Mercantile Club, Inc. v. Scherr

BLOOM, Judge. Appellant, the Mercantile Club, Inc. (“the Club”), filed a complaint against appellee, Donald Scherr, in the Circuit Court for Baltimore County alleging (1) breach of contract based upon a guaranty by Scherr that secured certain obligations owed to the Club by Anshe Emunah-Aitz Chaim Tifereth Israel Congregation, Inc. t/a Liberty Jewish Center (“LJC”), and (2) fraud. The court granted appellee’s Motion for Summary Judgment on the breach of the guaranty contract claim, and appellant voluntarily dismissed its fraud claim without prejudice. Appellant then filed this appeal, in which we are required to consider whether the trial court was legally correct in granting appellee’s Motion for Summary Judgment.

FACTUAL BACKGROUND Appellant, a social club, owned approximately ten acres of property in Baltimore County, including a clubhouse and recreational facilities (“the club property”). In June 1987, the Club filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of Maryland, and was authorized to sell the club property as part of its reorganization plan. LJC, an incorporated Jewish congregation, owned property in Randallstown, where its synagogue was located. LJC wanted to relocate its synagogue, and expressed interest in purchasing the club property for that purpose.

Donald Scherr, an active member of the congregation, served as president of LJC during the negotiations between LJC and the Club. Appellant agreed to sell the club property to LJC for $2,500,000. LJC paid a $50,000 deposit and agreed to pay $1,850,000 at settlement. Appellant agreed to accept a first purchase money mortgage on the club property for $600,000, the balance of the purchase price.

Because of financing difficulties, the parties amended the contract of sale twice. As president of LJC, Scherr signed the amendments. Under the terms of the second amendment, the ⁷⁶¹ Club agreed to take back a second purchase money mortgage (“the second mortgage”) for $900,000, the difference between the $2,500,000 sales price and the approximately $1,600,000 of the Club’s outstanding debts on the club property. As additional collateral on the second mortgage, LJC agreed to grant an indemnity second lien on its existing synagogue building and Scherr agreed to grant a second lien on an office building that he owned.

The second amendment also contained the following provision: “The second mortgage lien shall be personally guaranteed by Donald Scherr and such other guarantors as the Buyer may be able to furnish, if any, provided that all such guarantees shall be absolute and unconditional.” Additionally, LJC obtained financing from the Yorkridge Calvert Savings and Loan Association (“Yorkridge”). Yorkridge granted LJC a $1,500,000 loan secured by a first deed of trust of the club property and by LJC granting to Yorkridge a security interest in all contracts entered into by LJC for the sale of its Randallstown property. At settlement, Scherr, in his capacity as president of LJC, executed the second mortgage to appellant in the amount of $800,000. The terms of the second mortgage obligated LJC to pay quarterly interest payments commencing on the second year of the mortgage and continuing until its maturity date, at which time the principal and accrued unpaid interest would become due.

Additionally, the mortgage contained a guaranty, signed by Scherr, which stated: The following undersigned hereby guarantees the performance of all covenants and conditions set forth in this mortgage to be performed on the part of the mortgagor, this guaranty being absolute and unconditional, and the undersigned waiving all defenses ordinarily available to guarantors except that of payment in full. In January 1990, LJC filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of Maryland. LJC filed a Motion for Valuation of Security and for Determination of Classes (“Motion for Valuation”) requesting that appellant’s claim against LJC under the $800,000 ⁷⁶² second mortgage be deemed fully secured. Appellant received the Motion for Valuation and did not oppose it.

The bankruptcy court granted the motion. In July 1990, LJC submitted its Plan of Reorganization (“the plan”) to the bankruptcy court. The plan provided that Yorkridge’s claim against LJC would be considered the Class 1 claim and that appellant’s claim against LJC would be considered the Class 2 claim. Both the club property and the Randallstown property were to be assigned to a Nominee, who was to “take, hold and administer, in trust, the [club property and the Randallstown property], and to sell such property for the benefit of the holders of the Class 1 and Class 2 Claims, and for the benefit of the Debtor.” The Nominee would apply the proceeds from the sale of the properties first, to the payment of expenses of the administration of the properties; second, to the payment of the Class 1 claim in full; and then to the payment of the Class 2 claim in full.

