower court’s grant of appellees’ motions to dismiss, is as follows. Ammendale LP, which is owned and controlled by a group of British investors represented by David B. Law (British Investors), purchased property in Prince George’s County known as Ammendale Business Campus (the property) in 1987. Ammendale LP had received loans from NationsBank to finance the acquisition of the property and the construction of six commercial buildings to be located on the property. The loans were secured by three deeds of trust on the property.

From 1990 to early 1991, the British Investors and NationsBank discussed the funding of a sixth building on the property and the possible re-negotiation of Ammendale LP’s original financing of the property. In November 1989, after five buildings had been constructed, Ammendale LP contracted with Michael, Harris & Rosato Brothers, Inc. (MHR), the general contractor, for the con ⁷⁵⁵ struction of the sixth commercial building (Building F) for $1,427,529. Ammendale LP also contracted with MHR in June 1990 for tenant improvement work on Building F for $180,881. MHR subcontracted with appellants to perform work required under MHR’s contracts with Ammendale LP.

MHR and appellants completed their work on Building F in 1990. On 29 October 1990, MHR filed suit to establish a mechanics’ lien on the property. This lien included the amount owed to the appellants for their work on Building F. Two appellants, Bennett Heating and Air Conditioning, Inc. (Bennett) and D & L Electric, Inc. (D & L) obtained final orders establishing mechanics’ liens on the property on 28 November 1990 and 15 March 1991. In March 1991, Ammendale LP, which still owed Nations-Bank $28,592,806, defaulted on its loans.

NationsBank, through substituted trustees, instituted foreclosure proceedings on the property, which was Ammendale LP’s only asset. At the time of the foreclosure, Ammendale LP still owed MHR $902,884 under the contract to build Building F and the entire $180,881 under the contract for tenant improvements to the building. Appellants had not received any payment for their work. On 22 March 1991, the property was sold at foreclosure for $21,050,000 to the sole bidder, Metropolitan Commercial Properties (Metropolitan), a subsidiary of NationsBank.

Metropolitan then assigned its rights as purchaser to Banbury LP, which is owned and controlled by the British Investors. This assignment and substitution was ratified by the Circuit Court for Prince George’s County in May 1991. To finance its purchase of the property, Banbury LP borrowed $18,675,000 from NationsBank and agreed to pay NationsBank “additional yield” up to $3,479,038 contingent upon the proceeds derived from the property by Banbury LP. Banbury LP borrowed an additional $1,000,000 from Nations-Bank to finance improvements to the property.

These loans are secured by three deeds of trust on the property. ⁷⁵⁶ After the ratification of the foreclosure sale in May 1991, appellants Bennett, D & L, and Anne Arundel Fire Protection, Inc. filed a complaint against appellees, seeking damages for unjust enrichment, quantum meruit, and breach of contract. In December 1991, that complaint was amended to include appellant William Dale Judy (Judy) as a plaintiff and to add a fifth and sixth count to the complaint. NationsBank filed a Motion to Dismiss or, Alternatively, for Summary Judgment, which the court granted. Appellants thereafter filed a Second Amended Complaint, adding appellant Dennis Stubbs Plumbing, Inc. as a plaintiff and also adding a seventh count to the complaint.

Although the Second Amended Complaint named NationsBank as a defendant, appellants stated that they were not pursuing any claims against NationsBank since the court had granted NationsBank’s motion for dismissal of the complaint as to it. Banbury LP and Banbury Investment then filed a Motion for Summary Judgment, and a few days later ELV Ammendale filed a Motion for Partial Summary Judgment and Carfax filed a Motion for Summary Judgment. Appellants, in turn, filed a Motion to Vacate Dismissal of Defendant NationsBank of Maryland. The circuit court, after hearing arguments on that motion and on appellees’ motions for summary judgment, concluded that appellants’ quantum meruit and unjust enrichment claims were barred unless the foreclosure sale were set aside.

The court granted leave for appellants to amend their Second Amended Complaint. Appellants then filed their Third Amended Complaint, which included NationsBank as a defendant and added a count petitioning the court to set aside the foreclosure sale on the basis of fraud. Appellees countered with motions to dismiss various counts of the Third Amended Complaint. The court granted those motions and dismissed the entire complaint.

This appeal is from that judgment. Banbury LP presently owns and operates the property as a commercial business park. The first five buildings constructed on the property are occupied fully by tenants, and Building ⁷⁵⁷ F has a tenant in the space improved by appellants’ work and materials. DISCUSSION In reviewing the grant of a motion to dismiss pursuant to Maryland Rule 2-322(b), “we must assume the truth of all relevant and material facts that are well pleaded and all inferences which can be reasonably drawn from those pleadings.” Sharrow v. State Farm Mut.

