Equitable Trust Co. v. Imbesi

Smith, J., delivered the opinion of the Court. We shall here hold that in Maryland an agreement between a borrower and a lender that a borrower will neither convey nor encumber specified land creates no lien in favor of the lender. Under Maryland Code (1974) § 12-601, Courts and Judicial Proceedings Article, jurisdiction is granted to this Court to "answer questions of law certified to it by ... a United States District Court ... if there is involved in any proceeding before the certifying court a question of law of this state which may be determinative of the cause then pending in the certifying court and as to which it appears to the certifying court there is no controlling precedent in the Court of Appeals of this state.” Pursuant to that authority, the United States District Court for the District of Maryland certified to us the following questions: (1) Is a "covenant not to encumber or convey real property”, such as Plaintiffs Exhibit 2, an equitable lien or mortgage so that it is paramount to subsequent mortgages or judgment liens on the same property? (2) Is extrinsic testimony concerning the intent of the parties to a "covenant not to encumber or convey real property” admissible for purposes of deciding certified question (1)?

Because we regard the instrument here as unambiguous, under our parol evidence rule we shall also answer the second question in the negative. I Thomas L. Imbesi (Imbesi) and his son borrowed $60,000 from The Equitable Trust Company, a Baltimore bank. Imbesi executed an assignment of certain life insurance to secure repayment of the debt together with an instrument ²⁵² entitled "Covenant Not to Encumber or Convey Real Estate.” It mentioned certain real estate and said that so long as Imbesi was indebted to Equitable he would "not make, or cause to be made any deed of trust, mortgage, conveyance or any other instrument or agreement having the effect of a lien upon or conveyance of the real estate [then] owned by [him]” and thereafter mentioned. 1 The instrument was acknowledged before a notary public and recorded among the land records of Baltimore County. The recordation tax placed upon instruments securing debts was paid.

The loan was for use in a business which apparently was carried on by the son. A little more than a year later the son borrowed a substantial sum of money from another Baltimore bank. Imbesi guaranteed payment of that loan, signing a guaranty on the form of the Small Business Administration. That indemnity agreement was secured by a mortgage on the land ²⁵³ mentioned in the covenant not to encumber.

This mortgage also was duly recorded among the land records of Baltimore County. The second bank ultimately entered judgment against Imbesi. The judgment was assigned to a corporation in which Imbesi held a large interest. A suit to foreclose the covenant not to encumber was filed by Equitable in the Circuit Court for Baltimore County.

Defendants included Imbesi, the second bank, and the assignee of the judgment. Thereafter the mortgage of the second bank was assigned to the Small Business Administration. It then was substituted as a defendant in the foreclosure proceeding. SBA promptly removed the case to the United States District Court for the District of Maryland.

II Although we have reason to believe that covenants such as that here in issue have been somewhat widely used in recent years by some Maryland banks, this is a case of first impression in this State. Moreover, very few courts seem to have had similar instruments before them. Equitable is of the view that the instrument here, "on its face, [is] precisely the type of agreement which creates an equitable lien or mortgage.” We start with the fact that this instrument by no stretch of the imagination can legitimately be called a mortgage and that it does not even purport to be in the form of a mortgage. In Bank v. Lanahan, 45 Md. 396 (1876), Judge Alvey set forth for the Court the characteristics of a mortgage: By the legal, formal mortgage, as distinguished from instruments held to be mortgages by construction of Courts of Equity, the property is conveyed or assigned by the mortgagor to the mortgagee, in form like that of an absolute legal conveyance, but subject to a proviso or condition by ²⁵⁴ which the conveyance is to become void, or the estate is to be reconveyed, upon payment to the mortgagee of the principal sum secured, with interest, on a day certain; and upon nonperformance of this condition, the mortgagee’s conditional estate becomes absolute at law, and he may take possession thereof, but it remains redeemable in equity during a certain period under the rules imposed by Courts of Equity, or by statute. [Id. at 407.] It will be seen that this instrument has in it none of the requisites of a mortgage set forth for the Court by Judge Alvey in that case.

