Katz v. Simcha Company, Inc.

²²⁹ Finan, J., delivered the opinion of the Court. Joseph Katz and Pauline Katz, his wife, have appealed from a judgment in the amount of $4,900.50, rendered against them in the Circuit Court for Montgomery County in an action at law brought by the appellee, Simcha Company, Inc., to obtain a deficiency judgment on two promissory notes dated July 6, 1955. The notes were secured by two deeds of trust on property designated as No. 712 F Street N. W., Washington, D. C. The trusts were second and third trusts respectively, being subject to a first trust in the amount of $7,000.00. At the time of the execution of the notes by the appellants they were made payable to the order of Jennie Michaelson, a secretary in the office of William Spurling, a real estate broker who negotiated the sale of the notes.

One was in the amount of $4,950.00 payable at the rate of $50.00 each month, the entire balance being due in five years and the second in the amount of $1,000.00 payable at the rate of $10.00 each month. Both notes bore interest at the rate of six per cent (6%) per annum. The record reveals that Jennie Michaelson purchased the property 712 F Street, N. W., from an Arren Paulson and the same day July 6, 1955, conveyed it to the appellants, receiving from them as a part of the consideration for the purchase price the two promissory notes which we have mentioned. The deeds and deeds of trust were all recorded July 19, 1955.

It would also appear from the record that the appellants deposited $2,000.-00 in cash with the real estate agent, Spurling, and further that the appellants either purchased the property subject to an existing first trust in the amount of $7,000.00 or arranged to borrow that sum, secured by a first trust in that amount, from the Perpetual Building Association, the total purchase price being $14,950.00. There was evidence to the effect that Jennie Michaelson was a “straw man” for her employer William Spurling, in this purchase from Paulson and sale to the Katzes, and that Spurling was the real party at interest. There was also testimony that Mr. and Mrs. Katz were acting in some capacity as “straw men” for the same William Spurling, which might well surround this transaction with a ²³⁰ malodorous aura. However, the testimony fails to reveal that Mr. Irvin Kas, or the corporate holders of the notes, whom he represented in the purchase of the notes, knew of any such “straw man” transactions on the part of Spurling.

The only positive testimony- on this point came from Spurling himself, who stated that Irvin Kas did not know of the “straw man” position of Mr. and Mrs. Katz. It is significant to note in this connection, as did the lower court in its opinion, that the appellants, Mr. and Mrs. Katz, did not testify in this case. Thereafter, it appears that the note dated July 6, 1955, in the amount of $4,950.00 was sold for $3,150.00 and about two weeks later the note of July 6, 1955, in the amount of $1,000.00 was sold for $300.00, both to the District Mortgage and Investment Corporation, of which Irvin Kas was an officer and director. At the direction of Mr. Spurling the check in the amount of $3,150.00 in payment of the $4,950.00 note was made payable to the District Title Insurance Company and the check in the amount of $300.00 for the purchase of the $1,000.00 note was made payable to Franklin Realty Co. A Mr. Paroni, Vice-President of the District Title Insurance Company, which handled the preparation and filing of the papers, testified that the settlement sheet showed the Title Company did in fact receive $3,150.00 from the sale of the one note for application to the purchase price which Jennie Michaelson paid to Arren Paul-son.

The deeds of trust were all properly recorded in the District of Columbia. There was evidence that Mr. Irvin Kas prior to purchasing the notes made some inquiry and investigation concerning them, with both the realtor, Mr. Spurling and the District Title Insurance Company. The appellants made some 38 payments from August 25, 1955, through September 18, 1959, on the larger note and continued payments on the smaller note until January 18, 1960. 'Diere was also evidence that prior to instituting the foreclosure proceedings in the District of Columbia, Irvin Kas visited the appellants at their place of business in Virginia, in an effort to impress them with the necessity of bringing the payments up ²³¹ to date, and personally collected several payments from them, although shortly after the notes had been purchased by the District Mortgage and Investment Corporation they had been placed in the hands of the American Security and Trust Company for collection purposes. The District Mortgage and Investment Corporation assigned the notes to the appellee, Simcha Company, Inc., another corporation owned and controlled by Irvin Kas and his associates.

On March 31, 1960, the notes secured by the second and third trust then being in default, the appellee, as the holder and owner of the notes directed the trustees to foreclose on the second deed of trust. The trustees advertised the property for sale under the power contained in the trust and the appellee “bought in” the property for the sum of $1,000.00 at public sale, he being then and there the highest bidder. The property was sold subject to the first deed of trust which then had an unpaid balance in the amount of $5,443.46. There does not appear to have been any irregularity concerning this sale.

