Dryfoos v. Hostetter

Singley, J., delivered the opinion of the Court. On 20 April 1967, J. Virgil Hostetter and Lois G. ³⁹⁸ Hostetter, his wife (the Hostetters) sold certain unimproved property in Prince George’s County to Henry Dryfoos, III and Pauline Webb Dryfoos, his wife (the Dryfooses). Of the total purchase price, $40,000.00 was deferred, the note received by the Hostetters representing that amount being secured by a purchase money deed of trust to Paul M. Nussbaum and Herbert W. Reichelt, trustees. The deed of trust from the Dryfooses to Nussbaum and Reichelt, as trustees, contained the following provision, the significance of which will be later discussed: “IT BEING EXPRESSLY UNDERSTOOD AND AGREED that upon the recordation of any bona fide construction loan or loans secured on the hereafter described property, the Lien of this Instrument shall become subordinate to such construction loan or loans and to any and all advances made thereunder, whether such advances are pursuant to a firm commitment or voluntarily made.” On 14 February 1969, the Dryfooses sold the same property to B. A., Inc. (B. A.) for $80,000.00, including, however, the purchase money debt of $40,000.00 owed the Hostetters to which the property remained subject.

Of the remainder of the purchase price, $18,000.00 was deferred, represented by a note payable to the Dryfooses secured by a deed of trust from B. A. to Edwin Collier and Francis A. Shaffer, as trustees. At this brief instant, the Hostetters were secured by the senior encumbrance on the property; the Dryfooses, by the junior. On the day the transaction was closed, B. A. gave Suburban Home Investment Corporation (Suburban) a note for $50,000.00. The note given Suburban was secured by a deed of trust from B. A. to G. Patricia Colicchio and Charles E. Mitchell, as trustees.

Only $22,000.00 appears to have been paid in cash to the Dry ³⁹⁹ fooses from the loan proceeds, the $18,000.00 Dryfoos trust and the $40,000.00 Hostetter trust rounding out the balance of the $80,000.00 contract price. It would seem that while the Suburban loan was in the face amount of $50,000.00, B. A.’s note was sold by Suburban to Fellowship Investment Associates (Fellowship) for $42,500.00, subject, however, to a commission of $4,200.00 paid by B. A. to Suburban, and the deduction of $1,875.00 as prepaid interest, but here the record becomes cloudy. It appears to be conceded, however, that Berks Title Insurance Company, as agent for B. A., received only $30,625.00 of the $50,000.00 which B. A. had borrowed, and that even this sum was paid it by Fellowship, and not by Suburban. The balance of something over $5,000.00 was disbursed by Suburban to B. A’s president, or on his order.

Two difficulties underlay the whole transaction. The first was that Nussbaum, trustee under the deed of trust securing the obligation to the Hostetters, several days preceding the closing, had joined with his fellow trustee, Reichelt, with Hostetter’s approval, in the execution of an agreement which had the effect of subordinating the Hostetter obligation to the Suburban loan, primarily because Mr. Hostetter had been advised by his counsel that the Hostetter trust provided for subordination to a construction loan, and Hostetter was under the impression that Suburban was making such a loan. Unhappily, however, the subordination agreement which Nussbaum and Reichelt signed on 10 February 1969 specifically subordinated the lien of the Hostetter deed of trust to that of a deed of trust to be executed. The agreement contained no reference to the provision that the lien of the Hostetter trust was only to be subordinated to a construction loan, nor any representation that a lender was, in fact, making a construction loan.

The form of subordination agreement submitted to Nussbaum and Reichelt for signature contained the name of a different borrower and disclosed neither the date of ⁴⁰⁰ the deed of trust (which had not yet been prepared) nor the correct name of the borrower. This was later corrected by interlineation and insertion. The second difficulty stemmed from the fact that by Ch. 718 of the Laws of 1968, effective 1 July 1968, the General Assembly had enacted what is now Maryland Code (1957, 1966 Repl. Vol., 1971 Cum.

