Bennett Heating & Air Conditioning, Inc. v. NationsBank of Maryland

RODOWSKY, Judge. We granted cross-petitions for certiorari in order to review the judgment of the Court of Special Appeals in two appeals (Nos. 899 and 900, September Term, 1994) from the Circuit Court for Prince George’s County. Bennett Heating & Air Conditioning, Inc. v. NationsBank of Maryland, 103 Md.App. 749 , 654 A.2d 949 (1995). The plaintiffs are unpaid subcontractors whose mechanics’ liens, or potential claims for such liens, were extinguished by the foreclosure of a senior mortgage.

In a plenary civil action (No. 899) the plaintiffs primarily sought money judgments for restitution from the foreclosure purchaser and its mortgage lender in the amount of the increased value of the property attributable to the plaintiffs’ unpaid work. Plaintiffs also sought to set aside the enrolled judgment of ratification of sale in the foreclosure action (No. 900) by a third amended complaint filed in the plenary action and by attempting to consolidate the two actions. For the reasons set forth below we agree with the circuit court which held that the complaint failed to state claims for which the relief of restitution, or of avoidance of the ratification judgment, can be granted. ¹⁷⁴ The circuit court’s judgment in the plenary action was entered on motions filed by the defendants to dismiss the third amended complaint of the plaintiffs on the face of that pleading. See Maryland Rule 2-322(c).

Consequently, in that action we consider the facts to be those that are well pleaded by the plaintiffs, including those facts that may fairly be inferred from the matters expressly alleged. In the appeal in the foreclosure action we additionally consider the facts of record that underlie the judgment in that summary action. In overview, the dispute involves a business park in Prince George’s County, the development of which began in 1987. The developer, a limited partnership which owned only the business park (the Property), had as its general partner a corporation which owned nothing other than its interest in the limited partnership.

Debt financing for the undertaking was furnished by a predecessor of NationsBank of Maryland (the Bank) which was secured by a mortgage on the Property. Five buildings for office, commercial and/or warehouse use were successfully completed. The difficulties with which we are concerned arose with the construction of the sixth building, Building F. The general contract for the construction of Building F was let in November 1989. In the course of constructing Building F, the developer did not fully pay the general contractor, and the general contractor did not fully pay the subcontractors.

There were negotiations between the developer and the Bank “to fund the construction of Building F and to re-negotiate the financing on the Property.” By June 1990 a tenant had been acquired for a portion of Building F, and an additional contract was made between the developer and the general contractor for work in the tenant’s space. This led to additional subcontracts relating to the tenant’s space. The developer did not pay the general contractor for tenant space work, and the general contractor did not pay the subcontractors for their tenant space work. The Bank foreclosed.

Two of the subcontractors had established mechanics’ liens prior to the foreclosure sale, but there ¹⁷⁵ was no surplus over the mortgage debt. A subsidiary of the Bank bought in at the sale and assigned its rights as purchaser to a new entity which acquired the Property by utilizing, largely but not exclusively, funds borrowed from the Bank on the security of a new mortgage on the Property. The assignee-purchaser is a Maryland limited partnership, the sole general partner of which is a Maryland corporation. The only asset of this new entity is the Property, and the only asset of its corporate general partner is the general partner’s interest in the new limited partnership.

Plaintiffs allege that the investors in the old and the new limited partnerships and their respective corporate general partners are the same individuals. The plaintiffs refer to them as the “British Investors.” Specifically, the general contractor for Building F was Michael, Harris & Rosato Brothers, Inc. (MHR). The contract price was $1,427,529. MHR is not a plaintiff in this action.

The plaintiffs are the heating, ventilating and air conditioning subcontractor, Bennett Heating & Air Conditioning, Inc. (Bennett), the electrical subcontractor, D & L Electric, Inc. (D & L), the automatic fire sprinkler system subcontractor, the floor covering subcontractor, and the plumbing subcontractor. The subcontractors have not been paid for work both on basic Building F and on the tenant space. The largest claim, that of Bennett, exceeds $825,000. 1 Specifically, the defendants in this action are the Bank, as successor to Sovran Bank/Maryland; the original developer entity, Ammendale Business Campus Limited Partnership (Ammendale LP); Ammendale LP’s general partner, ELV/Ammendaie I, Inc.; a limited partner in Ammendale LP, Carfax Enterprises Limited Partnership; the new developer ¹⁷⁶ entity, Banbury Associates Limited Partnership (Banbury LP); and Banbury’s general partner, Banbury Real Estate Investment, Inc. Plaintiffs allege that work by Bennett was completed in July 1990 and by the other plaintiffs by June of that year. Bennett established its mechanic’s lien on November 28, 1990.

