Gould v. Transamerican Associates

²⁸⁸ Prescott, J., delivered the opinion of the Court. The Circuit Court of Baltimore City permanently enjoined the appellants from foreclosing a second mortgage in a suit, which was instituted on account of alleged defaults with respect to the payment of state and city taxes for the year 1959, and the appellants appealed. The appellants are mortgagees under a purchase-money second mortgage, dated January 18, 1958, as modified by a “Mortgage Modification,” dated April 27, 1959, securing the principal amount of $945,000 (the principal amount of the first mortgage was, as of December, 1958, approximately $434,000), on the property described as 200-208 W. Baltimore Street and 2-6 N. Liberty Street, Baltimore City, and generally known as the Butler Building. The appellee is a New York limited partnership and is the mortgagor under the said second mortgage.

One Marvin Kratter is its leading general partner. On September 6, 1957, the appellants agreed to sell the said property to Kratter. The contract provided, inter alia, that the purchase-money second mortgage involved herein was to call for no interest and no amortization for a period of ten years, and thereafter interest was to be paid, together with amortization payments over some 28 years; that the mortgagor was to have no personal liability under the mortgage; that the forms of the notes and the mortgage were to be the same as those used in connection with the first mortgage then upon the premises; that the first mortgage contained covenants whereby the mortgagors agreed to pay taxes “when due” and “to remove liens within ten days,” with acceleration rights in the mortgagee in the event of defaults; and that the sellers had “complied with all of the obligations of the mortgagor under said [first] mortgage and that said mortgage is now, and will at the time of closing, be in full force and effect without any defaults thereunder.” (Emphasis supplied.) Prior to the settlement on January 18, 1958, Kratter assigned the contract to the appellee, and, at the settlement, certain differences arose between the parties with reference to whether or not the terms of the notes conformed to the provisions of the contract. The appellants also claim (and the ²⁸⁹ appellee denies) that the same differences arose with reference to the provisions of the mortgage.

However, the deed and the mortgage were executed and recorded. The notes were executed and placed in escrow with the understanding that they would be revised to conform with the second mortgage “as finally executed,” and they were thereafter so corrected. At the time of settlement, taxes for the year 1958 were open and unpaid. Apparently this fact was known to the appellee as well as to the appellants; since an apportionment of the taxes was made on the settlement sheet, whereby the sellers were charged with taxes for seventeen days.

No discussion by the parties was had at that time as to whether the sellers’ failure to pay the taxes by January 18th constituted a default under the first mortgage, but, at the time of trial, Kingdon Gould, Jr., one of the appellants and the chief spokesman and negotiator for the sellers, testified that he had obtained permission from the holder of the first mortgage to pay the taxes for 1957 and 1958 at any time during the period “when taxes are flat,” which he understood meant at any time before a penalty was incurred (which we will later see to be July 31st insofar as city taxes are concerned). Gould did not inform the appellees that he had requested, nor that he had received, such permission. We have noted that the settlement took place on January 18, 1958. Gould claims that shortly thereafter he discovered that the second mortgage failed to conform with the provisions of the first mortgage in certain particulars, and he demanded that it be corrected.

After failing to obtain what they desired by direct request, the appellants filed suit, on January 20, 1959, in the United States District Court for the purpose of obtaining certain changes in the terms of the second mortgage. There was no contention in this suit that the appellee was in default under the mortgage, either for the nonpayment of taxes or otherwise. Following the suit, extensive negotiations between the parties took place, and modifications of the provisions of the second mortgage were finally agreed upon and incorporated in an instrument, which was dated April 27, 1959, termed “Mortgage Modification.” ²⁹⁰ In this modification agreement, quite a few changes were made in the second mortgage; it will only be necessary to mention several. Although appellants contended ..that the original contract between the parties called for the second mortgage to have the same covenants and provisions (except as to the sum secured and repayment, etc.) as the first mortgage, the modification agreement failed, in several important aspects, to conform with the provisions of the first mortgage.

The second mortgage originally had provided for a general grace period of 20 days for defaults and a 20-day period to “remove liens”; whereas the first mortgage provided for no general grace period, and allowed only 10 days to remove liens. The second mortgage was modified so as to eliminate the 20-day general grace period, except as to the covenant to maintain the property in good repair; the 20-day period for removing liens was reduced to 10 days; the option of the mortgagees to accelerate and foreclose was made exercisable “without declaration of said option and without notice,” a provision that was contained in the first mortgage; and the attorney’s fee in the event of foreclosure, which in the original second mortgage was 5% and in the first mortgage $500, was fixed at 2%. In preparation for the settlement and execution of the Mortgage Modification, the appellee’s attorney, Norman Howard, Esquire, had written Gould stating that the appellee would expect the appellants to withdraw the pending suit in connection with the mortgage and to furnish the appellee with a certification that the second mortgage was in full force and effect, without any defaults thereunder on the part of the mortgagor. Gould replied on April 21, 1959, saying, among other things, that the mortgagees would be willing to state that the mortgage was in full force and effect, and that no defaults had been declared thereunder by the mortgagors.

At the settlement, however, Gould, at first, refused to give a certificate about defaults, but yielded and did so when Howard pointed out what Gould had said in his letter, and insisted upon receiving such a certificate. The certificate stated that “said mortgage, as amended, is in full force and that no defaults have been declared thereunder by us [the mortgagees].” ²⁹¹ The appellee’s attorney testified that before he accepted the certification in this form he was careful to ask Gould whether there were, in fact, any defaults under the mortgage, and after Gould “hemmed and hawed,” he finally said “No.” Whereupon, appellee’s attorney said: “All right, on the basis of that representation, I will accept this letter, this certification.” The chancellor found that, “Gould assured or gave Howard the understanding that there were no defaults under the mortgage which the defendant [the appellee] accepted and relied on as it had a right to do.” Insofar as the above is a finding of facts, we cannot say the chancellor was clearly erroneous. Maryland Rule 886 (a). After the signing of the Mortgage Modification on April 27, 1959, and the withdrawal of the mortgagees’ suit in the District Court, the appellee apparently felt that the differences between the parties, at least up to the above date, had been finally settled and disposed of, but the appellee was soon to learn that such was not the case.

