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Bank of Commerce v. Maryland Financial Bank

United States District Court, D. Maryland

March 2, 2015

BANK OF COMMERCE, Plaintiff,
v.
MARYLAND FINANCIAL BANK, Defendant.

MEMORANDUM OPINION

ELLEN LIPTON HOLLANDER, District Judge.

This case arises from a dispute concerning the interpretation of a loan participation agreement dated August 17, 2008 ("Participation Agreement" or "Agreement").[1] Bank of Commerce ("Commerce"), plaintiff, is the successor in interest to the original lender, Bank of the Eastern Shore ("BOES"). Maryland Financial Bank ("MFB"), defendant, is a loan participant with a 25% "Participation Interest." Commerce filed a "Complaint For Declaratory Judgment" against MFB, seeking a declaratory judgment pursuant to 28 U.S.C. § 2201 with respect to the parties' rights under the Agreement. See ECF 1, "Complaint."[2] In response, MFB filed an answer and a two-count counterclaim, similarly seeking a declaratory judgment (Count I), and also alleging breach of contract (Count II). ECF 5 at 4-10.

The parties have filed cross motions for summary judgment. Commerce's "Motion for Summary Judgment, " ECF 9, is supported by a "Memorandum of Law" (ECF 9-1, collectively with ECF 9, the "Commerce Motion") and exhibits. MFB's "Cross Motion for Summary Judgment and Response in Opposition to Bank of Commerce's Motion for Summary Judgment" is at ECF 11, supported by a "Memorandum of Law" (ECF 11-1, collectively with ECF 11, the "MFB Motion") and exhibits. The central dispute requires the Court to determine whether MFB is entitled to recover 25% of the outstanding balance on the loan initially made by BOES, amounting to $575, 691.28, as MFB claims, or, instead, 25% of the foreclosure sale proceeds, amounting to $348, 367.46, as Commerce contends.

The issues have been fully briefed, [3] and no hearing is necessary to resolve them. See Local Rule 105.6. For the reasons that follow, I will grant the Commerce Motion and deny the MFB Motion.

I. FACTUAL BACKGROUND

A. The Loan

On November 17, 2006, Bank of the Eastern Shore, located in Cambridge, Maryland, loaned $3, 000, 000 (the "Loan") to BSJ Partners, LLC ("BSJ"), a Maryland limited liability company, ECF 9-1 at 2, pursuant to the terms of a Building and Loan Agreement. See Limited Forbearance Agreement of May 4, 2011 at 1 ("Forbearance Agreement"), ECF 9-3 at 2. The Loan was for the purpose of acquiring and renovating "the Country Club property, " i.e., "133.78 acres of water front property, " including a clubhouse, golf course and swimming pool, located in Cambridge (the "Property").[4] Agreement at 2, ECF 9-2 at 3.[5]

In connection with the Loan, BSJ tendered a promissory note to BOES dated November 17, 2006 ("Note"). Agreement at 2, ECF 9-2 at 3. The Note was secured by a Purchase Money Deed of Trust and Security Agreement, recorded in the land records of Dorchester County at Liber 772, Folio 487. Forbearance Agreement at 1, ECF 9-3 at 2. The Property served as collateral for the Loan under the Deed of Trust, and "had an as-completed' appraised value of $4, 000, 000" as of November 1, 2006. Agreement at 2, ECF 9-2 at 3.[6]

Nearly two years later, on August 17, 2008, BOES and MFB entered into the Participation Agreement, by which MFB purchased a 25% interest in the Loan from BOES. Agreement § 1, ECF 9-2.[7] At the time of execution of the Agreement, the Loan had an outstanding balance of $2, 977, 877.21. Id. at 2, ECF 9-2 at 3. And, it was not then in material default. Id. § 14(d). MFB paid BOES $744, 569.30, which was 25% of the then existing Loan balance, for its purchase of a 25% "Participation Interest" in the Loan. Id. at 2, ECF 9-2 at 3. The Participation Interest ( i.e. the interest sold by BOES and purchased by MFB under the Agreement) is defined in Section 1 of the Agreement, ECF 9-2, in part as follows:

Subject to the terms and conditions of this Agreement, ... MFB hereby agrees to purchase and acquire from OB, [8] title to an undivided interest and participation in the Loan as described below, and in any and all documents now or hereafter executed in connection with the Loan (collectively, the "Loan Documents") together with title to an undivided interest in any and all security interests or other liens which OB has (or will have) in or to any personal or real property collateral to secure the Loan (the " Collateral ") and all direct and indirect proceeds of such Collateral (collectively, the " Participation Interest ").

