Stratakos v. Parcells

BARBERA, J. In this appeal, we construe a clause of a real estate contract that provides for the award of attorney’s fees to a party to the contract who prevails in a dispute “arising out of’ the contract. In particular, we must decide if a lawsuit by the buyers alleging that the sellers made false or negligent representations in the Maryland Residential Property Disclosure Statement is a dispute arising out of the real estate contract, notwithstanding that the disclosure statement was not made part of the contract. The Circuit Court for Montgomery County (Mason, J.) concluded that the suit was such a dispute and, pursuant to the contract, awarded attorney’s fees to the sellers as the prevailing parties. For the reasons that follow, we agree with the circuit court’s legal conclusion and therefore affirm the fee award.

FACTS In December 2000, George Stratakos and Jami Rankin, appellants, purchased from Steven J. Parcells and Harriet Parcells, appellees, a parcel of improved residential property located in Montgomery County, Maryland (“the property”). The parties entered into a written contract for the sale of the property. In connection with the sale, and in accordance with Maryland Code (1974, 2003 Repl.Vol., 2006 Supp.), § 10-702 of the Real Property Article, appellees provided appellants with a Maryland Residential Property Disclosure Statement (hereafter “disclosure statement”). The Montgomery County Notice and Disclosure Addendum to the contract of sale referred to the disclosure statement, advising the buyer of the right to receive a disclosure (or disclaimer) statement from the seller unless exempt.

The disclosure statement itself, however, was not made part of the contract. Appellees stated in the disclosure statement that they were not aware of any defects in the interior or exterior structural ⁴⁶⁷ systems of the property. Appellees further stated that they were not aware of any previous infestations of wood-destroying insects or any repairs made to the property because of a previous wood-destroying insect infestation. In August 2003, appellants began renovations on the property.

During the renovations, they discovered extensive damage in a covered crawl space, which they alleged was caused by wood-destroying insects. On December 15, 2004, appellants filed a complaint against appellees alleging fraudulent misrepresentation, negligent misrepresentation, and breach of warranty. Appellants argued that the factual representations appellees made in the disclosure statement were false, and that appellees made the statements knowing they were false or with reckless indifference to the truth. Appellants alleged, inter alia, that they “would not have purchased the Property had the misrepresentations not been made,” and that “the House was worth considerably less than [appellants] paid for it in the belief that the House was as it was represented to be in the Disclosure Statement.” In the ad damnum clause of the complaint, appellants sought $30,000.00 in compensatory damages, $150,000.00 in punitive damages, and attorney’s fees pursuant to Paragraph 23 of the real estate contract.

Paragraph 23 entitles the prevailing party, in any action or proceeding involving a dispute between the parties “arising out of’ the real estate contract, to recover costs and reasonable attorney’s fees. On August 29, 2005, appellants filed an amended complaint setting forth essentially the same allegations as those made in the original complaint. Appellants again sought monetary relief, including attorney’s fees “per the contract between the parties.” Although appellees were married when they sold the property to appellants, they were separated when suit was filed. Consequently, they separately defended the suit. ⁴⁶⁸ On September 21, 2005, appellee Steven Parcells filed a motion for summary judgment, denying the allegations set forth in the amended complaint.

Six weeks later, the motion came on for a hearing. The court granted the motion, reasoning that appellants failed to show that they had incurred actual injury from the alleged misrepresentations, such as increased renovation costs. The following day, Steven Parcells filed a motion for award of costs and attorney’s fees. In the motion, he argued that the real estate contract between the parties provides that, in the event of a dispute, the prevailing party is entitled to receive from the other party reasonable attorney’s fees.

Thereafter, appellants filed a motion for reconsideration. The court held a hearing on appellants’ motion for reconsideration and Mr. Parcells’s motion for award of costs and attorney’s fees. The court denied the motion for reconsideration, and awarded Mr. Parcells costs and attorney’s fees in the amount of $14,105.14. On January 13, 2006, appellee Harriet Parcells filed a motion for summary judgment.

Following a hearing, the court granted the motion. Ms. Parcells also filed a motion requesting $16,975.00 in .costs and attorney’s fees, which the court granted. Both awards of attorney’s fees were reduced to judgment. This appeal followed.

DISCUSSION Appellants’ sole contention on appeal is that the circuit court erred in awarding attorney’s fees to appellees pursuant to Paragraph 23 of the real estate contract. Paragraph 23 states: In any action or proceeding involving a dispute between the Purchaser and the Seller arising out of this Contract, the prevailing party will be entitled to receive from the other party reasonable attorney’s fees to be determined by the court or arbitrator(s). ⁴⁶⁹ Appellants argue that the parties’ dispute relating to the representations made in the disclosure statement does not arise out of the contract; consequently, Paragraph 23 was not triggered and the court committed legal error by awarding attorney’s fees to appellees. Appellees respond that the allegations set forth in appellants’ complaint arose out of the real estate contract; therefore, Paragraph 23 entitles them to recover attorney’s fees. They argue that appellants could bring a suit for misrepresentation and breach of warranty only because the parties had entered into a contract for the sale of real property.

Appellee Harriet Parcells also points out that RP § 10-702 sets forth the requirements of a disclosure statement in a residential real estate transaction. She argues that, “[b]y virtue of the statute, the disclosure duties it creates are inextricably intertwined with the sales contract.” 1 ⁴⁷⁰ Appellee Steven Parcells makes the additional argument that the dispute “not only arose out of the contract, but was based, in part, on a specific provision of the contract.” He refers to appellants’ request for attorney’s fees in the ad damnum clause of the complaint pursuant to Paragraph 23. 2 ⁴⁷¹ “Ordinarily, in the absence of a statute, rule, or contract expressly allowing the recovery of attorney’s fees, a prevailing party in a lawsuit may not recover attorney’s fees. This is true whether the action seeking fees sounds in contract or tort.” Chang v. Brethren Mut. Ins.

