Wellington Co. v. Shakiba

HOLLANDER, J. In this appeal, we must determine whether a contract action to recover a debt may be brought on a deed of trust, executed under seal, that contains a covenant to pay, even though the underlying obligation is also evidenced by a promissory note, for which limitations has arguably expired. On October 12, 2005, the Wellington Company, Inc. Profit Sharing Plan and Trust (“Wellington,” the “Trust,” or the “Lender”), appellant, filed a Complaint in the Circuit Court for Anne Arundel County against Hosein M. Shakiba and Roya M. Shakiba (“Borrowers”), appellees. 1 Wellington alleged that it had loaned $53,000 to appellees on September 7, 2001, “evidenced by a commercial balloon note and deed of trust.” Averring that appellees had defaulted on their obligation, appellant demanded judgment of $83,758.15, which included principal, penalties, and pre-judgment interest, plus $12,000 in attorney’s fees. On December 14, 2005, Mr. Shakiba moved to dismiss the suit, contending that it was barred by the three-year statute of limitations set forth in Maryland Code (1974, 2002 RepLVol.), § 5-101 of the Courts and Judicial Proceedings Article (“C.J.”). After the court denied the motion, the matter proceeded to a bench trial in February of 2007. ⁵⁸¹ At the close of appellant’s case, Mr. Shakiba moved for judgment.

The court granted the motion, entering judgment in favor of appellees in an Order docketed April 6, 2007. This appeal followed. Wellington raises two issues, which we have rephrased slightly: 1. Whether the Deed of Trust that was the basis of the Complaint was an instrument upon which an action at law for breach of contract could be maintained for monies due and owing. 2.

Whether the Note and Deed of Trust that were the basis of the Complaint were instruments under seal. For the reasons set forth below, we shall reverse the judgment of the circuit court and remand for further proceedings. FACTUAL AND PROCEDURAL BACKGROUND Wellington filed a one-count suit against appellees on October 12, 2005. In relevant part, the Lender averred: 2.

That the Plaintiff loaned the sum of $53,000.00 to the Defendants on September 7, 2001. 3. That said loan was evidenced by and received by a commercial balloon note and deed of trust which are marked exhibits A and B respectively and which are attached hereto and incorporated herein by reference. 4. That the deed of trust referenced herein was recorded among the land records of Anne Arundel County, Maryland. 5. That pursuant to said deed of trust and commercial balloon note, the defendants were obligated to repay said loan....

On December 9, 2005, Ms. Shakiba, through counsel, filed a “Notice of Filing of Case in Bankruptcy Court.” It stated: You are hereby notified of the filing of a Chapter 7 bankruptcy case in the Baltimore Division of the United States Bankruptcy Court for the District of Maryland and pursuant to Section 362 of the Bankruptcy Code, this action is ⁵⁸² stayed for [Ms. Shakiba]. The Bankruptcy Case No. is 04-35704 and was filed on October 25, 2004. This case was discharged on February 21, 2005. On January 13, 2006, the court issued an Order stating: The Court has reviewed the Bankruptcy Notice filed by [Ms. Shakiba’s counsel].

As it does not appear that there is an existing bankruptcy, no stay is required. The notice was not accompanied by any schedules or other evidence indicating the debt that is the subject of this suit has been discharged. The case shall proceed in [the] ordinary course. As noted, Mr. Shakiba moved to dismiss appellant’s suit, claiming it was barred by the three-year statute of limitations set forth in C.J. § 5-101.

The court denied Mr. Shakiba’s motion on January 13, 2006. The case was tried to the court on February 7, 2007. At trial, Delbert Ashby, Trustee of the Trust, was appellant’s sole witness. Mr. Ashby described the Trust as “the vehicle for retirement program [sic] for the [Wellington Company’s] employees.” He recalled that the Trust lent $53,000 to appellees in September 2001, reflected in a “Commercial Balloon Note” (the “Note”) dated September 7, 2001, as well as a Deed of Trust, also dated September 7, 2001, secured by property located at 751 Defense Highway in Anne Arundel County (the “Property”).

