652 A.2d 1117 (Md. 1995), 13, Ellerin v. Fairfax Sav., F.S.B.

Docket Nº:13,
Citation:652 A.2d 1117, 337 Md. 216
Opinion Judge:[10] Eldridge
Party Name:Charles ELLERIN et al. v. FAIRFAX SAVINGS, F.S.B.
Attorney:[7] ARGUED BY David Freishtat (Stacie F. Dubnow, Freishtat & Sandler, all on brief) all of Baltimore, MD., FOR PETITIONERS.
Case Date:February 03, 1995
Court:Court of Appeals of Maryland
 
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Page 1117

652 A.2d 1117 (Md. 1995)

337 Md. 216

Charles ELLERIN et al.

v.

FAIRFAX SAVINGS, F.S.B.

No. 13,

Court of Appeals of Maryland.

February 3, 1995

Page 1118

[337 Md. 219] David Freishtat (Stacie F. Dubnow, Freishtat & Sandler, all on brief), Baltimore, for petitioners.

George A. Nilson (Kurt J. Fischer, Marta D. Harting, Piper and Marbury, all on brief), Baltimore, for respondent.

Argued before MURPHY, C.J., and ELDRIDGE, RODOWSKY, McAULIFFE, [*] CHASANOW, KARWACKI and BELL, JJ.

Opinion by ELDRIDGE, Judge.

This case concerns the appropriate standard for the availability of punitive damages in a tort action of fraud or deceit.

I.

The litigation arose from commercial real estate development loans. In 1982, Charles Ellerin and Louis Seidel decided to acquire four historic buildings in Westminster, Maryland, for commercial development. Ellerin and Seidel planned to [337 Md. 220] develop the properties through a limited partnership, Sherwood Square Associates ("Sherwood"), of which they were the general partners.

Ellerin and Seidel financed their project through Fairfax Savings, F.S.B. ("Fairfax"). Fairfax agreed to lend Sherwood a total of $5,700,000.00, made up of three separate loans. One loan was a conventional loan for $850,000.00. 1 The other two loans were Industrial

Page 1119

Revenue Finance Bond (IRB) loans, acquired through the City of Westminster, in the amounts of $3,050,000.00 and $1,800,000.00 respectively.

Because the buildings were initially little more than empty shells, Fairfax was concerned about security for its investment. Fairfax took mortgages on the property and buildings, but also insisted on personal guarantees from the project's principal investors. The nature and extent of these personal guarantees, and Fairfax's methods of securing them, are the subject of the litigation that ensued when, in 1985, Sherwood defaulted on the loans.

The major loan documents had been drafted, reviewed and approved by the parties before settlement. The loan documents for the transaction included a Loan Agreement and a Completion Guaranty for each IRB loan. 2 The Loan Agreements set out Sherwood's obligations with respect to developing the buildings and making payments on the loans, and created liabilities for Ellerin and Seidel in their capacities as general partners of Sherwood. The Completion Guaranties imposed personal obligations on Charles Ellerin and his wife Naoma, on Louis Seidel and his wife Gloria, and on Tri-Ess, a corporation owned by Ellerin and Seidel, that was the general contractor for the project. Fairfax submitted final drafts of the loan documents to the attorney for Ellerin and Seidel on or about December 22, 1982, and the attorney approved those documents. [337 Md. 221]

The preapproved documents contained the following provisions governing the existence and duration of loan guarantees. Section 4.1 of the Loan Agreements made Sherwood and the individual partners liable only for breaches of undertakings specified in the Completion Guaranties, "it being the intent that the Land, improvements and rents to issue therefrom shall constitute the sole security and source of funds for the repayment of the Loan" once the buildings were completed. The Completion Guaranties themselves provided that "the obligations of the Guarantors hereunder shall cease and be extinguished ... when the acquisition of the facility has been completed." 3 The obligations of the guarantors under the Completion Guaranties were to complete the buildings according to the specifications, and to secure additional financing to finish the project if necessary.

The preapproved documents imposed no liability on Ellerin and Seidel for repayment of the debt once the buildings had been completed, either in their capacity as the general partners of Sherwood under the Loan Agreements, or in their capacity as guarantors of the project under the Completion Guaranties.

