Noor v. Centreville Bank

ALAN M. WILNER, J., Retired, Specially Assigned. On May 9, 2007, appellant entered into a contract with Richland Homes, Inc. to purchase a home at 917 Bargagni Road, in Anne Arundel County. The contract anticipated that Richland would construct a new home on the lot. In fact, the home was nearly completed when the contract was signed, for settlement was set in the contract for July 20, 2007, two-and-a-half months later.

The purchase price was $410,000, of which $4,000 was given as a deposit. The contract, which was drafted by appellant’s real estate agent, contained an unusual clause that lies at the heart of the principal legal issue presented to us. In the paragraph dealing with “TITLE; POSSESSION,” it stated: “Neither legal nor equitable title shall pass until delivery of the deed. Upon payment of the unpaid purchase price at the time of settlement, a special warranty deed shall be executed by Builder, at Buyer’s expense.” At the time, Richland was indebted to Liberty Savings Bank, which we assume was its construction lender and which held a first deed of trust on the property.

It was also indebted to Centreville National Bank by reason of its guaranty of a line of credit the bank had extended to an entity known as RHI Meadow Creek, LLC. That liability was evidenced by a confessed judgment note. ¹⁶⁴ The genesis of the dispute before us arose from events that occurred in July 2007. On July 17, Richland obtained from the county a certificate of occupancy for the property, which was the last contingency provided for in the contract. The next day, July 18, Centreville filed a complaint in the Circuit Court for Anne Arundel County against Richland and others based on its confessed judgment note.

On July 19, the clerk recorded a judgment by confession against the defendants in the amount of $3,086,504, and, on July 26, personally unaware of that judgment, appellant went to settlement. She paid $422,752, being the unpaid portion of the purchase price plus expenses allocable to her, of which $260,000 came from the proceeds of a mortgage loan from Branch Banking and Trust Company. From the funds paid by appellant, $348,008 was disbursed to Liberty Savings Bank, in order to discharge its lien on the property, and the balance was paid to Richland. Appellant took possession of the property, and nothing more of significance transpired until January 15, 2009, eighteen months later, when Centreville filed in the confessed judgment case a Request for Writ of Execution by Levy against the property.

Noting that the property no longer belonged to Richland (or any other judgment debtor), the court, apparently on its own initiative, entered an order directing Centreville to show cause why a levy should be allowed on the property. Notice was given to appellant who, without objection, was permitted to intervene in order to protect her interest. 1 Appellant’s position was that, under the doctrine of equitable conversion, she became the equitable owner of the property, at the latest, on July 17, 2007, when the last contingency in the contract was resolved and she acquired the right to specific performance of the contract, and that the judgment, entered two days later, therefore could not attach to the ¹⁶⁵ property. Centreville countered that (1) the aforecited clause in the contract precluded appellant from obtaining equitable title until the property was actually conveyed to her on July 26, by which time the property was subject to the judgment lien, and (2) even apart from that clause, because the contract expressly limited her remedy in the event of a default by Richland to the return of her deposit, she never acquired a right of specific performance, and, for that reason as well, she never acquired equitable title prior to the entry of Centreville’s judgment. The issues before the court were purely legal ones.

No material facts were in dispute. During the colloquy between the court and counsel, it was suggested that appellant may have a remedy against her title insurer for not picking up the Centreville judgment, which was of record at the time of closing, but the question of Centreville’s entitlement to the writ of execution it sought hinged on whether, by reason of the doctrine of equitable conversion, the judgment had attached to the land prior to the conveyance of legal title to appellant on July 26, 2007. The court concluded that it did, and, on May 14, 2009, it entered a judgment to that effect and granted the request for a writ of execution. Because of other funds that had been collected on the judgment, the amount of the levy was $1,170,939.

During the hearing, counsel for appellant advised the court that, in addition to the defense of equitable conversion, there was a lurking issue of equitable subrogation — essentially that, if the judgment lien attached, appellant should be subrogated to the rights of Liberty Savings Bank, which held a lien superior to Centreville’s judgment, and that the judgment lien should therefore come behind the $348,008 appellant paid to discharge the Liberty Savings Bank lien. Although counsel noted that defense in a brief footnote in his written points and authorities, he made clear at oral argument that the equitable subrogation issue was not being raised in that proceeding. He stated “that is not an issue before Your Honor today, because our only argument for saying that the judgment did not attach is the equitable conversion doctrine” and that a separate ¹⁶⁶ action would be filed with respect to equitable subrogation should appellant not succeed on her equitable conversion argument. Immediately on the heels of that statement, the court orally announced its decision regarding equitable conversion and said nothing, either in its oral pronouncement or later in its written judgment, regarding equitable subrogation.