Supp.) Art. 21, § 30 (b) which required that the party secured by a purchase money deed of trust, if not the seller of the property, make an affidavit that the funds borrowed had been disbursed at the time the deed of trust was executed. The deed of trust from B. A. to Suburban, executed 14 February 1969, bore no affidavit of disbursement. In July 1970, the Dryfooses having defaulted under their deed of trust, the Hostetters, Nussbaum and Reichelt filed an amended bill in equity in the Circuit Court for Prince George’s County against B. A., Colicchio, Mitchell, Suburban, Fellowship and the Dryfooses, seeking to have Fellowship enjoined from foreclosing the deed of trust securing its note; asking that the subordination agreement be set aside and that the priority of the deed of trust securing the Hostetter obligation be reestablished. 1 The Dryfooses answered, agreeing to a grant of the claimed relief. Suburban and Fellowship filed answers generally denying the allegations of the bill.

Suburban and Fellowship countered with a third-party claim against Berks Title Insurance Company, alleging that Berks guaranteed that Suburban and any successor in interest would be secured by a first lien on the property, and that Berks would be liable to Suburban or Fellowship for any loss which they might suffer. On 19 October 1971, this claim was dismissed before the case came on for trial, without prejudice. Ultimately, the court, having determined that the Suburban trust was a purchase money trust; that the ⁴⁰¹ absence of the affidavit of disbursement was inadvertent, and was therefore corrected by the curative act, Code (1957, 1966 Repl. Vol., 1971 Cum.

Supp.) Art. 21, § 99, and that there was no evidence that a fraud had been worked on the Hostetters, entered an order on 28 July 1972 holding that the Suburban trust was valid and that the Hostetter trust was subordinated to it by the subordination agreement. The Dryfooses then moved to set aside this order, on the ground that the subordination of the lien of their deed of trust to Hostetter to that of B. A.’s to Suburban amounted to an invalid application of the curative act, and would deprive them and the Hostetters of vested rights which both had in the property. From an order entered on 24 August denying this motion and from the order of 28 July, the Dryfooses have appealed. The Hostetters have appealed from the order entered in July granting validity and priority to the Suburban trust.

The Dryfooses rest their case on three arguments: 1. The absence of the affidavit of disbursement renders the Suburban trust invalid, an invalidity which cannot be corrected by the curative act, without unconstitutionally disturbing rights which had become vested; 2. It was error to rule that the Hostetters and the Dryfooses had the burden of proving that the omission of the affidavit of disbursement was not inadvertent; and 3. Without committing perjury, Suburban could not make an affidavit of disbursement when $50,000.00 had been borrowed, but only $30,625.00 had been disbursed and then two days after the Suburban deed of trust was executed.

The Hostetters, in their cross appeal, argue: 1. A subordination agreement executed on 10 February 1969 prior to the preparation of a deed of trust on 12 February 1969 is defective on its face. ⁴⁰² 2. It was error not to find that the subordination agreement was procured by fraud. Because we regard the Dryfooses’ first contention, albeit in somewhat modified form, as dispositive of the case, we need not reach the other points.

For more than a century, Maryland has conditioned the validity of a mortgage as to third parties without notice upon the making of an affidavit of consideration by the party secured, see Ch. 154, § 112 of the Laws of 1856. By Ch. 652 of the Laws of 1963, Code (1957, 1966 Repl. Vol.) Art. 21, § 30, the requirement was specifically extended to deeds of trust as well as mortgages, Weidemeyer v. Brekke, 248 Md. 175 , 235 A. 2d 718 (1967). Suburban met this requirement, despite the fact that B. A. received less than the full amount of the note which it promised to pay, see Govane Bldg.

Co. v. Sun Mortgage Co., 156 Md. 401 , 144 A. 486 (1929). By Ch. 718 of the Laws of 1968, effective 1 July 1968, Code (1957, 1966 Repl. Vol., 1971 Cum. Supp.), Art. 21, § 30 was amended, with the result that at the time the Dryfooses sold to B. A., there was required not only an affidavit of consideration to import validity to a mortgage or deed of trust, § 30 (a), but an affidavit of disr bursement to import validity to a purchase money deed of trust given to anyone other than the seller, § 30 (b).

