Coe v. Hays

³⁵² ROBERT M. BELL, Judge. We granted certiorari to consider whether (1) the doctrine of equitable conversion applies to determine how to distribute the proceeds of a sale of real property when the contract of sale was executed prior to the decedent’s death, but settlement did not occur until after his death and (2) the decedent’s intentions are clearly reflected in his will. For reasons that will appear hereinafter, we need address only the first question. I. In 1979, the decedent Gail A. Lewis (“Lewis”) executed his Last Will and Testament.

It provided, in pertinent part: SECOND: Unto Fannie C. Hays, I give all of my personal property, including but not limited to all furniture and fixtures in my residential home, any motor vehicles which I may own and any monies which I may have at the time of my death. Also, unto the said Fannie C. Hays, I give and devise a life estate in and for the term of her life, in and to a parcel of real estate located in the Hauver’s Election District of Frederick County, Maryland, improved with a residential home, containing 8 acres, more or less, and being all and the same parcel of real estate shown and described as parcel #1 in a deed dated December 6th, 1952 from Roscoe G. Wolfe, et al., unto Gail A. Lewis and wife, said deed being recorded in Liber 518, folio 538, among the Land Records of Frederick County, Maryland. The interest of the said Evelyn A. Lewis having been conveyed unto Gail A. Lewis, by deed dated August 30th, 1978. THIRD: All the rest, residue and remainder of my estate, I give unto my children equally.

(Emphasis added). More than eight years after the will was executed, Lewis entered into a contract to sell certain real property he owned for $100,000.00. By his will, the respondent, Ms. Hays, was granted a life estate in that property and, ³⁵³ because it was not otherwise bequeathed, the remainder would have passed under the residuary clause. The buyers having paid $1000.00 down, settlement was scheduled on or before June 1,1988, when the balance was to be paid.

The contract required Lewis to convey good and marketable title and to pay one-half of the transfer tax and one-half of the State stamps, pro-rated to the date of settlement. All other costs were to be paid by the purchasers. Prior to settlement, Lewis and the buyers executed an addendum to the contract. It stated, “[b]ecause a title problem has arisen and a complete survey is necessary, we hereby extend this contract until a good and marketable title can be transferred.” Lewis died on June 19, 1988, before the sale was finalized.

On November 16, 1988, Ms. Hays settled on the property in accordance with her powers as the appointed personal representative. 1 Subsequently, she filed the estate’s First and Final Administration Account, which showed the proceeds from the real estate sale being distributed to her as personalty under the doctrine of equitable conversion. Petitioners, the decedent’s children and residuary legatees, Evelyn Coe, Martha L. Wolfe, Gail R. Lewis and Basil E. Lewis (“the children”), filed exceptions to the account. On August 11, 1989, the children filed a Complaint For Construction of Will in the Circuit Court for Washington County. They alleged that the proceeds of the real estate sale should be treated as realty, rather than as personalty, and distributed to them.

Ms. Hays answered, repeating ³⁵⁴ that the proceeds are personal property and, thus, under the doctrine of equitable conversion, were properly distributed to her. In an oral opinion, the trial court found the doctrine of equitable conversion inapplicable. Finding, by virtue of the residuary clause, that Lewis intended his children to receive his real property, it concluded that applying the doctrine would produce a result inconsistent^ with that intent. Alternatively, the court opined that equitable conversion did not occur “because of the cloud [on the title] that existed at that time.” It ordered the proceeds treated as realty, to which, pursuant to the residuary clause, the children were entitled.

Ms. Hays appealed to the Court of Special Appeals, claiming that the lower court erred by failing to apply the doctrine of equitable conversion. Construing the circuit court’s comment that there was a “cloud that existed at that time” as referring to the Rule Against Perpetuities, she also argued that the circuit court improperly found the contract unenforceable on that account. The children’s cross-appeal challenged the lower court’s refusal to admit extrinsic evidence to show the decedent’s intent at the time he executed his will. In urging the intermediate appellate court to uphold the trial court’s decision, they relied on only one of the court’s rationales — that it would be inconsistent with the testator’s intent to apply equitable conversion.

Reversing, the intermediate appellate court concluded that Lewis’ bequest to Ms. Hays encompassed both tangible and intangible personal property. Hays v. Coe, 88 Md.App. 491, 498-99 , 595 A.2d 484, 487-88 (1991). Next, being unpersuaded by the trial court’s rationale, the court held that, because the contract was executed before Lewis’ death, although not settled until afterward, the doctrine of equitable conversion did apply to pass the proceeds of the sale to Ms. Hays. Id. at 503 , 595 A.2d at 490 .

The court agreed with the trial court’s exclusion of extrinsic evidence, id. at 505 , 595 A.2d at 491 , concluding that the language of ³⁵⁵ the will was clear and unambiguous. 2 Finally, the court held that neither the contract nor the addendum, extending the contract until a good and marketable title could be transferred, violated the Rule Against Perpetuities or was otherwise indefinite and unenforceable. Id., Id., 88 Md.App. at 503-504 , 595 A.2d at 490 .

