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Tower Oaks Boulevard, LLC v. Procida

Court of Special Appeals of Maryland

October 2, 2014

TOWER OAKS BOULEVARD, LLC
v.
BRENT W. PROCIDA, ET AL. SUBSTITUTE TRUSTEES

Eyler, Deborah S., J., Nazarian, Salmon, James P. (Retired, Specially Assigned), JJ.

EYLER, DEBORAH S., J.

Tower Oaks Boulevard, LLC ("Tower Oaks"), the appellant, is a Virginia limited liability company that owned commercial real estate located at 2701 Tower Oaks Boulevard, in Rockville ("the Property"). 2701 Tower Oaks Boulevard Holdings, LLC ("TOB Holdings") held a deed of trust against the Property. Brent W. Procida and Laura S. Bouyea, the appellees, were appointed by TOB Holdings as substitute trustees under the deed of trust.

On October 22, 2012, in the Circuit Court for Montgomery County, the substitute trustees commenced an action against Tower Oaks to foreclose on the deed of trust for the Property. Tower Oaks filed a motion to stay and dismiss. The court granted a temporary stay but, after an evidentiary hearing, lifted the stay and denied the motion. Tower Oaks noted this interlocutory appeal, in which it asks whether the court's ruling was in error. We shall affirm the order.

FACTS AND PROCEEDINGS

On March 19, 2007, TOB, Inc., an entity related to Tower Oaks, borrowed $9.1 million dollars from CWCapital, LLC ("CW"), and executed a promissory note guaranteed by Tower Oaks. (Unless it is necessary to do otherwise, we include TOB, Inc., when we reference Tower Oaks.) As security for the loan, Tower Oaks granted CW a deed of trust against the Property. The promissory note and the deed of trust were assigned several times to various lenders, the last of which was TOB Holdings.

The sole Member of Tower Oaks is Oak Plaza, LLC ("Oak Plaza"), a Maryland limited liability company. Oak Plaza's Operating Agreement states that its purpose is "to acquire and hold all outstanding membership interests in Tower Oaks LLC and, through Tower Oaks LLC, to buy, sell, own, hold, develop, lease, manage, subdivide, and otherwise deal in and with the . . . Property and to do any and all things necessary, convenient, or incidental to that purpose."

Oak Plaza was formed on January 11, 2001. Its original Members were five siblings in the Buckingham family, who owned the following percentages of the company: Thomas and Daniel, 26% each; and Susan, Richard, and David, 16% each. Their father, John Buckingham, was designated the Manager of the company in the Operating Agreement, but was not a Member. An amendment to the Operating Agreement in February of 2007 made John a Member, with a 1% interest. The other Members' interests were reduced accordingly (Thomas and Daniel, 25.8% each; Susan, Richard, and David, 15.8% each).

John also was the Manager of Tower Oaks under its Operating Agreement. For many years, he managed both companies. As we shall discuss below, the Tower Oaks Operating Agreement authorizes its Manager to carry out the business of the company but requires that "Major Decisions" be made "by written instrument of Members representing a majority of Membership Interests." Among these "Major Decisions" is any decision "to compromise, settle or submit to arbitration, and to institute, prosecute, and defend any and all actions in favor of or against [Tower Oaks] or relating to its businesses."

The Oak Plaza Operating Agreement, by contrast, gives the Manager extremely broad authority and discretion to act on behalf of the company and make decisions affecting it. That Operating Agreement contains a succession plan for the position of Manager. The plan provides that John will act as Manager until his death or resignation, at which time Thomas, Daniel, and Elizabeth Buckingham (John's wife and the mother of the siblings) "shall jointly become the Manager (with all Manager decisions to thereafter be made by majority vote of these three (3) individuals, or in such other manner as they may among themselves determine to be appropriate.)." (The Manager of Oak Plaza need not be a Member.)

John developed dementia and became unable to function mentally. On January 13, 2011, the Circuit Court for Montgomery County issued an order appointing Elizabeth and David co-guardians of John's person and David guardian of his property, without limitation. David's guardianship authority included the power to act in John's stead as Manager of Tower Oaks and Manager of Oak Plaza.

