COLOMIRIS v. Woods

CHASANOW, Judge. This controversy raises important questions for the interpretation of contracts when a party alleges that a contract is ambiguous and seeks to admit extrinsic evidence to show the intent of the contracting parties. Factually, the case involves the interpretation of a release provision of a mortgage contract covering about six acres of land in Howard County. The trial court found the provision ambiguous and used extrinsic evidence to determine the amount that the Respondent must pay to obtain a release from the mortgage.

Applying a de novo standard of review, we conclude that, viewed objectively, the release provision is unambiguous. We therefore reverse, holding that the trial court erroneously admitted extrinsic evidence and interpreted the contract in contradiction to its express terms. I. The dispute arises out of the 1992 purchase for $1.2 million of 38 acres of undeveloped land in Howard County. New ⁴²⁹ Panorama Development Corporation (New Panorama) purchased the property from Robert F. Simpson, who secured $654,000 of the purchase price with a mortgage.

The mortgage covered Lot 126, which contained a little more than six acres, and was dated December 31, 1992. In 1995, New Panorama subdivided Lot 126 into two lots, creating Lot 130, about which this dispute centers. New Panorama enlarged Lot 130 by 2,200 square feet from adjacent land unencumbered by the Simpson mortgage. Lot 130 was transferred in August, 1995, to Lovell Regency Homes (Lovell).

After constructing a single family residence on the property, Lovell sold the property to Respondent Caryn Woods (Woods) on February 23,1996. Lovell did not record its deed from New Panorama until February 26,1996, three days after it had sold the property to Woods. The deed to Woods was not recorded until the afternoon of March 13, 1996. By that time, the Simpson mortgage had matured and was in default.

The trustees of the Simpson mortgage filed for foreclosure on the mortgage for the full amount, $654,000. 1 A foreclosure sale took place in the morning of March 13, 1996, only a few hours before the Woods deed was recorded. Exceptions to the foreclosure were filed by numerous parties, including New Panorama, Lovell, and Woods. In July 1996, Woods filed a petition for reformation and partial release of the mortgage. Woods’ petition argued that the transfer of Lot 130 to Lovell and then to her without obtaining a partial release was by inadvertence and mistake, and requested the trial court to set a partial release amount, which Woods’ title insurer was willing to pay.

The mortgagee filed a motion for summary judgment. The trial court granted the mortgagee’s request for summary judgment as to the claim for reformation, but allowed the petition to set a figure for partial release to proceed. ⁴³⁰ The ruling on the petition for partial release is what is before us. Woods’ request for a partial release of the mortgage is based on the following provision in the mortgage contract between New Panorama and Simpson: “Upon request of the Mortgagor, Mortgagee shall release portions of the mortgaged premises as follows: Subdivided lots shall be released by payment by Mortgagor to Mortgagee of an amount equal to $752,100.00 [ 2 ] divided by the total number of subdivided residential building lots in a recorded subdivision plat of the mortgaged premises, from time to time. All releases shall be prepared at the expense of Mortgagor and shall be executed by the Mortgagee when requested by Mortgagor.

Mortgagee shall not unreasonably refuse to execute or join in the execution of plats of subdivision, record plats, deeds or other grants of rights of way and easements for the installation and maintenance of sanitary rights of way and easements for the installation and maintenance of sanitary sewers, storm drainage, water, electricity and other utilities for the benefit of the mortgaged premises; provided such execution or joinder does not subject the Mortgagee to any cost, liabilities or expenses in connection therewith.” (Emphasis added). While most of the mortgage contract consists of a standard form, with the specifics of the transaction typed into blank spaces, the entire release provision quoted above appears not to be a part of the standard form, but rather inserted by the contracting parties, as evidenced by the different and slightly larger typeface of the release provision. 3 ⁴³¹ The emphasized text from the excerpt quoted above, which describes how the partial release figure will be computed, is the contractual language that has been the main point of contention in this dispute. The trial court “specifically [found] that the release provision is sufficiently ambiguous that extrinsic evidence needs to be considered in determining the intention of the parties at the time the mortgage was executed.” The court gave no explanation of its finding of ambiguity in its written order other than the statement just quoted. The trial court then considered evidence of negotiations taking place prior to the execution of the mortgage, admitting into evidence exhibits and testimony from four witnesses.