Following entry of the court’s judgment, Centreville apparently took the position that the court had resolved the equitable subrogation issue against appellant, so appellant filed a motion to alter or amend the judgment seeking clarification. She asked that, if the court had “jurisdiction to decide the subrogation claim at the hearing,” the judgment be revised to hold that Centreville’s judgment lien is subject to a $348,008 lien to which appellant was subrogated. In a handwritten order, the court denied the motion on the ground that it “implicitly denied her claim based on equitable subrogation with the 5/14 judgment herein.” Aggrieved, appellant filed this appeal, in which she argues that (1) because of equitable conversion, the judgment never became a lien on her property, (2) the court had no jurisdiction to consider the equitable subrogation claim, (3) if it did have such jurisdiction, the court was wrong in rejecting that claim, and (4) the court erred in considering evidence that appellant might be compensated for any loss by her title insurance carrier. DISCUSSION It is the two equitable issues raised by appellant that need to be substantively addressed and resolved.

Before turning to those issues, however, we shall dispose quickly of the title insurance matter. Although there were some brief, and mostly oblique, references to the prospect of some recovery by appellant from her title insurance carrier, there is no indication that such a prospect in any way influenced the court’s ruling on the issue of equitable conversion. We find no merit in appellant’s fourth argument. ¹⁶⁷ Equitable Conversion Equitable conversion is a broad, well-established principle that emanates from the maxim that “equity treats that as being done which should be done.” Himmighoefer v. Medallion Industries, Inc., 302 Md. 270, 278 , 487 A.2d 282, 286 (1985) (quoting from 8A Thompson, Real Property, § 4447 (Grimes Replacement Volume 1963), at 273-74) (Emphasis added). Thus, as the Himmighoefer Court continued, in its quotation from Thompson: “[WJhen the vendee contracts to buy and the vendor to sell, though legal title has not yet passed, in equity the vendee becomes the owner of the land, the vendor of the purchase money.

In equity the vendee has a real interest and the vendor a personal interest. Equity treats the executory contract as a conversion, whereby an equitable interest in the land is secured to the purchaser for whom the vendor holds the legal title in trust.” Id. See also Standard Fire v. Berrett, 395 Md. 439, 454 , 910 A.2d 1072, 1081 (2006); Washington Mut. Bank v. Homan, 186 Md.App. 372 , 974 A.2d 376 (2009).

One effect of this conversion is that the buyer, as holder of an equitable title or interest in the property, has a claim superior to that of a creditor who obtains a judgment against the seller subsequent to execution of the contract. See Stebbins-Anderson Co. v. Bolton, 208 Md. 183, 187 , 117 A.2d 908, 910 (1955), confirmed in Himmighoefer, supra, 302 Md. at 279 , 487 A.2d at 286 . One well-recognized caveat to that principle, however, which also emanates from the underlying equity maxim, is that, for equitable conversion to apply, there must, in fact, be a clear duty on the part of the seller to convey the property, a duty enforceable by an action for specific performance. See Watson v. Watson, 304 Md. 48, 61-62 , 497 A.2d 794, 800 (1985) (“The commentators are in accord that equitable conversion by contract takes place only if the contract is specifically enforceable.”).

If the seller’s contractual duty is not subject to contingencies, equitable conversion takes effect when the contract is duly signed because the right ¹⁶⁸ to specific performance accrues at that point. If there is some condition or contingency to the seller’s duty to convey, however, equitable conversion would not take effect until that condition or contingency is resolved to the point that the duty can be specifically enforced. As noted, Centreville’s defense to equitable conversion is two-fold. It relies on the clause precluding the transfer of equitable title and it relies as well on other clauses in the contract that expressly limit appellant’s remedy, in the event of any default by Richland, to the recovery of her deposit, thereby precluding the remedy of specific performance and thus the application of equitable conversion.

