Holding: Under the Maryland Credit Agreement Act, Cts. & Jud. Proc., § 5-408, a borrower may not introduce extrinsic evidence to interpret ambiguities in a credit agreement where a claim for breach of contract is asserted as a means to directly defeat or attain modification of the credit agreement.
Facts: Plaintiffs obtained several loans from a bank secured by real property owned by plaintiffs. Within two years, the real property serving as collateral (the “property”) significantly declined in value and plaintiffs and the bank renegotiated the terms of the existing loans in a letter agreement. The letter agreement provided, among other things, that it was in the mutual interest of plaintiffs and the bank to have the property “engineered to obtain the highest and best use” and thus the bank agreed to pay for a market feasibility study and fifty-percent of reasonable costs for such engineering. Subsequently, the bank was placed into receivership and defendant purchased the bank’s assets, including the loans to plaintiffs. Neither the market feasibility study nor the re-engineering ever occurred and plaintiffs defaulted on the loans.
Plaintiffs alleged, among other things, that defendant breached the letter agreement because, during negotiations leading up to the letter agreement, the bank agreed to obtain the market feasibility study, not just pay for it. Plaintiffs did not allege, however, that the bank’s obligation had been reduced to writing. Defendant filed a motion to dismiss the claim.
Analysis: Applying an objective standard of contract interpretation, the Court found the letter agreement ambiguous as to which party was responsible for obtaining the market feasibility study. Further, the letter agreement was subject to the Maryland Credit Agreement Act, under which extrinsic evidence is barred in a dispute about a credit agreement if the borrower asserts a claim as a means to directly defeat or attain modification of the agreement. The court noted that extrinsic evidence nevertheless may be considered by a court if the borrower asserts a claim “notwithstanding the implicitly conceded enforceability” of the agreement, such as any claims that would serve as a set-off against any judgment. The Court found that plaintiffs’ allegations of the verbal agreement between them and the bank would modify the terms of the letter agreement and thus the Maryland Credit Agreement Act barred the Court from considering such evidence.
Although the letter agreement implied that when it was drafted, all parties expected a market feasibility study to take place, the Court found no evidence that either plaintiffs, the bank or defendant made an undertaking to obtain such study. This silence defeated plaintiffs’ allegations that defendant breached a contractual obligation and therefore the Court dismissed plaintiffs’ breach of contract claim against defendant.
In a footnote, the Court points out that if plaintiffs had alleged the bank promised to obtain the market feasibility study in writing, the court would face a “radically different” question, and such evidence would likely be considered in resolving the ambiguity in the letter agreement.