The Note, executed by appellees, matured on May 1, 2002. It was received in evidence and provided, in part: 1. BORROWERS PROMISE TO PAY. FOR VALUE RECEIVED, the undersigned, Hosein M. Shakiba and Roya M. Shakiba (hereinafter referred to as the “Borrowers”) promises to pay to The Wellington Company Inc., Profit Sharing Plan and Trust (hereinafter referred to as the “Lender”) or order, the principal sum of FIFTY THREE THOUSAND ($53,000.00) DOLLARS.

The principal and interest payments of this Note shall be due and payable as follows: (1) Interest will be charged on unpaid principal until the full amount of ⁵⁸³ principal has been paid. I will pay interest at a yearly rate of 18.000%[;] (2) the interest rate required is the rate I will pay both before and after any default described in section 3[;] (3) commencing on November 1, 2001 (the “Commencement Date”), interest and principal payments in the amount of SEVEN HUNDRED NINETY FIVE DOLLARS AND NO CENTS ($795.00) shall be paid monthly on the first (1st) day of each month until May 1, 2002, the maturity date; and (4) at the Maturity Day of May 1, 2002, the remaining principal sum and any unpaid interest shall be due and payable. 2. Late Charges. The interest and principal payments of this Note are due and payable on the first (1 st) day of each month.

If the Lender has not received the full monthly interest payment by the end of the fifth (5th) calendar day after payment is due, Lender may collect a late charge in the amount of FIVE (5%) PERCENT of the overdue amount of each payment. 3. Default and Acceleration. If I do not pay the full amount of each monthly payment on the date it is due, I will be in default. In the event of default in payment of this Note, then the entire principal sum thereon shall at once become due and payable, without notice, at the option of the holder of this Note.

Failure to exercise this option shall not constitute a waiver of the right to exercise such option in the event of any subsequent default. 4. Collection. If this Note is forwarded to an attorney for collection after maturity hereof (whether by demand, acceleration, declaration, extension, or otherwise), the Borrower shall pay on demand all costs and expenses of collection including attorneys’ fees of FIFTEEN (15%) PERCENT of the unpaid balance of the Principal Amount then outstanding. WITNESS the following hand and seal. ⁵⁸⁴ WITNESS/ATTEST _[Signature]_ Hosein M. Shakiba — Borrower WITNESS/ATTEST _[Signature]_ Roya M. Shakiba — Borrower (Emphasis added.) Appellant also introduced in evidence the notarized Deed of Trust, which provided, in part: DEED OF TRUST THIS DEED OF TRUST (“Security Instrument”) is made on this 7th day of September, 2001.

The grantors are Hosein M. Shakiba and Roya M. Shakiba (“Borrowers”). The trustee is Delbert M. Ashby, Anne Arundel County, Maryland (“Trustee”). The beneficiary is The Wellington Company Inc., Profit Sharing Plan and Trust which is organized and existing under the Laws of Maryland, and whose address is 2579 Rutland Road, Davidsonville, MD 21035 (“Lender”). Borrower owes Lender the principal sum of FIFTY THREE THOUSAND ($53,000.00 DOLLARS).

This debt is evidenced by Borrower’s note dated the same date as this Security Instrument (“Note”), which provides for monthly payments, with the full debt, if not paid earlier, due and payable on May 1, 2002 This Security Instrument secures to Lender: (a) the repayment of the debt evidenced by the Note, with interest, and all renewals, extensions and modifications of the Note; (b) the payment of all other sums, with interest, advanced under paragraph 7 to protect the security of this Security Instrument; and (c) the performance of Borrower’s covenants and agreements. For this purpose, Borrower irrevocably grants and conveys to Trustee, in trust, with power of sale, the following described property located in Anne Arundel County, Maryland: ⁵⁸⁵ [See Schedule A Attached] which has the address of 751 Defense Highway, Davidson-ville, Maryland 21085 UNIFORM COVENANTS. Borrower and Lender covenant and agree as follows: 1. Payment of Principal and Interest: prepayment and Late Charges.