It is undisputed that the preapproved loan documents were different from the documents signed at the settlement on December 29 and 30, 1982. The new Loan Agreements provided that neither Sherwood nor the individual partners would be liable for the loans if the event of default occurred "at any time after the termination of the Completion Guaranty (pursuant to Section 8.1 thereof)...." Section 8.1 of the new Completion Guaranties provided that the guarantors' obligations "shall cease and be extinguished ... when the acquisition of the Facility has been completed and when the Facility Applicant [Sherwood] has fully complied with and satisfied the Rent Roll Requirement." The Rent Roll Requirement, a new addition to the Completion Guaranties, was defined to mean [337 Md. 222] the leasing of 70% of the total leaseable space in the finished buildings to tenants approved by Fairfax.

The new obligations of the guarantors were listed in a rewritten section 3.1 of the Completion Guaranties. As in the original documents, the guarantors were required to complete the "acquisition" or construction of the project. A new section added to Section 3.1, however, imposed post-completion guarantees in the event that Sherwood "has not fully complied with and satisfied the Rent Roll Requirement," but "[i]n no event shall the aggregate liability of the Completion

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Guarantors under this subsection ... exceed $1,150,000...." The parties remain divided over the liability of the parties under the loan documents signed at closing. 4

Sherwood defaulted on the loans after the buildings were completed but before the Rent Roll Requirement was satisfied. Accordingly, Ellerin and Seidel would be free of liability under the documents approved on or about December 22, but would be liable for a disputed, but substantial, amount under the documents signed at settlement.

When Sherwood defaulted on the loans, Fairfax filed in the Circuit Court for Baltimore County three suits against Ellerin, [337 Md. 223] Seidel and their wives as guarantors, based on the Completion Guaranties, and two suits against Ellerin and Seidel, as general partners of Sherwood, based on the Loan Agreements. Confessed judgments docketed in these cases were vacated after the guarantors filed counterclaims. The counterclaims, setting forth tort causes of action for fraud or deceit, alleged that Fairfax had obtained the post-completion guarantees by fraud. In their counterclaims, the guarantors argued that after their attorney had approved the loan documents on or about December 22, Fairfax had fraudulently changed those documents to insert the post-completion guarantees contained in the documents ultimately signed at settlement, and that the guarantors had never been told of these changes. The guarantors demanded $6,000,000.00 in compensatory damages and $10,000,000.00 in punitive damages for the fraud.

The cases were tried for the first time in 1987. The trial was bifurcated, with the cases based on the Completion Guaranties tried first. During the month-long trial, Fairfax took the position that the guarantors had agreed to the changes in the loan documents. The guarantors introduced evidence that they knew nothing about the changes, and believed that the documents which they signed at settlement imposed no liability that could survive the completion of the buildings.

In response to six questions on a special verdict sheet, the jury found, by clear and convincing evidence, that Fairfax's insertion of the post-completion guarantees into the final loan documents had been fraudulent. 5 The jury also found that the guarantors had ratified the fraud by continuing with the project after they had learned what Fairfax had done. According [337 Md. 224] to the instructions on the verdict sheet, this finding required the jury to enter judgment in favor of Fairfax and against the guarantors, and barred the jury from awarding damages against Fairfax on the tort counterclaims. 6 Consequently,

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the jury returned a verdict in favor of Fairfax in the specified amount.

After the jury verdict in the cases based on the Completion Guaranties, the circuit court granted Fairfax's motion for summary judgment against Ellerin and Seidel in the cases based on the Loan Agreements. The court entered judgment against Ellerin and Seidel for $5,263,688.75, the amount of the unpaid balance of the loans at that time.

The Court of Special Appeals reversed based on the trial court's erroneous conclusion that, because Ellerin and Seidel had continued the contract with Fairfax, they were precluded from seeking damages for the fraud. Ellerin v. Fairfax Sav. Ass'n, 78 Md.App. 92, 109-111, 552 A.2d 918, 927-928, cert. denied, 316 Md. 210, 557 A.2d 1336 (1989). The intermediate appellate court pointed out that, while the guarantors' continued performance might bar them from the remedy of rescission, they would still be entitled to tort damages based on the fraud. 7 Furthermore, the appellate court held that the erroneous jury instructions had tainted the entire verdict. The Court of Special Appeals remanded the cases for a new trial on all issues, and this Court denied a petition for a writ of [337 Md. 225] certiorari. The second trial began on September 25, 1990, and ended almost a month later with a hung jury.

The cases were tried for the third time in 1990, with the liability phase of the trial tried separately from the damages phase. The verdict sheet at the liability phase asked only one question about Fairfax's alleged fraud:

"Are you persuaded that, when Mr. Ellerin signed the documents that he signed on December 29 and/or 30, 1982, neither he nor [his attorney] knew that additional personal guarantees had been inserted into [the Completion Guaranties and Loan Agreements]?"

The jury answered "yes" to this question. The trial court did not instruct the...

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