Ellerin v. Fairfax Savings Ass'n

ROSALYN B. BELL, Judge. Two appeals are combined in this opinion. Both appeals arise from Fairfax Savings Association’s loan of over $5,000,000 to Sherwood Square Associates to develop a shopping center complex in historic Westminster. Fairfax Savings Association sued Charles and Naoma Ellerin, Louis and Gloria Seidel, and Tri-Ess, Inc. for $2,300,000 in payment guaranties included in the loan (Guaranty Cases), as well as Charles Ellerin and Louis Seidel, the general partners of Sherwood Square Associates, (Partnership Cases) for the amount left due on the loan when they stopped making payments.

In the first appeal, R. Bruce Alderman, the attorney who represented Sherwood Square Associates at the loan closing, presents one issue: —Does an attorney have a right to intervene in an action in order to protect his interest in a subsequent legal malpractice action which may be filed against him? Based on these particular circumstances, we hold that the trial court did not err in denying Alderman’s intervention motion. In the second appeal, Charles and Naoma Ellerin, Louis and Gloria Seidel, and Tri-Ess, Inc., contest the jury’s verdict of over $2 million in favor of Fairfax Savings Association. They present the following questions: —Did the trial court err in instructing the jury that ratification of specific fraudulent provisions in a contract by the defrauded party barred that party from recovering any damages resulting from the fraud? —Should the trial court have admitted evidence that Fairfax Savings Association waived its right to require an architect’s certificate to show completion? —Did the trial court err in determining as a matter of law that there was 120,000 square feet of leasable space ⁹⁶ where damages were to be based on a “rent roll” formula in which leasable square footage was a component? —Did the trial court err in granting Fairfax Savings Association’s summary judgment motion in the Partnership Cases?

We reverse and remand for a new trial. For clarity, we analyze the two appeals in separate sections. But first, we set forth the somewhat complex factual and procedural background common to both. Charles Ellerin and Louis Seidel (Partners) were the general partners in Sherwood Square Associates (SSA), a limited partnership. 1 Fairfax Savings Association (Fairfax) loaned SSA $5.7 million so that SSA could acquire and renovate a group of very old buildings in a historic section of the City of Westminster (City).

These buildings, known as the Barrel House Buildings, were essentially empty shells when the project began. The loan transaction was structured in the following manner. The City issued two Industrial Revenue Bonds (IRBs), the first in the amount of $3,050,000 and the second for $1,800,000, both of which were acquired by Fairfax. Fairfax also made a conventional loan of $850,000 to SSA.

SSA repaid the conventional loan before this litigation ensued. The City assigned all its rights in regard to the IRBs to Fairfax, 2 but did, however, maintain an interest in the successful rehabilitation of the buildings, as shown by the Development Agreement entered into by the City and SSA. 3 ⁹⁷ By the terms of this agreement, SSA agreed that the renovated property would contain “approximately 120,000 square feet of space, for use as retail and commercial facilities____” SSA subsequently assigned an interest in the Development Agreement to Fairfax. Central to this controversy are the personal guaranties signed by the Partners at the loan settlement — two identical 16-page documents, one for each IRB. These personal guaranties were signed by Charles Ellerin, his wife Naoma Ellerin, Louis Seidel, and his wife Gloria Seidel; Louis Seidel’s signature appears again for Tri-Ess Corporation (Guarantors).

(Tri-Ess was the general contractor on the project and was owned by Charles Ellerin and Louis Seidel.) All signatures were witnessed by attorney R. Bruce Aider-man of the law firm of White, Mindel, Clarke and Hill, who represented the Guarantors, the Partners, and SSA at settlement. Mortgages on the property and buildings provided additional security for the loan. The twin documents entitled “Completion Guaranties” provided that the Guarantors would complete the project and personally guarantee repayment on the IRB loans. The maximum the Guarantors could be required to repay was $2.3 million — $1.15 million on each IRB.

