Chaires v. Chevy Chase Bank, F.S.B.

KENNEY, Judge. In June 1988, William and Laurie Chaires executed a promissory note and Deed of Trust securing a $350,000 loan from B.F. Saul Mortgage Company (“Saul”), a wholly owned subsidiary of Chevy Chase Bank, F.S.B. (“Chevy Chase”), appellees. This note was later assigned to Chevy Chase.

In May 1995, the Chaireses brought suit against Chevy Chase and Saul, alleging illegal conduct by charging loan fees in excess of those permitted under Maryland’s Secondary Mortgage Loan-Credit Provisions Law (“SMLL”), codified in Md.Code Ann. (1975, 1990 Repl.Vol.), § 12-401 et seq. of the Commercial Law Article (“C.L.”). The circuit court entered final judgment in favor of the Chaireses. Prior to consideration of the matter by this Court, the Court of Appeals issued a writ of certiorari on their own motion. The Court of Appeals held that a statutory lien on the Chaireses’ waterfront property was a lien of prior encumbrance and that the Chaireses’ loan was a second lien subject to SMLL.

Because Mr. Chaires failed to disclose this prior lien on the property while acting as attorney for all parties to the loan, however, the Chaireses were estopped from asserting SMLL claims. See, Chevy Chase Bank, F.S.B. v. Chaires, 350 Md. 716 , 715 A.2d 199 (1998) (“Chaires I”). On September 22, 1997, the Chaireses initiated this suit against Chevy Chase alleging that it continued to impose illegal loan fees after the decision in Chaires I and that such actions constituted unfair and deceptive trade practices and harassment. The Chaireses claimed that, in light of the holding of Chaires I, appellees had actual knowledge, independent of any involvement by Mr. Chaires, that the loan was subject to the SMLL and yet continued to impose illegal ⁶⁹ charges.

The Chaireses amended their complaint on November 19, 1997 and August 3, 1998 to add Jerry and Patricia Nelson 1 and Hillman Foster 2 as additional plaintiffs in the suit, and also added Saul and the First National Bank of Chicago as defendants. Chevy Chase and Saul filed a motion for summary judgment, arguing that federal law preempted any state law violations, that the Chaireses were estopped from arguing state law violations under Chaires I, and that the Nelsons were barred based on res judicata. The trial court, in a written opinion dated October 9, 1998, granted their motion for summary judgment. While recognizing the Court of Appeals’ ruling in Chaires I, the trial court found that the federal preemption issue was not addressed.

The trial court held that Chevy Chase was a federal savings and loan institution subject to the federal regulations. The trial court further found that the federal regulations, specifically the Office of Thrift Supervision (“OTS”) regulations, conflicted with SMLL and Maryland’s Credit Grantor Closed End Credit Provisions 3 (“CECP”), and held that “OTS federal regulation preempts the charges to the extent they are not allowed by the CECP or SMLL.” The trial court also found that the Foster and Nelson loans were first mortgages and therefore subject to the federal Depository Institution Deregulation and Monetary Control Act (“DIDMCA”), as codified in 12 U.S.C. § 1735f-7, which also preempted state usury laws concerning “federally related” first mortgages on residential property. ⁷⁰ Additionally, the trial court found that the Chaireses were barred from recovery based on estoppel grounds as discussed in Chaires I, and that the Nelsons were similarly barred by res judicata based on prior foreclosure proceedings. A foreclosure action had been previously instituted against the Nelson property, whereby the Nelsons, through their attorney, Mr. Chaires, filed exceptions, alleging that Chevy Chase violated “Maryland’s Commercial Law Article generally, Title 10 specifically.” Chevy Chase responded to the exceptions, raising the issue of federal preemption. Without discussion, the Circuit Court for Anne Arundel County overruled the Nelsons’ exceptions and ratified the sale (“Final Order Ratifying Sale”).

The trial court in this action found that the Final Order Ratifying Sale was an unappealed adjudication that barred further litigation on the preemption issue. Although the trial court’s entry of summary judgment was originally entered in favor only of Chevy Chase, the trial court subsequently entered a Final Order in which it granted summary judgment in favor of Chevy Chase and B.F. Saul for all claims. 4 The Chaires, the Nelsons, and Foster, appellants, filed a timely notice of appeal presenting the following questions, which we have re-ordered and slightly rephrased: I. Did the trial court err in ruling the Chaireses were estopped from pursuing claims for violations of the SMLL after the Court of Appeals decision in Chaires I?

II

Did the trial court err in granting summary judgment in favor of Chevy Chase and B.F. Saul as to the Nelsons based on res judicata?

III

Did the trial court err in granting summary judgment in favor of Chevy Chase and B.F. Saul on the issue of federal preemption?

