DWS Holdings, Inc. v. Hyde Park Associates

Lowe, J., delivered the opinion of the Court. Prologue In seeking the top development dollar for its land, appellant, DWS Holdings, Inc., (DES) was compelled to risk losing 10% of its selling price by taking back a note, secured by a deed of trust, for that portion of the price. Because land purchased for development presupposes substantial construction financing, appellant agreed to subordinate its deed of trust lien to the lien of “any Deed of Trust securing a bona fide construction loan. . . .” Anticipating that contingency, appellant sought to minimize its risk by obtaining personal sureties if such a construction loan subordination did take place. Following default on the note by the corporate promisor, DWS brought suit against the personal guarantors.

The issue was whether the contingency required to obligate these personal sureties had come to pass. By directing a verdict in favor of the personal guarantors, in the Circuit Court for Montgomery County, Judge Richard B. Latham ruled that the contingency had not occurred. Facts The problem stemmed from a real estate development transaction involving 70 acres of land owned by appellant DWS in Montgomery County. DWS sold that land to Hyde Park Associates, one of the appellees, for residential development purposes.

The 70 acre parcel was to be divided in two parts for a three phase development. One parcel was to contain Phase I and the second parcel Phases II-III. Hyde Park’s source of financing was BankAmerica Realty Investors (BARI) whose financing agreement with Hyde ⁶⁶⁹ Park forms the foundation for the position taken here by DWS. On January 31, 1978, BARI made its loan to Hyde Park.

The loan was to equal 90% of the cost of the land for both parcels, and the entire cost of the construction on Phase I. As shown by the Construction Loan Agreement between BARI and Hyde Park, contemporaneously executed, the land cost allocated to Phase I was $675,000 and the land cost allocated to Phases II-III was $1,825,000, for a total of $2,500,000. Ninety percent of this sum was $2,250,000, which left $250,000 for Hyde Park to pay DWS for land from some source other than the BARI loan. Although cash was originally contemplated for the land cost, it was later agreed that a note for $250,000, secured by a deed of trust from Hyde Park to DWS on the land reserved for Phases II-III, would provide the remaining 10% of land costs. In accordance with the Construction Loan Agreement, Hyde Park’s obligation to BARI was evidenced by two separate notes.

BARI note 1, in the amount of $6,585,000, represented 90% of the land cost allocated to Phase I ($607,500) and the balance represented construction costs of Phase I. The second note, BARI note 2, was for $1,640,000, representing 90% of the land cost of Phases II-III. Each note was separately secured by a recorded deed of trust. 1 Each deed of trust conveyed the entire 70 acres to the trustees as security. The Purchase Agreement between DWS and Hyde Park provided for the payment of the $2,500,000 purchase price by certified check for $2,250,000, and the $250,000 note secured by a deed of trust. DWS agreed to subordinate its deed of trust securing the $250,000 note taken back by it for the 10% balance due on the purchase price of the 70 acres of land, to the deed of trust from Hyde Park, securing a loan not to exceed $1,640,000 from BARI, which was the amount ⁶⁷⁰ allocated by the Construction Loan Agreement to 90% of the Phase II-III land cost.

When the proposed subordination was submitted to DWS for review, however, it provided for subordination of the lien securing the $250,000 note to both the land loan and two construction loans. DWS objected that this was contrary to the agreement in the sales contract, and insisted upon the personal guaranties of the individual appellees 2 if Hyde Park requested subordination to construction loans. It is this provision, required by DWS, upon which appellant relies in trying to collect from the contingent personal guarantors. The crucial paragraph, added by DWS to the deed of trust it took to secure the $250,000 note, was: “IT IS HEREBY COVENANTED AND AGREED: The trustees are hereby authorized and directed, without attaining further consent from the noteholder, and without any additional payment on account of the indebtedness secured hereby, so long as there is no then existing default hereunder, to subordinate the lien of this Deed of Trust to the lien of any Deed of Trust securing a bona fide construction loan made by an institutional lender such as a bank, savings and loan association, life insurance company, union pension fund, real estate investment trust, or a similar institution.

As a condition to any such subordination, Alan I. Kay, Allen E. Rozansky and Stuart A. Bernstein, and all other General Partners of Hyde Park Associates, A Limited Partnership, shall guarantee the payment of the Note herein secured in accordance with its terms.” (emphasis added). At settlement on January 31, 1973, Hyde Park paid DWS $2,250,000 and gave to them a note for $250,000. The note contained a phrase which, pursuant to the revised contract of sale, provided that there would be no personal liability on the note and that DWS would look solely to the property for ⁶⁷¹ satisfaction. The deed of trust securing the note contained the contingent personal liability clause quoted above.

