Tolzman v. Gwynn

Powers, J., delivered the opinion of the Court. These appeals involve the right to foreclose the lien of a deed of trust of real estate in Baltimore County, and a determination of the amount secured by the lien. The proceeding in the Circuit Court for Baltimore County from which these appeals were taken is but a postlude to the main drama of several acts, played in Prince George’s County, with one scene presented in Annapolis. An understanding of the prior transactions and events is necessary to a solution of the legal issues now presented.

Rudolf Walti and Alfred H. Tolzman were the principals in United Leaf Tobacco Corporation, located in Upper Marlboro. In 1967 and 1968 the company borrowed a total of $70,000.00 from Mrs. E. Lucille McCauley on unsecured notes. There may have been an intention to give security for the debt, but none was given at that time. The corporation also borrowed funds from Suburban Trust Company on two notes, one dated 1 July 1968 for $39,000.00 and one dated 30 December 1968 for $75,000.00.

Walti and Tolzman, and their wives, signed both notes as endorsers and guarantors. On 14 April 1969, when the earlier note had been reduced to $34,500.00 and the later one remained at $75,000.00, Walti and Tolzman and their wives ⁵⁶⁶ gave additional security for the existing indebtedness to the bank by a deed of trust conveying to trustees named by the bank the Walti residence property, located in Prince George’s County, and the Tolzman residence property, located in Baltimore County. Apparently neither was subject to any existing encumbrance at that time. The deed of trust was recorded in both counties.

By a mortgage on their residence property dated 10 June 1970 Walti and his wife gave Mrs. McCauley security for the corporation’s indebtedness to her. The lien of this mortgage was junior to the lien of the deed of trust securing the notes at the bank. In October 1971 Mrs. McCauley, learning that the bank had commenced proceedings to foreclose its deed of trust, purchased the notes held by Suburban Trust Company for the balances then due, plus accrued interest. Quite obviously she did this to protect her junior lien on the Walti property.

By a deed of appointment she substituted her attorney, David H. Gywnn, for the trustees originally named by the bank. Foreclosure of the junior mortgage held by Mrs. McCauley on the Walti property was then instituted by Mr. Gwynn, as the attorney named in the mortgage. The advertisement of sale stated that the property would be sold subject to a first trust, on which the balance due, announced at the time of sale, was $53,430.87. Sale was held on 15 November 1971.

The property was sold to Mrs. McCauley on her bid of $54,000.00. An apparent misunderstanding of the proper application of the $54,000.00 sale price arose, and was ultimately resolved by the Court of Appeals in Tolzman v. Gwynn, 267 Md. 96 , 296 A. 2d 594 (1972). Mr. Gwynn reported that the property was offered, subject to the balance due on the first trust of $53,430.87, and sold for $54,000.00, “including the balance owed on the first trust”. The sale was ratified by the court.

In his draft of an account suggested to the auditor Mr. Gwynn took the position that the true net selling price was $569.13, the amount by which the bid exceeded the first trust balance. The auditor disagreed, taking the position that ⁵⁶⁷ what was sold was the equity after the first lien, and that it sold for $54,000.00. His account and report reflected that view. The balance due Mrs. McCauley on her second mortgage debt was audited at $65,095.84.

After costs and expenses allowed in the audit, the net result was that the sale at $54,000.00 left a deficiency still due Mrs. McCauley of $16,071.19. Mr. and Mrs. Tolzman filed exceptions to the auditor’s account, contending “that the $54,000.00 of sale proceeds, after expenses, should have been applied in reduction of the debt of $53,430.87 due under the first trust”. 267 Md. at 99 . The lower court ultimately ratified the account as stated, and the Tolzmans appealed. With a modification as to commissions allowed, the Court of Appeals affirmed the order ratifying the auditor’s account, including the deficiency as stated.

The Court said, at 99: “The simple fact is, however, that he [Mr. Gwynn] was foreclosing the second mortgage, not the first deed of trust. The advertisement of sale clearly stated, as it should have, that the property was being sold subject to the senior debt, which was in default, and could not be assumed, see Diliansz v. Klatch, K1967). It was imperative that the net proceeds of sale be applied in reduction of the debt secured by the second mortgage, and nowhere else.” After having filed in Prince George’s County a release of the former Walti property from the lien of the deed of trust, the substituted trustee instituted in the Circuit Court for Baltimore County the case now before us, to foreclose that deed of trust against the Tolzman property. The Tolzmans filed a petition to enjoin the sale, asserting generally the position taken by them in their exceptions to the auditor’s report in Prince George’s County upon which a final ruling had not yet been made.

