Pines Plaza Ltd. Partnership v. Berkley Trace, LLC

McDonald, j. This case concerns the interpretation of a contract for the sale of real property. Much turns on the actions of a party no longer present and the significance of what was left unsaid in the contract and related documents. The controversy arose out of a contract to sell a shopping center — a contract that was amended on several occasions.

Among other things, the buyer agreed to indemnify the seller for a real estate commission, which they both disclaimed in the contract itself, that might ultimately be owed to a particular real estate broker. Another provision provided for forfeiture of the buyer’s $200,000 deposit if the transaction did not close on the timetable in the contract. In order to raise funds for the purchase, the buyer recruited some investors to fund the deposit and most of the purchase price and assigned them interests in the contract. Complications arose.

The transaction ultimately closed after the appointed date. The real estate broker successfully sued the seller for a commission in the amount of $196,666.66. The buyer went bankrupt and dropped out of the picture, leaving the seller and the assignee investors to sort out the consequences of those events under the contract. They resorted to the courts, and it is now our task to interpret the contract and related documents in light of Maryland law.

Under Maryland common law, one who takes an assignment of an interest in a contract for the sale of real property does not assume the obligations of the assignor under the contract, unless the assignment explicitly provides so. The seller in this case invites us to reverse that presumption and hold that an assignee normally assumes the obligations of the assignor under the contract, unless the assignment provides otherwise. We decline to do so. Accordingly, the seller here is not entitled to indemnification from the assignee investors for its liability for the broker’s commission, even though the buyer (their assignor) is obligated to indemnify the seller. ⁶⁵⁷ Under Maryland common law, failure to meet a deadline for the settlement of a contract for the sale of real property is not a breach that triggers forfeiture of the buyer’s deposit if the transaction closes within a reasonable time of the stated date, unless the contract clearly provides otherwise.

The seller in this case asserts that this particular contract allows no deviation from the stated deadline. We disagree. The contract language itself suggests that the normal rule applies. And the seller proceeded to complete the settlement without declaring a default.

Accordingly, the seller is not entitled to forfeit the deposit funded by the investors. Finally, the seller seeks to have the investors’ claim for refund of the $200,000 deposit offset by the amount of indemnification ($196,666.66) that their assignor, the buyer, owes the seller. In this regard, the seller’s position has merit. An assignee, such as the investors here, who asserts a claim based on the assignment of a contract right is subject to an offsetting claim that the seller would have against their assignor arising from the same transaction.

This concept, known as recoupment, applies even if the seller could not, as in this case, affirmatively assert that claim against the assignee. Thus, the end result is, more or less, a draw. Background 1998-2002: Pines Plaza seeks a buyer for its shopping center Beginning in January 1998, Pines Plaza Limited Partnership (“Pines Plaza”), the Petitioner in this case, sought to sell a shopping center it owned (“the property”) in the Ocean Pines community of Worcester County. Toward that end, Pines Plaza entered into an exclusive listing agreement with Crimmins Associates Real Estate (“Crimmins Associates”), a real estate brokerage firm.

The listing agreement remained in effect for the next four years, but the property was not sold. In early 2002 new owners took control of Crimmins Associates; Pines Plaza informed Crimmins Associates that it had decided not to renew its listings with the firm, including the unsold shopping center. Nevertheless, in a letter dated ⁶⁵⁸ March 23, 2002, a representative of Pines Plaza informed Crimmins Associates that “if you do get a real buyer and a contract, [Pines Plaza] will accept it under the same terms and conditions of the original listing.” June 2002: Crimmins Associates finds a buyer — Q-C In June 2002, Crimmins Associates informed Pines Plaza that a potential buyer had been found. James Quillen 1 and Eric Chadwick proposed to purchase the property through a new venture, Q-C Pines Plaza, LLC (“Q-C”).

The initial proposal fell through. But Mr. Quillen and Mr. Chadwick again expressed an interest in buying the property. This offer was apparently more attractive to Pines Plaza. In February 2003, Pines Plaza entered into a contract to sell the property to Q-C. 2003: The Contract, its First Amendment, and its Second Amendment, without a closing The contract stated a purchase price of $6 million, required a deposit of $10,000, and set the deadline for closing as April 15, 2003.