The Bank’s foreclosure was docketed on March 6, 1991. At that time the full mortgage indebtedness of $21,500,000 was due, together with interest of $966,455.03 through March 3, 1996 and late charges of over $1,125,000. D & L established its mechanic’s lien on March 15, 1991. The mortgage foreclosure sale was held on March 22,1991.

A subsidiary of the Bank bought in at the auction for $21,050,000 and assigned its rights to Banbury LP. 2 The sale was ratified on May 3, 1991. The sale price did not produce any surplus distributable to junior lienors. Banbury LP borrowed $18,675,000 from the Bank to settle on the purchase and, thus, Banbury LP obtained $2,375,000 of capital from sources other than the Bank in order to complete the purchase. Plaintiffs allege that Banbury LP also agreed to pay the Bank up to $3,479,038 in “ ‘additional yield’ ... depending on the proceeds that Banbury LP derived from the Property in the future.” In addition, the Bank loaned Banbury LP $1 million “to finance additional improvements to the Property.” The initial complaint was filed against all of the defendants in November 1991.

Additional parties joined as plaintiffs in the first and second amended complaints. These complaints alleged that the defendants had been unjustly enriched by the labor and materials furnished by the plaintiffs for which the plaintiffs had not been paid, but which the defendants enjoyed in the form of enhanced value in Building F. In the course of ¹⁷⁷ the proceedings the Bank, in April 1992, was dismissed from the case. That judgment, however, was never certified as final, and it remained interlocutory. See Md.Rule 2-602.

In November 1993 plaintiffs moved to vacate the judgment dismissing the Bank, and that motion, among others, was heard in December 1993. At that hearing plaintiffs explained that the remaining defendants were asserting that they could not have been unjustly enriched by the plaintiffs’ labor and materials because the public auction sale price conclusively determined the value of the Property. The plaintiffs wanted the Bank back in the case so that they could challenge the sale. The circuit court expressed skepticism concerning the possible success of that tactic (“When you buy at an auction on the courthouse steps how could you be unjustly enriched irrespective of what went on before?

It’s all wiped out.”). The plaintiffs represented to the circuit court that they had information that Ammendale LP and the Bank had colluded for the purpose of wiping out the mechanics’ liens and that the British Investors continued to own the Property. The circuit court postponed the impending trial of the action so that the plaintiffs could file a third amended complaint, and the court reinstated the Bank as a defendant. In that amended complaint the plaintiffs added a new Count I alleging the following: “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 re-purchase the Property. ¹⁷⁸ “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.” Plaintiffs also filed in the mortgage foreclosure action a motion to consolidate that action with the plenary civil suit. The purpose of the motion to consolidate was to direct the allegations of Count I of the third amended complaint to the judgment of ratification of sale.

Consequently, we consider the motion to consolidate as a petition in the mortgage foreclosure action to set aside the ratification on the grounds stated in Count I. The defendants, including the Bank, moved to dismiss the third amended complaint. After a hearing, the circuit court dismissed the third amended complaint for failure to state claims on which relief could be granted, and the circuit court denied the motion to consolidate that was filed in the foreclosure action. Plaintiffs appealed to the Court of Special Appeals from both judgments. The Court of Special Appeals held that the allegations of Count I were legally sufficient to permit further proceedings on the claim seeking reopening of the ratification of sale.

Bennett, 103 Md.App. at 763 , 654 A.2d at 956 . We shall consider the sufficiency of the Count I allegations in Part II, infra. The Court of Special Appeals then held that the allegations of unjust enrichment were not legally sufficient, whether or not the foreclosure sale would be set . aside on remand. Id. at 765-66 , 654 A.2d at 957 .