II

Under the doctrine of equitable conversion, “real estate is considered for certain purposes as personal property and personal property as real estate.” Harrison v. Prentice, 183 Md. 474, 479 , 38 A.2d 101, 104 (1944); Sands v. Church, ETC., 181 Md. 536, 544 , 30 A.2d 771, 776 (1943); Roger A. Cunningham et al., The Law of Property, § 10.13 at 698-705 (1984). Among the ways in which the doctrine may be triggered is by a direction in a will, Harrison, 183 Md. 474 , 38 A.2d 101 ; Miller v. Hirschmann, 170 Md. 145, 148 , 183 A. 259, 261 (1936); Talbott v. Compher, 136 Md. 95, 99 , 110 A. 100, 102 (1920), and by contract, Watson v. Watson, 304 Md. 48, 61 , 497 A.2d 794, 800 (1985). Himmighoefer v. Medallion Indus., Inc., 302 Md. 270, 278 , 487 A.2d 282, 286 (1985). 3 ³⁵⁶ A. In Harrison, 183 Md. at 474 , 38 A.2d at 101 , we explained the doctrine, and its rationale, as it pertains to a direction in a will: [W]here a testator manifests a clear intention that his real estate shall be sold and the proceeds thereof distributed, the court considers the real estate converted into money at the time of the testator’s death, unless there is some provision in the will which postpones the time of conversion____ The basis for the doctrine of equitable conversion ... is the intention of the party creating a right in the property, and the maxim “Equity regards that as done which ought to be done.” (citations omitted). Id., 183 Md. at 479 , 38 A.2d at 104 .

In this regard, “The doctrine [of equitable conversion] is not a fixed rule of law, but proceeds upon equitable principles which take into account the result which its applications will accomplish.” Sands v. Church, ETC., 181 Md. at 544 , 30 A.2d at 776 . For the doctrine to apply, “there must be an absolute obligation to convert either immediately or at a future time. A discretionary power, or mere expression of desire that a sale be made, is not sufficient.” Harrison, 183 Md. at 479-80 , 38 A.2d at 105 . Equitable conversion, not being a fixed or absolute rule to be applied in all circumstances, see Sands, 181 Md. at 544 , 30 A.2d at 776 ; Harrison, 183 Md. at 100 , 38 A.2d at 104 ; Talbott, 136 Md. at 100 , 110 A. at 102 , applies when, consistent with the testator’s intent as expressed in the will, “[e]quity regards that as done which ought to be done,” see Watson, 304 Md. at 61 , 497 A.2d at 800 ; Harrison, 183 Md. at 479-80 , 38 A.2d at 105 ; it takes place no further than is made necessary by the specific instrument involved.

See ³⁵⁷ Cronise v. Hardt, 47 Md. 433, 436-37 (1878), cited by the children. 4 Cronise involved a suit by a judgment creditor of one a devisee under a will, that authorized the sale of “all or so much and such parts” of the decedent’s real and personal property as necessary to pay his debts and funeral expenses. Id. at 434-35 . Because it had insufficient funds, albeit by only a small amount, to pay the debts and funeral expenses, the executrix sold unimproved real property, devised in the will, for considerably more than was necessary to pay those bills. The judgment creditor argued that the excess should be treated as if it were unconverted real estate, to which his judgments against his debtor constituted liens.

Id. at 436 . This Court rejected that argument, holding that the judgment debtor held the surplus proceeds only as personalty, not as realty. Id. at 438 . Before reaching that conclusion, however, we observed: t is certainly true, that the conversion of real into personal property, or personal into real, under a power in a will, takes place only for the purposes for which it is authorized; and so far as those purposes do not extend, or, in so far as any of them do not take effect in fact or in law, the property is considered as remaining in its former condition, and passes accordingly.

Id. at 436-37 . Thus, we said the balance of the proceeds over and above that necessary to pay the decedent’s debts did not convert to personalty, rather, it “remained impressed with the character of real estate for the purpose of determining who was entitled to receive it, ” id. at 437 , but for that purpose only. B. Equitable conversion by contract rests on similar, though not identical, underpinnings. In Himmighoefer , we explained: ³⁵⁸ The legal cliche, that equity treats that as being done which should be done, is the basis of the theory of equitable conversion.

Hence, when the vendee contracts to buy and the vendor to sell, though legal title has not yet passed, in equity the vendee becomes the owner of the land, the vendor of the purchase money. In equity the vendee has a real interest and the vendor a personal interest. Equity treats the executory contract as a conversion, whereby an equitable interest in the land is secured to the purchaser for whom the vendor holds the legal title in trust. This is the doctrine of equitable conversion, (citation omitted).

Id., 302 Md. at 278 , 487 A.2d at 286 (quoting 8A Thompson, Real Property, § 4447 at 273-74 (Grimes Repl.Vol.1963)). The determination whether real property, the subject of a contract of sale at the testator’s death, is realty or personalty depends upon the intent of the testator as well as whether the contract of sale was “valid and binding, free from equitable imperfections, and such as a court of equity will specifically enforce against an unwilling purchaser.” Birckner v. Tilch, 179 Md. 314, 323 , 18 A.2d 222 , 226 cert. denied, 314 U.S. 635 , 62 S.Ct. 68 , 86 L.Ed. 509 (1941). Ordinarily, the conversion occurs when the contract is executed, assuming that the contract of sale is “bona fide made for a valuable consideration,” Hampson v. Edelen, 2 H. & J. 64,