Capital Finance, LLC v. Rosenberg (Maryland U.S.D.C.)

Filed:  January 23, 2019

Opinion by:  Richard D. Bennett

Holding:  The word “and” in a “bad boy” guaranty agreement may require a disjunctive reading of the provision due to the character of the contract when the language is unambiguous and when a conjunctive reading would render the guaranty meaningless, even if a conjunctive reading of the provision is theoretically possible.

Facts:  On July 1, 2015, a lender (the “Lender”) entered into a Credit and Security Agreement and a Note with a group of skilled nursing facilities and long term hospitals (the “Borrower”) controlled by two individuals (the “Guarantors”) who personally guaranteed the financing.  As a condition precedent to the financing, a Guarantor submitted Borrowing Base Certificates that warranted the facilities had paid all payroll taxes.  The Credit Agreement required the Borrower to deposit proceeds into bank accounts by a Deposit Account Control Agreement (the “DACA”).  The Guarantors executed “bad boy” guaranties, “which required them to satisfy all outstanding obligations” upon the Borrower’s commission of fraud or illegal acts. 

The Borrower failed to pay payroll taxes, triggering the guaranties.  The Borrowing Base Certificates falsely represented that Borrower had paid these taxes.  Between December 2016 and January 2017 the terms of the Credit Agreement were further violated when payments were diverted from DACA-controlled accounts to an account that was not controlled by the Lender.  

Section 1(d) of the guaranties provided the following: 

Notwithstanding any provision herein to the contrary, Agent acknowledges that this Guaranty and the Guaranteed Obligations hereby shall only be applicable and enforceable against the Guarantor in the event that: (a) Borrower colludes with other creditors in causing an involuntary bankruptcy or insolvency proceeding involving any of the Credit Parties in an effort to circumvent, avoid or impair the rights of Agent or the Lenders, (b) a voluntary bankruptcy filing by Borrower to the extent that a court of appropriate jurisdiction determines that such filing was made otherwise than in accordance with applicable law, and (c) any act of fraud or other illegal action taken by Borrower or any Credit Party in connection with the Credit Agreement or any other Financing Document.  [emphasis added]

On June 8, 2018, the Lender demanded payment from the Guarantors under the guaranties.  The defendants argued that all three events listed in Section 1(d) of the guaranties must have occurred to trigger liability pursuant to the guaranties. 

Analysis:  “To prevail on a claim for breach of contract under Maryland law, a party must prove the existence of a contractual obligation, a material breach of that contractual obligation, and resulting damages.”  A court does not need to consult extrinsic evidence when a contract is unambiguous.  Maryland law, as provided in Bankers & Shippers Ins. Co. v. Urie, recognizes that the word “and” may require a “disjunctive reading in light of the character of the contract.”  After finding that Section 1(d) of the guaranties is not ambiguous, the court stated that the guaranties would be rendered meaningless if the defendants’ argument held.  “A bad boy guaranty which remains unenforceable until Borrower engages in an implausible triad of egregious conduct, any one of which would seriously inhibit the lender’s access to collateral, does not provide this sort of incentive – it is not a guaranty at all.”  While the defendants’ interpretation of the guaranties is possible – a single entity may undergo voluntary and involuntary bankruptcy proceedings – it is not the reading of a reasonable person. The court found that each of (i) failing to pay payroll taxes and (ii) submitting false Borrowing Base Certificates constituted fraud and provided a base for liability under the guaranties.  

The court also stated that the “No Waiver” section of the Credit Agreement and the “Guaranty Absolute” provision of the guaranties precluded “affirmative defenses of equitable estoppel, waiver, release, and laches.”

The full opinion is available here in PDF.  

Maryland Financial Bank v. Congressional Bank (Cir. Ct. Mont. Cnty)

Filed: May 17, 2018

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.

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. 

Full text of opinion available here.

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.

Suntrust Bank v. Goldman (Ct. of Special Appeals)

Filed: September 30, 2011
Opinion by: Judge James R. Eyler

Held: The prevailing party in a suit for breach of a line of credit agreement may only be awarded attorneys' fees in the amount of fees actually incurred (including future fees that can be proven with certainty), notwithstanding contract language allowing for recovery of a greater sum measured as a percentage of the principal loan amount.

Facts: A borrower entered into a line of credit agreement with a bank. The agreement contained a clause that stated that the borrower would be responsible to pay any costs of collection for failure to pay on the loan, including 15% of the principal as attorneys' fees or reasonable attorneys' fees. The borrower defaulted and the bank sued. The borrower failed to answer, and the trial court awarded the bank an order of default for the principal amount due and interest. The bank also asked the court for attorneys' fees in the amount of $60,206.00, or 15% of the principal. The court denied this request and only awarded attorneys' fees in the amount of $3,258.30, or the actual fees incurred to date plus costs. The bank filed a motion to revise judgment to award attorneys' fees as provided in the contract, which the trial court denied. The bank appealed.

Analysis: The Court of Special Appeals affirmed.

The bank argued that it sought the 15% fee to cover actual fees, as well as fees it may incur in the future as a result of efforts to enforce the judgment. The bank pointed out that if it were denied that fee, it would not be able to sue to enforce the provision after final judgment due to the doctrine of merger.

The Court stated that attorneys' fee provisions are in the nature of indemnity agreements. The Court explained that "Maryland law limits the amount of contractual attorneys fees to actual fees incurred, regardless of whether the contract provides for a greater amount." The Court distinguished this case from Webster v. People's Loan, Sav. & Deposit Bank of Cambridge, 160 Md. 57 (1976) that contained language by the Court of Appeals that supports the bank's claim for the 15% attorneys' fee then later crediting the appellees with the amount of fees not actually incurred. This Court distinguished Webster because it dealt with a judgment by confession when confessed judgments were entered by the clerk of the court based on the terms of the underlying note. Now, the Court explained, the procedure is different. Md. Rule 2-611, amended in 2010, includes a new section (b) which "requires a court to review a confessed judgment for factual and legal validity before the clerk may enter the judgment." Therefore, judicial review of confessed judgment is now done at the outset where the reviewing court can make a determination as to the reasonableness of the attorneys' fees.

The bank explained that it should be able to claim un-incurred fees, subject to later credit because the merger doctrine does not allow a party to seek post-judgment requests for attorneys' fees for which the court has already entered judgment. The Court discusses various ways to avoid the merger bar, including for the parties to state their intent in the contract that the fee provision shall not merge into the judgment (without specifying how this would be done).

The Court concluded that in order to collect both incurred fees and future fees, the requesting party will need to put on evidence of fees that it will certainly incur in the future, as well as those fees actually incurred at that time, as long as they are reasonable. Because the bank presented no evidence as to any agreement to pay attorneys' fees other than on an hourly basis and no evidence to provide fees certain to be incurred in the future, the Court concluded that the trial court had properly awarded only incurred attorneys' fees to the bank.

The full opinion is available in pdf.