If the sale were not set aside, Ammendale LP would no longer own the Property and would not be benefited. Id. at 765 , 654 A.2d at 957 . Similarly, the new owner, Banbury LP, and its lender, the Bank, would not be unjustly enriched because the undisturbed foreclosure sale would establish that Banbury LP had paid fair market value. Id.

On the other hand, if the foreclosure sale ¹⁷⁹ were set aside, then the ownership of the Property would revert back to Ammendale LP, but there was no allegation that Ammendale LP dealt directly with the plaintiffs or misled the plaintiffs into believing that Ammendale LP, as opposed to the general contractor, would be responsible for paying for the labor and materials. Id. at 766 , 654 A.2d at 957 . We granted cross-petitions for certiorari that sought further review in both appeals. We shall initially consider the issues relating to unjust enrichment.

I “At the outset, [plaintiffs] emphasize, that it is not necessary to set aside the Foreclosure Sale in order for the Subcontractors to state quantum meruit claims against the defendants.” Brief for Petitioners at 16. The plaintiffs point out that they seek in personam money judgments against the defendants and not an in rem remedy. Plaintiffs also recognize that a subcontractor’s claim based on unjust enrichment would not lie against an owner who has paid the general contractor. Id. at 18.

Under those circumstances the owner has received nothing for which it did not pay, and it would be inequitable to require the owner to pay twice. This Court so held in Hamilton & Spiegel, Inc. v. Board of Educ., 233 Md. 196 , 195 A.2d 710 (1963). There, an unpaid subcontractor on a school construction project sued a board of education asserting that it was a third party beneficiary of the board-general contractor contract and that the board was unjustly enriched. Id. at 198 , 195 A.2d at 711 .

We affirmed the dismissal on demurrer of both theories. As to the latter theory we explained that there was no allegation that the board had not paid the entire agreed contract price. Id. at 201 , 195 A.2d at 712 . Further, both the plaintiff and the board knew that, if the services and materials were not paid for, the Little Miller Act “payment bond was there, if properly availed of, for [the plaintiffs] protection.” Id., 195 A.2d at ¹⁸⁰ 712. 3 Plaintiffs’ point is that Ammendale LP did not pay MHR in full, and, under those circumstances, it is unjust for Ammendale LP and its successors or alter egos in title to retain the benefits without having paid their value.

Plaintiffs invoke the law of restitution. Its substantive basis “is related to substantive equity,” although “[r]estitution claims for money are usually claims ‘at law.’ ” 1 D. Dobbs, Law of Remedies § 4.1(1), at 556 (2d ed. 1993) (hereinafter, Dobbs). 4 Much the same theory for relief as is advanced by the plaintiffs in the instant matter was submitted, without ¹⁸¹ success, in Goldberg v. Ford, 188 Md. 658 , 53 A.2d 665 (1947). The owner of land containing coal deposits leased the land to a lessee, together with the right to strip mine upon payment of a royalty. Id. at 660 , 53 A.2d at 665 .

The lessee, in turn, contracted with the plaintiffs to mine the coal and load the coal onto trucks to be furnished by the lessee. Id. at 661 , 53 A.2d at 666 . After the plaintiffs had uncovered about 8,000 tons of coal and had incurred expenses of $18,000, the lessee defaulted in furnishing trucks and in paying royalties to the owner. Id. at 661, 663 , 53 A.2d at 666-67 .

The plaintiffs then sued the owner, claiming “a right to restitution, upon the theory of unjust enrichment, enforcible by way of an equitable lien upon the property,” in order to reimburse the plaintiffs “for the labor and improvements laid out by them upon the lessor’s land.” Id. at 662 , 53 A.2d at 667 . This Court said that the “lessor had an unqualified right under its lease agreement to re-enter and take possession of the coal that remained unsevered from the realty.” Id. at 663 , 53 A.2d at 667 . The plaintiff knew of the lease provisions. Id.

There was no mistake, no confusion as to title to the realty, and no charge of fraud. Id. The plaintiff had only a contract with the lessee. We said that “[i]n the somewhat analogous situation, where labor and material [are] furnished by a sub-contractor for improvements to property, it is only by virtue of [the mechanics’ lien statute] that a remedy is available.

