Clark-King Constr. v. SALTER AND TAYLOR, TRUSTEES

Barnes, J., delivered the opinion of the Court. In this appeal from a final order issued by the Circuit Court for Montgomery County (Miller, J.) on March 9, 1973, ratifying a foreclosure sale, the principal and decisive question involves the allocation of payments towards the debtor’s obligations. One appellant, Clark-King Construction Company, Inc. (Clark-King), was the maker of a trust note secured by the deed of trust which was foreclosed. The other appellant, Peter C. Andresen (Andresen), was the holder of a junior lien.

Both were exceptants below and contended that the note had been fully paid. The appellees trustees, James William Salter, III and Owen McDonald Taylor, contended that $14,000.00 remained due and owing on the trust note. The relevant facts are somewhat involved but, for the most part, undisputed. On September 27, 1968, Clark-King ⁴⁹⁶ borrowed $24,000.00 from Arthur Dale Lumsden (Lumsden), giving as security for that loan a promissory note for $24,000.00 and a deed of trust of the same date, which imposed a lien upon 18 lots in Section 10 of a development in Montgomery County known as “Potomac Woods,” recorded in Plat Book 83, Plat 8673 among the Land Records of Montgomery County.

On the face of the note and the body of the deed of trust, itself, the 18 lots were described as being in Section 10 of the Potomac Woods subdivision and more specifically described as being: “Lots 23, 24, 25, 26 in Block R Lots 11,12,13,14,15,16 in Block S Lots 6, 7, 8, 9, 10,11,12,13 in Block T.” The promissory note provided for interest at 7% per annum, payable on April 1 and October 1 in each year. The principal was payable two years after date “if not sooner paid.” There was a provision in the note that if default was made of any amount becoming due under the note or the deed of trust, the entire principal sum and accrued interest should become due at the option of the holder of the note. The note contains a certification by the notary that the note is the one “described in, and secured by, a Deed of Trust of even date herewith” and was in the same principal amounts as stated to the named trustees, “said Deed of Trust being executed in my presence.” The deed of trust of September 27, 1968, is in the usual form used in Montgomery County. In addition, significantly, the trustees were directed by the noteholder to take the proper steps to effect a release of each of the lots from the operation of the deed of trust upon payment of $1,333 per lot to the noteholder and the note provided an allowance for all release fees.

The usual affidavit of consideration was executed by Lumsden and Mr. Taylor, one of the trustees, certified that he was a member of the Maryland Bar and that the deed of trust was prepared under his supervision for signing and recording. The deed of trust was duly recorded on October 9, 1968, among the Land Records of Montgomery County in Liber 3797, folio 799. ⁴⁹⁷ On September 27, 1970, by written agreement, Lumsden extended the payment of the note to September 27, 1971. On June 4, 1971, Lumsden endorsed the note, without recourse, to the Madison National Bank (Madison). As will be later shown, Clark-King paid Lumsden 10 payments of $1,333.00 each in exchange for partial releases of various lots and paid the interest on the loan to June 1,1971.

On June 1, 1971, Clark-King paid Lumsden $10,664.00, the balance of the note, in order to purchase back the note and to release all of the remaining lots. Lumsden, however, at the request of Clark-King, did not mark the note as cancelled and paid, but rather endorsed the note in blank, without recourse, even though the $10,664.00 check recited that it was for the release of the remaining lots. Clark-King then delivered the note to Madison as partial collateral security for a loan by Madison to Clark-King in the amount of $24,000.00. Apparently, Clark-King gave Madison a note for $24,000.00 for the June 1971 loan, but this note was never offered in evidence and the record is silent in regard to its date, term or any notations upon it.