Auto. Ins. Co., 306 Md. 754, 768 , 511 A.2d 492 (1986). “[T]he complaint should not be dismissed unless it appears that no set of facts can be proven in support of the claim set forth therein.” Ungar v. State, 63 Md.App. 472, 479 , 492 A.2d 1336 (1985), cert. denied, 475 U.S. 1066 , 106 S.Ct. 1379 , 89 L.Ed.2d 604 (1986). With these considerations in mind, we shall address the issues in the present case.

I. Appellants contend that the circuit court erred in dismissing Count I of appellants’ complaint, which petitions the court to set aside the foreclosure sale, for failing to state a claim upon which relief can be granted. Appellants allege in Count I that the foreclosure on the property “was a sham conducted pursuant to collusion between the mortgagor and the mortgagee in order to cut off the mechanics’ lien rights of MHR and the Subcontractors.” Appellants assert that the “Foreclosure Sale was infected with fraud, illegality, and improper dealings and [the final order ratifying the sale] should be set aside----” Specifically, the pertinent allegations set forth in Count I of the Third Amended Complaint are as follows: 21. In an attempt to avoid paying MHR and plaintiffs for the work done on Building F, the British Investors (representing Ammendale LP and the other defendants) and NationsBank agreed: a) that NationsBank would foreclose on the Property and would purchase the Property at the foreclosure sale at an agreed price, and b) that after fore ⁷⁵⁸ closure, NationsBank would sell the Property back to the British Investors for the agreed price, and c) that Nations-Bank would lend the British Investors funds to finance the re-purchase of the Property. 28. The Foreclosure Sale was a sham conducted pursuant to collusion between the mortgagor and the mortgagee in order to cut off the mechanics’ lien rights of MHR and plaintiffs.

The British Investors, who owned and controlled Ammendale LP (the mortgagor), and NationsBank (the mortgagee) agreed in advance to the Foreclosure Sale, agreed on the price to be bid at the Foreclosure Sale, agreed that NationsBank would sell the Property back to the British Investors at that agreed price, and agreed that NationsBank would lend the British Investors the funds necessary to repurchase the Property. 29. The Foreclosure Sale was used by defendants as a mechanism to transfer the Property from one set of entities owned and controlled by the British Investors (Ammendale LP and ELV/Ammendale) to another set of entities owned and controlled by the British Investors (Banbury LP and Banbury Investment) in an attempt to avoid paying MHR and plaintiffs for the work done on Building F. 30. The Foreclosure Sale was infected with fraud, illegality, and improper dealings and should be set aside by [the circuit court]. Appellants were not parties to the action in which the judgment ratifying the foreclosure sale was entered.

Nevertheless, they are attempting, through this separate and independent judicial proceeding, to have the judgment in the foreclosure case vacated. The first count of their complaint thus amounts to a collateral attack on that judgment by a third party. See Fisher v. DeMarr, 226 Md. 509, 514-15 , 174 A.2d 345 (1961). Although it is a general rule in Maryland that “a ratified foreclosure proceeding may not be collaterally assailed,” Kline v. Chase Manhattan Bank, 43 Md.App. 133, ⁷⁵⁹ 144 , 403 A.2d 395 (1979), we are unable to find any decisions by Maryland’s appellate courts addressing a collateral attack in the context of the facts alleged in the present case.

There is, however, dicta in the case of Harris v. Hooper, 50 Md. 537 (1879), to the effect that a subsequent encumbrancer, such as one who obtains a judgment against the mortgagor after the date of the mortgage (or perhaps, as in this case, one who obtains a mechanic’s lien against mortgaged premises), who was not made a party to the foreclosure proceedings, may intervene therein and seek satisfaction of his lien out of any mortgage sale proceeds remaining after payment of the sums due under the mortgage, or might seek more complete relief by a separate action to annul the decree and set the sale aside for fraud either in obtaining the deed or in the sale. Id. at 548-49 . Other jurisdictions that have considered collateral attacks in factual circumstances similar to those in this case have concluded that third party creditors may collaterally impeach a judgment for fraud committed by either party to that judgment or for the collusion of both parties thereto in obtaining the judgment, if the creditor had vested rights that would be impaired if the judgment were given full credit and the fraud or collusion was committed for the purpose of defrauding a third person. See Hartford Accident and Indem.