In 2011, BOES extended additional credit to BSJ, which was also secured by a lien on the Property. See Affidavit of Andrew J. Hines, former Executive Vice-President and Chief Credit Officer of MFB ("Hines Affidavit"), ECF 11-3 ¶ 4. In his capacity as Chief Credit Officer, Mr. Hines "was responsible for overseeing" the Loan in question. Id. ¶ 3. According to Hines, "In 2011, pursuant to the Agreement and the existing Deed of Trust, BOES requested permission from MFB to place a second lien" on the Property, which was a subordinate lien. Id. ¶ 4. He avers that MFB sought "confirmation from BOES that any foreclosure of the property owned by BSJ would result in MFB getting paid its participation interest first from proceeds of any foreclosure sale." Id. ¶ 5.

In response, Mr. Hines received an email of October 26, 2011, from Joe Markley, a representative of BOES. Id. ¶ 6; Markley email of October 26, 2011 ("Markley Email"), ECF 11-3 at 3.[9] Attached to the Markley Email was an undated letter from Harold Robbins, then President of BOES. ECF 11-3 at 4 ("Robbins Letter"). In the Robbins Letter, Mr. Robbins referenced "Loan Number - XXXXXXXXX"[10] and stated, in part, id.:

This letter is to affirm the Bank of Eastern Shore has agreed to remit all proceeds on a FIRST OUT BASIS to MFB if the above loan (collateral) is obtained as a consequence of a foreclosure proceeding by BOES. This condition is contained in the Participation Agreement, dated August 17, 2008, Section 9(b), Default by the Borrower.

Mr. Hines alleges that the Markley Email and the Robbins Letter "confirm[ed], " in the event of foreclosure, BOES's "obligation to pay MFB its interest in the BSJ loan on a first out basis pursuant to the terms of the Agreement." Hines Affidavit ¶ 6, ECF 11-3. Mr. Hines also contends: "MFB would not have approved the extension of additional credit to BSJ and the additional lien on the BSJ property without that confirmation from BOES." Id. ¶ 5, ECF 11-3.

B. Borrower Default and Foreclosure Sale

At some point prior to May 2011, the Loan went into default. Forbearance Agreement §§ H, I, ECF 9-3; ECF 9-1 at 4. Although BSJ made various efforts to cure the default, such as entering into the Forbearance Agreement of May 4, 2011, ECF 9-3, the Loan remained in default. ECF 9-1 at 4.

In the meantime, the Maryland Commissioner of Financial Regulation closed BOES on April 27, 2012, id. at 4, and the Federal Deposit Insurance Corporation ("FDIC") was appointed as Receiver. Insured Deposit Purchase and Assumption Agreement of April 27, 2012 ("Deposit Agreement"), ECF 9-4 at 6. Pursuant to its authority as Receiver of BOES, on October 5, 2012, FDIC sold and assigned "all right, title and interest" in the Loan to Commerce. See Bill of Sale of October 5, 2012 ("Bill of Sale"), ECF 9-5 at C-1; Assignment and Assumption of Interests and Obligations ("Assignment"), ECF 9-6. The Assignment is recorded among the land records of Dorchester County, Maryland, at Liber 1145, folio 176. ECF 11-1 at 4.

On August 15, 2013, Commerce initiated a foreclosure proceeding against BSJ in the Circuit Court for Dorchester County. See Jeffrey H. Scherr v. BSJ Partners, LLC, Case 09-C-13-20766, Circuit Court for Dorchester County; Affidavit of Alex O' Brien, president of Commerce Bank. ¶¶ 1, 13 ("O'Brien Affidavit"), ECF 9-9.[11] The foreclosure sale took place on December 6, 2013, id. ¶ 14, and was ratified on February 7, 2014. See Order Ratifying Sale of February 7, 2014, ECF 9-7. Although the foreclosure sale generated $1, 393, 469.86 in proceeds, O'Brien Affidavit ¶ 19, ECF 9-9; see also HUD-1, ECF 9-8, this sum was "insufficient to satisfy the then outstanding loan balance." ECF 9-1 at 5. After deducting $1, 393, 469.86 in foreclosure proceeds from the outstanding principal of $2, 302, 765.12, there was a loss on the Loan of $909, 295.26. ECF 11-1 at 11.