Co., 168 Md.App. 534, 551-52 , 897 A.2d 854 (2006) (citation omitted). The parties do not dispute that Paragraph 23 is a valid provision for the award of attorney’s fees to the prevailing party in litigation concerning a dispute arising out of the contract. Indeed, such provisions “generally are valid and enforceable in Maryland.” Myers v. Kayhoe, 391 Md. 188, 198 , 892 A.2d 520 (2006). The parties’ debate focuses more narrowly on how Paragraph 23 should be read.

As we have said, they disagree about what is meant by a dispute “arising out of’ the contract. Resolution of the issue requires us to decide the proper construction of that phrase. We adhere in Maryland “to the objective theory of contract interpretation, giving effect to the clear terms of agreements, regardless of the intent of the parties at the time of contract formation.” Id. at 198 , 892 A.2d 520 . “Contract interpretation, including the determination of the ambiguity of a contract, is a question of law and subject to de novo review.” United Services Auto. Ass’n v. Riley, 393 Md. 55, 79 , 899 A.2d 819 (2006). “[I]n the construction of contracts, words are to be given their ordinary meaning[.]” Auction and Estate Representatives, Inc. v. Ashton, 354 Md. 333, 343 , 731 A.2d 441 (1999).

If the language of the contract is plain and unambiguous, there is no room for construction. United Services, 393 Md. at 80 , 899 A.2d 819 . In that instance, the “court must presume that the parties meant what they expressed.” Id. (citation and internal quotation marks omitted).

No reported opinion of the Court of Appeals or this Court addresses what is meant in a contract provision for attorney’s fees by “a dispute ... arising out of’ the contract. But both appellate courts have construed other contract clauses containing “arising out of’ language. One example is CSX ⁴⁷² Transp., Inc. v. Mass Transit Admin., 111 Md.App. 634 , 683 A.2d 1127 (1996), aff'd, 349 Md. 299 , 708 A.2d 298 (1998). CSX Transportation involved construction of such language in the indemnification provision of a state procurement contract.

The contract required the Mass Transit Administration (“MTA”) to indemnify CSX Transportation, which operates the Maryland Rail Commuter Service (“MARC”), for “any and all claims arising out of ‘Contract Service.’ ” Id. at 636, 683 A.2d 1127 . CSX Transportation submitted a claim to MTA for indemnification of property damage losses resulting from a collision between a MARC train and a backhoe owned by a third party. Id. CSX Transportation believed that the claim was subject to indemnification because it was one “arising out of ‘Contract Service.’ ” The MTA and the Board of Contract Appeals disagreed and denied the claim.

The Circuit Court for Howard County affirmed on judicial review of CSX Transportation’s petition. Id. at 636-37 , 683 A.2d 1127 . CSX Transportation appealed to this Court. We reversed.

In construing the phrase “arising out of ‘Contract Service,’ ” we applied the definition of the term “arising out of’ that the Court of Appeals had used in Northern Assurance Co. v. EDP Floors, 311 Md. 217, 230 , 533 A.2d 682 (1987). See CSX Transp., 111 Md.App. at 640-41 , 683 A.2d 1127 . In EDP Floors , a ease involving the duty of an insurance company to defend an insured employer from a tort suit based on an employee’s negligence, the Court concluded that the “words ‘arising out of must be afforded their common understanding, namely, to mean originating from, growing out of, flowing from, or the like.” 311 Md. at 220-21, 230 , 533 A.2d 682 . We also noted in CSX Transportation that, although the words “arising out of’ require a showing of a causal relationship, “recovery is not limited to ... direct and proximate cause.” 111 Md.App. at 641 , 683 A.2d 1127 (citations and internal quotation marks omitted).

Relying on the EDP Floors Court’s definition of “arising out of’ and the construction given the term in other contract cases within and outside of Maryland, we held in CSX Transportation that, for the indemnification provision to apply, it was enough that the MARC ⁴⁷³ train was a cause of the injury notwithstanding that “the injury may also have arisen out of other causes further back in the sequence of events[.]” Id. at 643-44, 683 A.2d 1127 . CSX Transportation and EDP Floors are cases involving construction of liability insurance contract provisions, whereas the case before us involves a contract provision of a very different sort. Those cases nevertheless are helpful to the present case in that, in both of those cases, construction of the “arising out of’ language was based on the common understanding of the phrase. As we construe that phrase in the present case, we shall afford it the same common understanding, that is, “to mean originating from, growing out of, flowing from, or the like.” Also helpful to our analysis is Marcus v. Fox, 150 Ariz. 333 , 723 P.2d 682 (1986), a case upon which Steven Parcells relies in support of his position that the dispute between the parties arises out of the real estate contract.

In Marcus , the jury found that the plaintiffs were fraudulently induced to enter into a contract to purchase real property. Id. at 683. An Arizona statute provides for attorney’s fees to a prevailing party in any contested action “arising out of a eontract[.]” Ariz.Rev.Stat. § 12-341.01(A). The trial court ruled the statute inapplicable and denied the plaintiffs’ request for attorney’s fees as the prevailing party to the suit.

Id. The intermediate appellate court affirmed. Id. The Arizona Supreme Court reversed, holding that the plaintiffs were entitled to attorney’s fees because the cause of action arose out of the real estate contract.

Id. at 684-85. The court wrote: It was that contract [for the sale of real estate] which prompted this suit and also