Shillman v. Hobstetter

Barnes, J., delivered the opinion of the Court. The principal question in this appeal involves the right of the appellees, contract purchasers of dwelling properties in Section 12 of Maryland City, to sue and recover as donee beneficiaries on a contract signed by the appellants. The case is an interesting one and for the most part the facts are substantially undisputed. The Maryland City Corporation (developer), a Maryland corporation, was the developer of a large housing development, commonly known as “Maryland City,” located off Route 198 in Anne Arundel County.

The development proceeded by the erection of houses in various sections, the whole proposed development consisting of Sections 1 to 14. Fifty-nine contract purchasers entered into contracts with the developer in which, inter alia, it was agreed that the developer for the considerations stated in the respective contracts would construct houses for them in Sections 9, 10 and 11. In accordance with the provisions of the contracts, each of the contract purchasers paid deposits in varying amounts to the developer. In order to finance the development, funds were borrowed by the developer from Weaver Bros., Inc., and the borrowed funds were secured by a deed of trust in the nature of a mortgage on the property.

In addition to handling the construction financing, Weaver Bros, processed the applications of all purchasers of individual lots located in Sections 1 through 12 of ⁶⁸² the development who desired insured purchase money mortgages of the Federal Flousing Administration (FHA). In accordance with these applications, FHA granted conditional and final commitments to insure mortgage loans of purchasers of lots and homes in Sections 1 through 12. When conditional commitments on each section were granted by FHA, the mortgagee, Weaver Bros., would advance funds theoretically to cover the costs of the construction of the homes to be built in each applicable section. In May, 1964, the developer began to encounter financial difficulties of which both Weaver Bros, and FHA were aware.

When the developer applied for a conditional commitment for Section 12, FHA acting through its state director, Charles H. Borcherding, Sr. (Borcherding), on April 15, 1964, advised Weaver Bros, by a letter of that date to Douglas Buttner (Buttner), its vice-president, that eight requirements must be satisfied before FHA would approve conditional commitments for Section 12. By a letter, dated May 6, 1964, from E. Harvey Kayne (Kayne), president of the developer, to Joseph W. Maguire, Operations Commissioner of FHA for Zone 1, the eight requirements were considered at some length. FHA, by a letter dated May 11, 1964, informed the developer that if the construction of the houses located in Sections 9 and 10 were completed by the developer, FHA would issue conditional commitments on Section 12. During the week preceding May 27, 1964, a meeting was held with the appellants Miller, Shillman and Harms and representatives of FHA and Weaver Bros, to discuss the question of conditional commitments by FHA.

All of the appellants were minority stockholders of the developer. The appellant Harms was also a creditor of the developer in the amount of approximately $72,000.00. The appellant Shillman was a principal in States Engineering Corporation, a supplier of building materials to which the developer was heavily indebted. Miller was secretary of the developer.

At this meeting it was agreed that if the appellants would guarantee the refund of deposits made by the contract purchasers in Sections 9, 10 and 11, FHA would issue conditional commitments for Section 12. This was evidenced by a letter, dated May 27, 1964, signed by the appellants, di ⁶⁸³ rected to Borcherding as state director of FTIA, with a copy to a representative of Weaver Bros. This important letter provides : “Re: Sections 12 — -Maryland City Dear Mr. Borcherding: “The undersigned hereby guarantee to refund deposits made by contract purchasers of homes in Sections 9, 10 and 11 if the developer, Maryland City Corporation, fails to complete the dwellings and settle with the purchasers.” There is some conflict in the testimony in regard to whether there was an oral agreement or understanding that FHA would also issue conditional commitments for Sections 13 and 14. Harms testified: “It was agreed also that we would be given commitments contingent basically upon satisfactory operation in 12, that we would be given commitments in Sections 13 and 14, following right on through in the normal sequence as had been done in other sections of Maryland City, earlier sections.” He further testified that a financial analysis had been made and the appellants were aware of the making of the deposits by the contract purchasers.

An analysis had also been made of the construction to be completed. He stated: “We compared that with the draws remaining to be drawn, and there was no possible way, no sensible, reasonable way, by which the development could even approach satisfactory financial completion without taking all three of these sections as one complete package.” When asked why FHA did not give commitments for Sections 13 and 14 at the same time as it gave them for Section 12, he stated : “I don’t know the complete answer, but it was just a matter of policy, I presume. The practice had been ⁶⁸⁴ throughout the earlier portions of Maryland City to have one section achieve a fixed or approximate completion portion or percentage before the next section was given commitments.” In regard to alleged assurances given by Borcherding, his testimony was as follows: “Q. Were you given any assurances as to 13 or 14 by Mr. Borcherding? “A. Indeed so, as far as I was concerned, I was, yes. “Q. What were those assurances? “A. Only the fact that if we performed properly in Section 12, we would be given commitments on Sections 13 and 14. Otherwise we wouldn’t have even started Section 12.” On cross examination, Harms stated that at the time he signed the letter of May 27, he did not expect FHA to issue commitments for Sections 13 and 14 as its policy was to issue commitments for one section at a time and that “When we showed sufficient progress on 12, we were to have gotten 13 and so on.” As he understood it, “commitments were to be issued on one section, then work would reach a certain stage of progress and then perhaps commitments would be issued on the next section.” In regard to why he signed the letter of May 27, Harms testified : “We were substantial creditors, one of my cohorts here was a substantial creditor, we had a lot of friends who were creditors, and I individually met with the subcontractors at Maryland City on at least one occasion and discussed with them the problems that were being encountered, the financial problems.

