Cappel v. Riaso, LLC

MEREDITH, J. In this appeal, we are asked to determine whether, in an action to enforce a confession of judgment clause in a guarantee of a promissory note executed outside the State of Maryland, the Circuit Court for Montgomery County had personal ³⁵⁰ jurisdiction over Lenan Cappel and his wife, Pauline Cappel, (the “Cappels”), appellants, by virtue of their ownership of unimproved real property in Maryland unrelated to the cause of action. It is our determination that the circuit court lacked personal jurisdiction over the Cappels, and we will therefore vacate the judgment which the circuit court entered in favor of Riaso, LLC, (“Riaso”), appellee. As a result, we will not reach the other questions posed by the Cappels. 1 Facts and Procedural History Riaso is a District of Columbia limited liability company with offices located at 3817 Whitman Road, Annandale, Virginia. The Cappels are residents of Washington, D.C. They are limited partners of, and hold a 50% ownership interest in, Hope 7 Monroe Street Limited Partnership (“Monroe LP”), ³⁵¹ which is a District of Columbia limited partnership.

Monroe LP’s general partner is Hope 7 Inc. Monroe LP holds title to real property improved by an apartment building at 1020 Monroe Street, NW, Washington, D.C. On November 22, 2006, Monroe LP borrowed $1,600,000 from Riaso in order to, among other purposes, pay off an existing mortgage on the 1020 Monroe Street property. The note evidencing the loan was signed in Virginia. In the note, Monroe LP agreed to the entry of a confessed judgment against it in case of default, in which event Monroe LP would be subject to an increased interest rate of 23%. The confessed judgment provision of the note—Paragraph 11—provided that “LMonroe LP] consents to the jurisdiction of and agrees that venue shall be proper in the Circuit Court of any County of the State of Virginia.” In Paragraph 19 of the note, Monroe LP also consented to personal jurisdiction in the United States District Court for the District of Columbia and the United States District Court for the Eastern District of Virginia.

As a condition of the loan, Riaso required the Cappels to enter into identical personal guarantee agreements in which the Cappels each consented to the entry of a confessed judgment against them in the event of Monroe LP’s default. Specifically, the Cappels agreed to the entry of judgment by confession “for the entire principal amount of the Note then remaining unpaid, whether by acceleration or otherwise, together with all court costs and attorneys’ fees equal to fifteen percent (15%) of the amount due.” In addition, the Cappels agreed to pay “all amounts due with respect to the Note, including all interest payments thereon.” Like the promissory note, both of these guarantees were executed in Virginia. In Paragraph 7 of the guarantees, the Cappels agreed to appear “in any court of competent jurisdiction in the State of Virginia or any other State or Territory of the United States” to confess judgment. Paragraph 20, however, stated that Maryland law governs the guarantees: ³⁵² 20.

Governing Law. This Guaranty Agreement shall be deemed to be made in and governed by the laws of the State of Maryland, without reference to principles of conflict of laws. After Monroe LP defaulted, Riaso brought an action against the limited partnership in Washington, D.C., to enforce the terms of the promissory note. Monroe LP subsequently filed for bankruptcy in the United States Bankruptcy Court for the District of Columbia.

On July 16, 2009, based on the guarantee agreements, Riaso filed a complaint and affidavit for confessed judgment against the Cappels, pursuant to Maryland Rule 2-611, in the Circuit Court for Montgomery County. The Cappels were served notice of this complaint in Washington, D.C. On July 16, 2009, the clerk of the circuit court entered judgment against the Cappels in favor of Riaso for $2,938,312.51, plus attorneys’ fees of 15% of that amount. The judgment was comprised of the following: (1) $1,600,000—the principal due on the promissory note; (2) $203,200.00 in late fees; (3) $1,092,460.11 in interest as of July 1, 2009; and (4) “Foreclosure expenses and Trustee’s fee(s) of $42,652.40.” On September 15, 2009, pursuant to Rule 2—611(d), the Cappels filed a motion to open, modify, or vacate the order of confessed judgment. In their motion, the Cappels argued, among other defenses, that the circuit court lacked personal jurisdiction over them because of their minimal connections to the State of Maryland.

Riaso filed an opposition in which it argued that the court had personal jurisdiction based on the Cappels’ ownership of a piece of undeveloped property located at 14500 Friendlywood Road, in Burtonsville in Montgomery County, Maryland. The Cappels had acquired the property in 1997. According to Riaso, the Cappels’ “purchase of this vacant property is the transacting of business” in Maryland. Riaso argued: In this matter, [the Cappels’] contacts with the State of Maryland are more than cursory.

They acquired property in 1997 and have continuously owned it since then.... [The ³⁵³ Cappels] have “continuously and systematically” continued to pay taxes, own the property and otherwise maintained a contact with the State of Maryland. The [Cappels] have purposefully availed themselves of the benefits and protections of the forum State by virtue of their ownership of real property within this forum. Therefore, this Court may exercise general jurisdiction over the defendants. (Footnotes omitted.) The circuit court conducted a hearing on the Cappels’ motion.