The two provisions are quoted below, because we regard the difference in language as critical in this case: “(a) No mortgage or deed of trust shall be valid except as between the parties thereto, unless there be endorsed thereon an oath or affirmation of the mortgagee or the party secured by a deed of trust that the consideration recited in said mortgage or deed of trust is true and bona fide as therein set forth, (emphasis supplied) “(b) No purchase money deed of trust involving land any part of which is situated in ⁴⁰³ Maryland, shall be valid either as between the parties or as to any third parties unless such deed of trust contains or has endorsed upon it at a time prior to recordation, the oath or affirmation of the party secured by such deed of trust stating that the amount of the loan which said deed of trust has been given to secure was paid over and disbursed by the party secured by the deed of trust to either the borrower or the person responsible for disbursement of funds in the closing transaction or their respective agent at a time no later than the final and complete execution of the deed of trust, provided, however, that this subsection shall not apply where a deed of trust is given to a seller in a transaction in order to secure payment to him of all or part of the purchase price of said property.” (emphasis supplied) It will be noted that § 30 (a) provides that a mortgage or deed of trust remains valid as between the parties, even though an affidavit of consideration be lacking. In Pagenhardt v. Walsh, 250 Md. 333 , 243 A. 2d 494 (1968), we reviewed the cases and concluded that substantial compliance with the requirement that an affidavit of consideration be endorsed on a mortgage was sufficient if the transaction were entered into in good faith, but that where the affidavit was deficient in form, the mortgage was a nullity, except as between the parties and as to others having actual notice. As a consequence, under such circumstances, a mortgage is not absolutely void, but is given effect as an equitable mortgage as between the parties and as to those having actual notice. The absence of an affidavit of disbursement from a deed of trust, however, brings about a sharply different result.

The deficient deed of trust is invalid as to the parties as well as to third persons: in other words, it is wholly void. As a consequence, had either the Dryfooses or the Hostetters (or even B. A.) sought a declaration ⁴⁰⁴ that the deed of trust to Suburban was of no effect, they surely would have prevailed if final judgment could have been entered before the effective date of the curative act on which the court below relied. The significance of the difference in the sanctions imposed by § 30 (a) and § 30 (b) for noncompliance will be considered hereafter. We now turn to a consideration of the effect of the curative act.

The sale to B. A. took place on 14 February 1969; the Dryfooses’ amended bill was filed on 2 July 1970; and the curative act on which Suburban and Fellowship rely, Ch. 479 of the Laws of 1971, Code (1957, 1966 Repl. Vol., 1971 Cum. Supp.) Art. 21, § 99, became effective 1 July 1971, nearly a year after the filing of the amended bill but prior to the entry of the orders of 28 July 1972 and 24 August 1972, from which these appeals were taken. Curative acts have been enacted at virtually every session of the General Assembly commencing with Ch. 208 of the Laws of 1858.

They have as their general purpose the validation of conveyances which might otherwise have been challenged because of some deficiency in form or content. Although curative acts may be broadly characterized as being retroactive or retrospective in their operation, they are generally sustained on the theory that whatever a sovereign power may authorize in prospect, it may adopt and validate in retrospect, so long as there is no interference with vested rights or contractual obligations, Leonardo v. Board of County Comm’rs of St. Mary’s County, 214 Md. 287, 301-02 , 134 A. 2d 284 (1957); cert. denied, 355 U. S. 906 , 78 S. Ct. 332 , 2 L.Ed.2d 260 ; reh. denied, 355 U. S. 967 , 78 S. Ct. 534 , 2 L.Ed.2d 543 ; 2 Cooley, Constitutional Limitations at 775, and cases collected at 776, Note 1 (8th ed. 1927); 2 Sutherland, Statutory Construction § 2214 at’ 137 (3d ed.1943). Perhaps the most succinct summary of the criteria against which the validity of a curative act is tested is found in Judge Murrah’s statement for the 10th Circuit ⁴⁰⁵ in Goddard v. Frazier, 156 F. 2d 938, 941-42 (10th Cir. 1946), cert. denied, 329 U. S. 765 , 67 S. Ct. 124 , 91 L. Ed. 659 : “As a general proposition, it is said that a jurisdictional defect in a judgment cannot be cured by retroactive legislation without denial of due process of law, while retroactive legislation designed to cure non-jurisdictional or modal defects is within the constitutional power