The contract contained a provision in which Pines Plaza and Q-C both “represented] and warranted]” that no broker, other than one of the principals of Pines Plaza and the firm that represented Q-C, was entitled to a commission in connection with the transaction. Nevertheless, the contract also included an indemnification provision that “Purchaser shall indemnify and hold harmless from and against any claim for a broker’s fee, commission, finder’s fee or similar fee from Crimmins Associates.... ” There apparently had been a discussion between Pines Plaza and Q-C, not memorialized in the contract, as to whether Crimmins Associates was due any fee. According to testimony by the principal of Pines Plaza, he insisted on the indemnification provision, even though Mr. ⁶⁵⁹ Quillen said that he had already resolved the issue by paying $19,000 to Crimmins Associates as a finder’s fee. Shortly thereafter, an unforeseen issue emerged, and Pines Plaza terminated the contract within the contract’s rescission period prior to payment of the $10,000 deposit. 2 To revive the deal, Mr. Quillen, one of the principals of Q-C, then drafted and faxed to Pines Plaza a “First Amendment to Contract of Sale” (the “First Amendment”) that provided for, among other things, the reinstatement of the contract, payment of the nonrefundable $10,000 deposit by Q-C, and a new closing deadline of June 30, 2003. 3 The parties executed the First Amendment effective April 1, 2003, but the sale did not close on the appointed day.

Yet again Mr. Quillen returned to Pines Plaza and sought to revive the sale. Pines Plaza and Q-C entered into a “Second Amendment of Contract of Sale” (the “Second Amendment”) which the parties executed on January 5, 2004. The Second Amendment provided that Q-C’s deposit of $10,000 was forfeited and would not be applied to the sale price. Further, the Second Amendment required an additional $200,000 deposit by Q-C, which would be applied against the purchase price at closing, and specified a new deadline for the closing date as January 12, 2004.

It also provided that the $200,000 deposit could be retained by Pines Plaza as “liquidated damages” if the closing did not occur as agreed. January 200b: Berkley Investors agree to fund the deposit and part of the purchase price To raise funds needed for the deposit and purchase price, Q-C recruited three additional investors: Berkley Trace, LLC; The Hampton Company, Inc.; and James P. Joyce (collectively, the “Berkley Investors”), the Respondents in this ⁶⁶⁰ case. 4 On January 9, 2004, Q-C assigned each of the three Berkley Investors a 25 percent tenant-in-common interest “in and to the Contract for the shopping center----” The written assignments also made reference to both the First Amendment and the Second Amendment. While the assignments recited in boilerplate language that they were provided in consideration of “mutual covenants” and other consideration, they did not identify the consideration provided by the Berkley Investors. 5 Nor did they state that the Berkley Investors were undertaking Q-C’s obligations under the contract. Between January 7 and January 15, the Berkley Investors funded the $200,000 deposit required by the Second Amendment of the contract and paid $3.1 million toward the $6 million purchase price by wiring funds to the settlement agent.

Pines Plaza was aware of the assignments to the Berkley Investors, at least by the scheduled closing date of January 12, 2004. January 12, 2004: Execution of closing documents On January 12, 2004, Pines Plaza and Q-C executed closing documents, including a deed. Three days later, the settlement agent transferred $3.1 million to Pines Plaza’s agent. Settlement, however, did not conclude on that date as Q-C failed to provide the remainder of the purchase price. 6 According to ⁶⁶¹ the Berkley Investors, however, one of the principals of Q-C, Mr. Quillen, advised that the deal had in fact closed on January 15, but that they would have to obtain additional funds from another bank to complete the financing. 7 January 29, 2001: A Third Amendment without the Berkley Investors; settlement Unbeknownst to the Berkley Investors, two weeks after execution of closing documents, on January 29, 2004, Mr. Quillen prepared a “Third Amendment of Contract of Sale” (the “Third Amendment”) between Pines Plaza and Q-C. The Third Amendment was executed by the president of Pines Plaza and by Mr. Quillen on behalf of Q-C. The Third Amendment acknowledged that closing documents had been executed two weeks earlier, but declared that event a “nullity,” stated that the $200,000 deposit had been forfeited, and set a new closing date of March 1, 2004.

The Third Amendment also provided for forfeiture, as liquidated damages, of the $3.1 million paid by the Berkley Investors if closing did not occur on that date. The Berkley Investors did not participate in the negotiations or execute the Third Amendment. The sale ultimately settled on March 1, 2004. Documents executed on January 12, 2004 were included and re-dated as of March 1, 2004.

The $200,000 deposit was not credited against the purchase price. No payment was made to Crimmins Associates as a commission with respect to the sale. 2005: Crimmins Associates sues Pines Plaza; Judgment for Crimmins Associates In 2005, the principals of Crimmins Associates filed a lawsuit in the Circuit Court for Worcester County against Pines Plaza. That suit sought damages from Pines Plaza for failure to pay a commission on the sale of the property. Pines Plaza filed a third-party claim, seeking indemnification from Q-C ⁶⁶² and the Berkley Investors.