Based on this evidence, the court concluded that “the parties never intended to create a situation where one lot ... would bear the entire burden of the mortgage.” Referring to a letter written by an attorney representing the mortgagee on May 4, 1992, more than six months prior to the signing of the mortgage, the trial court found that “[e]vidence adduced at trial established the fact that pro rata release prices had been discussed by the parties.” The trial court then concluded that a pro rata release, ie., basing the partial release on the acreage of encumbered land in the Woods lot relative to the total land subject to the mortgage, was the “fair and equitable result.” It rejected as leading to “an unfair and unreasonable result” the interpretation proposed by the mortgagee, that the denominator by which to divide the total amount of the mortgage was one, since the Woods lot was the only platted and recorded residential building lot on the mortgaged property. The court therefore arrived at a partial release figure of $21,058.80 by computing the percentage of encumbered land in Woods’ lot (7,416 square feet) relative to the total land encumbered by the mortgage (267,101.21 square feet) and multiplying that percentage (2.8%) by the total release amount of $752,100.00. In an unreported opinion, the Court of Special Appeals applied a clearly erroneous standard to affirm the trial court’s finding of ambiguity. Under that standard, the court said it would had to have found “no reasonable suggestion of ambigú ⁴³² ity” in the contractual language in order to reverse the trial judge’s finding of ambiguity.

The intermediate appellate court pointed to the specific contract language “from time to time” as ambiguous. Judge Kenney dissented on the grounds that the release provision was clear in setting the release based on the total number of subdivided residential building lots then platted and recorded and that the trial court’s method of determining the release price was not reflected in the language of the mortgage contract nor in the negotiations. We granted certiorari in order to address the issues of contract interpretation raised in this case. Calomiris v. Woods, 350 Md. 279 , 711 A.2d 871 (1998). 4 II.

As just described, the trial court in this case declared the partial release provision ambiguous and then sought to ascertain the intent of the parties through the use of evidence extrinsic to the contract itself. These actions implicate the role of the judiciary in contract interpretation and the use of extrinsic evidence for interpretative purposes. Maryland law generally requires giving legal effect to the clear terms of a contract and bars the admission of prior or contemporaneous agreements or negotiations to vary or contradict a written contractual term. Equitable Trust Co. v. Imbesi, 287 Md. 249, 271-72 , 412 A.2d 96, 107 (1980).

Under the parol evidence rule, a written agreement “discharges prior agreements,” thereby rendering legally inoperative communications and negotiations leading up to the written contract. See Restatement (Second) of Contracts § 213 (1979). The re ⁴³³ quirement that courts give legal effect to the unambiguous provisions of a contract and the rule that prohibits the admission of parol evidence for ascertaining the parties’ intent provide a necessary legal foundation for the certainty of contracting parties. As Professor Farnsworth has observed, there are often times in which contracting parties, “after concluding their negotiations, want to simplify the administration of the resulting contract and to facilitate the resolution of possible disputes by excluding from the scope of their agreement those matters that were raised and dropped or even agreed upon and superseded during the negotiations.

It is often useful to be able to replace the negotiations of yesterday with an authoritative agreement of today.” E. Allan Farnsworth, II Farnsworth on Contracts § 7.2, at 214-15 (1998). As with many legal rules, however, there are situations that render the rule inoperable. All courts generally agree that parol evidence is admissible when the written words are sufficiently ambiguous. E. Allan Farnsworth, II Farnsworth on Contracts § 7.11, at 292 (1998).

The remainder of this part of the opinion (1) explains the appropriate standard by which the appellate courts should address a trial court’s ruling on a party’s claim of contract ambiguity, (2) considers the appropriate substantive test for determining whether contractual language is ambiguous, and (3) reviews some of our prior decisions on the ambiguity exception to the rule against admitting extrinsic evidence for contract interpretation. Part III of the opinion then applies this law to the dispute raised in the instant case. A. Initially, we address the appropriate standard of review for interpreting the terms of the mortgage. As noted above, the Court of Special Appeals applied a clearly erroneous standard to uphold the trial court’s finding of ambiguity, relying as authority for its application of this standard on Admiral ⁴³⁴ Builders v. South River Landing, 66 Md.App. 124, 128 , 502 A.2d 1096, 1098 (1986).

Quoting that case, the court said it would have had to find “no reasonable suggestion of ambiguity” in the contractual language in order to reverse the trial court’s holding. We disagree. The rules of contract interpretation apply to our review of the language of a mortgage. Leisure Campground v. Leisure Estates, 280 Md. 220, 226-27 , 372 A.2d 595, 600 (1977), quoting Chapman v. Ford, 246 Md. 42, 51 , 227 A.2d 26, 31 (1967)(“ ‘The mortgage is not only a security instrument, it is also a contract between the parties.’ ”).

