Hyatt v. Maryland Federal Savings & Loan Ass'n

⁶²⁴ MacDaniel, J., delivered the opinion of the Court. The appellants, Herbert S. and Jerry H. Hyatt, sought a judgment, in the Circuit Court for Montgomery County, declaring that a mortgage held by them was superior to any liens of Maryland Federal Savings and Loan Association, one of the appellees, and that any subordination agreements purporting to create superiority in Maryland Federal were null and void. The evidence in the court below showed that on September 1,1971, Matthew M. Witenstein, the mortgagor, entered into a $47,500 purchase money mortgage with Paul A. Welsh, the mortgagee, in connection with the purchase by Witenstein of real estate from Welsh. The real estate (hereinafter referred to as the “subject property”) consisted of 11.0286 acres in Damascus, Montgomery County, Maryland.

The property was described in the mortgage by metes and bounds. The mortgage was recorded on September 1,1972, among the land records of Montgomery County. It included the fpllowing provision: “This mortgage will be subordinated to bona fide ground development and construction loans____” On July 20, 1972, Welsh borrowed $7,500 from the Bank of Damascus (hereinafter “the Bank”) and “assigned” the mortgage to the Bank. A standard assignment form was recorded on July 25, 1975, and Witenstein was given notice.

Herbert Hyatt, President of the Bank, testified in the court below regarding the purpose of the “assignment.” He said: “Q The bank originally took the assignment purely as collateral security for the $7,500 loan, is that correct? A That was the original intent; yes, sir. Q And, — A However, it was assigned and completely recorded. Q Well, the purpose — A But the purpose was in order to allow him credit so that he could borrow money. ⁶²⁵ Q In other words, it was used as collateral security for the loan of $7,500.00?

A That’s true.” The Bank took over collection on the mortgage. Mr. Hyatt explained: “ ... we required that as additional security on the note, the $7,500.00 note. We put them in the Collection Department in every case so that he could not get the payment from Witenstein and spend it without us getting it.” In September 1972, Witenstein made an interest payment on the mortgage to the Bank. Subsequently, Welsh refinanced the $7,500 demand note and replaced it with a new $7,500 note.

The mortgage was still held as security and for collection. On November 15,1972, Witenstein, individually and as the sole genera] partner of Damascus Developers, a limited partnership, signed and recorded a subdivision record plat respecting the subject property. The plat stated: “There are no suits of action, leases, liens or trusts on the property included in this plan of subdivision.” On December 5, 1972, Witenstein and Damascus Developers executed a mortgage to Maryland State Savings and Loan Association to secure a $284,000 loan. The mortgage, which created a lien on certain portions of the “subject property,” was recorded on December 6, 1972.

An agreement between Witenstein and Welsh subordinating the $47,500 mortgage (which had been “assigned” to the Bank for collateral) to the mortgage with Maryland State Savings and Loan Association was recorded on December 7, 1972. On January 25, 1973, the appellants purchased the $47,500 mortgage from Welsh for $25,000 in cash and assumption of payment of the $7,500 demand note. The agreement was reduced to writing, and the Bank assigned its interest in the mortgage to the appellants. The assignment was not recorded until April 11, 1975.

The Bank still held the mortgage for collection, but it was no longer security for the $7,500 debt. ⁶²⁶ Witenstein was notified of the purchase of the mortgage, and he continued to make payments to the Bank on the mortgage debt. On September 2, 1973, Witenstein recorded a subdivision record plat for another portion of the “subject property.” The plat made the same statement as above regarding liens on the property. On February 28, 1974, another mortgage was executed between Witenstein/Damascus Developers and Maryland State Savings and Loan Association to secure a $200,000 loan. It was secured by most, but not all, of the “subject property” and was recorded on March 1, 1974.

On March 4, 1974, another subordination agreement with Welsh was recorded. In both of the Maryland State Savings and Loan Association mortgages and in the subordination agreements, the property affected was described according to the record plat subdivision and not by metes and bounds. In 1974, the Maryland State Savings and Loan Association foreclosed on the $200,000 loan and, at the foreclosure sale, purchased the property affected by that mortgage. The remainder of the “subject property” is still owned by Witenstein who, on March 11, 1975, filed for bankruptcy.

At the time of the above foreclosure sale, the appellants were not aware that some of the property subject to their mortgage was being sold. Mr. Hyatt explained: “The advertisement in the foreclosure proceedings only spoke of lots and blocks. Since I had no knowledge that there were lots and blocks attempted to be subdivided off the property I had no knowledge at all. I was confident that it just covered the townhouse development which was next to this.” The appellants first discovered the facts surrounding the second and third mortgages in April 1975, when they had the title of the “subject property” searched in preparation for their own foreclosure.

The title search revealed the subordination agreements. The last title search had been at the time that the $47,500 mortgage had been given as security to the Bank. ⁶²⁷ Mr. Hyatt was also questioned as follows with regard to the provision in the $47,500 mortgage that it would be subordinated to bona fide ground development and construction loans: “Q But had you been asked to subordinate this mortgage in accordance with these terms you would have done it, wouldn’t you? A If it had been in accordance with those terms, if it was a bona fide construction loan. However, these subordinations were not.

Q Were these not bona fide ground development loans, to your knowledge? A Not on my property, not on the subject property. Q On what do you base that statement? A I’m positive.

I live near there, and I looked at it, and there is what happened to it. It is growing up in weeds. Q Did you make an inquiry to find out what happened to that money or where it went? A I had no knowledge of anything.

I didn’t know that there was money involved until the title report showed it. Q Well, you are familiar with real estate sufficiently, I think, to answer this question. It is expensive to prepare and have engineering done, and prepare a plat; isn’t it? A I suppose so.

Q Isn’t that a phase of ground development? A It could be. Q Isn’t it necessary before you can subdivide to have engineering work done? A I would think so.

Q You don’t know whether the money went into the cost of engineering incident to the plat, do you? A I — well, no. I have no direct knowledge of where ⁶²⁸ the money went; however, that would not have been very much involved in that.” The lower court held that Title 9 of the Uniform Commercial Code applied to the facts of this case and that, because the Bank had not filed a financing statement, it had an imperfect assignment of the $47,500 mortgage. Consequently, the lower court said, the Hyatts’ assignment also was imperfect, and they were unsecured creditors as far as third parties were concerned.

The court concluded that the appellants had a lien superior to Maryland Federal Savings and Loan Association to the extent of $7,500 plus interest 1 but that, beyond that amount, Maryland Federal had