In February 2008, the Circuit Court entered judgment against Pines Plaza in the amount of $200,000, an amount later reduced by agreement to $196,666.66. Pines Plaza’s third-party claim was dismissed without prejudice. Pines Plaza satisfied the judgment in late July 2008. 2008-2010: Pines Plaza seeks indemnification from Q-C and Berkley Investors In September 2008, Pines Plaza filed suit against Q-C and the Berkley Investors renewing its claim for payment under the indemnification provision of the contract with respect to the judgment in favor of Crimmins Associates. Q-C did not offer a defense, and a default judgment was ultimately awarded against it in the amount of $196,666.66. 8 The Berkley Investors actively defended the law suit, however, and filed a counterclaim against Pines Plaza seeking recovery of the $200,000 deposit, which had not been credited against the purchase price.

A bench trial was held on March 29, 2010. The Circuit Court ruled in favor of the Berkley Investors on both the claim and the counterclaim. It concluded that, while Q-C had agreed in the contract to indemnify Pines Plaza for any real estate commission owed to Crimmins Associates, the Berkley Investors had not assumed that obligation when Q-C assigned them interests in the contract. The Circuit Court also concluded that, in proceeding to settlement in March 2004 instead of terminating the contract, Pines Plaza had opted to disregard the failure to complete the closing by the January deadline; accordingly, it was not entitled to forfeiture of the Berkley Investors’ $200,000 deposit as “liquidated damages” under the Second Amendment.

The court also concluded that the Third Amendment, which purported to recognize the forfeiture of that sum, was not binding on the Berkley Inves ⁶⁶³ tors, as they were not privy to that agreement between Pines Plaza and Q-C. The Circuit Court granted judgment in favor of the Berkley Investors in the amount of $200,000.00. Appeal of judgment in favor of Berkley Investors Pines Plaza appealed to the Court of Special Appeals. That court affirmed the judgment of the Circuit Court in an unreported decision. We granted Pines Plaza’s petition for a writ of certiorari.

Standard of Review We review factual determinations of the Circuit Court for clear error in the light most favorable to the prevailing party — here the Berkley Investors. City of Bowie v. MIE Props., Inc., 398 Md. 657, 676 , 922 A.2d 509 (2007). We review the decision of legal questions, including the interpretation of the contract, its amendments, and the assignments, without according any special deference to the Circuit Court or the Court of Special Appeals. Id. at 677 , 922 A.2d 509 .

Discussion Pines Plaza has presented three issues for our review. First, it argues that the lower courts should have ruled that it was entitled to indemnification of the $196,666.66 commission it paid to Crimmins Associates because the assignment of interests in the contract to the Berkley Investors necessarily also delegated to them Q-C’s obligation to indemnify Pines Plaza for any commission paid to Crimmins Associates. Second, with respect to the Berkley Investors’ counterclaim, Pines Plaza contends that it was entitled to retain the $200,000 deposit, without crediting it to the purchase price, because the deposit was forfeited to it under the Second Amendment when the transaction was not completed by January 12, 2004 — the deadline for closing in the Second Amendment. 9 ⁶⁶⁴ Finally, Pines Plaza asserts that, even if we affirm the lower courts’ rulings against it on the first two issues, it is entitled to a set-off (or more precisely, recoupment) against its liability for the $200,000 deposit. In particular, it argues that, even if it is only entitled to indemnification from Q-C (and not from Q-C’s assignees — the Berkley Investors) for the Crimmins Associates judgment, any claim by the Berkley Investors against Pines Plaza for the $200,000 deposit is subject to the defenses that Pines Plaza would have against the Berkley Investors’ assignor — Q-C. Accordingly, Pines Plaza reasons, it is entitled to offset the amount of its indemnification claim against Q-C of $196,666.66 against its liability to the Berkley Investors, even if it is not entitled to sue the Berkley Investors directly for that amount.

Whether the assignments obligated the Berkley Investors to indemnify Pines Plaza Under the original contract, Q-C was required to indemnify Pines Plaza for any real estate commission that Pines Plaza might owe to Crimmins Associates — a provision unaltered by any of the subsequent amendments. 10 Pines Plaza argues that Q-C’s assignment of interests in that contract to the Berkley Investors necessarily included the indemnification obligation. Under that theory, the entry of a judgment against Pines Plaza in favor of Crimmins Associates for a commission in the amount of $196,666.66 triggered a require ⁶⁶⁵ ment that the Berkley Investors pay a like amount to Pines Plaza. The assignments by Q-C to the Berkley Investors are silent as to whether they also delegate Q-C’s obligations under the contract. 11 Thus, we consider whether, in an assignment of a contract for the sale of real property, there is a presumptive delegation and assumption of the assignor’s obligations. Maryland law has traditionally followed the rule that assignment of a real estate contract is presumed not to include an assumption or delegation of the assignor’s obligations under the contract.

