MORTGAGE INV. OF WASHINGTON v. Citizens Bank and Trust Co.

Orth, C. J., delivered the opinion of the Court. The issue for decision in this case is whether a stipulation in a promissory note for the payment by the debtor of a specified attorney’s fee for services in the collection of the debt upon default is valid and enforceable. We hold that such a provision is valid and that it is enforceable with the limitation that the fee may not exceed the amount which the creditor is obligated to pay his attorney for the services contemplated. ⁵⁹³ STATEMENT OF THE CASE Mortgage Investors of Washington (MIW) executed two notes, promising to pay Citizens Bank and Trust Company of Maryland (Citizens) at a certain time “the total of payments stated hereon with interest until paid.” The notes contained this provision: “If, upon our default, suit is instituted, we agree to pay all court costs and an attorney’s fee of 15% of the outstanding balance at the time of suit.” 1 The notes became overdue, and Citizens, its request for payment going unheeded, instituted suit through its counsel in the Circuit Court for Montgomery County on 13 November 1974, claiming the outstanding principal balance, interest, costs, and attorney’s fees. A motion raising preliminary objection, a motion ne reeipiatur and a motion to postpone depositions, all filed by MIW, were denied.

On 11 April 1975, upon hearing, motions for summary judgment were granted. One judgment was entered for the outstanding balance of the debt with interest and costs and another judgment was entered for attorney’s fees with interest and costs. Thereafter, MIW paid the balance due on the principal debt, and on 11 April and 22 April Citizens entered credits totaling the full amount of the award on that debt. On 16 April MIW filed motions for a new trial, for reconsideration and rehearing on the motion for summary judgment, and to set aside the award of attorney’s fees.

On 6 May the motions were heard and taken under advisement, but on 9 May, before they were determined, MIW noted an appeal. The appeal was taken both from the judgment on the principal debt and the judgment on the attorney’s fees. Because the full amount of the judgment awarded on the principal debt has been paid and credits duly entered by Citizens, the appeal as to that judgment is moot. The appeal from the judgment with respect to the attorney’s fees is all that remains for review and, in fact, is all that was briefed and argued before us. ⁵⁹⁴ Citizens made known that under an agreement between it and its attorney, entered into independently of the instant case, a contingent fee schedule for collection services had been established as “reasonably fair” to the bank and the attorney, “particularly in light of the removal of confession of judgment provisions from Bank forms.” Under this schedule, Citizens was obliged to pay the attorney for his services in collecting the balance due on the notes, an amount which was less than the judgment for those services awarded on the basis of the stipulation in the note.

Citizens asserts that it “has only sought indemnification for the amounts which it has legitimately become obligated to pay by reason of that default [of the notes], and ‘nothing more’.” THE LAW “Parties have the right to make their contracts in what form they please, provided they consist with the law of the land; and it is the duty of the courts so to construe them, if possible, as to maintain them in their integrity and entirety.” This language from Maryland Fertilizing and Manufacturing Company v. Newman, 60 Md. 584, 588 (1883) enunciated a precept now firmly established in Maryland. Webster v. People’s Loan, Savings & Deposit Bank, 160 Md. 57, 61 (1931); Gaither v. Tolson, 84 Md. 637, 639 (1897); Bowie v. Hall, 69 Md. 433, 435 (1888). It is the foundation for the consistent upholding by the Court of Appeals of Maryland of the validity of a provision in a promissory note requiring the debtor upon default to pay an attorney’s fee for services performed to collect the debt. The Court said in Webster , at 61: “That the parties to a contract have the right to agree for the payment of an attorney’s fee in the event of default in payment by the promisor has long been recognized in the decisions of this court.” As recently as Qualified Builders, Inc. v. Equitable Trust Co., 273 Md. 579, 584 (1975), the Court, quoting Brenner v. Plitt, 182 Md. 348, 366 (1943) recognized that “there is no question that a stipulation in a promissory note, in case of its non-payment at maturity, to ⁵⁹⁵ pay the costs of collecting the same, including attorney’s fees, is valid and can be enforced,” adding “even though, in the absence of either statutory or contractual authority, expenditures for attorney’s fees ordinarily are not recoverable as damages by the successful litigant against his unsuccessful adversary.” The Court observed in Webster , at 61: “In a few of the courts of the country such provisions have been characterized as a cover to usury and declared void as against public policy. ...