The guaranty provided that this liability would be reduced proportionately as the property was leased, i.e., a “rent roll” formula. The Guarantors’ liability was to terminate when the project was completed and 70 percent of its total square footage was leased. 4 ⁹⁸ Given that the project met with reverses, one needs no lengthy experience to predict what happened next. SSA defaulted on the loan and Fairfax filed complaints against Charles Ellerin and against Louis Seidel as the general partners of SSA on November 26, 1985. Fairfax also filed complaints against the Guarantors, based on the previously described personal payment guaranties.

Judgments by confession were docketed the next day. The Guarantors filed motions to vacate the confessed judgments, claiming, inter alia, that Fairfax had fraudulently hidden the two 16-page guarantees amidst the many and varied settlement documents at the closing. The Guarantors also claimed that the documents, which had been pre-approved, had been changed between the approval and settlement. They also claimed that they had signed the documents under duress, without an opportunity to read them, because Fairfax had told them that the deal could not be consummated unless the documents were signed.

On December 30, 1985, the Guarantors filed an affirmative suit against Fairfax, including counts of fraud, duress, and negligent misrepresentation, and claiming $6 million in compensatory and $10 million in punitive damages against Fairfax. An extremely lengthy motions battle ensued — it is sufficient for our purposes here to note that ultimately the Guarantors’ affirmative suit took on the guise of a counterclaim. The Guaranty cases were consolidated, the Partnership cases were consolidated, and the trial judge ordered that they be tried in sequence. R. Bruce Alderman and the law firm in which he was then a partner, White, Mindel, Clarke and Hill (who, the reader may remember, represented the Guarantors, the Partners, and SSA at the closing), 5 filed a motion to intervene in the litigation on July 30, 1987.

Alderman asserted that, because both the Guarantors and Fairfax had threatened to sue him (and his law firm) if they lost the case, he had a right to intervene under Rule 2-214(a) to protect his inter ⁹⁹ ests. The trial judge, after a hearing on August 18, 1987, denied Alderman’s motion. A jury trial began on September 2, 1987. Fairfax offered the executed loans as evidence, as well as testimony from Richard Jacobs, the Fairfax loan officer who worked with the Partners and attorneys, preparing documents for the loan closing.

The gist of Jacob’s testimony, based on his close work with the principals, was that it had always been understood that the Guarantors would be required to guarantee payment on the IRBs because, in the project’s initial stages the main buildings were just empty shells and insufficient to secure such a large loan. Jacobs stated that the executed guaranties accurately reflected the terms as ultimately agreed upon during a telephone conference call about a week before the loan closing. Ellerin and Seidel testified that Ellerin and Alderman conducted all the loan negotiations with Fairfax. Apart from the guarantee that the facility would be completed, the only part of the loan they agreed to guarantee personally was the $850,000 conventional loan.

Ellerin testified that it was his understanding that the loans were to be settled in strict accordance with the terms of the three Commitment Letters Fairfax had sent to Ellerin and Seidel on December 21, 1982. 6 Ellerin testified that he did not read the Commitment Letters, which had been sent to his wife in Florida, but his wife read one of the IRB Commitments to him over the ¹⁰⁰ telephone. Ellerin then told Seidel of their contents. Based on their belief that the Commitment Letters controlled all the terms of the loan, and their reliance on Alderman’s statement that he had reviewed the loan documents, neither partner read any of the documents signed at the closing. Ellerin testified that he discovered the personal guaranties in October of 1984, after a conversation in which Fairfax’s president, Malcolm Berman, referred to them. 7 Ellerin testified that he experienced severe stress and stomach pain after learning of the personal guaranties, although visits to physicians revealed nothing physically wrong.

