Mayor of Rockville v. Walker

WENNER, Judge. This appeal has its genesis in an agreement (the Agreement) between the Mayor and Council of Rockville (the City) ⁴⁰⁰ and New Rockville Town Center Partners (the Developer)' 1 for the sale and development of a portion of the City’s “Mid-City Urban Renewal Project.” The Agreement, and later a deed from the City to the Developer, gave the City the right to re-enter the property, terminate the Developer’s interest, and revest title to the property in the City if the Developer defaulted on the Agreement. The Developer subsequently defaulted, the City re-entered, and we found in Hadid Land Development Corp. v. Mayor and Council of Rockville, No. 88-1339 (Md.Ct.Spec.App. May 16, 1988) that the City’s reentry was valid. In Mayor and Council of Rockville v. Walker, 86 Md.App. 691 , 587 A.2d 1179 (1991) {Rockville I), we held that a deed of trust granted to Thomas J. Walker, Jr., substituted trustee, as security for a loan from Equitable Federal Savings Bank 2 to the Developer subsequent to the Developer’s deed from the City, was extinguished by the City’s re-entry unless Equitable’s secured loan to the Developer was authorized by the Agreement.

The City’s right to re-enter was specifically “subject to any rights or interests provided in Article VI of [the] Agreement for the protection of mortgage holders.” Since there was an inadequate basis on which to determine whether Equitable’s secured loan to the Developer was authorized 3 by the Agreement, however, we remanded the case to ⁴⁰¹ the Circuit Court for Montgomery County for an evidentiary hearing on that issue. On remand, the circuit court held that Equitable’s secured loan to the Developer was authorized by the Agreement and thus survived the City’s re-entry, and that Equitable could proceed with its foreclosure of the deed of trust securing its loan to the Developer. This appeal followed. On appeal, the City asserts that the circuit court erred in determining that Equitable’s secured loan to the Developer was authorized by the Agreement.

For the reasons we will explain, we agree with the City and shall reverse the judgment of the circuit court. I. Section 6.01 of Article VI of the Agreement establishes restrictions on the amounts and purposes of financing permitted and requires that notice of any proposed financing be given to the City. This restriction is imposed entirely upon the Developer. In Rockville I, the City argued that the requirements of § 6.01 were not satisfied and that as Equitable’s loan to the Developer was therefore not authorized, it did not survive the City’s re-entry.

With respect to Equitable’s responsibility, the City contended that: Equitable was on constructive notice of the existence of the provisions of Section 6.01 in that the Agreement was recorded in the land records one month prior to its loan and Deed of Trust to the Developer. If Equitable, in the exercise of proper diligence, wished to satisfy the requirements of Section 6.01 and be assured that the loan was a proper loan that would survive any default by the Developer under the Deed and Indenture, Equitable should have obtained or required that the Developer obtain necessary assurances, in writing, from the City in order to claim any third party benefit under the Agreement. If Equitable now seeks to obtain the benefits provided to lenders that make certain ⁴⁰² limited types of loans permissible under the Agreement ... it was required to see that the terms of the contract governing the placement of the loan were being properly followed, that is, that notice be first given to the City prior to the placement of the loan. This contention then underwent somewhat of a transformation, so that, by the end of its brief, the City was arguing that Equitable was responsible for giving it the notice required by Section 6.01 of Article VI of the Agreement: Moreover, Equitable is estopped from asserting or relying on the Agreement in an attempt to enforce its Deed of Trust against the property of the City in light of the failure to comply with the Agreement by not notifying the City and obtaining assurances from the City as to the placement of the subject Deed of Trust on the property.

We properly rejected the City’s final contention, explaining that: ... The Agreement specifically states that ‘[t]he Developer shall notify the City....” Nowhere in the Agreement does it indicate that the lender also is obliged to notify the City and we have no power to re-write the Agreement. If the City required the lender to notify it as well as the Developer, then the City should have included a provision to that effect in the Agreement. Rockville I, 86 Md.App. at 704 , 587 A.2d 1179 .

We then remanded the case to the trial court to determine whether Equitable’s secured loan to the Developer was authorized by the Agreement: We think that the trial court discussed the question of whether the loan was authorized under the Agreement without sufficient evidence in the record for it to do so. Consequently, we remand for an evidentiary hearing to determine whether appellee [Equitable] complied with the provisions' of Article VI when it loaned the Developer the $900,000. If appellee failed to comply with the provisions of ⁴⁰³ Article VI, then appellee’s interest will be subordinate to that of the City, ie., title will revest in the City.... Id. at 703 , 587 A.2d 1179 (emphasis added).

