Kline v. Chase Manhattan Bank, N.A.

Gilbert, C. J., delivered the opinion of the Court. Trial judges, as a rule, are cast in appellate briefs in one of two roles, viz. they are either somewhat short of astute or, at least for the purpose of the particular appeal, a combination of Coke, Blackstone, Marshall, Holmes, Brandéis and Cardozo. This appeal is no exception. The appellants 1 view the trial judge as having committed error piled upon error while the appellee, 2 true to form, extols his wisdom.

At the root of this appeal lies the issue of whether the appellants should be held personally liable for the payment ¹³⁵ of the full amount of a deed of trust note executed between a limited partnership and the appellee. The appellants signed and delivered to the appellee’s assignor 3 an “unconditional guaranty [4] of due performance and prompt payment... of all the Borrower’s obligations under the Note, the Mortgage and the Building Loan Agreement... including all legal and other costs or expenses paid or incurred....” We think that the appellants are personally liable to the appellee, and we affirm the judgment of the Circuit Court for Prince George’s County (Loveless, J.). We shall now explain why. THE FACTS.

In the fall of 1964, Mr. E. J. Dunningham, a Chase vice-president and lending officer, met with Mr. Richard Duckett, a Washington D.C. mortgage broker. At that time Chase was seeking borrowers for commercial real estate construction and permanent loans, and Duckett was in a position to locate prospective borrowers. Duckett spoke with Appellant Kline, a developer of commercial residential real estate. Coincidentally, Kline had a contract to purchase 22.8 acres of land in Prince George’s County upon which he intended to erect apartment houses.

Kline showed to Duckett the preliminary plans for over 400 units. Duckett presented the plans to Dunningham. 5 At trial of this matter, Duckett testified on direct examination that Chase had agreed to the loan upon the following terms: (a) Chase would have an appraiser estimate the value of the prospective project; (b) Chase would lend 2/3 of the estimated value of the completed project, with the borrower liable for completing the project but with no personal liability ¹³⁶ for the permanent loan once the project was completed, the 2/3 figure being the “normal” or “floor” loan; (c) Chase would lend up to 3/4 the estimated value, the difference between the 2/3 loan and the 3/4 loan being the “gap,” provided that there was personal liability for the “gap” until the permanent loan was paid down to the 2/3 level or a specific rent roll was achieved; alternatively, Chase would make a 3/4 loan without personal liability for the “gap” if the gap (i.e., at the tail end of the construction period) were held back, namely not advanced, until a rent roll achievement was met, or both; (d) Chase would make a loan only through a New York intermediary corporation rather than directly to the borrower; the form would be that Chase would make the loan to the intermediary, who would, in turn, make the same loan to the ultimate borrower, and the loan arrangement between the intermediary corporation and the ultimate borrower would be assigned to Chase as collateral for the loan by Chase to that New York corporation. Section I of the planned project was appraised at $2,770,000. Duckett, in the loan application pertaining to Section I, requested $1,830,000, a figure roughly two-thirds of the actual value of the project.

Kline, however, was in need of an additional $200,000 for the purchase of the land. Unable to find equity investors for that sum, Kline set out to obtain the needed funds by applying for a 75% commitment, bringing the total loan to $2,050,000. In order to accomplish that end, according to Duckett, Kline would have to have “sufficiently strong guarantors ... so long as those guarantors took the bank off the hook for the difference between a normal loan [66%%] and ... an increased loan, 75 per cent.” Kline, in May 1965, asked certain partners at the law firm of Arent, Fox, Kintner, Plotkin, and Kahn if they would invest in the project, become partners in the venture, and assume liability for the “gap” of $225,000. Eleven members of the ¹³⁷ firm agreed to do so, ten as limited partners, with Kintner as their nominee and as a general partner.

Meanwhile, Duckett had purchased Conel Television Production, Inc. (Conel), a dormant New York corporation, that was to act as intermediary in setting up the loan and assigning the collateral to Chase. On October 26,1965, the closing was held relative to Section I. Conel entered into a building loan agreement with the partnership for a $2,050,000 loan to finance construction. At the same time, Chase entered into a loan arrangement with Conel for the exact same amount. The Chase-Conel loan was secured by Conel’s interim pledge to Chase of its interest as construction mortgagee in the project.

At closing, the partnership delivered to Conel a document signed by all the partners, general and limited, and their wives. The pertinent parts of that document, the virtual eye of the storm now raging before us, provide: “RE: Construction Mortgage Loan of $2,050,000 to Palmer Park Limited Partnership evidenced by Note and Mortgage or Deed of Trust (the Mortgage) dated September , 1965 To induce you to consummate the captioned transaction and to lend the indicated amount to the above named Borrower, to be advanced in accordance with a Building Loan Agreement made between you and the Borrower, we hereby jointly and severally represent, warrant and covenant as follows: 1. The Building Loan Agreement, Mortgage and Note were duly executed by the Borrower and are legal, valid and binding instruments, enforceable against the Borrower in accordance with their respective terms. 2. Each of us unconditionally guarantees to you and to any purchaser of the Note from you, the due performance and prompt payment, whether at maturity or by acceleration or otherwise, of all of ¹³⁸ Borrower's obligations under the Note, the Mortgage and the Building Loan Agreement, together with interest on such obligation to the extent provided for in said documents, including all legal and other costs or expenses paid or incurred by you in the enforcement thereof against either the Borrower or any of us. 3.