Equitable does not say that this is a proper mortgage, but suggests it is an equitable mortgage. Without exception, the instruments which we have held to be equitable mortgages have been ones which on their face appeared to be mortgages but which were defective in some manner. For instance, in LeBrun v. Prosise, 197 Md. 466, 477 , 79 A.2d 543 (1951), Judge Markell quoted from Dyson v. Simmons, 48 Md. 207 (1878), where Judge Alvey said for the Court: The principle is now so well settled, that it would seem to be beyond all question and controversy, that if a party makes a mortgage, or affects to make one, but it proves to be defective, by reason of some informality or omission, such as failure to record in due time, defective acknowledgment, or the like, though even by the omission of the mortgagee himself, as the instrument is at least evidence of an agreement to convey, the conscience of the mortgagor is bound, and it will be enforced by a court of equity. [Id. 48 Md. at 214 .] In Dyson the mortgage was recorded in Montgomery County where the land was situate, but the acknowledgment was taken before a justice of the peace in Frederick County. Our statute at the time required that if an acknowledgment were taken before a justice of the peace "out of the county ... wherein the real estate or any part of it lies,” then "the ²⁵⁵ official character of the justice [was required to be] certified to by the clerk of the circuit or superior court under his official seal.” 2 This certificate was missing.

These principles relative to equitable mortgages were discussed for the Court by Chief Judge Hammond in Adams v. Avirett, 252 Md. 566 , 250 A.2d 891 (1969). In that instance the purported acknowledgment of a deed of trust was made over the telephone to a notary whom the grantors never saw. In finding "that the deed of trust created an equitable lien fully valid as far as [the parties to it were] concerned,” Judge Hammond said for the Court: The law of Maryland is therefore that where one who has the right and power to do so intends by a writing to create a lien on his land to secure another but fails to create a statutorily valid security instrument, his expressed intention may be enforced in equity by the other party to the instrument. [Id. at 571.] The Court quoted from 5 H. Tiffany, The Law of Real Property § 1563 at 659-60 (3d ed., B. Jones 1939), and 4 American Law of Property § 16.30 (1952), observing that "Maryland decisions are in accord with the law set forth in Tiffany and the American Law of Property.” Id. at 569. In Lubin v. Klein, 232 Md. 369 , 193 A.2d 46 (1963), the Court held that "a defectively executed mortgage c[ould] be recognized as an equitable mortgage only when the party who executed it had the power to charge the land, and there is no such power in a person acting under an unacknowledged power of attorney____” Id. at 372 .

Thus, it held "that the mortgage in th[at] case was void (except as between the parties) and did not create an equitable lien on the property.” Id. at 372-73 . Equitable liens have been held to arise in Maryland under ²⁵⁶ circumstances other than those of some defect in a mortgage or deed of trust. See in this regard an annotation on equitable liens by William T. Brantly published in 1885 appearing opposite page 139 in his edition of Alexander v. Ghiselin, 5 Gill. 138 (1847). In Keyworth v. Israelson, 240 Md. 289 , 214 A.2d 168 (1965), Judge Oppenheimer said for the Court: An equitable lien is based on specific enforcement of a contract to assign property as security.

The contract need not stipulate for the lien in express terms; it is enough if that is the fair and reasonable implication of the terms employed. A mere promise to pay a debt or obligation does not of itself, however, create a lien unless the intention to create it is apparent from the instrument and circumstances leading to it. Johnson v. Johnson, 40 Md. 189, 196 (1874). See 33 Am.

Jur. Liens § 18 and 4 Pomeroy’s Equity Jurisprudence §§ 1235-1237 (5th ed. 1941); but also see 41 Harv. L. Rev. 404 (1928). [Id. at 305.] This is in accord with 4 J. Pomeroy, Equity Jurisprudence § 1235 (5th ed., S. Symons 1941), cited in Keyworth , where it is stated: The doctrine may be stated in its most general form, that every express executory agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund, therein described or identified, a security for a debt or other obligation, or whereby the party promises to convey or assign or transfer the property as security, creates an equitable lien upon the property so indicated, which is enforceable against the property in the hands not only of the original contractor, but of his heirs, administrators, executors, voluntary assignees, and purchasers or encumbrancers with notice. [Id. at 696.] ²⁵⁷ Johnson v. Johnson, 40 Md. 189 (1874), cited in Keyworth and much relied upon by Equitable, is illustrative of the circumstances under which we have found equitable liens to exist. In that case an individual claimed money was due him from his father and his uncle.