In the great majority of the states such provisions have been upheld, in some as a penalty for failure to pay promptly as agreed, but in most cases as a contract of indemnity to reimburse the plaintiff for the expense of enforcing his contract incurred by the defendant’s default. . . .” (citations omitted). 2 In Maryland it is settled that such provision is a contract of indemnity. Webster , at 62-63; Legum, at 360; Weiner, at 126. It cannot be “regarded as a cover to usury, for its effect is clearly not to put any money above the legal rate of interest into the pocket of the lender, but merely to enable him to get back his money with legal interest and nothing more.” Bowie , at 435-436; Gaither , at 639; Webster , at 61; Weiner, at 126. Consistent with the view that the fee provision is a contract of indemnity: “If the plaintiff pays less for the services of his attorney than the amount stipulated, or allowed by the court where the amount is not ⁵⁹⁶ specified in the instrument..., then it is his duty to remit or credit the difference; if he pays more than the fees entered, then he is out the excess.” Webster , at 63.

See Weiner, at 126-127; Qualified Builders, at 581, n. 2. The fee “is not a gratuity to which the attorney is entitled upon the entry of his appearance for the plaintiff, but is payable for services rendered as the judgment is collected.” Webster , at 63; Brenner , at 366-367; American Nat. Bank, at 325; Qualified Builders, at 581, n. 2. The amount of the fee is payable to the extent stipulated, Webster , at 62, that is “at' the rate or in the proportions stated in the contract... .”, id., at 63 .

See Brenner , at 366-367. It is when the fee provision in the note is not explicit, but merely designates a “reasonable attorney’s fee”, that the court in which suit is filed has the right to determine what is a reasonable fee. In such case, the amount is not left “to the option or the conscience of the attorney.” The parties, by specifying only a “reasonable attorney’s fee” contemplated “a judicial proceeding by the court for the purpose of ascertaining the amount which may reasonably be charged up.” Johnson v. Phillips, 143 Md. 16, 26-27 (1923). We find it clear, however, that, in a valid note, when the amount of the fee is specified, as by a percentage of the outstanding balance, the fee is ordinarily payable in the amount so designated.

The Maryland eases are not to the contrary. So in Johnson , at 27, the Court pointed out that the clerk is authorized to exercise the power of entering judgment as to a cognovit note, “when the amount due appears on the instrument or can be rendered certain by calculation from its face.” Or conversely, “the clerk had no power to include in the judgment or to name the amount of attorney’s fee in a case of this kind, where the note does not fix the amount... .” Id., at 28 . The clear indication was that the clerk had such power when the note fixed the amount. The provision in the note specifying the fee is enforceable as between the parties.

It is only when other creditors are involved that, under certain circumstances, the amount of the fee may be questioned. “Such a provision rests upon a valid consideration, and is not fraudulent as to other creditors; unless the amount designated as attorney’s fees is ⁵⁹⁷ grossly in excess of any reasonable amount, in which case the judgment, at least to the extent of such fees, is fraudulent and void as against the other creditors of the defendant” (emphasis added) Johnson , at 26, quoting 1 Black, Judgments, § 75. We find it manifest from Webster that the attorney’s fee in the note is payable by the defendant to the plaintiff “to the extent stipulated”, 160 Md., at 62 . Moreover, by iterating, at 61, the Black quote from Johnson , the Court affirmed the view that the reasonableness of the fee is subject to inquiry only as to other creditors of the defendant. It is when other creditors are involved that the specified fee may be fraudulent and void as to such creditors if it is “grossly in excess of any reasonable amount.” In Legum the Court noted that the debtor agreed in his note to pay an attorney’s fee designated. 180 Md., at 360. “It is not to be presumed that the [creditor] will not pay this money, when collected by it, to its attorney.

If it does not, the attorney is the one to complain. The [debtor] is not now in any position to raise a question about it.” (emphasis added) Id., at 361. In Brenner, 182 Md., at 366-367 , the Court, quoting from Webster , at 63, observed that the attorney’s fee is payable for services rendered as the judgment is collected, “and at the rate or in the proportions stated in the contract” when the fee is designated, or at the amount stated in the court’s order when the note was not explicit as to the amount but called only for the payment of a “reasonable fee.” In Weiner, 217 Md., at 126, the Court again referred to Webster in stating that attorney’s fees in a confessed judgment note are payable “to the extent stipulated, for the expense of employing an attorney to collect by suit at law the principal debt.” This is, of course, subject to the proviso expressed in Webster , at 63, that “if the