Borrower shall promptly pay when due the principal of and interest on the debt evidenced by the Note and any prepayment and late charges due under the note. Paragraph 21 of the Deed of Trust set forth the Lender’s remedies upon the Borrowers’ default. It provided that, as a remedy for default, the Lender “may invoke the power of sale and any other remedies permitted by applicable law.” In addition, appellees signed the Deed of Trust under seal, as follows: BY SIGNING BELOW, Borrower accepts and agrees to the terms and covenants contained in this Security Instrument and in any rider(s) executed by Borrower and recorded with it. [Signature]_(Seal) Hosein M. Shakiba — Borrower [Signature]_(Seal) Roya M. Shakiba — Borrower Mr. Ashby testified that Mr. Shakiba made payments to appellant until March 15, 2002. He claimed that appellees were in default, and that $115,510.85 was due and owing, representing the sum of principal, interest, late fees, and attorney’s fees.

On cross-examination, Mr. Ashby testified that he believed the Note was drafted by the company that handled the closing on the loan. He admitted that he did not witness the signatures on the Note. Moreover, he explained that Wellington attempted to foreclose on the Property, but never went to closing, or received any funds from it, because “an underlying first mortgage ... came in and subsequently foreclosed it and wiped out” appellant’s interest. The following ensued: ⁵⁸⁶ [MR.

SHAKIBA’S COUNSEL]: Okay. In that proceeding, did you file [a] request for a deficiency judgment? [MR. ASHBY]: I think it was discovered that there was no proceeds left there to do so. [MR. SHAKIBA’S COUNSEL]: Did you request a deficiency judgment against the borrowers in that proceeding? [MR.

ASHBY]: I would have to yield to counsel. I am not sure. After appellant rested, Mr. Shakiba’s counsel moved for judgment; the court denied the motion. Mr. Shakiba did not present evidence, and his lawyer renewed his motion for judgment, based on limitations.

Mr. Shakiba’s attorney argued: “There is no relevance to the Deed of Trust.” He maintained that, because the Note matured on May 1, 2002, suit was untimely, as it was instituted beyond the three-year limitations period in C.J. § 5-101. Further, he insisted that the twelve-year limitations period did not apply under C.J. § 5-102, because the Note was not signed under seal. Mr. Shakiba’s counsel argued: The Maryland law is clear, and the Maryland law has been clear for many, many years, that that recitation in the document under the witness part or any recitations in the document ... without a seal is insufficient to render the contract into a speciality pursuant to Maryland law. Appellant’s counsel responded: “[W]e have sued on the note and the Deed of Trust.” Observing that the Note contained the words “signed, sealed and delivered.” Wellington’s counsel claimed that the Note was, in fact, executed under seal.

He also claimed that the suit was brought on a specialty. By Order dated April 3, 2007, the court issued an “Order” entering judgment in favor of appellees, as well as a “Memorandum Opinion.” In its Opinion, the court found that appellant’s cause of action “began to accrue on May 1, 2002, the maturity date of the Note.” The court reasoned that the Note was not a document under seal, and therefore appellant was not entitled to the twelve-year limitations period set forth in C.J. § 5-102. Rather, the court was of the view that the case ⁵⁸⁷ was governed by the three-year limitations period contained in C.J. § 5-101. Because appellant did not file its Complaint until October 12, 2005 — over five months after the expiration of the three-year limitations period — the court concluded that suit was barred by limitations.

The court explained: [Appellant] contends that Warfield [v. Baltimore Gas and Electric Co., 307 Md. 142 , 512 A.2d 1044 (1986) ] stands for the proposition that a document will be under seal so long as there is “some recognition” anywhere in the document that it is under seal. However, this contention would defeat the purpose of the seal being an additional affixation as an attestation by the signatory that the document has been executed. In Warfield, the specific issue was whether the word “(SEAL)” which “was printed at the end of each of the prepared lines on the form and appears after the signature of Warfield,” id. at 143 , 512 A.2d 1044 , was sufficient to make the document one under seal, where there was no recitation elsewhere that the document was under seal. The important factual distinction between Warfield and the case at bar is that the word “seal” appeared after the signature line in Warfield, and not in the body of the document.