He resided on the farm of the uncle. The uncle conveyed the farm to the claimant’s father. After the death of the uncle the son claimed a right of possession of the farm by reason of certain pecuniary claims against the uncle and the father. The father advertised the farm for sale.

The son filed a bill in equity to restrain the sale and for a decree that the land be sold for satisfaction of his claims. He and his father reached an agreement by which the father was to pay the son $2,500 in full satisfaction of his claims, "such sum to be paid in a specified manner, namely: Five hundred dollars on or before the expiration of thirty days from the date of the agreement; one thousand dollars out of the first payment made on the sale of the farm...; and the other thousand dollars out of the second payment on said farm.” Id. at 195. The son "promised to give up and surrender to the [father] the immediate possession of the farm, and also all the personal property held by him which had belonged to the [uncle], with certain specified exceptions.” Id. The father neither sold the farm nor paid the remaining $2,000.

The son then sought, as the Court put it, "an enforcement of the [father’s] covenant as a charge or lien on the land, and, in that view, praying that the farm be decreed to be sold to raise the fund to pay off the amount due from the [father] on his covenant.” Id. at 195. The chancellor found in favor of the son. It was in this context that Judge Alvey said for the Court: In a case like the present, the question whether there has been a charge created depends in a great measure upon the intention of the contracting parties; and here we think it manifest, as well from the language of the covenant itself as from the circumstances leading to it and under which it was made, that the parties contemplated the sale of the farm, and the proceeds of sale as the fund from which the debt was to be paid. In other words, the ²⁵⁸ farm was to be sold, and a sufficient amount of the purchase money specifically appropriated to the payment of the debt due the plaintiff.

If such be the fair construction of the agreement, it created a charge on the land as a security to the plaintiff; for, as was said by Chancellor Sugden, in Rolleston v. Morton, 1 Dr. & W. 195, if a man has power to charge his lands, and agrees to charge them, in equity he has actually charged them; and a Court of Equity will execute the charge. Here, as we have seen, there are no express words creating the lien or charge upon the land; but there is no doubt of the proposition, that a charge may be created by fair and reasonable implication as well as where express words of trust or charge are employed in the covenant or agreement of the parties. Perry on Trusts, sec. 122, and authorities there cited; and 2 Story’s Eq. sec. 1246. [Id. at 196-97.] Further illustrative of the matter of equitable liens in Maryland is Union Trust Co. v. Biggs, 153 Md. 50 , 137 A. 509 (1927). Biggs issued a nonresident attachment against Speers.

The sheriff laid the attachment on certain land of Speers in Anne Arundel County. Speers and a corporation filed separate motions to quash the attachment, alleging that Speers had conveyed a part of the land to the corporation. There was a further allegation that there had been no actual levy made upon the land and that although the tract of land was occupied, the sheriff had falsely returned that no person was in possession. An agreement was reached between Biggs and Speers to the effect that the land claimed to have been conveyed away should be released from the attachment, but the lien of the attachment should be retained as to the remainder.

Biggs obtained a judgment when the short note case was tried. A mortgage, made and recorded prior to the attachment, was foreclosed. Funds remained in the hands of the assignee in excess of the mortgage claim. Union Trust Company entered a judgment by confession against Speers after the assignee of the ²⁵⁹ mortgage had filed his report of sale.

The Court was faced with a contest in the foreclosure proceeding as to the relative priority of the Union Trust and Biggs claims. Judge Parke pointed out for the Court: [Biggs] had relied upon the agreement, and neither had sought nor obtained a judgment of condemnation, which would have had merely the effect of adjudicating the property originally attached as that of the debtor and applicable to the satisfaction of the claim of the attaching creditor, and this legal result of a judgment of condemnation is precisely the effect intended to be accomplished by the agreement in the present case. West v. Wood Co., 140 Md. 514, 521 [, 118 A. 69 (1972)]. But this agreement did not authorize the entry of a judgment of condemnation, and it was informal and insufficient at law as a pledge, mortgage, or assignment, so no property right in the equity of redemption was acquired at law by the agreement.