IV

Did the trial court err in granting summary judgment in favor of Chevy Chase and B.F. Saul on the issue of ⁷¹ federal preemption because it failed to consider the circumstances surrounding the individual loans and whether they were preempted by the federal regulations? V. Did the trial court abuse its discretion in refusing to allow appellants the opportunity to conduct discovery prior to the resolution of the summary judgment motion? DISCUSSION I. Appellants argue that the trial court erred in ruling that the Chaireses were estopped from asserting that appellees violated the SMLL. They contend that, by virtue of the holding in Chaires I, appellees were aware that they were subject to SMLL and thereby had actual knowledge that their activity was illegal. 5 ⁷² In support of their claim, the Chaireses assert that the trial court’s ruling “is contrary to both the law governing the doctrine of estoppel and the facts of this case.” They argue that the trial court’s holding “fails to recognize that the present litigation is founded upon a different factual predicate than was Chaires I.” We disagree.

In Chaires I, the Court of Appeals found that the Chaireses were estopped from asserting that Chevy Chase violated the SMLL, based on Mr. Chaires’s actions as borrower, settlement attorney for the lender, settlement attorney for himself and his wife as borrowers, and as the agent for the title insurer. The Court found that there was a conflict of interest and his failure to disclose the existence of the prior shore lien on the property to the lender constituted inadequate disclosure, causing Chevy Chase to obtain a second rather than a first lien on the property. In finding that such acts estopped him from arguing Chevy Chase violated the SMLL, the Court of Appeals held: In the matter now before us the loan from B.F. Saul originated as one in the regular course of its business, but it deviated from that course. B.F. Saul furnished closing instructions to its settlement attorney, and the loan would have been one in ordinary course had those instructions been followed.

The obstruction was the Shore Lien. Having in hand closing instructions that called for the documents necessary to effect a first lien, Mr. Chaires did not fulfill his obligation of disclosure by relying on the reference to the Shore Lien in the commitment for title insurance. Nor could he treat that reference as having generated the Ghent’s acquiescence in closing the transaction with the prior Shore Lien still in effect, particularly when the closing instructions directed elimination of the exception for the Shore Lien, as well as of the exception for any and all liens. As attorney for the lender in the transaction, it was Mr. Chaires’s duty, at a minimum, to bring the obstacle of the Shore Lien to the direct attention of an appropriate representative of B.F. Saul so that the lender could consider its options.... ⁷³ We assume, most favorably to the plaintiffs, that Mr. Chaires either failed to look at the SECL or attempted to write the policy around it in the hope that that would be acceptable to B.F. Saul.

Chevy Chase concedes that the assertion by the Chaireses of claims under SMLL was the result of afterthought and not part of a plot at the time the loan was made. Nevertheless, estoppel does not require that the persons estopped intend the detriment that flows from their conduct. Here, Mr. Chaires knew that the Loudon Lane property was subject to the Shore Lien. The estoppel results from the actual, and not simply potential, conflict existing when the loan was made.

That lien secured a no interest loan from DNR on which, by Mr. Chaires’s estimate, $15,000 to $17,000 remained to be paid as of the time of the B.F. Saul Loan. Thus, in addition to some $6,000 in fees and closing costs that the Chaireses would have to pay in order to borrow the $350,000 to repay Queenstown Bank, the Chaireses would have to produce an additional $15,000 to $17,000 in order to satisfy the objectives of Mr. Chaires’s client, should the client decide not to make the loan unless the Shore Lien was released. This conflict of interests places Mr. Chaires in a position where, whether intentionally or not, his inadequate disclosure in violation of his duty to the client operated for his benefit and that of Mrs. Chaires. Public policy is also invoked by the Chaireses who submit that estoppel cannot be applied to bar a claim based upon a statute that is intended to protect the party against whom estoppel is asserted.

In making this argument Mr. Chaires seeks to don exclusively his hat as a borrower for consumer purposes, and he totally ignores his relationship to the lender as title and settlement attorney. It is the latter relationship that gives rise to the estoppel. Messick v. Smith, 193 Md. 659 , 69 A.2d 478 (1949), reh’g denied, 193 Md. 659 , 72 A.2d 249 (1950), on which the Chaireses rely, ⁷⁴ does not involve estoppel and does not involve the attorney-client relationship. Nor does the jury’s finding that Chevy Chase “knowingly” violated SMLL prevent an estoppel from arising.

Under the facts of the instant matter estoppel was a legal question for the court to decide; there was no jury issue. [Emphasis added.] Chaires I, 350 Md. at 742 , 715 A.2d 199 . The Court of Appeals found that the Chaireses were es-topped based on Mr. Chaires’s actual conflict of interest and inadequate disclosure of the prior lien, from which the Chaireses benefited. The essence of the estoppel was that Mr. Chaires’s acts created the situation in which Chevy Chase found itself as the holder of a second lien subject to the SMLL. That undesired and unbargained for circumstance did not change as a result of Chaires I, which only confirmed that Chevy Chase’s lien was a second lien.