We choose not to address that second argument, because we believe that the clause precluding the pre-settlement transfer of equitable title is effective to achieve that result. The clause in question is clear and unambiguous in its intent: “Neither legal nor equitable title shall pass until delivery of the deed.” 2 The only issue is whether the parties are competent, by contract, to thwart the operation of a doctrine so well-ingrained in the law. Surprisingly, there are only a few cases dealing with that issue. One of them, however, was from this Court.

In White v. Simard, 152 Md.App. 229 , 831 A.2d 517 (2003), we had before us a situation in which the buyer at a mortgage foreclosure sale, Simard, defaulted, whereupon the property was resold at his risk. He was the high bidder at the second sale as well, and he again defaulted, although this time he was able to find an assignee willing and able to complete the sale. The price bid at the second sale, unlike that at the first, was sufficient to create a surplus — the price, even after expenses, was more than was due the mortgagee, and Simard claimed that, under the common law, he, rather than the mortgagor, ¹⁶⁹ was entitled to that surplus. Citing several decisions of the Court of Appeals, this Court agreed with him on that issue.

The problem was that the advertisements of sale, with respect to both the first and second sales, expressly provided that “[t]he purchaser shall not be entitled to any surplus proceeds or profits resulting from any resale of the property.” Although recognizing that the advertisement was not, itself, a contract, the Court concluded that it did set forth the terms that would later be embodied in the contract upon acceptance of a bid by the trustees and therefore did have contractual significance. The question was whether that provision sufficed to overcome the common law doctrine entitling the purchaser to the surplus proceeds, and the Court held that it did, that a party was free to bargain away that entitlement. More to the precise point of this case, the Court went on to hold that the fact that Simard still held equitable title to the property at the time of the resale did not require a different result. Noting that the doctrine of equitable conversion was founded on contract, the Court concluded that the determination of title, though a real estate concept, is “governed by contract law — what the parties to the transaction intended.” White v. Simard, supra, 152 Md.App. at 247 , 831 A.2d at 528 .

Citing State Farm Mut. v. Nationwide Mut., 307 Md. 631, 643 , 516 A.2d 586, 592 (1986) for the well-recognized proposition that “[a]s a general rule, parties are free to contract as they wish,” the Court held that “[m]ore specifically, parties are free to contract away rights and consequences that normally would flow from the shift in equitable title arising from a contract.” White, 152 Md.App. at 248 , 831 A.2d at 528 . A familiar example of that, the Court observed, was the contractual shift in the risk of loss by casualty occurring before settlement. The Court of Appeals granted certiorari in White and affirmed the judgment of this Court, but on a different ground. In a 71-page tour deforce on the history of mortgages dating back to the Sixteenth Century, the Court of Appeals disagreed with this Court’s conclusion that Simard would have been entitled to the surplus under Maryland common law. ¹⁷⁰ Simard v. White, 383 Md. 257 , 859 A.2d 168 (2004).

It therefore did not need to reach, and did not reach, this Court’s holding that the doctrine of equitable conversion could be modified, or avoided, by contract. That holding by this Court remains undisturbed and, in the context of this case, appears to us to remain sound. In reaching that conclusion, we are mindful of the fact that equitable conversion, as its name indicates, is an equitable doctrine, and, by creating legal consequences substantially inconsistent with those that would operate under the common law, is a far-reaching one. It must therefore take its place within the wider realms of other equitable doctrines, of basic contract law, and, depending on the context, of testamentary or trust law, which, separately or in combination, may impact on its operation.

See Coe v. Hays, 328 Md. 350, 356 , 614 A.2d 576, 579 (1992), confirming the statement from Sands v. Church, etc., 181 Md. 536, 544 , 30 A.2d 771, 776 (1943) that “[t]he doctrine [of equitable conversion] is not a fixed rule of law, but proceeds upon equitable principles which take into account the result which its applications will accomplish.” There may be circumstances in which a contractual provision limiting or precluding the operation of the doctrine would be inequitable and should be denied, even under basic contract law. Cf. Baltrotsky v. Kugler, 395 Md. 468, 480 , 910 A.2d 1089, 1097 (2006), noting the general rule that parties are free to contract as they wish but pointing out that that general rule “is tempered, however, by the caveat that ‘fraud, duress, mistake, or some countervailing public policy’ may serve as occasions to modify or excise certain terms of a contract.’ ” (quoting from Calomiris v. Woods, 353 Md. 425, 445 , 727 A.2d 358, 368