The court enjoined the sale, subject to further order. This case remained dormant for more than a year, during which the Circuit Court for Prince George’s County ⁵⁶⁸ overruled the exceptions and ratified the auditor’s report, and the Court of Appeals affirmed. During that time also, Mrs. McCauley privately sold the former Walti property for a gross price of $85,000.00. In March 1973 Mr. Gwynn, the substituted trustee, petitioned the court to dissolve the injunction and let the foreclosure proceed.

An answer was filed, a hearing held, and on 3 August 1973 the chancellor filed a memorandum opinion, followed by a decree on 10 September 1973. The decree dissolved the injunction and permitted the trustee to proceed with foreclosure, and fixed the amount of the debt secured by granting to Mrs. McCauley a judgment against the Tolzmans for $38,502.06, with interest from 9 December 1971, and assessed costs against the Tolzmans. Although it would not otherwise have been an issue at that stage of the case, both sides introduced evidence, and briefed and argued the question of the balance due, and agreed that the chancellor should make a finding on the question in order to eliminate further proceedings. Both sides appealed from that decree.

The Tolzmans contend here: 1. That Mrs. McCauley’s release of the Walti property from the lien of the deed of trust was not a legitimate release, but was a forbidden impairment of collateral which discharged them as guarantors. 2. That they have a right of contribution against the Waltis, their co-guarantors, for a proportionate share of the debt due, and to enforce that right of contribution they should have an equitable lien on the proceeds of the sale of the Walti property. 3. That they are discharged by the trustee’s breach of his duty, on default, to sell the property in one parcel. 4.

That if any sum is due Mrs. McCauley, it cannot exceed $16,071.19, the deficiency suffered by her in the foreclosure of her junior mortgage on the Walti property. Mr. Gwynn, trustee, as cross appellant contends only that the lower court incorrectly determined the amount of the indebtedness. ⁵⁶⁹ The two notes originally payable to the bank, later secured by the deed of trust here involved, and still later purchased by and endorsed to Mrs. McCauley, each contained on its face, above the signature of the corporate maker, the following clause: “The undersigned and all endorsers, sureties and guarantors hereof jointly and severally waive presentment for payment, demand, notice of nonpayment, notice of protest, and protest of this note, and all endorsers, sureties, and guarantors hereof consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by the Bank with respect to the payment or other provisions of this note and to the release of the collateral, or any part thereof, with or without substitution and agree that additional makers, endorsers, guarantors, or sureties may become parties hereto without notice to them or affecting their liability hereunder.” On the back of each note, immediately above the individual signatures of Mr. and Mrs. Tolzman and Mr. and Mrs. Walti, this provision was printed: “In addition to the liability as endorsers, which the undersigned hereby assume, and intending to be legally bound, the undersigned (and if more than one, each of them jointly and severally) (a) hereby become surety and guarantor to the SUBURBAN TRUST COMPANY, its successors, endorsees and assigns, for the payment of the within note; (b) consent (1) that the Collateral may be exchanged; surrendered or sold from time to time, (2) that the payment of the note, or any of the liabilities of the Maker thereof, or of any Collateral, may be extended in whole or in part, and (3) that any of the provisions of the note may be modified; all without notice to and without affecting the liability of the undersigned as endorser, surety and guarantor; and ⁵⁷⁰ (c) authorize judgment by confession against each of us under the terms on the face of the note.” To support their contention that Mrs. McCauley’s release of the Walti property from the lien of the deed of trust discharged them as guarantors, the Tolzmans rely upon Code, Art. 95B (Uniform Commercial Code), § 3-606. The section provides, in part: “(1) The holder discharges any party to the instrument to the extent that without such party’s consent the holder (a) Without express reservation of rights releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse * * *; or (b) Unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse.” The Official Comment under § 3-606 states that one of the purposes of the new matter is to make it clear that: “Consent may be given in advance, and is commonly incorporated in the instrument; or it may be given afterward. It requires no consideration, and