In order to vest title to the real estate in the Nominee free and clear of all liens and encumbrances, the plan proposed that the bankruptcy court void any and all liens on the properties, including the Club’s second mortgage, and transfer the liens to any proceeds from the sale of the properties. The plan provided: Execution and delivery by [LJC] of a deed conveying the [Randallstown property and club property] to the Nominee is the sole obligation of [LJC] under this Plan to the holders of Class 1 and Class 2 Claims. Execution and delivery of the deed shall comprise the satisfaction by [LJC] and novation of Class 1 and Class 2 Claims, subject to the provisions of this Plan. By an Order dated 14 September 1990, the bankruptcy court confirmed LJC’s Plan of Reorganization.

The Order provided as follows: ORDERED, that any and all creditors are boimd by the Plan, that any and all property of the estate of [LJC] is vested in [LJC], free and clear of all claims and interests of creditors, and that [LJC] be, and it hereby is, DISCHARGED from the payment of any debt arising before ⁷⁶³ the date of this order (excepting only the payment obligations of the debtor to Class 3, Class 4, and Class 5 creditors, explicitly set forth in the Plan) ... ijs ^ ORDERED, that the liens securing payment of the Class 1 claim and the Class 2 claim against The Mercantile Club Property and the Randallstown Property (as those terms are defined in the Plan) be, and they hereby are, AVOIDED, without prejudice as to their validity, priority or extent, with such liens transferred to the proceeds of sale of such properties ... LJC continued to make mortgage payments to the Club until discharged by the bankruptcy court’s order. After the bankruptcy court issued its order, appellant did not receive payments on the mortgage. It filed a complaint against Scherr in the Circuit Court for Baltimore County, based upon his liability under the terms of the guaranty contained in the second mortgage.

In March 1993, the Club amended its complaint to include a second count, stating a cause of action against appellee for breach of contract with regard to the second mortgage, and a third count, stating a cause of action against appellee for fraud. 1 In a motion for summary judgment on appellant’s claim of breach of the guaranty, appellee contended that LJC was not in default on its obligations under the second mortgage because the mortgage payments were current as of the date of confirmation of the plan, and that thereafter, by virtue of confirmation of that plan, LJC was relieved of all obligations to make mortgage payments. Scherr further argued that he could not be held accountable to appellant under his guaranty of the second mortgage because there cannot be a call on a guaranty unless and until the principal obligor defaults. The court granted appellee’s Motion for Summary Judgment, stat ⁷⁶⁴ ing that “there cannot be default for failure to make payments during the period of the bankruptcy” and, unless the bankruptcy court ruled that there had been a default, “there [had] to have been a default prior to the filing of the bankruptcy petition.” The court then granted appellant’s request to dismiss the fraud claim without prejudice, and appellant then filed a timely appeal of the summary judgment. STANDARD OF REVIEW Summary judgment is appropriate where there is no dispute as to any material facts and the moving party is entitled to judgment as a matter of law.

Md.Rule 2-501. We review the same information from the record and decide the same issues of law as the trial court. “Although all reasonable inferences from the facts are to be considered in the light most favorable to the non-moving party, Maryland courts narrow their focus to those facts that will ‘somehow affect the outcome of the case.’ ” Warner v. German, 100 Md.App. 512, 516 , 642 A.2d 239 (1994) (quoting King v. Bankerd, 303 Md. 98, 111 , 492 A.2d 608 (1985)). Ordinarily, we are confined to the basis relied upon by the lower court, and we may not explain the lower court’s conclusion by introducing new legal theories. Warner, 100 Md.App. at 517 , 642 A.2d 239 .