At the hearing, Riaso again argued that the property at 14500 Friendlywood Road is a “viable asset that the [Cap-pels] are using to transact business in the state of Maryland.” After considering the parties’ arguments, on November 10, 2010, the court ruled that it had personal jurisdiction, and denied the Cappels’ motion to vacate the entry of judgment in favor of Riaso. The court explained its decision as follows: THE COURT: Okay. I’ve read Camelback [ 312 Md. 330 , 539 A.2d 1107 (1988) ] I’ve read International Shoe [ 326 U.S. 310 , 66 S.Ct. 154 , 90 L.Ed. 95 (1945) ] a long time ago.... * * * Now whether the court applies the standard in Camel-back, which the Court has reviewed with respect to the relevant factors, the burden on the defendant, the interest of the forum state, the plaintiffs interest in obtaining relief, the interstate judicial system’s interest in obtaining the most efficient resolution of controversy and the shared interest of the several states in furthering fundamental substantive social policies or whether we simply apply International Shoe , which is a minimum contacts provision, this Court is satisfied that the representation concerning the nature of the contacts, i.e., property in Montgomery County, and transacting business is sufficient to constitute minimum contacts under International Shoe or the sufficient criteria that are laid out in page 5 of the Camel-back decision. Either way, the Court does find that there is jurisdiction, both personal and subject matter jurisdiction. ³⁵⁴ With respect to the motion to open, modify, or vacate the order of confessed judgment under 2-611(d), the Court realizes that in terms of the burden the courts sometime[ ] look askew upon confessed judgments and [they are] to be looked upon with great introspection, if you will, with respect to the nature of the confessed judgment.

But based upon the allegations of this, this Court is not satisfied that this basis to open and modify or vacate that confessed judgment [is met]. The motion is denied. (Emphasis added.) Within ten days, the Cappels moved to alter, amend, or modify the judgment entered on November 10, 2010, arguing, among other grounds, the lack of the court’s personal jurisdiction. The circuit court denied the motion to alter or amend.

The Cappels then filed a notice of appeal. Discussion Rule 2-611(d) allows a defendant to raise defenses to a confessed judgment. The rule states: (d) Motion by defendant. The defendant may move to open, modify, or vacate the judgment within the time prescribed for answering by sections (a) and (b) of Rule 2-321.

The motion shall state the legal and factual basis for the defense to the claim. The courts of this State have not explicitly stated that the defense of lack of personal jurisdiction is properly raised in a Rule 2-611(d) motion. Cf. Burnside v. Wong, 412 Md. 180, 195 , 986 A.2d 427 (2010) (“The defense of lack of personal jurisdiction, unlike subject matter jurisdiction, is waived unless raised in a mandatory preliminary motion, Rule 2-322(a)(1); Paul V. Niemeyer & Linda M. Schuett, Maryland Rules Commentary 202 (3rd ed. 2003).”) Nevertheless, a filing under Rule 2-611(d) is in the nature of a mandatory preliminary motion.

Moreover, Maryland appellate courts have, on a number of occasions, addressed the defense of lack of personal jurisdiction raised in a confessed judgment action. See, e.g., Krashes v. White, 275 Md. 549 , 341 A.2d 798 (1975). ³⁵⁵ We deem it appropriate, therefore, to address on its merits the Cappels’ argument that the circuit court lacked personal jurisdiction. The existence of personal jurisdiction is a question of law. CSR v. Taylor, 411 Md. 457, 471 , 983 A.2d 492 (2009).

Because Riaso was the plaintiff in the circuit court, it bears “the burden to establish the propriety of personal jurisdiction.” Id. at 467 n. 2, 983 A.2d 492 . Under Md.Code (1973, 2006 RepLVoL), Courts & Judicial Proceedings Article (“CJ”), § 6-102(a), the personal jurisdiction of Maryland’s courts includes, but is not limited to, “any cause of action over a person domiciled in, served with process in, organized under the laws of, or who maintains his principal place of business in the State.” None of these circumstances exist with respect to the Cappels in the present case. The Cappels are residents of Washington, D.C., and were served out-of-state. Maryland courts undertake two interrelated inquiries in deciding whether personal jurisdiction exists over an out-of-state defendant.

CSR, supra, 411 Md. at 472 , 983 A.2d 492 . Our first task is to consider whether the provisions of Maryland’s long-arm statute, CJ § 6-103, are met. Next, we apply the constitutionally minimum standards for personal jurisdiction required under the Due Process Clause of the Fourteenth Amendment. CSR, supra, 411 Md. at 473 , 983 A.2d 492 .