Furthermore, the Court cannot ignore the fact that the Note was not witnessed. This is not insignificant when the words Plaintiff contends act as a seal, “witness the following hand and seal,” are followed by blank witness lines in addition to the Defendants’ signatures which do no have any additional indication of a following seal. In other words, the non-existent seal was not witnessed according to the Note in evidence. In addition, the court rejected appellant’s claim that, “because there is a deed of trust indisputably under seal, which secures the repayment of the debt evidenced by the Note, ‘the note is [also] under seal because it evidences such an intent and because it is referenced and incorporated into the deed of trust which is under seal.’ ” It reasoned: ⁵⁸⁸ This Court finds that the Goodwin case [i.e., Goodwin and Boone v. Choice Hotels Int’l, Inc., 346 Md. 153 , 695 A.2d 168 (1997),] does not support the Plaintiffs argument that the deed of trust, a separate and independent instrument, although signed contemporaneously with and referenced by the Note, can transform the Note into a specialty.

In Goodwin, the substitute trustees specifically assumed the obligations and rights that were contained in the original unsealed document when they signed and legitimately sealed the new Assumption Agreement, which incorporated the old franchise agreement. The Assumption Agreement was not a separate and independent instrument, as is the case with the deed of trust and the Note in the case at bar. Lastly, the Court finds that the deed of trust is merely a lien instrument, securing the Note that evidences the debt. Outside of the limited context of foreclosure and the remedies set forth in Md. Rule 14-208, the deed of trust cannot serve as the foundation for the Plaintiffs action requesting a judgment based upon the debt evidenced by the Note.

Kirsner v. Cohen, et al., 171 Md. 687 , 190 A. 520 (1937). The court concluded: “Therefore, the Plaintiffs complaint based upon the debt owed on the Note is barred by the statute of limitations and shall be dismissed with prejudice.” DISCUSSION I. Appellant contends that if a deed of trust contains a covenant to pay the debt secured by the deed, an action at law may be brought directly on that instrument to recover the debt. According to Wellington, the Deed of Trust “specifically provides in numerous places more than one covenant in which the Appellees agree to repay the debt evidenced by the Note.” Moreover, appellant contends that limitations did not expire, because the Deed of Trust was executed under seal, for which ⁵⁸⁹ there is a limitations period of twelve years under C.J. § 5-102. Appellant argues: The statutory law is ... clear that in fact a deed of trust may be the basis for an action at law for breach of contract.

Rule 14-208(b) specifically provides that a secured party may file a motion for deficiency judgment if the net proceeds of sale are insufficient to satisfy the debt and accrued interest. This rule specifically provides for an in personam judgment against the debtor. The deed of trust is no different than any other contract and, as such, may be enforceable by its terms or by any legal means available to the enforcement of a contract in this state. The deed of trust in this instance is a contract under seal subject to the 12-year statute of limitations.

According to appellant, the fact that appellees also executed the Note “is in no way determinative of the lender’s rights.” Claiming that, under Maryland law, a mortgagee may use all of its remedies to collect an outstanding debt, appellant maintains that the Lender could “proceed either on the note or the deed of trust, so long as the deed of trust contains an explicit covenant to repay the indebtedness.” Appellant adds: “Such express covenant exists in this case.” Thus, appellant concludes that the Lender was entitled to sue directly on the Deed of Trust. Moreover, Wellington insists that it had twelve years to do so, dating from May 1, 2002, because the instrument was executed under seal. In response, Mr. Shakiba contends that appellant’s action “is not, nor can it be, an ‘action on’ the Deed of Trust.” Rather, Mr. Shakiba argues that the Deed of Trust was intended by the parties to create a security interest and, “by its terms, simply secures the land owned by the Defendants and provides a right of sale to the named Trustee.” He insists that the parties did not intend the Deed of Trust to function as a contract, because this would render the Note “superfluous ⁵⁹⁰ and indeed meaningless.” Moreover, appellee maintains that the Deed of Trust “is merely a ‘security instrument,’ and (other than the statutorily created action for a deficiency decree), there is no common law cause of action available to the beneficiary arising from the Deed of Trust.” According to Mr. Shakiba, appellant’s remedy with respect to the Deed of Trust was limited to a foreclosure action, coupled with the right, under Title 14 of the Maryland Rules, for a beneficiary to bring a deficiency action in the foreclosure proceeding. He maintains that the law “is very clear that the remedy in Rule 14-208, which was formerly codified in Art. 16 of the Maryland Code, has no application outside of the foreclosure context.” Mr. Shakiba continues: By the terms of Maryland Rule 14-208(b), which is the only proceeding relevant to the Deed of Trust, Appellant was required to file a motion for a deficiency judgment within three (3) years after the final ratification of the auditor’s report.