Tower Oaks defaulted on its obligations under the promissory note, and in November of 2011, in the Circuit Court for Montgomery County, the substitute trustees, acting under the deed of trust held by TOB Holdings, commenced a foreclosure action against the Property (sometimes referred to as "the first foreclosure action"). The Property was sold at foreclosure on November 28, 2011. On December 19, 2011, David, with the agreement of Thomas, Richard, and Susan, retained the law firm of Gleason, Flynn, Emig and Fogleman ("GFEF") to defend Tower Oaks in the foreclosure action. Through GFEF, Tower Oaks filed exceptions to the foreclosure sale. Eventually, the substitute trustees agreed to set the sale aside and dismiss the foreclosure action without prejudice. On July 30, 2012, the court entered a consent order to that effect.

In the meantime, on December 7, 2011, Elizabeth died.

On August 14, 2012, David, acting as Manager of Oak Plaza and purportedly acting pursuant to a provision of the Oak Plaza Operating Agreement by which each Member makes the Manager his or her attorney-in-fact, signed a "Second Amendment to Operating Agreement of Oak Plaza, LLC" ("Second Amendment") individually, and on behalf of Thomas and Daniel, as their attorney-in-fact. Richard and Susan personally signed the Second Amendment. As written, the Second Amendment changed the line of managerial succession in the Oak Plaza Operating Agreement, removing Thomas and Daniel and replacing them with Richard, Susan, and David. Thomas and Daniel were not aware of the Second Amendment.

John died on October 17, 2012. Five days later, on October 22, 2012, the substitute trustees again brought a foreclosure action against Tower Oaks regarding the Property (sometimes referred to as "the second foreclosure action"). A sale of the Property was scheduled for November 13, 2012.

On November 9, 2012, Tower Oaks, represented by GFEF, filed a motion to stay and dismiss the second foreclosure action, under Rule 14-211(a). Such a motion "shall . . . state with particularity the factual and legal basis of each defense that the moving party has to the validity of the lien or the lien instrument or to the right of the plaintiff to foreclose in the pending action." Id . If the court grants a temporary stay, it shall then conduct a merits hearing, after which, unless it finds good cause to the contrary, it shall grant the motion if it finds that the moving party has established that the lien or lien instrument is not valid or has established that the plaintiff did not have a right to foreclose. Md. Rule 14-211(e). The court shall deny the motion if it finds otherwise. Id.

In its motion, Tower Oaks "dispute[d] and challenge[d the] plaintiffs' right to foreclose against the Property." It did so based on allegations it had made in a pending civil action it had brought, together with TOB, Inc., Oak Plaza, and John (soon before his death), against TOB Holdings and prior holders of the promissory note ("the Lenders"), and Ronald Cohen Investments, Inc., and Ronald Cohen Management Company, both tenants of the Property ("the Tenants") ("the civil action"). In the civil action, Tower Oaks made claims for tortious interference with contractual relations, civil conspiracy, aiding and abetting, abuse of process, breach of contract, conversion, unjust enrichment, constructive fraud, and breach of an indemnification agreement. The gist of the allegations was that the Lenders, most prominently TOB Holdings, had conspired with the Tenants to have the Tenants not pay their rent for the Property, which would deprive Tower Oaks of the income necessary to make the payments on the promissory note secured by the Property, put the loan in default, and result in foreclosure.

Also on November 9, 2012, the substitute trustees filed an opposition to the motion to stay and dismiss. They stated that the total amount due on the loan, which had been accelerated upon default, was over $9.8 million. They pointed out that in the civil action Tower Oaks had acknowledged the promissory note and deed of trust, that payment on the promissory note was in default, and that the loan had been accelerated. They emphasized that, pursuant to Rule 14-211(a)(3)(B), a motion to stay and dismiss a foreclosure action must "'state with particularity the factual and legal basis of each defense that the moving party has to the validity of the lien or the lien instrument or to the right of the plaintiff to foreclose in the pending action.'" (Emphasis in opposition filed by substitute trustees.) They argued that Tower Oaks's motion to stay and dismiss was legally deficient, as it did not present a defense to the validity of the lien or to the right of the lien holder to foreclose. The substitute trustees stated:

The Complaint [in the civil action] seeks a money judgment, an accounting and the imposition of a constructive trust. It does not contest the validity of the lien or the right of TOB Holdings to foreclose. On the contrary, the Complaint [in the civil action] confirms the validity of the Deed of Trust and the default.

