Knight v. Manufacturers & Traders Trust Co. (Maryland U.S.D.C.)

Filed: February 4, 2015

Opinion by: James K. Bredar

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.

The full opinion is available in PDF.

Pease v. Wachovia SBA Lending, Inc. (Ct. of Appeals)

Filed: October 21, 2010
Opinion by Judge J. Harrell

Held: In vacating the Circuit Court’s decision, the Court of Appeals held that the Maryland Credit Agreement Act (Courts & Judicial Proceedings 5-408(b)) does not bar the Circuit Court from considering negligence, fraud and breach of a fiduciary duty so long as the claims are not attempting to enforce either an oral credit agreement or oral modification of an existing loan agreement.

Facts: The Appellants sold a plumbing business in Virginia, relocated to Maryland, purchased a home and entered the market to purchase another plumbing business. After identifying a potential target, the Appellants elected to finance the acquisition using a SBA loan provided by the Appellee. With the goal of protecting their house from any possible foreclosure arising from the commercial loan, the Appellants also created two legal entities, one to own their house and the other to own their business.

Upon alleged advice from Appellee’s agent, the Appellants also reduced the equity in their house to an amount less than twenty-percent by encumbering their home with a home equity line of credit with the Appellee. The Appellants also learned on or around closing that the target business had weaker financials than originally contended, and alleged that the Appellee withheld certain negative financial information from them until after settlement.

Settlement of the purchase took place in August 2005, and the Appellants signed the loan agreement, including a confessed judgment clause and a guarantee secured by their house. In November of 2007, Appellants defaulted on the commercial loan, and Appellee accelerated the loan and instituted proceedings. The Circuit Court for Baltimore City entered and indexed confessed judgments against both of the Appellants’ business entities in January of 2008.

The Appellants filed a motion to open, modify, or vacate the confessed judgments in April of 2008, asserting allegations of negligence, fraud, and breach of fiduciary duty. Appellants asserted that Appellee and its agent verbally misrepresented that this “artificial loan” would safeguard their home from foreclosure if they defaulted under the SBA loan, and that these statements were made to induce them into executing the SBA loan. Appellee argued Appellants’ defenses were barred by the Maryland Credit Agreement Act.

At the hearing, the Appellants argued that if the confessed judgment were vacated, they would seek to void the SBA loan and pursue the tort claims using the same facts. The hearing judge denied the Appellants’ motion on the basis that the Maryland Credit Agreement Statute barred their claims. Appellants appealed to the Court of Special Appeals. The Court of Appeals granted certiorari before the intermediate appellate court could decide the appeal.

Analysis: The Court after reviewing that Legislative History held that the Maryland Credit Agreement Act is intended to act as a statute of frauds for loan agreements, and accordingly, the Act would bar any of the Appellants’ counterclaims attempting to enforce either an oral credit agreement or a verbal modification of an existing loan agreement.

Applying the Courts holding to the Appellants’ counterclaims of negligence, fraud, and breach of fiduciary duty, the Court held that such claims were not attempting to enforce a verbal agreement to borrow or to modify an existing agreement, but did constitute an attempt to obtain a set-off against any recovery by the Appellee.

Applying the Courts holding to the Appellants’ attempt to void the loan agreements based on the same facts used in the tort claims, the Court found that this maneuver is the type that the Maryland Credit Agreement Act was intended to prevent. The Court found that the parol evidence in the current case, while not an attempt to enforce an oral credit agreement, was an attempt to enforce a verbal modification to an existing credit agreement by not enforcing the guaranty.

The Court of Appeals vacated the judgment of the Circuit Court and remanded to the court for consideration not inconsistent with the Court’s decision.

The full opinion is available in pdf.