On May 12, 1959 (as noted by the chancellor, “Hardly had the ink dried upon the executed papers”), Gould wrote the appellee, stating that considerable repair work was necessary on the building, and that a list would be sent of matters requiring attention. This list was never furnished, but on May 28th, following, the appellants wrote the appellee, purporting to exercise their option so as to cause the whole principal sum secured by the second mortgage to become due and payable at once, giving as their reason therefor the alleged failure of the appellee to comply “with certain provisions of paragraphs three [wherein the appellees agreed to pay taxes, etc., when due] and six [wherein the appellee agreed that no prior lien to the second mortgage, except the first mortgage, would be allowed to remain on the property for ten days] of said mortgage as modified.” On May 29, 1959, the appellee’s attorney answered Gould’s letter of May 28th, denying knowledge of any default, stating that the appellee was prepared to cure any that existed, and requesting an enumeration of the alleged defaults. Gould replied on June 2, 1959, stating that state and city taxes for 1959 were open and unpaid, as well as metered water rent charges, sewerage taxes and a fire-line charge. Upon in ²⁹² vestigation, it was discovered that all of these bills (except the taxes) had been paid, with the exception of some $14.00 on a water cut-off charge, which was paid forthwith by the appellee.

On June 16, 1959, Howard again wrote to Gould stating that there were no delinquent tax, water, sewer or other items against the property, and when the mortgage modification was closed: “* * * I thought that would be the end of all problems with respect to this mortgage, and not the beginning. I thought you were tired of the constant fighting and would be happy once you got what you wanted.” Gould’s reply to this was to file the suit to foreclose on June 26, 1959. The appellee paid the state and city taxes on July 7, 1959. In the posture that the case reaches us, it will only be necessary to state, in pertinent part, the substance of paragraphs three and six of the second mortgage.

In paragraph three, the mortgagor agrees to pay all taxes “when due,” and paragraph six provides that if any mechanics’ or other liens that may be prior to the second mortgage, except the existing first mortgage, be created or rest upon any part of the premises for ten days without being released or discharged, or upon default in the performance of any condition or covenant of the mortgage, the mortgagees shall have the right, at their option, to accelerate the due date of the principal sum due under the mortgage, without declaration of said option and without notice. It is conceded that state and city taxes for the year 1959 were not paid until July 7, 1959. The appellants, obviously feeling that their case was much stronger as it related to city taxes rather than to state taxes, confined their- argument in their brief, in practical effect, to the question of city taxes, and we shall do likewise. The appellants point out that by the Charter and P. L. L. of Baltimore City (1949), Section 34, the taxes, “shall be due and may be paid * * * on or after the first day of January next ensuing,” and by the Code (1957), Article 81, Section 206, any tax may be collected by an action of assumpsit instituted at any time after the tax shall become due and payable, and insist that it is clear, when these sections are considered, that the taxes for 1959, paid on July 7th, were not paid “when due” ²⁹³ under the provisions of the mortgage (paragraph three), which resulted in a default that authorized their exercise of the option to accelerate the due date of the principal sum due under the mortgage and their right to foreclose.

The appellee answers by saying that the Court must arrive at the intention of the parties to the mortgage, when they provided that a default would occur thereunder for failure to pay taxes “when due”; that the meaning of the word “due” in the tax statutes is not determinative of its meaning in the mortgage; that by all of the canons and standards of construction of contracts, the words “when due,” as used in the mortgage, were intended to mean “before taxes are in arrears”; and as the suit was instituted on June 26th, and the taxes would not be in arrears, at the earliest, until July 1st, the foreclosure was premature and invalid. The appellants also contend that appellee’s failure to pay the 1959 taxes until July 7, 1959, constituted a default under paragraph six of the mortgage. They claim it is elementary that taxes are liens from January 1 of the year for which they are levied (citing Code [1957], Article 81, Section 70, and Charter and P. L. L. of Baltimore City [1949], Sections 34 and 52), and that taxes are prior to the lien of any mortgage. Consequently, when the appellee failed to pay the taxes until July 7th, it permitted a lien, prior to the second mortgage, to remain unpaid for a period of more than ten days, constituting a default under paragraph six.

The appellee gives several answers to this contention. One of them is that it was clearly not the intention of the parties that the mechanics lien clause (paragraph six) should include the obligation to pay taxes, which appeared in another and separate covenant in the mortgage (paragraph three). The appellee points out that the appellants maintain that taxes are “due” on January 1st (and, therefore, must be paid immediately under paragraph three), and are liens from that date forward (and, therefore, need only be discharged before ten days under paragraph six to avoid a default), which would result in an inconsistency as to the time when the mortgagor would be required to perform a single obligation, the payment of taxes, and argues that when this occurs, the more particular and specific clause must govern. ²⁹⁴ We do not deem it necessary to answer these and the other claims and counter-contentions of the respective parties, with the exception of the question of waiver and estoppel, for we think, as did the chancellor, that Gould, by his actions, words, and conduct, waived the failure to pay the 1959 taxes until July 7, 1959, (even if we assume such failure constituted a default), and estopped the appellants from claiming such failure to be a default under the terms of the mortgage. We shall, therefore, assume, without deciding, that the appellee’s failure to pay the taxes for 1959 until July 7th constituted a