A lot of the subcontractors were not being paid and things didn’t seem to be going along properly, and it was agreed in this get-together that we had with the subcontractors that Mr. Miller, who had been with the project since it began and I, who had been with the project since it be ⁶⁸⁵ gan, and Mr. Shillman, who was a substantial creditor of Maryland City, would, so to speak, represent the subcontractors, who all were in the process of being, taken broke and bankrupt and so on, we would represent them in a group to try to oversee this thing, and this is how we got involved with Maryland City, how we got to the stage oí talking with Mr. Borcherding, and when we reached the point where we were obligated to sign this letter in order to keep Maryland City going, we felt that it was the right thing to do and this was our obligation, and we took a stab at it.” Miller testified that it would be impossible to operate the whole development unless a commitment were obtained for Sections 13 and 14 and this was discussed with Borcherding, who stated: “He said just get started. We have no problems.” Miller further testified that if the commitment was only for Section 12, he would never have signed the letter of May 27. Borcherding, on the other hand, testified that he never gave the appellants “any assurance that the FHA would issue conditional commitments as to Sections 13 or 14.” He stated that Sections 13 and 14 “may have been discussed, but I am sure that my answer was, as it would be if I were still there, that let’s get finished with Section 12 first before we even start to discuss 13 and 14, because we weren’t interested in it.” Buttner, who was present at the May, 1964, meeting testified that FHA issued 90 conditional commitments for Section 12 but did not approve Sections 13 and 14 for conditional commitments. At the request of the developer, Weaver Bros., on August 31, 1964, wrote FHA for permission to submit applications on Sections 13 and 14, but he had little hope that there would be favorable consideration of the request by FHA “Because satisfactory progress in the other sections had not been made.” It is not disputed that it was agreed that the down payments made by contract purchasers in Section 12 would be held in escrow and these down payments are not involved in this litigation.

Later in 1964 the developer became insolvent. The appellants maintain that this was caused by the delay by FHA in issuing ⁶⁸⁶ conditional commitments for Sections 13 and 14. In any event a receiver was appointed for the developer and there was a default under the deed of trust to Weaver Bros. Foreclosure proceedings were instituted and at the foreclosure sale Weaver Bros, purchased all of the lots in Sections 11, 12 and 13.

Many of the houses on the lots in these sections were in varying degrees of construction. These lots were resold by Weaver Bros, to certain of the appellees. The appellees, as contract purchasers, could repurchase these houses and lots only if FHA insured mortgages were available for them. The FHA regulations provided for down payments equal to a certain percentage of the FHA valuation, and in order to avoid the effect of this regulation as applicable to the resale contract purchasers the value of each house was increased to the extent of the actual deposit theretofore given the developer, so that each former contract purchaser would qualify for what in effect would be a 100% FHA insured loan so far as Weaver Bros, was concerned.

Those appellees who availed themselves of this arrangement were obliged to pay to Weaver Bros., for application to their respective mortgages, any amounts received by them from the appellants in the present case. An action was filed by the appellees to recover as donee beneficiaries in January, 1965. After an amended declaration was filed, the appellants pleaded the general issue pleas, but no special pleas. There was a stipulation between the parties in regard to many facts not in dispute, including a stipulation that ■none of the original contract purchasers of lots in Sections 9, 10 and 11 have been refunded their deposits.

After the taking of testimony, the lower court (Macgill, C. J.) sitting without a jury, in a well-reasoned and carefully considered written opinion, concluded that the appellees were intended to be donee beneficiaries under the guaranty of May 27, 1964, and entered judgment for the appellees in varying amounts from $203.25 to :$2,455.00, a total of $48,718.25. The appellants make four contentions: 1. The appellees are not donee beneficiaries of the agreement of May 27, 1964. 2. The agreement of May 27, 1964, is void for a lack of failure of consideration. ⁶⁸⁷ 3.

The promise to refund the deposits was conditional upon the granting by FHA of conditional commitments for Sections 12,13 and 14. 4. The agreement of May 27, 1964, was void as ultra vires FHA, was obtained by economic duress and was against public policy. We will consider these contentions in the order mentioned. 1. lit our opinion, the appellees were donee beneficiaries under the contract of May 27, 1964, and were entitled to sue and recover as such beneficiaries. Since the establishment of the doctrine of third party beneficiaries in the landmark decision of the Court of Appeals of New York in Lawrence v. Fox, 20 N. Y. 268 (1859), substantially all state courts of last resort, including this Court, have adopted and applied the doctrine.

See Small v. Schaefer, 24 Md. 143 (1866), adopting the doctrine for Maryland, and 4 Corbin on Contracts § 722. It is a developing doctrine of law and its limits in particular cases are still being established. See 4 Corbin on Contracts § 722. Our predecessors considered the doctrine and its scope in Mackubin v. Curtiss-Wright Corporation, 190 Md. 52 , 57 A. 2d 318 (1948), and again in Marlboro Shirt Co. v. American District, 196 Md. 565 ,