The fact that Chevy Chase then had actual knowledge that the mortgage was subject to SMLL did not in any way cure the impropriety of Mr. Chaires’s conduct. Under these circumstances, as the Court of Appeals stated in Chaires I , a “finding that Chevy Chase ‘knowingly’ violated SMLL [does not] prevent an estoppel from arising.” We therefore find no error in the trial court’s finding that the Chaireses were estopped from arguing violations of the SMLL by Chevy Chase.

II

Similarly, appellants argue that the trial court erred in finding the Nelsons’ claims were barred by res judicata. They claim that the foreclosure action and the case at bar are “separate cases which involve different causes of action” in which the “[resolution of one of the cases could not affect the rights of the parties as to the other.” Again, we disagree. Appellants correctly state the elements required to support a res judicata defense, as “1) that the parties in the present litigation are the same or in privity with the parties to the earlier dispute, 2) that the claim presented in the current ⁷⁵ action is identical to the one determined in the prior adjudication, and 3) that there was a valid final judgment on the merits.” Douglas v. First Sec. Federal Sav. Bank, Inc., 101 Md.App. 170, 181 , 643 A.2d 920 , cert. denied, 336 Md. 558 , 649 A.2d 601 (1994), and cert. denied, 514 U.S. 1128 , 115 S.Ct. 2001 , 131 L.Ed.2d 1002 (1995) (citing Major v. First Virginia Bank, 97 Md.App. 520, 533-34 , 631 A.2d 127 , cert. denied, 331 Md. 480 , 628 A.2d 1067 (1993)).

The res judicata analysis is straightforward when an earlier court has actually ruled on the matter litigated. It is when ... the earlier court has not directly ruled upon the matter that the analysis becomes more complex, for then the second court must determine whether the matter currently before it was fairly included within the claim or action that was before the earlier court and could have been resolved in that court. It has long been established that a judgment between the same parties or their privies upon the same cause of action is conclusive ‘not only as to all matters that have been decided in the original suit, but as to all matters which with propriety could have been litigated in the first suit.’ FWB Bank v. Rickman, 354 Md. 472, 493 , 731 A.2d 916 (1999). Stated another way, the concept of res judicata can be described as: “a judgment between the same parties and their privies is a final bar to any other suit upon the same cause of action, and is conclusive, not only as to all matters that have been decided in the original suit, but as to all matters which with propriety could have been litigated in the first suit.” Rowland v. Harrison, 320 Md. 223, 229 , 577 A.2d 51 (1990).

Appellants agree that there is identity of the parties and the first element is satisfied. They argue, however, that the second element was not satisfied, as “foreclosure proceedings in reference to the Nelsons’ home can hardly be thought of as an identical claim to those presented in the present action.” We are not persuaded. In their exceptions, the appellants claimed: ⁷⁶ 2. At the time of foreclosure, lender Chevy Chase FSB, which was conducting the foreclosure pursuant to the Deed of Trust by and through their trustee David N. Prensky, claimed that the Nelsons were approximately $4,000.00 in arrears on the Loan. 3.

At, the time of foreclosure, Chevy Chase owed the Nelsons $120,000.00 as a matter of law. 4. The $120,000 liability of Chevy chase to the Nelsons results from violations by Chevy Chase of Maryland’s Commercial Law Article generally, and Title 10 specifically. 5. The facts and legal circumstances in support of the Nelsons’ claim are specified in the Second Amendment to the Complaint, attached hereto, which has previously been filed in the Circuit Court for Prince Georges’ County, case CAL 97-18995. Exhibit A hereto. * * * Wherefore, Defendants respectfully request that their exception to the sale be granted, that ratification of the foreclosure sale be stayed and determined after resolution of their action in Case CAL 07-18995, or for such or different relief as the Court may determine to be appropriate.

In response, Chevy Chase claimed that although the foreclosure action was a distinct proceeding, separate and apart from appellants’s civil suit, the same issues were raised in both proceedings. The Nelsons raised the claim of illegality of the fees in an attempt to dispute the charges and the amount owed. In fact, they refer to their complaint for the sole support of their exceptions to the foreclosure sale. The propriety of the fees and charges, as well as the amount owed under the mortgage were proper objections to make to a foreclosure sale, and appellants had an opportunity to both raise the issues and argue the merits before the court.

Although the requested relief was different, the issues and factual circumstances surrounding the foreclosure action and ⁷⁷ this action were identical. Contrary to appellants’ assertion, the ratification of sale is more than declining to grant a stay. The ratification of a sale is res judicata as to the validity of the sale, except in case of fraud or illegality, and hence its regularity cannot be attacked in collateral proceedings. Ed Jacobsen, Jr., Inc. v. Barrick, 252 Md. 507, 511 , 250 A.2d 646 (1969).

