Opinion by:
Judge Anne K. Albright
Holding:
Assignment of key obligations undertaken by a party to a contract containing an
anti-assignment provision or other protective provision in favor of the
non-assigning party is invalid and unenforceable if such assignment is made
without the consent of the non-assigning party.
Facts:
American Bank (“American”) originated a loan that was secured by a first lien
against real property (the “Loan”). American simultaneously entered into
a participation agreement with Maryland Financial Bank (“MFB”) entitling MFB to
an undivided 50% interest in everything arising from or out of the Loan and
Loan documents. The participation agreement provided that, among other things,
American could not make material changes to the terms of the Loan without MFB’s
consent or assign its obligations or duties as servicer of the Loan without
MFB’s consent, but American could sell additional participations in the Loan
(provided such action would not adversely affect the rights of MFB), control
the course of action upon a Loan default after consulting MFB, and service the
Loan. MFB simultaneously sold a majority of its participation interest to
National Bank of Cambridge, which later became 1800 Bank (“1800”).
American began to effect a plan of merger with Congressional Bank, during which time American declared a default on the Loan and, with the assistance of Congressional, assigned all of American’s right, title and interest in the Loan to Democracy Capital Corporation (“Democracy”). Congressional continued servicing the Loan after assignment to Democracy. The assignment was made without MFB’s consent and, among other things, provided Democracy with a consent right before Congressional could take action upon an event of default and gave Democracy the right to terminate Congressional as the servicer. MFB filed suit against Congressional and Democracy claiming that, by assigning the Loan to Democracy, Congressional had violated the participation agreement; 1800 was joined as a necessary party and all parties countered seeking a declaration as to their respective rights. As part of a settlement agreement, Congressional transferred its servicing obligations to 1800 with MFB’s consent and over Democracy’s objections, and MFB, 1800 and Congressional dismissed their claims against each other; however, MFB, Democracy and 1880 were still seeking declaratory judgment as to 1880’s and Democracy’s rights and obligations relating to the Loan. Democracy argued that 1800 did not have standing to seek a declaratory judgment as it was not a party or third-party beneficiary of the assignment between Democracy and American/Congressional.
American began to effect a plan of merger with Congressional Bank, during which time American declared a default on the Loan and, with the assistance of Congressional, assigned all of American’s right, title and interest in the Loan to Democracy Capital Corporation (“Democracy”). Congressional continued servicing the Loan after assignment to Democracy. The assignment was made without MFB’s consent and, among other things, provided Democracy with a consent right before Congressional could take action upon an event of default and gave Democracy the right to terminate Congressional as the servicer. MFB filed suit against Congressional and Democracy claiming that, by assigning the Loan to Democracy, Congressional had violated the participation agreement; 1800 was joined as a necessary party and all parties countered seeking a declaration as to their respective rights. As part of a settlement agreement, Congressional transferred its servicing obligations to 1800 with MFB’s consent and over Democracy’s objections, and MFB, 1800 and Congressional dismissed their claims against each other; however, MFB, Democracy and 1880 were still seeking declaratory judgment as to 1880’s and Democracy’s rights and obligations relating to the Loan. Democracy argued that 1800 did not have standing to seek a declaratory judgment as it was not a party or third-party beneficiary of the assignment between Democracy and American/Congressional.
Analysis: As
an initial matter, the Court held that, because 1800 was a party to the
settlement agreement, it had standing to bring an action for declaratory
judgment. Applying the “cardinal rule of contract interpretation” to “give
effect to the parties’ intentions,” the court further held that the
assignment to Democracy of certain of American’s key obligations related to the
Loan violated the terms of the participation agreement. Although the
participation agreement gave American the right to sell participation interests
in the Loan on terms different from those in participation agreement with MFB,
American could not involve other participants in a manner that would adversely
affect the rights and obligations of MFB. After the assignment, not only
did Democracy have the same right as MFB to prevent Congressional from assigning
the servicing obligations, it could actually terminate Congressional as the
servicer; Democracy also had final say as to the course of action upon a Loan
default.
Democracy’s claim that the assignment of the servicing from Congressional to 1800 without Democracy’s failed because the court held that Democracy never had the right to consent to such assignment in the first place as the provisions of the assignment of the Loan to Democracy purporting to give Democracy the right to terminate Congressional as the servicer and withhold consent to any assignment by Congressional of its servicing obligations were invalid. Therefore, 1800, as the sole servicer of the Loan pursuant to the settlement agreement, was the only party who had the right to foreclose on the real property that had been mortgaged as collateral for the Loan.
Democracy’s claim that the assignment of the servicing from Congressional to 1800 without Democracy’s failed because the court held that Democracy never had the right to consent to such assignment in the first place as the provisions of the assignment of the Loan to Democracy purporting to give Democracy the right to terminate Congressional as the servicer and withhold consent to any assignment by Congressional of its servicing obligations were invalid. Therefore, 1800, as the sole servicer of the Loan pursuant to the settlement agreement, was the only party who had the right to foreclose on the real property that had been mortgaged as collateral for the Loan.
Full text of opinion
available here.