It appears that the phrasing of our remand instructions (that is, compliance "with the provisions of Article VI), in light of our holding regarding Equitable’s responsibility for notice, has, to our regret, caused some confusion. The issue to be resolved was “whether the loan was authorized under the Agreement.” We intended our remand instructions to determine “whether appellee [Equitable] complied with the provisions of Article VI” to be read in the context of Equitable’s position as a third party beneficiary. As we shall discuss infra, compliance on Equitable’s part thus would require participating only in an authorized loan. 4 Instead, read literally, the instructions apparently could be and have been interpreted to preclude notice to the City as part of the “authorization issue.” The trial judge clearly held this view, and felt constrained by what he believed to be our holding in Rockville I: The case is on remand from the Court of Special Appeals, and so I do not write on a clean slate. I am dealing with an opinion by that Court I might say right or wrong.

Now, let me say I am not altogether certain I would have decided this case the way the Court of Special Appeals did when it came to the issue of notice nor would I have — and I would be I think concerned about the extent to which a third-party beneficiary might in fact have to stand in the shoes of a promisee of an agreement and be bound by whatever defenses are available against that promisee. That is somewhat related to the collateral estoppel agreement, but not entirely dependent on it. As I understand what the Court of Special Appeals has said here, they have made it clear that the — with regard to the issue of notice to ⁴⁰⁴ the City there was no requirement of the lender notifying the City, and therefore apparently they are making a distinction between whatever rights the lender might have and the developer might have. They could have easily said, well, the lender didn’t have an obligation to notify the City, but the developer did.

The lender derives from the developer, and therefore the lender loses, but they didn’t say that. So, we have to live with that in this case, and I won’t say anything more about that on this point. Unfortunately, when read thusly, our remand instructions and our holding with respect to notice together imply that if only the loan amount and purpose limitations of Section 6.01 were complied with, Equitable’s secured loan to the Developer was authorized by the Agreement. This is not what we intended.

It is beyond cavil that the holder of a mortgage may be a third party beneficiary under the Agreement. Section 9.09 reads: It is the intent of the parties to this Agreement to create rights and benefits for the benefit of the parties named herein and for certain mortgage holders and not for any other persons. Accordingly, the parties disclaim any intent whatsoever to create any third party beneficiary rights by their execution of this Agreement, except those specifically granted to mortgage holders in Article VI of this Agreement. Section 3.10 of the Agreement further provides that the City’s right of re-entry upon the default of the Developer is “subject to any rights or interests provided in Article VI of this Agreement for the protection of mortgage holders.” Even so, though potentially a third party beneficiary, the responsibility for compliance with the requirements of Section 6.01 cannot properly be placed upon the mortgage holder.

The Agreement is between the Developer and the City. Although a third party may benefit from the Agreement, it does not bind the third party to performance. This is not to say, ⁴⁰⁵ however, that, before relying upon its position as a third party beneficiary, it would not be incumbent upon a mortgage holder to ensure or verify that the terms of the Agreement have been met. First, the Agreement specifically excludes any third party rights other than those created by Article VI.

Second, it is axiomatic that a promisor may raise any defense against a third party beneficiary that it could have raised against the promisee. Three Garden Village Ltd Partnership v. United States Fidelity & Guaranty Co., 318 Md. 98, 116 , 567 A.2d 85 (1989) (citing Shillman v. Hobstetter, 249 Md. 678, 690 , 241 A.2d 570 (1968)). If, to ensure the protected status accorded by the Agreement to an authorized mortgage holder, the mortgage holder, rather than the Developer, has satisfied the Agreement’s requirements for priority, we would not deny that status to the mortgage holder. Nonetheless, we cannot conclude that a mortgage is an authorized mortgage when only some, but not all, of the requirements for that status contained in the Agreement are met.

II

The Agreement sets out a comprehensive framework establishing the rights of the City and of mortgage holders and their relations to one another in the event the Developer defaults on its obligations to either of them. Article VI of the Agreement is captioned “Mortgage Financing; Rights of Mortgage Holders.” Section 6.01 provides that the Developer shall place no encumbrances on the property “except for the purpose of obtaining (i) funds only to the extent necessary for making improvements on such Parcel and (ii) such additional funds, if any, in an amount not to exceed the purchase price, if any, paid by the Developer to the City for the Parcel.” Additionally, Section 6.01 requires that [t]he Developer shall notify the City in advance of any financing, secured by mortgage or similar lien instrument, it proposes to enter into with respect to such Parcel, and shall promptly notify the City of any encumbrance or lien that has been created on or attached to the Parcel, whether by ⁴⁰⁶ voluntary act of the Developer, or otherwise, of which the Developer has notice. Section 6.03 provides that, should the City deliver notice or demand to the Developer with respect to a breach or default under the Agreement, the City shall at the same time forward a copy of such notice or demand to each holder of any mortgage authorized by this Agreement at the last address of such holder shown in the records of the City. Section 6.04 provides that, “[a]fter any breach or default referred to in Section 6.03,” whereby both the developer and authorized mortgage holders are given notice, each mortgage holder shall have the right, at its option, to cure or remedy such breach or default and to add the cost thereof to the mortgage debt and the lien of its mortgage, except that the mortgage holder may not undertake construction unless it expressly assumes the obligations of the Agreement.

Section 6.02 provides that although the holder of any mortgage authorized