Commerce, as the successor in interest to BOES in regard to the Loan, is obligated to disburse the proceeds from the foreclosure sale in accordance with the Participation Agreement. But, the parties disagree as to the way in which the disbursement is to occur. Commerce argues that, under the Agreement, MFB is entitled to 25% of the foreclosure proceeds, i.e., "the amount of its ratable Participant's Share under the Agreement." ECF 9-1 at 5. That equals the sum of $348, 367.46 of the foreclosure proceeds. However, MFB contends, pursuant to the Agreement, that it is entitled to 25% of the outstanding balance on the Loan principal, which equals $575, 691.28. Id. at 5-6.

On March 20, 2014, Commerce and MFB entered into a Disbursement Agreement. Under the Disbursement Agreement, Commerce paid MFB, from the foreclosure proceeds, the undisputed amount of $348, 367.46 and retained $817, 778.58. O'Brien Affidavit ¶ 25, ECF 9-9. According to MFB, Commerce owes MFB an additional $227, 323.82 ("Disputed Amount"), which is the difference between what MFB contends is owed to it under the Agreement and what Commerce paid to MFB. The Disputed Amount of $227, 323.82 is being held in escrow pending this Court's resolution of the parties' dispute. Id.

Resolution of the dispute turns on the provisions of the Agreement as well as principles of contract construction. Therefore, I review next the relevant provisions of the Agreement.

C. Terms of the Participation Agreement

Section 1 of the Agreement describes and defines the interest sold by BOES and purchased by MFB. It states, in part, as follows, ECF 9-2 at 2 (emphasis in Agreement):

1. Purchase and Conveyance of Participation Interest. Subject to the terms and conditions of this Agreement, OB hereby sells, grants, transfers, assigns, and conveys to MFB, and MFB hereby agrees to purchase and acquire from OB, title to an undivided interest and participation in the Loan as described below, and in any and all documents now or hereafter executed in connection with the Loan (collectively, the "Loan Documents") together with title to an undivided interest in any and all security interests or other liens which OB has (or will have) in or to any personal or real property collateral to secure the Loan (the " Collateral ") and all direct and indirect proceeds of such Collateral (collectively, the " Participation Interest ")....

Section 3, ECF 9-2 at 4, defines the purpose of the Loan and the priority of the participation interests relative to each other:

3. Purpose of Loan; Bank of Participation. The proceeds of the Loan have been and from time to time may be disbursed by the Originating Bank, to each of the Borrower(s) for the purpose(s) set forth in Section 1 above. The Participation Interest and those interests of all other participants in the Loan shall, unless and except as otherwise expressly provided to the contrary herein, be of equal rank and priority in lien, and neither MFB nor any other participant in the Loan shall have priority over any other participant in the Loan unless so stated under Special Instructions above.

The Agreement contains a chart on pages 2 and 3, ECF 9-2 at 3-4, preceding Sections 2 and 3. One portion is titled "Special Instructions:" Id. at 3, ECF 9-2 at 4. However, no Special Instructions are set forth. Id.

Section 7 indicates how payments made by the Borrower are to be allocated under the Participation Agreement. It provides:

7. Payments. OB [ i.e., Originating Bank] shall report to MFB, MFB's share of all accrued interest, fees, payments other than principal amounts and all principal sums collected and paid to OB by the Borrower(s), and, irrespective as to whether a default has occurred with respect to the Loan, promptly remit to MFB its share based on the priorities indicated below. [Check only one box.]
a. [ ] First Out: First, to MFB, until each time as MFB has received an amount equal to its Participation Amount, then to OB until such time as OB has received an amount equal to its Retained Amount and then ratably between OB and MFB in an amount equal to their respective allocable shares (based on MFB's ...

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