Our liability hereunder shall be unaffected by any amendment or modification of the provisions of the Note or any other instrument made to or with you by the Borrower, whether made with or without notice to us, and we hereby covenant that we will cause the Borrower to maintain and preserve the enforceability of the instruments aforesaid as the same may be modified and to take no action of any kind which might be the basis for a claim that we have any defense to our obligations hereunder other than payment in full of the Note in accordance with its terms. Each of us hereby agrees to indemnify you against loss, cost or expense by reason of the assertion by the Borrower of any defense to its obligation under any of the instruments or the assertion by any of us of a defense to our obligation hereunder based upon any such action or inaction of the Borrower. Each of us waives any right or claim of right to cause a marshalling of the Borrower’s asséts or to cause you to proceed against any of the security for the Note before proceeding against us . or to proceed against us in any particular order and each of us agrees that any payments required to be made by us hereunder shall become due on demand in accordance with the terms hereof and of the Note immediately upon the happening of any default under the Note and without presentment of the Note to the Borrower, demand for payment or protest thereof, or notice of nonpayment or protest thereof and each of us expressly waives and relinquishes all rights and remedies accorded by applicable law to guarantors. ¹³⁹ 6. This guaranty shall be construed and enforced in accordance with the laws of the State of New York.” (Emphasis supplied.) The guaranty of payment was one of the documents assigned as collateral to Chase by Conel in 1965.

Subsequently, in February 1966, Chase and the appellants entered into a loan agreement for Section II. The same guarantors executed a guaranty of payment for that loan, but, in contrast to the Section I document, it contained explicit provisions stating that the guarantor’s liability to Chase for Section II would terminate upon the completion and rent up of that section. By July 1967, construction of Section I was completed and was substantially rented. Chase then purchased the note and allied documents for Section I from Conel.

As a result of the partnership’s default on both loans, Chase foreclosed on the mortgages. A substantial deficiency occurred. Obviously seeking to avert personal liability, the appellants herein filed an action against Chase in the Circuit Court for Prince George’s County, in Equity, seeking reformation of the above-quoted guaranty of payment. The objective of the reformation suit was to limit the liability of the guarantors for Section I, in a like manner as the guaranty for Section II.

Chase counterclaimed under the guaranty for payment of the deficiency resulting from the foreclosure. Following a hearing in August 1976, Judge Ernest A. Loveless denied the appellants’ reformation and transferred Chase’s counterclaim to the law side of the court. “Finality” of the reformation decision, for purposes of appeal, was withheld until resolution of the counterclaim. Md. Rule 605. The counterclaim was tried non-jury, before Judge Loveless.

The judge ruled that Chase was entitled to payment in accordance with the terms of the guaranty, entered judgment for Chase and ratified its 1976 decree denying reformation of the guaranty instrument. Desiring to escape from the net of financial entanglement in which they find themselves enmeshed, the appellants have ¹⁴⁰ brought their cause to this Court. They posit to us a series of questions as to whether the trial court erred in: 1) holding the appellants personally liable in the light of the evidence; 2) finding personal liability on the face of the closing documents which demonstrate that such liability was never intended; 3) holding the partners ratified the guaranty; 4) deciding that Chase sustained damages even though it actually suffered none and the deficiency judgment was founded in fraud; 5) awarding counsel fees on the basis of inadmissible hearsay, coupled with the lack of evidence as to reasonableness. CLEARLY ERRONEOUS. ' The least common denominator of questions 1 and 2 is simply the old “clearly erroneous rule,” adorned in more sophisticated language.

It is well established that when a case is tried non-jury, this Court will review the matter on both the law and the facts, but the judgment of the trial judge “will not be set aside on the evidence unless clearly erroneous----” Md. Rule 1086. The rule has been cited and discussed so many times that anything more than a reference to it is redundant. Notwithstanding the wording of the guaranty agreement applicable to Section I, as above-quoted, the court brushed aside Chase’s motion for summary judgment and agreed to hear parol evidence concerning, contradicting, and explaining the written agreement. No question has been raised about the use of the parol evidence so that we, for the purpose of this appeal, accept it as properly utilized without expressing either approval or disapproval.

Appellants argue that the parties never intended that the individuals comprising the partnership be held personally liable for payment of the mortgage on Section I. The trial judge found that the wording of the