We have frequently stated the general rule that “[t]he question of whether a contract is ambiguous ordinarily is determined by the court as a question of law.” State Highway v. Bramble, 351 Md. 226, 239 , 717 A.2d 943, 949 (1998). See also JBG/Twinbrook Metro Ltd. v. Wheeler, 346 Md. 601, 625 , 697 A.2d 898, 911 (1997) (“[T]he interpretation of a written contract is ordinarily a question of law for the court.”); Suburban Hospital v. Dwiggins, 324 Md. 294, 306 , 596 A.2d 1069, 1075 (1991), quoting Gordy v. Ocean Park, Inc., 218 Md. 52, 60 , 145 A.2d 273, 277 (1958)(“ ‘[A]s a general rule, the construction or interpretation of all written instruments is [initially] a question of law for the court____’”); Rothman v. Silver, 245 Md. 292, 296 , 226 A.2d 308, 310 (1967)(“If a written contract is susceptible of a clear, unambiguous and definite understanding, ... its construction is for the court to determine.”). Thus, the determination of ambiguity is one of law, not fact, and that determination is subject to de novo review by the appellate court. As in the case of a review of an order of summary judgment, de novo review is appropriate because the appellate court’s determination of whether written contractual language is ambiguous turns on whether the trial court was legally correct.

See Heat & Power v. Air Products, 320 Md. 584, 590-92 , 578 A.2d 1202, 1205-06 (1990). 5 In Heat & ⁴³⁵ Power, we observed that an appellate court reviewing a trial court’s ruling on a motion for summary judgment “has the same information from the record and decides the same issues of law as the trial court.” 320 Md. at 591-92 , 578 A.2d at 1206 . The same is true in determining whether a written contract is ambiguous; the review is essentially a “paper” review where the same contractual language is before the appellate court as was before the trial court. Since neither the credibility of witnesses nor the evaluation of evidence, other than the written contract, is in issue, the policy reasons behind deferring to the trial judge under the clearly erroneous standard are inapplicable. The standard of review afforded the trial court’s ruling on ambiguity differs from the standard applied to a trial court’s factual findings based on parol evidence after the court has determined that the contract language is ambiguous.

Should the appellate court agree with the trial court’s finding of ambiguity, it will apply a clearly erroneous standard to the trial court’s assessment of the construction of the contract in light of the parol evidence received. In sum, on appeal, de novo review applies to the initial determination of whether contractual language is ambiguous, and the clearly erroneous standard comes into play only after the trial court’s finding of ambiguity is upheld. Therefore, the Court of Special Appeals erred in this case by deferring under the clearly erroneous standard to the trial court’s finding that the contract language was ambiguous. B. In determining whether a writing is ambiguous, Maryland has long adhered to the law of the objective interpretation of contracts.

State v. Attman/Glazer, 323 Md. 592 , ⁴³⁶ 604, 594 A.2d 138, 144 (1991); Cloverland, Inc. v. Fry, 322 Md. 367, 373 , 587 A.2d 527, 530 (1991); Feick v. Thrutchley, 322 Md. 111, 114 , 586 A.2d 3, 4 (1991); General Motors Acceptance v. Daniels, 303 Md. 254, 261 , 492 A.2d 1306, 1310 (1985); Orkin v. Jacobson, 274 Md. 124, 128 , 332 A.2d 901, 903 (1975); Kasten Constr. v. Rod Enterprises, 268 Md. 318, 328 , 301 A.2d 12,17-18 (1973). Under the objective view, a written contract is ambiguous if, when read by a reasonably prudent person, it is susceptible of more than one meaning. Heat & Power, 320 Md. at 596 , 578 A.2d at 1208 ; Truck Ins. Exch. v. Marks Rentals, 288 Md. 428, 433 , 418 A.2d 1187, 1190 (1980).

The determination of whether language is susceptible of more than one meaning includes a consideration of “the character of the contract, its purpose, and the facts and circumstances of the parties at the time of execution,” Pacific Indem. v. Interstate Fire & Cas., 302 Md. 383, 388 , 488 A.2d 486, 488 (1985). ⁴³⁵ "(e) Entry of judgment. The court shall enter judgment in favor of or against the moving party if the motion and response show that there is no genuine dispute as to any material fact and that the party in whose favor judgment is entered is entitled to judgment as a matter of law.” ⁴³⁶ Therefore, when interpreting a contract the court’s task is to: “[Djetermine from the language of the agreement itself what a reasonable person in the position of the parties would have meant at the time it was effectuated. In addition, when the language of the contract is plain and unambiguous there is no room for construction, and a court must presume that the parties meant what they expressed. In these circumstances, the true test of what is meant is not what the parties to the contract intended it to mean, but what a reasonable person in the position of the parties would have thought it meant.