Still on that same day, the court held an expedited hearing on whether to issue a temporary stay of the upcoming foreclosure sale. The court granted the temporary stay, scheduled a merits hearing on the motion to stay and dismiss for January 3, 2013 (which later was moved to January 10, 2013), and ordered Tower Oaks to post a bond by 2:00 p.m. on November 13, 2012, in the amount of $95, 030.52 "as security for payment of advertising fees, cancellation fees, and the December, 2012, and January, 2013 payments of principal and interest." Instead of posting a bond, Tower Oaks paid that sum of money into court.

On January 9, 2013, the day before the hearing, the substitute trustees filed a "trial brief, " in which they argued for the first time that Tower Oaks's "appearance in th[e second foreclosure] action" was "improper" because its defense in that action had not been authorized in accordance with the Operating Agreements of Tower Oaks and Oak Plaza. The substitute trustees reasoned as follows. Whether Tower Oaks would defend itself in the second foreclosure action was a "Major Decision" of that company that, according to its Operating Agreement, had to be made by a majority of its Members. Because Oak Plaza was the only Member in Tower Oaks, that "Major Decision" was its to make. Per Oak Plaza's Operating Agreement, the authority to make that decision rested with its Manager, not its Members. Also per the Oak Plaza Operating Agreement, upon John's death Thomas and Daniel became the Manager, jointly, of Oak Plaza. Therefore, only they had the authority to decide whether Tower Oaks should defend itself in the second foreclosure action, and, if so, to take steps to do so. Thomas and Daniel had not made any decision or taken any action on that issue, however. Only David, who, not being the Manager of Oak Plaza, did not have the power to make that decision and take action on it, had done so. Accordingly, the motion to stay and dismiss, filed at David's request, was not authorized by Tower Oaks and had to be denied.

The substitute trustees also argued, as they had at the hearing on the temporary stay, that Tower Oaks could not show that the lien or lien instrument were invalid or that TOB Holdings did not have the right to foreclose on the Property.

The hearing went forward on January 10, 2013, and largely was devoted to the issue of David's authority vel non to cause Tower Oaks to defend itself in the second foreclosure action. The substitute trustees argued, as explained above, that because Thomas and Daniel did not authorize the hiring of counsel or the filing of the motion to stay and dismiss, the court had no option but to deny the motion. Mr. Fogleman (of GFEF), arguing on behalf of Tower Oaks, offered three reasons why David had been authorized to decide whether Tower Oaks would defend itself in the second foreclosure action and to take action to launch a defense: 1) David's guardianship power to act as Manager of Oak Plaza in John's place extended beyond the time of John's death, at least for a short period that encompassed the decision to defend Tower Oaks in the second foreclosure action (filed on October 22, 2012, five days after John died); 2) when GFEF was retained to represent Tower Oaks in the first foreclosure action, before John's death, the scope of the retention was to defend Tower Oaks in all foreclosure actions brought against it regarding the Property, which ultimately included the second foreclosure action; and 3) the Second Amendment to Oak Plaza's Operating Agreement removed Thomas and Daniel from the line of managerial succession and replaced them with David, Susan, and Richard, who in fact authorized the defense of Tower Oaks in the second foreclosure action.

The substitute trustees called Thomas and Daniel as witnesses. Thomas testified that he had served as the Assistant Manager of Tower Oaks until around the time David was appointed guardian of John's property. He did not sign the Second Amendment to the Oak Plaza Operating Agreement. He had consented to and authorized GFEF's representing and defending Tower Oaks in the first foreclosure action, in November 2011, and had discussed the matter with Mr. Fogleman then and in March of 2012. No one had discussed the second (pending) foreclosure action with him. When asked by the court whether he was authorizing David to proceed to take steps to defend Tower Oaks in the second foreclosure action, including hiring counsel, Thomas said he would "give [his] permission" to David to "do this." Thomas further testified that he had assumed that the second foreclosure action was a "continuation" and "followup" to the first foreclosure action, involving the same Property and the same loan. It was his view at the time of the hearing (January 10, 2013), as it had been in the Fall of 2011, that it was a "good idea" for Tower Oaks to contest the foreclosure action.