Ellerin did not, however, inform anyone from Fairfax that the personal guaranties were a surprise to him, because "... I thought it would be wise not to say anything, at least get the project finished and paid for____ I made a decision to try to make the project succeed, and to go forward and get it leased up and get enough income where Fairfax got paid; and there wouldn’t be a legal battle to avoid.” At the close of all the evidence, the trial judge granted Fairfax’s motion for judgment on the Guarantors’ duress defense, as well as the Guarantors’ negligent misrepresentation counterclaim. 8 The trial judge gave the jury a ratification instruction, accompanied by a special verdict sheet, the effect of which was to preclude the jury from awarding ¹⁰¹ Ellerin damages for fraud if it found that he ratified the contract by his silence. The month-long trial ended on October 2, 1987, a Friday afternoon. The jury found that Fairfax had fraudulently inserted a payment guarantee into the two identical “Completion Guaranty” documents, but also found that the Guarantors had ratified the fraud, accepted the benefits of the loan, and waived any right they may have had to avoid enforcement.

The jury awarded Fairfax damages against the Guarantors for $2,303,984.61. On October 6, 1987, the trial court granted Fairfax’s summary judgment motion in the Partnership Cases, entering judgment against Ellerin and Seidel for $5,263,688.75. APPEAL #1 —Intervention— Alderman contends that the trial court should have allowed him to intervene under Rule 2-214(a), both as a third-party defendant in Fairfax’s action against Ellerin, and as a third-party plaintiff against Fairfax’s law firm, Weinberg and Green. Because Alderman represented SSA and the Guarantors at the closing, Ellerin claimed that he relied on Alderman when he signed the loan documents that included the personal guaranties.

Moreover, at the loan closing, Alderman furnished a written opinion to Fairfax to the effect that, after thoroughly reviewing the loan documents, he found the loan agreement to be enforceable “as executed according to its terms.” Alderman’s opinion specifically mentioned the Completion Guaranties. The gravamen of Alderman’s intervention motion was the inevitability of a subsequent lawsuit against him; the Guarantors threatened to sue him for legal malpractice, and Fairfax threatened a breach of warranty suit based on Alderman’s opinion letter. The chief problem (but not the only problem as our later comments indicate) with Alderman’s intervention motion was the fact that it was not timely filed. We affirm the trial court’s denial of Alder ¹⁰² man’s motion because of this untimeliness.

We begin our explanation by reviewing the relevant dates. Alderman’s opinion letter was dated December 30, 1982, the date of the loan closing. He received a set of the signed loan documents by March of 1983. According to his trial testimony, Alderman discovered the precise contents of the completion guaranties in early 1984.

On November 26, 1985, Fairfax filed the loan actions, seeking to enforce obligations against SSA, Ellerin, Seidel and the Guarantors. The confessed judgments were granted the next day. On December 30, 1985, the Guarantors (represented by other counsel) moved to vacate the confessed judgments, claiming, inter alia, fraud in the execution of the loan documents on which they were based. Alderman provided an affidavit for the Guarantors’ counsel to support the motion to vacate; the affidavit was filed on April 1, 1986.