Madison, on November 9, 1972, for a recited consideration of “ $10.00, and other good and valuable consideration,” assigned the note to Title Insurance Company of Minnesota (Title), without recourse to Madison; and on December 6, 1972, Title assigned the note, without recourse to it, to Floyd A. Meneely, using the same form as had been used in the assignment of November 9,1972, from Madison to Title. The trustees of the deed of trust on January 5, 1973, by Leonard J. Williams, Esquire, their attorney, filed an order in the lower court to docket a foreclosure suit, with the usual military affidavit, and an affidavit stating that $14,000.00 remained due and owing upon the $24,000.00 note. The original note of September 27, 1968, together with the extension agreement of September 27, 1970, and the assignments of November 9 and December 6, 1972, were filed as were an affidavit by Mr. Williams that notice of the foreclosure sale had been sent to Clark-King by registered mail as required by Maryland Rule W74 a 2 (b), and a copy ⁴⁹⁸ of a letter of December 29, 1972, with a registered receipt attached, and a copy of the advertisement of sale for January 8 of Lot 16 in Block S. A certified copy of the deed of trust was also filed. A corporate bond for $20,000.00 was filed and approved on January 5,1973.

The Auctioneers’ Report indicates that Lot 16, Block S was sold at public auction to Floyd A. Meneely for $5,000.00, subject to a first trust of $41,338.25, with interest from December 31, 1972 (which cannot be assumed) — a total of $46,338.25. Attached to the Auctioneers’ Report were the terms of the sale as follows: “The property will be sold subject to a first deed of trust held by ENTERPRISE FEDERAL SAVINGS & LOAN (now National Permanent Federal Savings & Loan Association), now in default as of 12/31/72 in the amount of $41,338.25 plus interest at the rate of 7V2% from 1/1/73 and said deed of trust cannot be assumed. Therefore, every bid must be made on the basis that in addition to the amount of the bid there will be due $41,338.25 plus interest at 7V2% from 1/1/73 on the first deed of trust. The property is not complete and is being sold ‘As is’ without any warranty.

Taxes are unpaid in the amount of $814.91, and will be adjusted to date of sale. Among other uncompleted items: Kitchen cabinets are installed but damaged, no kitchen appliances are in the property, kitchen sink is not hooked up, no sinks or toilets are in bathrooms, no furnace or air-conditioning is included or installed, hardwood floors are not finished, tile floor in kitchen and one bath is not installed, walkout basement door is not installed or included, garage door is not installed or included, no electrical switches or fixtures are installed or included, neither grading nor sodding has been done.” The trustees, on January 9, 1973, filed their Report of Sale indicating that they “offer[ed] for sale the property ⁴⁹⁹ described in said deed of trust” and sold it to Floyd A. Meneely for $5,000.00 “and said sale was a fair one.” Meneely and wife had entered into a written contract of sale for Lot 16, Block S in the Potomac Woods subdivision on May 19,1971, whereby they agreed to purchase that lot from Clark-King for $56,250.00 of which $11,250.00 was to be paid at settlement, subject to a first deed of trust of $45,000.00 (with interest at 7% per annum, payable at $318.06 a month over a 25-year period). Apparently, Mr. Meneely was willing to pay $7,000.00 for the assignment of the promissory note and deed of trust of September 27,1968, with a view towards foreclosing the deed of trust and purchasing Lot 16, Block S at the foreclosure for a small amount. In fact, he was the purchaser at the foreclosure sale for $5,000.00, as we have indicated.

Unfortunately for him, the promissory note had been fully paid by a proper allocation of payments by the debtor and there was, therefore, no default under the deed of trust which would justify the entry of foreclosure proceedings — all as we shall consider more fully in this opinion. Clark-King and Andresen, on February 5, 1973, duly filed their exceptions to the foreclosure sale, alleging several grounds for setting aside the foreclosure sale. Among these grounds were: 1. There was no default justifying the sale, the promissory note having been “fully paid.” 2.

The advertisement of the foreclosure sale was defective in four respects. 3. The order nisi and advertisement of that order were defective and prejudicial to the exceptants in that they failed to mention that the property sold was sold subject to a first deed of trust. 4. The sale price was grossly inadequate. 5. The affidavit of indebtedness was “defective and fraudulent” in that it stated that the balance due on the note was $14,000.00 when in fact the note was fully paid. ⁵⁰⁰ Points and Authorities were duly filed with the exceptions.

