Jenkins v. Karlton

ROBERT M. BELL, Judge. The issue presented in this case is whether parol evidence of the parties’ intentions, expressed prior to, or contemporaneously with, the execution of a demand note, or the debt- or’s subsequent acknowledgment of the debt, may vary the terms of that note. The Circuit Court for Baltimore County, finding that neither could, dismissed, as barred by limitations, the action on the note that John S. Karlton (“Karlton”) filed against Albert E. Jenkins (“Jenkins”) more than three years after its execution. The Court of Special Appeals disagreed.

Reversing the trial court, that court held that the case fell within an exception to the general rule that the statute of limitations begins to run on the date that a demand note is executed. Karlton v. Jenkins, 86 Md.App. 556, 558 , 587 A.2d 580, 581 (1991). We granted Jenkins’ petition for certiorari. ⁵¹⁴ I. Prior to obtaining the loan in question, Jenkins raised money to enable Karlton and Karlton’s companies, J.S. Karlton Company, Inc. and J.S. Karlton Management Company, to create limited partnerships. While their business relationship was ongoing, Jenkins informed Karlton of problems he was having with the Internal Revenue Service, occasioned by his inability to pay delinquent taxes.

Karlton offered to and, in fact, did, lend Jenkins $15,000. Karlton testified that on February 15, 1985, when he gave Jenkins the money, he told him: “Pay me back when you can. It appears to me that you’re going to have a good future with us. You should be able to make money.

Pay me back when you can.” Later that day, Karlton sent Jenkins a letter, in which was enclosed a form of promissory note. The letter requested that it be executed and “returned ... by return receipt.” The promissory note, which was in the amount of $15,000 and not under seal, was executed by Jenkins on February 21, 1985. It contained a “due date” of “on demand”. In addition to repeating that it was payable on demand, the body of the note provided for “interest prior to maturity at the rate of 10%” and, in the event of default and placement with an attorney for collection, that the Maker and endorsers agree to pay all costs of collection including reasonable attorneys’ fees which shall be added to the amount due under this Note and recoverable with the amount of the same to the holder thereof at maturity and if thereafter any endorser shall place the same with an attorney for collection against Maker, prior endorsers or any of them, then they agree to pay to said endorsers all costs of collection including reasonable attorneys’ fees which shall be added to the amount due under this Note and recoverable with the amount of this Note. ⁵¹⁵ Four months later, in a telephone conversation initiated by Jenkins, the parties discussed Jenkins’ ability to pay the note.

Karlton agreed at that time to give Jenkins a “little time to gather his resources.” That forebearance was confirmed in a letter, dated June 14, 1985, from Karlton to Jenkins. Karlton wrote: We have agreed that even though the note is a demand note, no demand would be made for at least one year from the time that I lent you the money. Therefore, you can be assured that no demand will be made earlier than February 15, 1986, and I would be willing to extend it three months beyond that, which would get you through the tax season, if it will help you. Karlton first made demand of Jenkins for payment of the note by letter dated July 7, 1988. 1 When the note was not paid, he filed suit on the note on September 26, 1988.

By that action, Karlton sought judgment in the amount of $25,000, consisting of the face amount of the note and accrued interest and reasonable attorneys’ fees incurred in connection with its collection. At the end of Karlton’s case, Jenkins moved to dismiss the action. 2 He argued that, since it was brought more than three years after the date of the note and the June 14, ⁵¹⁶ 1985 letter did not vary the terms of the note, the action was barred by limitations. The trial court agreed. Granting the motion for judgment, it reasoned: If it was anticipated that payment was to begin at a later date, then you can always begin your note payable on such-and-such a date.

I can’t have you now read into the note reasons for it [not] being made on demand and that payment was to begin on a later date because of that. The court also concluded that the June 14, 1985 letter did not bring the suit within the exception to the general rule that the statute of limitations on a demand note begins to run on the date of the note. Reversing the trial court, the intermediate appellate court “examine[d] not only the words of the instrument itself but ‘the purpose and circumstances’ as well”, Karlton, 86 Md. App. at 558 , 587 A.2d at 581 , quoting Blick v. Cockins, 131 Md. 625, 630 , 102 A. 1022, 1024 (1917), and concluded that the uncontroverted evidence, considered most favorably to Karlton, if believed, was sufficient to prove the applicability of an exception to the general rule. The Court noted, as the relevant circumstances the extreme financial difficulties of Jenkins at the time, the pressures on him from the Internal Revenue Service, at least an implicit understanding that Jenkins could not repay the loan immediately and thus the “pay me back when you can” words heretofore referred to, which also show the anticipation that the parties would have an enduring and fruitful relationship____ [and] Karlton’s letter to Jenkins of June 14, 1985.