The Court of Appeals has explained, id. at 475 , 983 A.2d 492 , how these two considerations relate to one another: [T]he statutory and constitutional components of our jurisdictional inquiry are not mutually exclusive. Rather, the components become merged, as this Court has held that “the long arm statute represents an effort by the Legislature to expand the boundaries of permissible in personam jurisdiction to the limits permitted by the Federal Constitution.” Geelhoed v. Jensen, 277 Md. 220, 224 , 352 A.2d 818, 821 (1976). Riaso contends that personal jurisdiction over the Cappels is proper by virtue of their ownership of unimproved real property located within Maryland. But an out-of-state resident’s ownership of real property unrelated to the cause of ³⁵⁶ action, absent other ties to the forum state, is insufficient to establish jurisdiction under either the long-arm statute or the Due Process Clause.

CJ § 6—103(b)(5) is the provision of the long-arm statute which appears most relevant to the facts of the present case. The section provides: (b) In general.—A court may exercise personal jurisdiction over a person, who directly or by an agent: (5) Has an interest in, uses, or possesses real property in the State[.] On its face, this provision appears to support the circuit court’s exercise of jurisdiction over the Cappels. But jurisdiction under this subsection has been limited to causes of action connected with the property interest. In McLaughlin v. Copeland, 435 F.Supp. 513, 529 (D.Md.1977), the United States District Court for the District of Maryland refused to exercise personal jurisdiction pursuant to CJ § 6—103(b)(5) over defendants alleged to own real property in Maryland where the property in this State was not related to the cause of action.

The court explained, id.: Plaintiff alleges that both [defendants] had an “interest in, used, or possessed real property” in Maryland and therefore the court has jurisdiction over them under subsection (b)(5). In his deposition, [Defendant A] stated that he has not owned any real property in Maryland since September 1, 1974. [Defendant B] does not refute the allegation in either of his two affidavits. Even if the court assumes that [the defendants] have an interest in, use or possess real property in Maryland, subsection (b)(5) does not confer jurisdiction over them. Jurisdiction under (b)(5) is limited to causes of action having some connection with the alleged property interest.

Annotated Code of Maryland, Cts. & Jud.Proc.Art. § 6-103(a); see, e.g., McGinnis v. [Rogers ], 262 Md. 710 , 279 A.2d 459, 472 (1971); Auerbach, The “Long Arm” Comes to Maryland, 26 Md.L.Rev. 13, 44-45 (1966); Foster, [Judicial Economy: Fairness and Convenience of Place of Trial: Long-Arm, Jurisdiction in ³⁵⁷ District Courts,] 47 F.R.D. [73,] 85-86 n. 37. It is apparent that subsection (b)(5) is not a source of jurisdiction because this suit arises out of the defendants’ alleged acts which, even if proven, are not connected with any property interests that the defendants may have in Maryland. (Emphasis added.) In the present case, the cause of action arises out of a default on a promissory note that bears no connection with the unimproved parcel of real estate the Cappels own in Maryland. Because the instant action bears no relation to the Cappels’ ownership of real property in Maryland, CJ § 6-103(b)(5) is not a source of personal jurisdiction over the Cappels in this case.

Moreover, the Due Process Clause requires that a defendant “have certain minimum contacts with [the forum state] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’ ” Base Metal Trading v. OJSC Novokuznetsky Aluminum, 283 F.3d 208 , 213 (4th Cir.2002), cert. denied, 537 U.S. 822 , 123 S.Ct. 101 , 154 L.Ed.2d 30 (2002) (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 , 66 S.Ct. 154 , 90 L.Ed. 95 (1945)). The existence of these minimum contacts requires there to “be some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” Hanson v. Denckla, 357 U.S. 235, 253 , 78 S.Ct. 1228 , 2 L.Ed.2d 1283 (1958) (emphasis added). In Burger King v. Rudzewicz, 471 U.S. 462, 475-76 , 105 S.Ct. 2174 , 85 L.Ed.2d 528 (1985), the United States Supreme Court explained the purpose of requiring a finding that a defendant purposefully availed himself of the privileges of the forum state before the defendant can be haled into court: This “purposeful availment” requirement ensures that a defendant will not be haled into a jurisdiction solely as a result of “random,” “fortuitous,” or “attenuated” contacts, or of the “unilateral activity of another party or a third person[.]” Jurisdiction is proper, however, where the contacts ³⁵⁸ proximately result from actions by the defendant himself that create a “substantial connection” with the forum State. Thus where the defendant “deliberately” has engaged in significant activities within a State, or has created “continuing obligations” between himself and residents of the forum, he manifestly has availed himself of the privilege of conducting business there, and because his activities are shielded by “the benefits and protections” of the forum’s laws it is presumptively not unreasonable to require him to submit to the burdens of litigation in that forum as well.

(Internal citations omitted.) In Camelback Ski Corp. v. Behning [Camelback II ], 312 Md. 330, 338 , 539 A.2d 1107 , cert. denied, 488 U.S. 849 , 109 S.Ct. 130 , 102 L.Ed.2d 103 (1988), the Court of Appeals noted that “the quality and quantity of contacts required to support the exercise of personal jurisdiction will depend upon the nature of the action brought and the nexus of the contacts to the subject matter of the action.” In determining whether a defendant’s contacts with the forum state are sufficient, courts employ the “useful