But it can not be doubted that it was the express object of the contracting parties for the remaining land to be subject to an effective charge or lien which would secure to the creditor the payment of any judgment she might recover on account of the cause of action on which the attachment had been issued, and that this charge or lien was designed to be something in addition to the personal obligation of the debtor to pay. The mortgagor has long since received and enjoyed the consideration for her undertaking, which equity will not permit her now to repudiate. It is an accepted principle of equity that where, as here, the intention to hold and charge a particular interest or estate as security for the payment of a debt or other obligation is clearly manifested in writing, but frustrated simply through some default of form or in procedure, an equitable lien upon such interest or estate is created, which is enforceable against the property in the hands of not only the original promisor, but ²⁶⁰ as against his heirs, executors, administrators, voluntary assigns, and purchasers or encumbrancers with notice. See 3 Pomeroy, Eq.

Jur. (4th Ed.), secs. 1235-1237. Since a judgment is but a general lien and the judgment creditor not a purchaser for value, its lien must yield to the superior equity of a prior specific lien. As the prior specific equitable lien in the pending appeal was designed to retain and appropriate the inchoate lien upon particular property of an existing attachment at law as security for the payment of a debt in an amount to be ascertained by litigation between the creditor and debtor, the nature of this equitable lien is closely analogous to a defective mortgage lien, and so, as in the case of an equitable mortgage lien, the specific equitable lien created by the agreement will be paramount to subsequent judgment creditors who become such on causes of action which existed before the creation of such equitable lien. [Id. at 59-61.] In summary, it would appear that under our cases for an equitable lien to exist a specific intent to create a lien must be made manifest as, for instance, where a written instrument evidences an intent to create a lien but the instrument is imperfect in some regard, such as one with a defective acknowledgment.

In the absence of a written contract construed to embody the full agreement of the parties, an equitable lien may be found only where the sum total of the circumstances of the dealings between the parties fairly may be said to evidence an intent to create such a lien. Ill A limited number of cases involving negative covenants sought to be enforced as liens on land have arisen outside the State of Maryland. The oldest such case seems to be Knott v. Manufacturing Co., 30 W. Va. 790 , 5 S.E. 266 (1888). ²⁶¹ Negotiations had taken place relative to a loan to be secured by a deed of trust covering certain land. Ultimately a smaller loan was entered into with the borrower’s executing an agreement which included provisions that it would keep buildings and machinery insured to a specified amount, that the insurance policies would be transferred to the lender as additional security, and that the borrower "covenanted] that it w[ould] not give any voluntary lien of any character whatever on any of its buildings, machinery, or grounds so long as this debt remain[ed] unpaid.” Other creditors entered judgment against the borrower.

The lender sought priority over those judgment creditors. The court recited the general rule: The form or peculiar nature of the agreement which shall create a lien is not very material, for equity looks rather at the final intent and purpose than at the form; and if the intent appears to give, or to charge, or pledge property, real or personal, as security for an obligation, and the property is so described that the principal things intended to be given or charged can be sufficiently identified, the lien follows. Wayt v. Carwithen, 21 W. Va. 516 [(1883)]. [Id. at 794-95.] The court held the covenant not to be a lien, saying: Of course this creates no lien on or pledge of any property. It is simply negative; an agreement not to do a particular thing.

The creation of a lien is an affirmative act, and the intention to do such act can not be implied from an express negative. It seems to me that both of these clauses of the obligation are simply personal covenants, for the breach of which the remedy must be sought in a court of law. They create, as we have seen, no lien upon real estate, and give the plaintiff no interest therein. They simply impose a personal obligation upon the convenantor. [Id. at 796.] The next case to consider such a negative covenant issue ²⁶² was Western States Finance Co. v. Ruff, 108 Or. 442 , 215 P. 501 , rehearing denied, opinion modified, 108 Or. 455 , 216 P. 1020 (1923).

There a husband sold certain land. His wife did not join in the conveyance for the purpose of releasing her inchoate right of dower. The purchaser (Kaser), being desirous of obtaining a release of her interest, entered into an agreement with her. He was to pay her a specified sum two years after the execution of the agreement, at which time her deed was to be delivered.

The agreement between this purchaser and the wife specified that he would make no conveyance of this land during the two year period without seeing that the sum due the wife was paid. The wife and the husband were divorced during this two year period. The purchaser conveyed the land to a third party who brought an action to determine what, if any, claim she had against the land in question. The court referred to Knott , which it said was "directly in point.” It said the words used in the contract could not "be construed as importing a transfer or conveyance of an interest or estate in the lands as security, or for any other purpose,” nor did they "express an intent to