Id., 86 Md.App. at 559 , 587 A.2d at 581 .

II

The parties do not disagree as to the effect that the statute of limitations has on a promissory note payable on demand.. They agree that, in Maryland, consistent with the general rule, see J.A. Bock, Annotation, When Statute of ⁵¹⁷ Limitations Begins To Run Against Notes Payable On Demand, 71 A.L.R.2d 284 (1957), and cases there cited, it has long been well settled that demand notes are payable immediately, without demand. Continental Oil Co. v. Horsey, 177 Md. 383, 385 , 9 A.2d 607, 608 (1939); Blick v. Cockins, 131 Md. at 630 , 102 A. at 1023 ; Fells Point Sav. Inst. v. Weedon, 18 Md. 320, 327 (1862); Young v. Mayne Realty, 48 Md.App. 662, 666 , 429 A.2d 296, 298 (1981).

Consequently, they also agree that, considered in context with Maryland Code (1974, 1989 Repl.Vol., 1992 Cum.Supp.) § 5-101 of the Courts & Judicial Proceedings Article 3 , the general three year statute of limitations, unless an action on a demand promissory note was brought within three years of its date or delivery, it is barred. This is so because the statute begins to run when the payment becomes due, i.e., on the date the note is executed. Weedon, 18 Md. at 326 ; Darnall’s Exrs. v. Magruder, 1 H. & G. 439, 440 (1827). Karlton concedes that the general rule was codified, with respect to negotiable instruments, when Maryland adopted the Uniform Commercial Code (“U.C.C.”) in 1963.

See Chapter 538, Acts of 1963. That concession is appropriate. Section l-102(2)(a) and (c) the Maryland Uniform Commercial Code specifies as among the purposes of the enactment: “[t]o simplify, clarify and modernize the law governing commercial transactions” and “[t]o make uniform the law among the various jurisdictions.” This Court has observed: “[t]he basic plan of [the Maryland U.C.C.] is to deal with the normal and ordinary aspects of a commercial transaction from start to finish by means of nine subtitles, eight of which are devoted to a specific phase or facet of commercial activity.” Universal C.I.T. Credit Corp. v. Congressional Motors, 246 Md. 380, 387 , 228 A.2d 463, 468 (1967). See Madison Nat’l Bank v. Newrath, 261 Md. 321, 338 , 275 ⁵¹⁸ A.2d 495, 504 (1971) (“the intent and purpose of the Act is to provide comprehensive legislation in a given field [i.e., commercial transactions]”); In re Automated Bookbinding Serv., Inc., 471 F.2d 546, 552 (4th Cir.1972) (the U.C.C.’s purpose is to create a precise guide for commercial transactions under which businessmen may predict with confidence the results of their dealings).

Pertinent provisions of the U.C.C., now codified at Maryland Code (1975, 1992 Repl.Vol.) Commercial Law Article, also demonstrate the appropriateness of that concession. Section 3-104 provides: (1) Any writing to be a negotiable instrument within this title must (a) Be signed by the maker or drawer; and (b) Contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by this title; and (c) Be payable on demand or at a definite time; and (d) Be payable to order or to bearer. If it is a promise other than a certificate of deposit, the writing is a note. § 3-104(2)(d). Section 3-108 makes clear that a demand note is one that is “payable at sight or on presentation” or “in which no time for payment is stated.” A cause of action on a demand note accrues “upon its date, or if no date is stated, on the date of issue.” § 3-122(l)(b).

Notwithstanding his concession, Karlton is not persuaded that § 3-122 applies to the note in question. Karlton questions whether one of the provisions of the note has destroyed its negotiability. Aware that allowing for collection fees, including attorneys’ fees, does not render the sum payable uncertain, see § 3-106, he contends that this note contains promises regarding attorneys’ fees on behalf of both the maker and all endorsers of the note, which, he posits, “[appear] to be an additional promise not permitted by Md.Comm.Law Code Ann. §§ 3-104 and 3-112 [pertain ⁵¹⁹ ing to terms and omissions not affecting negotiability] thus, destroying the negotiability of the note.” Karlton also maintains that resolution of the issue in this case does not depend on application of the U.C.C. at all; rather, he asserts, well settled, pre-U.C.C., principles of Maryland contract law control. In particular, Karlton asserts that the circumstances • surrounding the giving of the promissory note stand in stark contrast to, and in contradiction of, the provisions declaring it a demand note.