In the affidavit, Alderman stated he “was not there [at the loan closing] to read and review every document to determine whether they accurately reflected the parties’ prior agreement” and that, as counsel for SSA and the Guarantors, his only “purpose of being at that closing was to resolve any questions which arose at closing and to otherwise facilitate the closing____” He stated he had not been privy to and was unfamiliar with the terms of the loan which, Alderman stated, were “negotiated directly ... without counsel.” 9 This is as good a time as any to point out that, by Alderman’s ov/n sworn affidavit, even if he had read the loan documents, he would not have known whether they accurately reflected the parties’ agreement in regard to loan security because he was totally unaware of what the parties intended. Nevertheless, stated Alderman, at the closing he signed the opinion letter “solely so that settlement could go to completion ... relying on their [Fairfax’s counsel] good faith as members of the bar that the documents prepared ¹⁰³ would accurately reflect the parties’ agreement____” In any event, Alderman’s affidavit illustrated that he knew of the Completion Guaranty controversy during late 1985 and early 1986, if not earlier. 10 Trial was originally scheduled for October of 1986, but twice was postponed and was ultimately set for September 2,1987. Yet Alderman did not file his motion to intervene until July 30, 1987. Rule 2-214, “Intervention,” provides in pertinent part: “(a) Of Right. — Upon timely motion, a person shall be permitted to intervene in an action: (1) when the person has an unconditional right to intervene as a matter of law; or (2) when the person claims an interest relating to the property or transaction that is the subject of the action, and the person is so situated that the disposition of the action may as a practical matter impair or impede the ability to protect that interest unless it is adequately represented by existing parties.” (Emphasis added.) As the Court of Appeals pointed out in Maryland Radiological Society, Inc. v. Health Services Cost Review Commission, 285 Md. 383, 388 , 402 A.2d 907 (1979), 11 the very first words of the Rule indicate that “timely application is a prerequisite to such a request being granted.” Indeed, timeliness is such an important requirement that a trial court “should require that the applicant demonstrate the promptness of his request” before it considers the substance of the motion.

Maryland Radiological, 285 Md. at 388 , 402 A.2d 907 . Timeliness is so important (and thus, a threshold requirement) because new parties, new facts, and new legal theories may be introduced in the action. As we recently observed, the question of timeliness depends on the individual circumstances of each case; it is a determination ¹⁰⁴ which rests within the sound discretion of the trial court. Hartford Ins.

Co. v. Birdsong, 69 Md.App. 615, 623 , 519 A.2d 219 (1987). It is not essential that the record reflect the extent, if any, on which the trial court based its denial on timeliness. Hartford Ins. Co., 69 Md.App. at 624 , 519 A.2d 219 .

In Maryland Radiological, 285 Md. at 388-89 , 402 A.2d 907 , the Court of Appeals, guided in part by federal precedent, 12 fashioned a four-prong approach to determine timeliness. First, why does the applicant wish to intervene? Second, how likely is it that the parties already in the case will be prejudiced because of the intervention? Third, to what extent have the proceedings progressed when the applicant seeks to intervene?

Fourth, what is the reason for the delay? We analyze each of these criteria in order. Why did Alderman wish to intervene? His stated purpose was that he had an economic interest to protect, in that one of the parties would inevitably seek to hold him liable.

Although as a practical matter it is easy to envision either party suing Alderman, at present such suit is merely theoretical. The precise nature of Alderman’s interest was contingent in that it depended on which party prevailed at trial. Moreover, Alderman does not provide us with any details of the alleged threats, thus adding to the speculative nature of his interest. We shall refrain from reaching the question Alderman would like us to reach; that is, is an attorney’s interest in protecting his pocketbook and reputation against a later legal malpractice action a substantial enough interest to allow intervention as of right?

The resolution of this issue should await another day and case 13 — preferably one where ¹⁰⁵ the attorney’s interest is more definite. It is sufficient for our purposes to note that Alderman’s interest does not weigh heavily in the balance. We turn to the second factor, i.e., the probability of prejudice to the parties already in the case. Both parties would have been severely prejudiced by the eleventh hour entry of Alderman.

Alderman conceded that a continuance would have been inevitable. In Hartford Insurance, 69 Md.App. at 624 , 519 A.2d 219 , we upheld the trial court’s denial of a motion filed three weeks before trial, despite the would-be intervenor’s assurances that intervention would not delay the proceedings. In the instant case, the motion was filed only a month before trial. It is significant that both existing parties resisted intervention, not only because of the delay in this already two-year-old action, but because Alderman’s presence and legal posture would have diverted the jury’s attention from the central issues of the case.

As it was, the issues were sufficiently complex as to require five weeks of trial. Adding to the virtual certainty of prejudice was the fact that Fairfax’s counsel would have been forced to withdraw because of Alderman’s third-party complaint. If its counsel had been disqualified a month before