Co. v. Phœnix Sand & Rock, Inc., 116 Ariz. 366 , 569 P.2d 308, 313 (Ct.App.1977); Stearns v. Los Angeles City School Dist., 244 Cal.App.2d 696 , 53 Cal.Rptr. 482, 503 (1966); Consolidated Rock Prods. Co. v. Higgins, 54 Cal.App.2d 779 , 129 P.2d 929, 930 (1942); Shapiro v. DiGuilio, 95 Ill.App.2d 184 , 237 N.E.2d 771, 774 (1968); Barnett v. Develle, 289 So.2d 129, 140 (La. 1974); Catabene v. Wallner, 16 N.J.Super. 597 , 85 A.2d 300, 302 (App.Div.1951); Strickland v. Hughes, 273 N.C. 481 , 160 S.E.2d 313, 318 (1968); Hooffstetter v. Adams, 67 Ohio App. 21 , 35 N.E.2d 896, 901-902 (1941). This general rule was applied to facts analogous to those in the case sub judice in Catabene v. Wallner, 16 N.J.Super. 597 , 85 A.2d 300 (App.Div.1951). In that case, Catabene, a trustee in bankruptcy of Heiss & Sons, Inc., brought an action in the ⁷⁶⁰ Chancery Division against Wallner and other officers and stockholders of Heiss & Sons, Inc., requesting that a foreclosure sale be set aside.

Catabene’s complaint alleged that the corporation and its stockholders conspired to defraud the corporation’s creditors by mortgaging the corporation’s property to one of the corporation’s officers without giving the corporation consideration in return. Id., 85 A.2d at 301-302 . The complaint also alleged that other defendants, in furtherance of the conspiracy, executed a foreclosure sale at which the property was sold at an amount significantly below its value. Id. at 302.

The Chancery Division entered a judgment dismissing the complaint on the grounds that “the complaint seeks to collaterally attack a final judgment in the Chancery Division heretofore entered in the Court and therefore [this court] lacks jurisdiction to dispose of the same.” Id. at 301. The Appellate Division reversed the judgment dismissing the complaint. Although Catabene’s complaint constituted a collateral attack on the judgment, the appellate court, stated: Even though it is a judgment of a legally organized judicial tribunal, proceeding within the scope of its allotted powers and possessing the requisite jurisdiction over the subject-matter of the suit and the parties thereto, it may be collaterally attacked when the judgment is procured through fraud of either of the parties or by the collusion of both for the purpose of defrauding a third person. Such third person may escape from the injury thus attempted by showing fraud or collusion directly affecting him by which the judgment was obtained. 1 Freeman on Judgments § 318.

A judgment obtained in fraud of the interests of a third person is subject to collateral attack by him. Restatement, Judgments § 91. Id. at 302. See also 2 Restatement (Second) of Judgments § '76 (1980).

The court then stated that Catabene “is such a third person who may make a collateral attack on a judgment on the ground that it is fraudulent,” because the “special rights and remedies available to creditors are also available to a trustee in bankruptcy as a primary and not a derivative right.” Id. We find the general rule applied in Catabene and ⁷⁶¹ followed in other jurisdictions to be persuasive and therefore adopt it. In the case sub judice, appellants’ complaint states in paragraph 20 that Bennett and D & L obtained final orders establishing mechanics’ liens on 28 November 1990 and 15 March 1991. The foreclosure sale was held subsequent to these orders on 22 March 1991.

Thus, at the time of the allegedly fraudulent and collusive sale, Bennett and D & L were creditors with vested interests in the property, see Van Royen v. Lacey, 262 Md. 94, 100 , 277 A.2d 13 (1971), that would be abrogated if the judgment ratifying the foreclosure sale were given full credit in the present case, since the foreclosure sale resulted in a deficiency rather than a surplus out of which junior encumbrances might be satisfied. With respect to whether appellees committed fraud or colluded to obtain the judgment ratifying the foreclosure sale, appellants’ pleadings, and the inferences that we draw from those pleadings, tell the following story. Ammendale LP and NationsBank agreed that Ammendale LP would intentionally default on its loan, even though the partnership was solvent and could make the required payments. NationsBank’s trustees subsequently foreclosed on the property, which was the only asset of Ammendale LP, and sold it to NationsBank’s subsidiary, Metropolitan, for less than the balance outstanding on Ammendale LP’s loans.

Metropolitan, in turn, immediately assigned its right to purchase the property to Banbury LP, a partnership that is owned and controlled by the same British Investors who own and control Ammendale LP. NationsBank lent Banbury LP $18,675,000 to finance a portion of the $21,050,000 purchase price and $1,000,000 to finance additional improvements to the property. In return, NationsBank earns interest on the loans and could receive payments totalling $3,479,038 contingent upon the proceeds that Banbury LP derives from the property. It could be inferred from these circumstances that appellees conspired to use the foreclosure sale to insulate the property from Bennett’s and D & L’s mechanics’ liens, thus preventing ⁷⁶² Bennett and D & L from