He also argues that his letter of June 14, 1985, confirming their telephone conversation, constituted Jenkins’ acknowledgement of the debt. Jenkins, for his part, denies that he acknowledged the debt within three years of Karlton’s filing suit. He argues that this case is controlled by the U.C.C. The code, he maintains, incorporates general contract principles, one of which, that parol or extrinsic evidence may not vary the terms of a clear and unambiguous promissory note, is directly applicable to this case. Because statutes of limitations are not to be given a strained construction so as to avoid their effect, he urges that the note not be construed in light of either parol evidence or extrinsic evidence, i.e., the June 14, 1985 letter.

III

We reject Karlton’s contention that the U.C.C. is inapplicable to the subject note. When the note was executed, the U.C.C. was in effect and the note is a negotiable instrument to which the U.C.C. certainly has applicability. Karlton’s reservation concerning the note’s negotiability is not well-taken. It is premised, as we have seen, on the fact that the note provides for collection fees, including attorneys’ fees, not only with regard to the maker of the note, but to all of the endorsers of the note as well.

If a promise by the maker of the note to pay collection fees, including attorneys’ fees, does not destroy the note’s negotiability, we can see no reason why an identical promise by ⁵²⁰ an endorser, who by endorsing, steps into the shoes of the maker, would do so. Nothing in § 3-104 nor § 3-112 4 mandates a contrary result. In Blick v. Cockins, this Court, while recognizing the general rule that a demand note is due immediately, stated that it is inapplicable “[w]hen a different intention of the parties is apparent from the terms of the instrument or the purpose and circumstances of the transactions.” 131 Md. at 630 , 102 A. at 1024 . We said: It is clear from the terms of the $2,250 note[ 5 ] that the parties intended it to represent a continuing liability ⁵²¹ which should mature only upon actual demand of payment, or upon the failure to provide further collateral if required, which it was agreed should have the effect of making the note due and payable.

Id. We explained: In the case before us the terms of the note, which was given for a loan, are wholly inconsistent with the theory that it was intended to become due and payable from the time of its delivery. It provides for the contingency of its maturity occurring at some future period as a result of the maker’s failure to furnish additional securities when desired by the payee. It requires a rebate of interest in the event of the payment of the note prior to its maturity.

These provisions, and that relating to the substitution of other collateral from time to time by mutual consent, clearly indicate the purpose of the parties that the note should not become due on delivery, but only upon default as to the agreement for additional security, or upon actual demand of payment, which in fact occurred within three years before the institution of the suit. There was consequently no error in the refusal of the prayers which sought to make the statute of limitations a complete bar to the plaintiff’s recovery. Id. Relying on Blick v. Cockins, and the cases upon which it relied, see Weedon, 18 Md. at 326 (general rule not applied because “the certificate of deposit has attached to it a condition, that the amount deposited is payable on the return of the certificate: and the appellant is, in fact, resisting the recovery of the claim upon the ground that this condition is not complied with”) and Mudd v. Harper, 1 Md. 110, 114 (1852) (acknowledging the general rule but ⁵²² discerning nothing in the record to show that it should not apply), 6 Karlton argues, “[t]he uncontroverted evidence of the circumstances surrounding the loan itself demonstrates that the parties never intended for payment to be due immediately.” He, like the Court of Special Appeals, perceives those circumstances as being Jenkins’ financial plight, from which may be inferred “at least an implicit understanding that Jenkins could not repay the loan imme ⁵²³ diately,” Karlton, 86 Md.App. at 559 , 587 A.2d at 581 , and statements which buttress that implicit understanding.