In Fairfax Savings, F.S.B. v. Kris Jen Limited Partnership, et al., 338 Md. 1 , 655 A.2d 1265 (1995), the Court of Appeals confronted a similar issue. In Fairfax, Kris Jen borrowed $3,200,000 from Fairfax Savings in order to construct eighteen luxury townhomes in Bel Air, Maryland. The loan was secured by a deed of trust on the property and personally guaranteed by Kris Jen’s general partner and his wife. A year later, the loan was in default.

Fairfax foreclosed on the property and the property was subsequently sold. A report of sale was filed with the court and Kris Jen filed exceptions. Prior to a hearing, Kris Jen withdrew his exceptions, and the court ratified the sale without discussion. While the foreclosure proceedings were underway, Kris Jen instituted a civil suit against Fairfax, alleging, among other things, that Fairfax engaged in fraud and misrepresentation, breached its duty of good faith and fair dealing, breached its fiduciary duty, and engaged in tortious interference, all of which essentially involved the “defense of no default.” Fairfax, 338 Md. at 23 , 655 A.2d 1265 .

After a lengthy discussion of claim preclusion, the Court of Appeals concluded: We have seen ... that, from the standpoint of Maryland procedure and based on Kris Jens’ voluntary appearance [at the foreclosure sale], Kris Jen had the opportunity to litigate to judgment in the foreclosure action its defense that there was no foreclosure-triggering default.... In any event, in the instant matter, a foreclosure-triggering default is a condition precedent to a Maryland mortgage foreclosure. Ordinarily the existence of that essential will be demonstrated by the statement of mortgage debt and by the mortgage that are required to accompany the order to docket the summary preceding. Allegations that there ⁷⁸ was no foreclosure-triggering default negate, contradict, and in that sense nullify an essential foundation for the foreclosure judgment.

Those allegations were precluded by the foreclosure judgment, and the circuit court correctly ruled that they should be culled from Plaintiffs’ second amended complaint. [Emphasis added.] Fairfax, 388 Md. at 31, 655 A.2d 1265 . We find this reasoning instructive. The Nelsons’ claim of illegality of fees was in the nature of a no default defense by claiming an offsetting liability of Chevy Chase against the amount Chevy Chase claimed to be in arrears. Their theory was that if the Nelsons could have successfully proved that they were entitled to recover $120,000 in illegal fees collected by Chevy Chase, it would negate the fact that the Nelsons were $4,000 in default on the loan.

Therefore, the Nelsons’ claim of illegality is one that would “nullify” the foreclosure-triggering default. Consequently, the foreclosure proceeding was a proper forum for the Nelsons to assert such claims and the court’s ratification of the sale is res judicata to these issues. See also, Tri-Towns Shopping Center, Inc. v. First Federal Savings Bank of Western Maryland, 114 Md.App. 63 , 688 A.2d 998 , cert. denied, 346 Md. 28 , 694 A.2d 950 (1997)(relying on Fairfax, this Court found that the debtors’ withdrawal of exceptions to a foreclosure sale pursuant to a settlement agreement constituted res judicata as to claims regarding purchase price of property and status as junior lienholders). The Nelsons had an opportunity to appeal the final order ratifying the foreclosure sale.

Their failure to do so precludes them from relitigating the issue.

III

Appellants next argue that the trial court erred in finding that the federal law preempted Maryland law in this case. The heart of their claim is that because each loan originated with Saul, the subsequent assignment of the notes to Chevy Chase, a federal lender, did not alter the original rights and obligations of the parties and does not subject ⁷⁹ appellants to different legal standards. In light of our holding in I and II above, we will limit our discussion to the Foster loan. Appellants’ argument is based essentially on contract principles.

They repeatedly assert that appellees “elected” Maryland law and waived federal protection, as evidenced by certain letters to the Maryland Commission and the language of the loan documents. They argue that the trial court erred when it “failed to consider that specific superceding terms were added to the loan documents by which the lenders elected that Maryland law controlled the transactions.” Appellants also argue that the trial court erred in construing the choice of law provision in the documents, and that ambiguous provisions, such as the choice of law provision, should be interpreted by the intent of the parties. Contrary to appellants’ argument that appellees elected Maryland law over federal law, the parties could not elect to have state law govern over federal law. The Code of Federal Regulations (“CFR”), 12 CFR § 560.2 , expressly provides that the federal regulations occupy the entire field of federal lending, and the federal regulations are to be the governing laws for certain activities, including the charging of fees, by federal institutions.

Section 560.2 provides: 12 CFR § 560.2 Applicability of law. (a) Occupation of field. Pursuant to sections 4(a) and 5(a) of the HOLA, 12 U.S.C. 1463(a), 1464(a), OTS is authorized to