Daniel testified that he had had no involvement in any matter having to do with the Property since 2009. He was not aware of the first foreclosure action and sale (later vacated) in 2011, and had not been informed of any decisions made or actions taken by David, or by anyone, regarding Tower Oaks's defense to that foreclosure action or to the second (pending) foreclosure action. He did not sign the Second Amendment to the Oak Plaza Operating Agreement, regarding the succession plan. As of the present (January 10, 2013), he did not have sufficient information to say whether he would have authorized Tower Oaks's defense in the second (pending) foreclosure action had he been asked.

Mr. Fogleman read into the record the engagement letter of December 19, 2011, between GFEF and Tower Oaks. The letter was signed by David. (We shall discuss its contents infra.) David then was called as a witness. He testified, in pertinent part, that in the Fall of 2011, when he was acting as guardian of John's property and therefore Manager of Oak Plaza and Tower Oaks, he had engaged GFEF to defend Tower Oaks in the first foreclosure action, which was then pending, and in any future foreclosure action concerning the Property.

David further testified that Daniel had not communicated any inclination against defending Tower Oaks in the second foreclosure action or against retaining GFEF to represent Tower Oaks in that action. David stated that, when it came time to decide how to defend Tower Oaks in the second foreclosure action, he consulted with Mr. Fogleman and executed the affidavit attached to the motion to stay and dismiss. He had been aware in August of 2012 (before John's death) that the substitute trustees were planning to file a second foreclosure action against the Property. Mr. Procida, one of the substitute trustees, had told him then that a foreclosure sale of the Property likely would be scheduled for a date in September of 2012. According to David, that was when he decided in favor of defending Tower Oaks in the second foreclosure action, even though it had not yet been filed, and he made that decision by exercising his authority as Manager of Oak Plaza, in John's stead.

The court ruled from the bench. It determined that, under Md. Code (2001, 2011 Repl. Vol.), sections 13-220 and 13-221 of the Estates and Trusts Article, David's guardianship of John's property ceased upon John's death, and after that date David had no power to act as Manager of Oak Plaza. It further determined that the engagement letter did not change this, and did not authorize a defense of Tower Oaks in an action commenced after John's death. The court also found that the Second Amendment to Oak Plaza's Operating Agreement, purporting to change the managerial succession plan for that company, did not come "close to complying with the law" because the Operating Agreement required an amendment of that significance to be made by the Members of Oak Plaza personally, not by means of a power of attorney. Because Thomas and Daniel did not give their consent to amend the Operating Agreement to change the line of managerial succession, no change was effected. Upon John's death, they became the Manager of Oak Plaza, jointly (Elizabeth having already died).

Although it had ruled that the motion to stay and dismiss had to be denied because it was not authorized by Tower Oaks, the court discussed the substance of the motion, and whether the facts alleged in the civil action, if true, could establish that TOB Holdings, and through it the substitute trustees, did not have the right to foreclose on the Property. The judge observed:

[T]he defendant in the foreclosure action has a preexisting duty to pay that money, and if there was some reason that it was deprived of its funds, it seems to me that an action for damages might lie -- I don't suggest that it does or doesn't -- but that would be the appropriate remedy for someone who says, "I couldn't pay because basically you took my money away."
And I recognize this is an equitable action and the unclean hands doctrine applies. I'm still reluctant to conclude that the relief that a person of, whose property was being foreclosed would have would be to say, you know, "You've caused this, " because I don't think the language of [Rule] 14-211(a)(3)(B) refers to that. I think it rather refers to the legal right of the plaintiff to foreclose, and whether he was not the proper note-holder or there was some imperfection in the deed . . ., I think that's what that refers to.

The judge further commented: "I don't really think, even assuming that [Tower Oaks] put on its case here and I said, 'You know what, the reason you didn't pay this was because they deprived you of your ability to do so, ' I don't think that falls within the provisions of the rule. I don't think that's what is contemplated by the rule."

That same day, the court issued and docketed an order lifting the temporary stay that had been entered on November 9, 2012. On January 22, 2013, Tower Oaks filed a motion to alter, amend, or revise judgment, and request for hearing, which was denied by order entered on ...


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