The hearing on the exceptions was held on March 9, 1973. Judge Miller concluded — erroneously in our opinion — that inasmuch as no agreement in regard to the allocation of payments had been proved, the creditor had the right to allocate the payments — specifically considered — had been made by Madison to the unsecured note for $24,000.00, rather than to the secured note, so that the secured note of September 27, 1968, had not been paid in full and was in default. From his final order of March 9, 1973, ratifying the foreclosure sale, this appeal was timely taken by the exceptants. In our opinion, the law is well established that in the absence of an agreement of the parties in regard to allocation of payments to a creditor holding two or more obligations of a debtor, the debtor has the original choice of allocation; and when the debtor makes an allocation of a payment, either expressly or by implication, the creditor must allocate that payment to the obligation indicated by the debtor.

See Safe Dep. & Tr. Co. v. Woodbridge, 184 Md. 560 , 42 A. 2d 231 (1945); Fuqua v. Moody & Clary Co., 462 S.W.2d 321 (Tex. Civ. App. 1970).

See also Diplomat Electric, Inc. v. Westinghouse Electric Supply Co., 430 F. 2d 38 (5th Cir. 1970). Cf. T. Dan Kolker, Inc. v. Shure, 209 Md. 290 , 121 A. 2d 233 (1956). If no allocation is indicated by the debtor, then the creditor has the right to designate the application of the payment.

If neither the debtor nor the creditor makes an allocation and if, as we have said, there is no agreement of the parties in regard to allocations, the law then makes the allocation to the oldest or the least secured obligations. See Luksus v. United Pacific Insurance Co., 452 F. 2d 207 (7th Cir. 1971); T. Dan Kolker, Inc. v. Shure, supra; Carozza v. Brannan, 186 Md. 123 , 46 A. 2d 198 (1946); Neidig v. Whiteford, 29 Md. 178 (1868). As we have indicated, Judge Miller was erroneously of the opinion that in the absence of agreement of the parties, the creditor, rather than the debtor, had the right to apply the ⁵⁰¹ payments. Counsel for the appellees argued to the same effect before us; but, as we have seen, this is an incorrect contention.

The resolution of the question of application of payments, therefore, turns on whether the debtor, Clark-King, effectively established that it designated its payments upon the note of September 27, 1968, resulting in its payment. We have concluded that it did establish, prima facie, such a designation of payments, which was not rebutted, and that the chancellor was clearly in error in not giving effect to the designated allocation of payments. It should be observed that there is properly no contention made in this case that any of the holders of the note of September 27, 1968, are bona fide holders for value without notice so that any equities existing between the parties may be considered by the chancellor and by us. We now turn to a consideration of the payments made by Clark-King and how they were treated at or about the time of the respective payments.

There was uncontradicted evidence that with each payment of $1,333.00 and later of $2,000.00, a partial release for a specific lot or for specific lots was tendered, and with one exception, executed, returned and recorded. On the face of the September 27, 1968, note itself, there are notations in ink that various lots had been “Paid.” Apparently, as each payment was made, the respective lot numbers were circled and dated — sometimes with the word “Paid.” In some instances, the check number and the amount “$1333.00” are given. Several notations are dated prior to the June 4, 1971, endorsement by Lumsden to Madison: Block R Lot 23 “Paid June 9 - 69 - $1333.00” Lot 24 “Paid Feb. 16, 70 - 4895” Lot 25 “Paid Feb. 16, 70 -181” Lot 26 “Paid 10-17-69 $1333.00” ⁵⁰² Block S Lot 11 “Apr 2170 Check 314” Lot 12 “May 19-70” Lot 13 “Paid 4-20-71” Block T Lot 7 “June 1,1971” Lot 8 “Jan 25 - 71” Lot 10 “Paid off” 1 On the face of the note, therefore, it was indicated that 10 of the 18 lots had been “Paid.” Between June 4, 1971, when the note was endorsed to Madison, and November 9,1972, when Madison assigned the note to Title, the following notations appear in regard to payment for the lots on the face of the note: Block S Lot 14 “paid 9/21/71” Lot 15 “Paid 11/16/71” Block T Lot 6 “11/5/71” Lot 9 “Aug. 19, Í971” Lot 11 “4/11/72” Lot 12 “4/11/72” The notations in ink entered after June 4, 1971, are in a different handwriting from those made before that date. It will be