Accordingly, even where a deed of trust is under seal, a three (3) year statute of limitations applies to the claim for the debt. Again, as recognized by the Trial Court, the instant case is not a motion for deficiency judgment under Maryland Rule 14-208(b). Indeed, as testified by the Appellant’s witness, a foreclosure proceeding had been filed by a senior lender, but the witness was “not sure” whether the Appellant requested a deficiency judgment in that proceeding. (Emphasis added by appellee.) Claiming that this case “is not a foreclosure proceeding,” Mr. Shakiba insists that the Lender “cannot avoid the three (3) year limitation established by Maryland Rule 14-208(b) for a deficiency judgment, and Appellant has no additional common law claim based on the Deed of Trust for payment of the debt.” (Emphasis added by appellee.) Moreover, Mr. Shakiba observes that appellant cites no cases to support his contention that a suit on the debt underlying the mortgage is “ ‘an action on’ the mortgage.” (Emphasis added by appellee.) Rather, he contends that the cases cited by appellant “stand for the proposition that where a mortgage contains an ⁵⁹¹ affirmative covenant to pay the debt, that language can be received ‘as evidence of the indebtedness generally.’ ” (Emphasis added by appellee.) To be sure, this case does not involve a foreclosure proceeding or other equitable action.

Instead, it involves an action at law initiated by appellant to enforce either the Note or the Deed of Trust, as contracts, and to obtain a remedy at law— monetary damages. The question is whether the Deed of Trust constitutes an enforceable contractual obligation. A “contract” is “ ‘a promise or set of promises for breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.’ ” Kiley v. First Nat’l Bank of Md., 102 Md.App. 317, 333 , 649 A.2d 1145 (1994) (quoting Richard A. Lord, 1 Williston on Contracts, § 1:1, at 2-3 (4th ed.1990)), cert. denied, 338 Md. 116 , 656 A.2d 772 , cert. denied, 516 U.S. 866 , 116 S.Ct. 181 , 133 L.Ed.2d 120 (1995); see Goldstein v. Miles, 159 Md.App. 403, 427 , 859 A.2d 313 (2004). The interpretation of a written contract is generally a question of law, subject to de novo review.

County Comm’rs for Carroll County v. Forty West Builders, Inc., 178 Md.App. 328, 376 , 941 A.2d 1181 (2008); see Hill v. Cross Country Settlements, LLC, 402 Md. 281, 306-07 , 936 A.2d 343 (2007); Wells v. Chevy Chase Bank, F.S.B., 363 Md. 232, 250 , 768 A.2d 620 (2001); Auction & Estate Representatives, Inc. v. Ashton, 354 Md. 333, 341 , 731 A.2d 441 (1999). In the Deed of Trust, appellees covenanted to “promptly pay when due the principal of and interest on the debt evidenced by the Note and any prepayment and late charges due under the note.” The instrument defines appellees as “Borrower,” appellant as “Lender,” and states: “Borrower owes Lender the principal sum of FIFTY THREE THOUSAND ($53,000.00) DOLLARS).” These provisions, read together, constitute a specific, definite obligation on the part of appellees. The parties did not render this obligation unenforceable merely by reciting the same obligation in a second document, i.e., the Note. ⁵⁹² We are satisfied that the Note and Deed of Trust are separate, enforceable contracts. Although Wellington could not recover twice, it was entitled to seek repayment under either the Note or the Deed of Trust.