Therefore, in reviewing a trial court’s grant of summary judgment, this Court must determine whether the trial court’s ruling was legally correct. Beatty v. Trailmaster Prods., Inc., 330 Md. 726, 737 , 625 A.2d 1005 (1993); Heat & Power Corp. v. Air Prods. & Chems., Inc., 320 Md. 584, 591 , 578 A.2d 1202 (1990). I. WAS THE FILING OF CHAPTER 11 BANKRUPTCY A TRANSFER CONSTITUTING A DEFAULT? The second mortgage states: It shall be deemed a default under this Mortgage if the Mortgagor shall sell, or cease to own, or encumber, or mortgage, or transfer, or dispose of the within described ⁷⁶⁵ property in any other manner involving a transfer of possession, without the prior written consent of the Mortgagee.

Appellant argues that filing for Chapter 11 bankruptcy effected a transfer of property without its consent and thus constituted a default under the terms of the mortgage. We disagree. Appellant rests its case on the provision in the Bankruptcy Code that transfers the debtor’s property into a bankruptcy estate. Specifically, the Code states: The commencement of a case under section 301, 302, or 303 of this title creates an estate.

Such estate is comprised of all the following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this section, [2] all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541 (a) (1988). The bankruptcy estate created under Section 541 of the Bankruptcy Code is a legal fiction created to facilitate the purposes of bankruptcy law. As appellee correctly argues, the default-on-transfer provision of the second mortgage is limited to a transfer of “possession” of the club property, and LJC never transferred possession of the club property. LJC retained title to the club property as the debtor in possession.

Specifically, the plan confirmed by the bankruptcy court provided that “[t]he [Randallstown property and the club property] shall remain, until sold, property of [LJC]’s estate, and property of the trust herein created.” Therefore, LJC’s property remained in LJC’s possession, and we hold that appellee did not violate the default-on-transfer provision of the second mortgage by instituting Chapter 11 bankruptcy proceedings.

II

LIABILITY UNDER THE GUARANTY Appellant contends that appellee’s obligation to appellant was that of a surety, rather than that of a guarantor. Al ⁷⁶⁶ though confirmation of the plan by the bankruptcy court excused LJC’s liability under the second mortgage, appellant argues, it did not excuse appellee’s liability as a surety of LJC’s obligations. Therefore, appellant asserts, because appellee has a valid obligation to appellant under the suretyship agreement in the second mortgage, appellee should be held liable for the obligation. We agree.

A. Suretyship vs. Guaranty Appellant and the lower court focussed on the difference between a suretyship and a guaranty, so we begin our discussion by addressing this distinction. The Court of Appeals defined a suretyship as follows: A contract of suretyship is a tripartite agreement among a principal obligor, his obligee, and a surety. This contract is a direct and original undertaking under which the surety is primarily or jointly liable with the principal obligor, see General Builders Supply Co. v. MacArthur, 228 Md. 320, 326 , 179 A.2d 868, 871-72 (1962), and therefore is responsible at once if the principal obligor fails to perform. A surety is usually bound with his principal by the same instrument, executed at the same time, and on the same consideration____ Ultimate liability rests upon the principal obligor rather than the surety, but the obligee has remedy against both.

See Dixon v. Spencer, 59 Md. 246, 247-48 (1883). General Motors Acceptance v. Daniels, 303 Md. 254, 259 , 492 A.2d 1306 (1985). In a suretyship, “discharge of the principal obligor does not discharge the surety.” Weast v. Arnold, 299 Md. 540, 555 , 474 A.2d 904 (1984) (citations omitted). The Court distinguished a surety from a guaranty by explaining: A contract of guaranty, similar to a contract of suretyship, is an accessory contract.

See Hooper v. Hooper, 81 Md. 155, 169 [ 31 A. 508 ] (1895) Despite this similarity, a contract of guaranty has several distinguishing characteristics. First, this particular contract is collateral to and independent of the principal contract that is guaranteed and, as a result, the guarantor is not a party to the principal obligation. A ⁷⁶⁷ guarantor is therefore secondarily liable to the creditor on his contract and his promise to answer for the debt, default, or miscarriage of another becomes absolute upon default of the principal debtor and the satisfaction of the conditions precedent to liability. See Kushnick v. Lake Drive Building & Loan Association, 153 Md. 638, 641 [ 139 A. 446 ] (1927) (quoting Booth v. Irving National Exchange Bank, 116 Md. 668, 673 [ 82 A. 652 ] (1911)).

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