If recovery could be had in Equity in such a case, there would have been no need for such legislation.” Id. at 663-64 , 53 A.2d at 667 (citation omitted). See also Freeform Pools, Inc. v. Strawbridge Home for Boys, Inc., 228 Md. 297, 303 , 179 A.2d 683, 686 (1962). Prior to its decision in the instant matter, the Court of Special Appeals was presented with somewhat analogous claims for restitution in two cases, Kline v. Signet Bank/Maryland, 102 Md.App. 727 , 651 A.2d 442 , cert. denied, 338 Md. 201 , 657 A.2d 795 (1995) and Francis O. Day Co. v. Montgomery County, 102 Md.App. 514 , 650 A.2d 303 (1994). In Day a contractor had built streets in a development pursuant to a ¹⁸² contract with the developer, but the contractor had not been paid by the developer.

Id. at 516 , 650 A.2d at 304 . The contractor then unsuccessfully sued Montgomery County, alleging unjust enrichment because the improvements were to be dedicated to the county. Id. at 516-17 , 650 A.2d at 304 . In Kline an unpaid subcontractor, alleging unjust enrichment, sued the construction lender who had foreclosed and acquired the property at the foreclosure sale through a subsidiary.

Kline, 102 Md.App. at 730 , 651 A.2d at 443 . Both Kline and Day found persuasive the analysis in D.A. Hill Co. v. Cleve-Trust Realty Investors, 524 Pa. 425 , 573 A.2d 1005 (1990), where the court recognized that a “third party is not unjustly enriched when it receives a benefit from a contract between two other parties where the party benefitted has not requested the benefit or misled the other parties.” Id. at 434 , 573 A.2d at 1010 (emphasis in original). The quoted language is a sufficiently correct statement of the law to be ordinarily applicable to the problem of whether restitution lies where benefits are conferred on a stranger to a contract by the performance rendered by one party to that contract. One commentator on the subcontractor cases has observed that, although “there is no good reason why a default by one promisor ... should deprive the owner, who has fully performed, of the price ceiling fixed in his contract[, a] more plausible argument for recovery by the sub could be advanced where the owner still owes something on the prime contract.” J. Dawson, The Self-Serving Intermeddler, 87 Harv.L.Rev. 1409, 1447 (1974) (Dawson).

Dawson suggests that the owner “could be protected against double liability, it seems, by crediting any enforced payment to the sub on the owner’s debt to the general.” Id. Nevertheless, Dawson recognizes that “[t]he decisions, old and new, are lined up in an unbroken phalanx against restitution recovery by sub against owner in the triangular arrangement so far discussed, where the sub’s performance is defined by and forms part of the performance promised by general to owner.” Id. The reported decisions involving claims by unpaid subcontractors against owners based on unjust enrichment do indeed ¹⁸³ almost uniformly deny relief, and, contrary to the submission of the plaintiffs in the instant matter, these cases do not turn on whether the owner has fully paid the general contractor. See, e.g., Stratton v. Inspiration Consol.

Copper Co., 140 Ariz. 528 , 683 P.2d 327 (1984); G & B Contractors, Inc. v. Coronet Developers, Inc., 134 Ga.App. 916 , 216 S.E.2d 705 (1975); Bishop v. Flood, 133 Ga.App. 804 , 212 S.E.2d 443 (1975); Dale’s Serv. Co. v. Jones, 96 Idaho 662 , 534 P.2d 1102 (1975); Indianapolis Raceway Park, Inc. v. Curtiss, 179 Ind.App. 557 , 386 N.E.2d 724 (1979); Pendleton v. Sard, 297 A.2d 889 (Me.1972); Christle v. Marberg, 421 N.W.2d 748 (Minn.Ct. App.1988); Skjod v. Hofstede, 402 N.W.2d 839 (Minn.Ct.App. 1987); Haggard Drilling, Inc. v. Greene, 195 Neb. 136 , 236 N.W.2d 841 (1975); Insulation Contracting & Supply v. Kravco, Inc., 209 N.J.Super. 367 , 507 A.2d 754 (1986); Graystone Materials Inc. v. Pyramid Champlain Co., 198 A.D.2d 740 , 604 N.Y.S.2d 295 (1993); Schuler-Haas Elec. Corp. v. Wager Constr. Corp., 57 A.D.2d 707 , 395 N.Y.S.2d 272 (1977); Paramore v. Rose, 90 Or.App. 569 , 752 P.2d 1291 (1988); R & B Elec.