In 1929, this Court stated: It is true that the covenant for payment of the purchase price of land does not follow the land into the hands of an assignee of the vendee, so that he would be under a liability to his vendor’s vendor, merely by virtue of his having bought the property. The authorities hold, “that a liability of this kind can result only from some express or implied contract of the assignee, and that it will not be implied from the mere assignment of the original contract even though followed by possession of the land.” East Vedado Corp. v. E.S. Adkins & Co., 157 Md. 416, 418-19 , 146 A. 385 (1929) (internal citation omitted). For purposes of clarity and brevity, we will refer to this rule as a “non-delegation presumption.” Although the statement in East Vedado was dicta — in that case, the assignment had clearly provided that the assignee assumed certain duties under the contract' — Maryland courts have reiterated the non-delegation presumption to decide subsequent cases. See Pumphrey v. Kehoe, 261 Md. 496, 506-07 , 276 A.2d 194 (1971); Petals Factory Outlet, Inc. v. EWH & Assoc., 90 Md.App. 312, 318-19 , 600 A.2d 1170 (1992); P/T Ltd. II v. Friendly Mobile Manor, 79 Md.App. 227, 238 , 556 A.2d 694 (1989). ⁶⁶⁶ A different presumption — that an assignment of a contract ordinarily includes an assumption of the assignor’s duties, which we will refer to as a “delegation presumption” — prevails in certain other areas of Maryland contract law that do not involve real estate transactions.

For example, the Maryland Uniform Commercial Code (“Maryland UCC”) adopts the delegation presumption for contracts involving the sale of goods. See Maryland Code, Commercial Law Article (“CL”), § 2-210(5). 12 Pines Plaza argues that the Legislature similarly adopted the delegation presumption when it recodified statutes concerning real property in the Real Property Article (“RP”) of the Maryland Code. In particular, it points to the following language: Unless otherwise expressly provided, any obligation imposed or right granted to any person is automatically binding on or inures to the benefit of his assigns, successors, heirs, legatees, and personal representative. However this section is not to be construed to create or confer any rights of assignment where none would exist otherwise.

RP § 1-103. According to Pines Plaza, this provision essentially extends the delegation presumption that appears in the Maryland UCC to assignments of real property contracts, such as Q-C’s assignments to the Berkley Investors. While the language of RP § 1-103, taken out of context, may superficially appear to embrace a delegation presumption ⁶⁶⁷ for assignments of real estate contracts, the function of that statute is quite different when considered in context. RP § 1-103 appears in the first subtitle of the Real Property Article, which contains definitions and other general provisions concerning the interpretation of the Real Property Article itself. 13 Rules of construction relating to the interpretation of deeds, instruments, real estate contracts, and other instruments appear in other parts of the Real Property Article.

See, e.g., Maryland Code, Real Property Article, Title 2 (entitled “Rules of Construction”). Although the purpose and application of RP § 1-103 appears clear from its context, the contemporary explanation of those who drafted it leaves no doubt. As the Court of Special Appeals observed, the predecessor of RP § 1-103 was originally enacted in 1972 as § 1-104 of Article 21 of the Maryland Code. Chapter 349, § 1, Laws of Maryland 1972.

It was recodified without substantive change in its current form when the Real Property Article was adopted in 1974 and has remained unchanged over the last four decades. See Chapter 12, § 2, Laws of Maryland 1974. The occasion for the creation of this provision was a recodification project of real property statutes undertaken by the Code Revision Committee of the Section of Real Property, Planning and Zoning Law of the Maryland State Bar Association. When the Legislature adopted the recodification in 1972, that committee provided commentary that explained the purpose of various provisions and that was reprinted in the Annotated Code of Maryland.

With respect to this provision, the commentary stated: [RP § 1-103] is a useful provision intended to eliminate useless verbiage from the statute. In some instances, language such as “personal representatives, heirs, and assigns” has been retained in the statute, but no inference beyond ⁶⁶⁸ the scope of [RP § 1-103] is to be drawn from such retention except where otherwise stated. Maryland Code, Article 21, Comment to Title 1 (1966 Repl. Yol., 1972 Interim Supp.).

To the extent that RP § 1-103 provides for obligations imposed on a person to be binding on a person’s “assigns,” it is referring to obligations imposed elsewhere in the Real Property Article, not obligations imposed by private contract. Thus, we agree with the Court of Special Appeals that RP § 1-103 was intended to apply to and govern the interpretation and effect of other provisions within the Real Property Article and that it was not intended as a general statement of law governing private contractual agreements, indemnification agreements, or claims arising out of real estate transactions. Apart from its interpretation of RP § 1-103, Pines Plaza seeks to have us adopt, as part of our common law, a delegation presumption in place of the non-delegation presumption previously applied by Maryland courts to assignments of real estate contracts. But there appears to be no consensus among courts in other jurisdictions that might influence us to abandon the rule consistently applied in earlier Maryland cases.

For example, while summarizing general principles of contract law, the Restatement 2d of Contracts adopts a delegation presumption. See Restatement 2d of Contracts § 328. 14 But