Consequently, the clear and unambiguous language of an agreement will not give away to what the parties thought that the agreement meant or intended it to mean.” General Motors Acceptance, 303 Md. at 261 , 492 A.2d at 1310 . Thus, while evidence of prior intentions and negotiations of the parties is inadmissible, the parol evidence rule would not bar a court from considering the context of the transaction or the custom of the trade in a determination of ambiguity. ⁴³⁷ C. We have frequently barred the admission of extrinsic evidence when the written contractual language is unambiguous. In Jenkins v. Karlton, 329 Md. 510, 524-26 , 620 A.2d 894, 897-99 (1993), we addressed whether a promissory note containing a due date of “on demand” was payable on demand, or whether extrinsic evidence of communications between the parties subsequent to the signing of the note could be used to show that it was not payable on demand. We concluded that “[t]he only purpose for which the evidence ... was offered was to prove the parties’ intention concerning when the promissory note was payable.

On that point, the note is clear and unambiguous, however. By its terms, Jenkins unconditionally agreed to pay the note, according to its terms, on demand. Consequently, parol evidence was not admissible to inject a condition not apparent on the face of the note.” Jenkins, 329 Md. at 525-26 , 620 A.2d at 902 . See also, e.g., General Motors Acceptance, 303 Md. at 262 , 492 A.2d at 1310-11 (holding parol evidence not admissible to prove secondary liability as guarantor where individual who co-signed a contract to purchase an automobile for his brother signed the contract as a “buyer” and where “[t]he contract clearly stated that all buyers agreed to be jointly and severally liable,” thereby establishing primary liability as a surety); Annapolis Mall v. Yogurt Tree, 299 Md. 244, 251 , 473 A.2d 32, 36 (1984)(holding that the trial court erred by allowing the tenant to present evidence that the rent was to commence upon the opening of its retail business even though that testimony contradicted the unambiguous terms of the written lease); Delmarva Drilling Co. v. Tuckahoe, 268 Md. 417, 426 , 302 A.2d 37, 41 (1973)(holding that parol evidence of well driller’s prior or contemporaneous promise to supply “usable water” was inadmissible to contradict unambiguous contract providing that no specific guaranty was given concerning water quality).

In Creamer v. Helferstay, 294 Md. 107 , 448 A.2d 332 (1982), we reversed a trial court for allowing testimony that one of the ⁴³⁸ contracting parties misrepresented itself during pre-contractual negotiations. Creamer involved a partial settlement to a lawsuit requiring the defendant to negotiate in good faith to resolve a remaining claim in exchange for the plaintiffs agreement to dismiss a separate fraud claim. Prior to reaching that agreement, the defendant “had repeatedly stated that any settlement would have to be in the range of $275,000 to $550,000.” Creamer, 294 Md. at 111 , 448 A.2d at 333-34 (footnote omitted). But after the settlement was reached, the defendant’s best offer was $80,000.

The plaintiff rejected the offer and sought to rescind the prior settlement in order to reinstate the fraud claim. The trial court concluded that while there was “ ‘no evidence of intentional misrepresentation’ ” by the law firm, the firm had made an “ ‘honest misrepresentation’ ” that induced the plaintiffs into believing that the settlement discussions would be in the range of $275,000 to $550,-000. Creamer, 294 Md. at 112 , 448 A.2d at 334 . The trial court hearing the plaintiffs claim for rescission therefore rescinded the agreement, allowing the fraud claim to be reinstated.

In reversing the trial court’s decision to allow rescission, we stated: “It is true that an unintentional ‘material misrepresentation of fact ... may warrant rescission by a Court of equity of a contract induced thereby.’ However, the trial court overlooked an important principle made clear by the cases regarding rescission for misrepresentation absent fraud or other intentional culpable conduct. That is, in order to be a ground for rescission, the alleged innocent misrepresentation inducing the signing of the contract may not vary or contradict an express term of the written instrument. * * * The parol evidence rule precludes the granting of relief for unintentional representations preceding the contract which conflict