The appellee further testified that it had paid $300.00 to the Perpetual Building Association to make current the payments in arrears on the first deed of trust and certain water bills due the District of Columbia, auctioneer fees and other expenses incident to the sale. On August 1, 1961, the appellee filed this action to obtain judgment for the deficiency represented by the unpaid balance due on both notes which it contended amounted to $5,389.50, with interest on $3,833.95 from October 6, 1959, and interest on $1,555.55 from January 18, 1960. The case was heard by Judge Shure sitting without a jury. Although Mrs. Katz, as one of the defendants below, filed a general issue plea on July 13, 1962, and Mr. Katz filed his plea September 21, 1964 (there having been some difficulty in obtaining service on Mr. Katz), the party defendants did not file a special plea setting up the defense of usury until September 12, 1966.

The appellants raise the following contentions on appeal: (1) the defense of usury, arguing that the substantial discount at which the notes were purchased was indicative that the instruments were a devious method to circumvent the usury law; (2) ²³² that purchase of the notes at such a substantial discount should nullify the appellee’s contention that it was a holder in due course; (3) appellants as “straw men” for the realtor, William Spurling, were in effect accommodation makers and that William Spurling was the maker; (4) that appellee Simcha Company, Inc., was not a holder of the note for value; (5) that appellee sued in the wrong cause of action and could not maintain a suit for a deficiency because the deed of trust did not contain a covenant to pay the debt; (6) that appellee was not entitled to sue in the Maryland Courts because it was a Delaware corporation not qualified to do business in Maryland; (7) that there was a fatal variance between the declaration, wherein it was alleged that the appellee was a District of Columbia corporation, and the testimony at the trial which revealed the appellee to be' a Delaware corporation; and (8) that the lower court erred in its refusal to allow appellants to attack the fairness of the foreclosure proceedings in the District of Columbia. I through IV The first four contentions of the appellants which we have enumerated above, all stand or fall on the question of whether the transactions, whereby the appellee purchased the notes on which the appellants appear as makers, were permeated with fraud to which the appellee was a party. We call attention to the fact that the lower court heard this case sitting without a jury and accordingly was to judge both the law and the facts. Maryland Rule 886 a provides: “a.

Upon Both Law and Evidence. “When an action has been tried by the lower court without a jury, this Court will review the case upon both the law and the evidence, but the judgment of the lower court will not be set aside on the evidence unless clearly erroneous and due regard will be given to the opportunity of the lower court to judge the credibility of the witnesses.” The significance of Rule 886 a cannot be minimized in this case because the several legal theories upon which the appellants relied to establish their defense became inapplicable be ²³³ cause of their failure to prove the facts which may have rendered their theories apposite. The lower court found that the evidence did not support a finding of any devious or fraudulent conduct on the part of the appellee which colored the transaction and we do not think the court erred in so holding. Judge Shure having had the opportunity to observe and listen to the witnesses and form an opinion as to their credibility made these observations in his opinion: “* * * both of the defendants did sign the notes in July, 1955 and they did sign deeds of trust in July 1955 and according to the testimony in this case, the first time that they mentioned anything irregular about the transaction was when they filed a plea of usury on September 16, 1966. “In addition the suit was filed in August 1961 and their original plea doesn’t mention usury or anything improper, but merely a general plea—a general issue plea that they were not indebted as alleged. “* * * there is no evidence from any source, from any witness of any improper conduct on the part of the corporation, who is the plaintiff in this case or Irvin Kas, who testified in the corporation’s behalf. “There is no evidence that he had any knowledge that the broker was going to use any part of the money for improper purposes if this was in fact the case, and as I intimated, there is no evidence that he knew or could have known that there was any irregularity about the transactions, if in fact, there was any irregularity there. “The evidence before me indicates that there was no irregularity, but I mention that because the attorney for the defendants keep repeating that there is something improper about this transaction. “In any event, Mr. and Mrs. Katz signed the notes and they signed the deed of trust and there is no evidence that there was any duress or impropriety about that and more importantly, there is no evidence that Mr. Kas for the plaintiff corporation had any knowl ²³⁴ edge that there was anything improper about it. On the contrary, the evidence is that he knew the Katzs, Mr. and Mrs. Katz for a year prior to that time.

He says that, and that he went and saw the property that was to be security for the note and that he got a statement from Mr. Spurling the broker and then he delivered the money, so he paid for the notes that he received, and the evidence further discloses that later on he not only received payment for the notes. . .on the notes, but that he went to Virginia and made collections from the Katzs and he talked about conversations that he had with them and that finally they told him that things weren’t working out so, he foreclosed on the second trust note and he purchased the property and there is no evidence that there was anything irregular about the sale and he testified without contradiction that he bought the property for $1,000.” [Subject to the first trust.] To this we add, that the testimony of Mr. Paroni, an officer of the District Title Insurance Company, who explained the data contained on the settlement sheets prepared by an employee of the Title Company, reveals that $3,150.00 was paid by Jennie' Michaelson to Arren Paulson, from whom she purchased the property, simultaneously with her sale