We explain. Mr. Shakiba would have us read out of the Deed of Trust appellees’ express covenant to repay the loan, so as to deny appellant the power to enforce the promises in that instrument. But, a guiding principle of contract construction requires that we “ ‘give effect to [the] plain meaning [of the agreement] and do not delve into what the parties may have subjectively intended.’ ” Eller v. Bolton, 168 Md.App. 96, 116 , 895 A.2d 382 (2006) (quoting Rourke v. Amchem Prods., Inc., 384 Md. 329, 354 , 863 A.2d 926 (2004)); see WFS Financial, Inc. v. Mayor and City Council of Baltimore, 402 Md. 1, 13 , 935 A.2d 385 (2007). We must also give “effect to every clause and phrase, so as not to omit an important part of the agreement.” Owens-Illinois, Inc. v. Cook, 386 Md. 468, 497 , 872 A.2d 969 (2005); see Bausch & Lomb v. Utica Mutual Ins.

Co., 330 Md. 758, 779 , 625 A.2d 1021 (1993). A determination that the Deed of Trust is contractual, and evidences appellees’ indebtedness, does not render the Note “meaningless,” or without effect, as appellee suggests; appellant could have timely pursued a suit on the Note. Although the Deed of Trust is, to some extent, cumulative as to the Note, the language the parties used in the instruments evidences their intent to create two separate documents to establish the same underlying obligation. Mr. Shakiba also seeks to distinguish this case from an ordinary contract action because of the technical meaning Maryland courts have assigned to the term “deed of trust.” He relies on a definition provided in Springhill Lake Investors Ltd. Partnership v. Prince George’s County, 114 Md.App. 420, 428 , 690 A.2d 535 (1997), in which the Court stated: “A deed of trust is a security device.

It transfers legal title from a property owner to one or more trustees to be held for the benefit of a beneficiary.” To this end, Mr. Shakiba emphasizes that deeds of trust “differ from technical mortgages in ⁵⁹³ their form and manner of execution and in the rights of the parties. ” Simard v. White, 383 Md. 257, 287-88 , 859 A.2d 168 (2004) (citing Richard M. Venable, The Law of Real Property and Leasehold Estates in Maryland 253-55 (1892) (emphasis added by Simard)). As a result, claims appellee, the cases cited by appellant are “irrelevant,” because they “stand for the proposition that where a mortgage contains an affirmative covenant to pay the debt, that language can be received ‘as evidence of the indebtedness generally.’ ... Furthermore, the mortgage cases have no applicability to a deed of trust.” 2 Mr. Shakiba’s bright line distinction between mortgages and deeds of trust is not supported by Maryland law. The Court of Appeals has long observed: “For most purposes [a] deed of trust is a mortgage.” LeBrun v. Prosise, 197 Md. 466, 473-74 , 79 A.2d 543 (1951); see also Conrad/Dommel, LLC v. West Development Co., 149 Md.App. 239, 275 , 815 A.2d 828 (2003) (“deeds of trust that evidence a security interest are treated as mortgages.”).

In Manor Coal Co. v. Beckman, 151 Md. 102, 115-16 , 133 A. 893 (1926), the Court of Appeals asserted: “A deed of trust to secure a debt is in legal effect a mortgage. It is a conveyance made to a person other than the creditor, conditioned to be void if the debt be paid at a certain time, but if not paid that the grantee may sell the land and apply the proceeds to the extinguishment of the debt, paying over the surplus to the grantor. It is in legal effect a mortgage with a power of sale, but the addition of the power of sale does not change the character of the instrument any more than it does when contained in a mortgage. Such a deed has all the essential elements of a mortgage; it is a conveyance of land as security for a debt.

It passes the legal title just as a mortgage does, except in those states where the