Co. v. Amco Constr. Co., 471 A.2d 1351 (R.I.1984); Berger Eng’g Co. v. Village Casuals, Inc., 576 S.W.2d 649 (Tex.Civ.App.1978); Farwest Steel Corp. v. Mainline Metal Works, Inc., 48 Wash.App. 719 , 741 P.2d 58 (1987) (a materials supplier to subcontractor versus general contractor); Hopkins v. Anderson, 7 Wash.App. 762 , 502 P.2d 473 (1972); Gebhardt Bros. v. Brimmel, 31 Wis.2d 581 , 143 N.W.2d 479 (1966). But see Paschall’s, Inc. v. Dozier, 219 Tenn. 45 , 407 S.W.2d 150 (1966). Dawson observes that “[w]here reasons are stated in these cases they usually consist of no more than a conclusion: the owner’s enrichment is not unjust.” Dawson at 1446.

He also notes that, at times, the rationale advanced is that it is “objectionable for the subcontractor to attempt to shift the risks he assumed in extending credit to the general.” Id. II G. Palmer, The Law of Restitution § 10.7(b), at 107 (1978, 1995 Cum.Supp. No. 2), states that “[m]odern cases continue to hold against aggrieved subcontractors on the theory that the services performed by the subcontractors are ¹⁸⁴ for the benefit of the general contractors responsible for the completion of the improvement, not for the benefit of the owner.” Id. The theoretical underpinning of the rule denying quantum meruit recovery to an unpaid subcontractor against an owner, even where the owner has not fully paid the general contractor, is perhaps best stated by Professor Dobbs. He says: “Statutes aside, the cases deny recovery.

Somewhat similar cases, those in which improvements are ordered by a tenant or someone who is not the owner, also deny recovery to the hapless contractor. The subcontractor cases sometimes say that the landowner is not unjustly enriched and this seems accurate, because the landowner got no more than what he contracted for. He remains liable for the payments due the contractor if he has not already paid. Indeed, this liability redounds to the benefit of the sub, who can, using garnishment or subrogation, enforce his claim against the general contractor against any funds retained by the landowner.

In addition, the parties almost certainly contemplated that their contractual arrangements constituted the full set of liabilities. The subcontractor relied on the credit of the general contractor, not the owner, and it is not unfair to him or enriching to the landowner to respect the contractual arrangement.” 1 Dobbs § 4.9(4), at 698 (footnotes omitted); see also 3 Dobbs § 12.20(3), at 472-73. For the foregoing reasons the unjust enrichment counts of the plaintiffs third amended complaint (Counts II, III, IV, VI and VIII) were properly dismissed, as the Court of Special Appeals held. II In this part II we consider the legal sufficiency of the allegations of Count I. In doing so, we assume that plaintiffs’ effort to set aside the foreclosure sale is not mooted by our holding in part I that unjust enrichment does not he for reasons that are independent of whether Banbury LP paid fair ¹⁸⁵ value as the substituted purchaser at foreclosure.

Phrased another way, we assume that Bennett and D & L intend to press any interests in the Property that they might have as mechanics’ lienholders, independently of their restitution theory for recovery. 5 We also assume, without deciding, that Bennett and D & L are not precluded from attempting to vacate the judgment of ratification, despite their not having excepted to the report of sale and despite their not asserting any lack of notice. Compare Bachrach v. Washington United Coop., Inc., 181 Md. 315 , 29 A.2d 822 (1943); Harris v. Hooper, 50 Md. 537 (1879). Further, we construe the allegations of Count I concerning collusion to involve at least five parties. The allegations describe negotiations and an agreement between the Bank on the one hand and representatives of Ammendale LP, of its corporate general partner, and of a new owner of the Property, either formed, or to be formed, as a limited partnership with a corporate, general partner.

Although the plaintiffs allege that the same persons were investors in the old and new owner-developer entities, the plaintiffs allege no facts that would justify disregarding the