Karlton also posits that the note’s provisions for “interest prior to maturity at the rate of 10%” and for “costs of collection including reasonable attorneys’ fees [which] are [to] be added to the amount due under this note and recoverable with the amount of the same to the holder at maturity” are indicative of the parties’ intention that the note mature at some future time. Finally, he also points to the June 14, 1985 confirmatory letter as dispelling “any lingering doubt as to the intent of the parties.” Karlton’s argument based on the circumstances surrounding the loan implicates the parol evidence rule. 7 U.C.C. § 1-103 provides, as relevant: Unless displaced by the particular provisions of Titles 1 through 10 of this article, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validatory cause shall supplement its provisions ____ Official Comment (1) recognizes “the continued applicability to commercial contracts of all supplemental bodies of law except insofar as they are explicitly displaced by this Act.” Its applicability not having been explicitly displaced, the parol evidence rule is relevant to the interpretation of the note at issue. ⁵²⁴ A. The argument that the note is facially ambiguous as to due date, which supports Karlton’s contention that the parties intended it to mature at some future time, is similar to the one made, and rejected, in Harris & Harris v. Tabler, 232 Va. 75 , 348 S.E.2d 241 (1986). In that case, the appellants argued that, when coupled with the absence of a due date, language in the note referencing “a maturity date at some point in the future”, id. 348 S.E.2d at 243 , was an indication that the parties did not contemplate that the note was immediately due, i.e., payable on demand. Citing §§ 3-108 and 3-122 of the U.C.C., the Supreme Court of Virginia, applying the general rule, held that the note was a demand note and that the cause of action accrued on the date of issue, no date being stated.

Id. Indeed, it characterized the note as a “straight” demand note and upheld the trial court’s ruling that parol evidence, which would have taken the note out of the statute of limitations, was properly excluded. Id. at 243. Because the statute of limitations had run, however, it also held that the payee on the note could not recover.

See also Dominion Bank, N.A. v. Moore, 688 F.Supp. 1084, 1086 (W.D.Va.1988); Brooks v. McCorkle, 174 Ga.App. 132 , 329 S.E.2d 214, 215 (1985); Davis v. Dennis, 448 S.W.2d 495, 497-98 (Tex.Civ.App. 1969). Moreover, just as neither a provision for interest nor for collection fees, including reasonable attorneys’ fees, destroys a note’s negotiability, Mortgage Investors of Washington v. Citizens Bank & Trust Co. of Maryland, 278 Md. 505, 509-10 , 366 A.2d 47, 50 (1976) (recovery of attorneys’ fees pursuant to provision in note obligating debtor to pay such fee upon default and entry of valid judgment against debtor might be denied in cases where contemplated services were not rendered or where amount stipulated was not paid to creditor’s counsel), see § 3-106 of the U.C.C. (providing for interest at a stated rate or for the cost of collection or an attorney’s fee or both, upon default, does not make the face amount of the note not a sum ⁵²⁵ certain), such provisions will not change the character of the note from one payable on demand to one payable at some later time. Qualified Bldrs. v. Equitable Trust Co., 273 Md. 579, 584 , 331 A.2d 293, 296 (1975); Brenner v. Plitt, 182 Md. 348, 367 , 34 A.2d 853, 862 (1943).

A demand promissory note is, as between the parties to it, a contract, to which the basic rules of contract construction apply. Maryland follows the objective law of contracts. Gen. Motors Acceptance v. Daniels, 303 Md. 254, 261 , 492 A.2d 1306, 1310 (1985).

See also Aetna Casualty & Sur. Co. v. Ins. Comm 'r, 293 Md. 409 , 420, 445 A.2d 14 , 19 (1982). This means that a court construing a contract seeks to determine from its language what a reasonable person in the parties’ position would have meant.

Daniels, 303 Md. at 261 , 492 A.2d at 1310 . Therefore, “in the absence of fraud, duress, or mistake, parol evidence is not admissible to show the intention of the parties or to vary, alter, or contradict the terms of that contract.” Id. at 261-62 , 492 A.2d at 1310 , and cases there cited. See also Strickler Eng. Corp. v. Seminar, 210 Md. 93, 100 , 122 A.2d 563, 568 (1956) (“Where parties have expressed their intention in clear and definite terms the paper must be construed according to the true meaning of the words used there.”); Crothers v. Nat’l Bank, 158 Md. 587, 595-96 , 149 A. 270, 274 (1930) (citations omitted) (“The sound doctrine is that parol testimony is not admissible to change the clear and precise terms of an executed, delivered, and operative written contract which was designed to be the repository and evidence of the final intention of the parties.”).

Nor may the subjective intent of the maker of the note be considered in the face of objection and unambiguous facts and circumstances to the contrary. Fithian v. Jamar, 286 Md. 161, 168 , 410 A.2d 569, 573 (1979). Karlton brought suit on the promissory note. The only purpose for which the evidence of purpose and circumstances was offered was to prove the parties’ intention concerning when the promissory note was payable.

On that ⁵²⁶ point, the note is clear and unambiguous, however. By its terms, Jenkins unconditionally agreed to pay