The DWS trustees contemporaneously executed a subordination of the deed of trust securing the $250,000 note to the deed of trust securing BARI’s note 2. This latter note, in the amount of $1,640,000, appears to have represented 90% of the purchase price of the second portion of land, the construction upon which had been set aside as Phases II-III. Because the deed of trust given in connection with BARI note 2 was cross-collateralized with the deed of trust given in connection with BARI note 1 (which, in turn, represented 90% of the purchase price of the first parcel and the entire construction cost of Phase I), ie., because both deeds of trust described the entire 70 acre tract as security, appellant contends that the personal guarantee clause was triggered. Summarizing its contentions, appellant reasons as follows: “From this proof it was clearly and uncontrovertibly established: (1) That under the DWS Deed of Trust, Appellees obligated themselves to personally guarantee payment of the DWS Note in the event that the lien of said DWS Deed of Trust were ever subordinated ‘. . .to the lien of any Deed of Trust securing a bona fide construction loan made by an institutional lender such as a . . . real estate investment trust. . . . ’ (2) That the DWS Deed of Trust was in fact then subordinated to the $1.64 million BARI Deed of Trust; (3) That BARI is a real estate investment trust; (4) That on or subsequent to January 31, 1973, BARI made a bona fide construction loan to HPA, embodied by the aforementioned Construction Loan Agreement between them; and (5) That the $1.64 million BARI Deed of Trust, to which the DWS Deed of Trust was subordinated, was indeed — by its very terms and those of the Construction Loan Agreement — a ‘Deed of Trust ⁶⁷² securing a bona fide construction loan’ as characterized in the relevant provision of the DWS Deed of Trust.

Given the above facts — the existence of which were clearly and manifestly evident from the face of the documentary proof — the lower Court erred in failing to conclude as a matter of law that the obligation of Appellees to personally guarantee payment of the DWS Note had been triggered and brought into full legal effect by virtue of the agreements and writings entered into by the parties or their representatives at the closing on January 31,1973.” Appellant asks a single question in its appeal from the circuit court’s judgment that the event necessary to hold the personal guarantors liable did not occur: “Did the lower Court err in failing to conclude, as a matter of law, that the execution by Trustees for Appellant of a Subordination Agreement dated January 31,1973 — subordinating the lien of Appellant’s Deed of Trust securing its $250,000 Promissory Note to the lien of an otherwise junior Deed of Trust securing obligations of Hyde Park Limited Partnership to BankAmerica Realty Investors — activated Appellees’ obligation to personally guarantee payment of the said Promissory Note, where the controlling contractual provisions were clear and unambiguous and where no controversy existed as to any material fact.” 3 Standard of Review The emphasis in appellant’s question, indicating its reliance upon error “as a matter of law”, is presumably prompted by the stringent burden appellants carry when ⁶⁷³ they ask us to set aside a lower court’s judgment upon the evidence. Md. Rule 1086. Appellant does not escape that burden, however, by simply designating the question as one of law rather than fact. To become a question of law, the record must clearly show that there is no room for evidentiary interpretation by a fact-finder in light of existing law on the subject at hand.

The “matter of law” upon which appellant relies is the banality prefacing an argument made in nearly every contract construction case before the courts, i.e., that the construction of clear and unambiguous agreements or writings is a matter of law and not of fact. Ensconcing that platitude amid abundant authority, appellant explains more precisely just what it entails, lest we fail to give proper credence to black letter law: “The written language embodying the terms of an agreement will govern the rights and liabilities of the parties, irrespective of the intent of the parties at the time they entered into the contract, unless the written language is not susceptible of a clear and definite understanding, or unless there is fraud, duress or mutual mistake.” Slice v. Carozza Prop., Inc., 215 Md. 357, 368 . The elenchus in appellant’s gnome, however, immediately follows the first conjunction in Chief Judge Brune’s explanation in Slice, i.e., “. . . unless the written language is not susceptible of a clear and definite understanding. . . .” See also C.J.S. Contracts, § 294 et seq. It is hard to imagine litigants incurring the expense and anguish of a trial and an appeal over the construction of a written document that is “susceptible of a clear and definite understanding.” But such litigious extravagance does exist (or the judicial eye is more discerning than that of litigants and their counsel), else how explain the relative frequency with which the “clear and unambiguous” platitude is applied and the exception dismissed in our appellate records? ⁶⁷⁴ We must discount appellant’s contention that the language is so clear and definite that it is entitled to judgment as a matter of law.

The amphibolous realities incident to the involved, tripartite financing of this multimillion dollar land development required the court to go beyond the precise provisions of the documents incident to the transaction and seek the intent of the parties. This is especially so since appellant’s case below relied exclusively upon evidence it introduced to convince the court of its interpretive intent, the primary source of which was a document to which it was not a party, i.e., the Construction Loan Agreement between BARI and Hyde Park. Indeed, interpretive ambiguity is as much apparent in the nature of the documents relied upon by appellant as from the conflicting language within them. The $250,000 note upon which appellant relied to establish the initial indebtedness contains the unequivocal statement that: “It is understood and agreed that there shall be no personal liability on the part of the maker of this Note, or its partners for the repayment of the indebtedness evidenced hereby. . . .” But that statement is contradicted by the very document securing the loan, the deed of trust which provides for a contingent personal liability.

It is therefore evident that these provisions are sufficiently contradictory to be fairly susceptible to different constructions. Furthermore, it is ironic that appellant evoked language from agreements extraneous to that of the pertinent contracts between the parties, and indeed from one agreement to which it was not a party, to interpret that which it now claims to be “clear and unambiguous”. The irony was increased when appellant called upon the only