Attorney Grievance Com'n of Maryland v. Clements

• Citation: 572 A.2d 174,319 Md. 289
• Decision Date: 17 April 1990
• Docket Number: No. 18,18
• Parties: ATTORNEY GRIEVANCE COMMISSION OF MARYLAND v. James F. CLEMENTS. Sept. Term 1988.
• Court: Court of Appeals of Maryland

Page 289

319 Md. 289

572 A.2d 174

ATTORNEY GRIEVANCE COMMISSION OF MARYLAND v. James F. CLEMENTS.

No. 18 Sept. Term 1988.

Court of Appeals of Maryland.

April 17, 1990.

Melvin Hirshman, Bar Counsel, and Kendall R. Calhoun, Asst. Bar Counsel, for the Attorney Grievance Comm'n of Maryland.

Mark J. Friedman and George A. Nilson, Baltimore, for respondent.

Argued before MURPHY, C.J., and ELDRIDGE, COLE, RODOWSKY, McAULIFFE and ADKINS, JJ., and CHARLES E. ORTH, Jr. (retired) Specially Assigned.

RODOWSKY, Judge.

Respondent, James F. Clements (Clements), excepts to findings and conclusions of Judge Robert C. Nalley that Clements had violated then governing Disciplinary Rule 1-102(A)(4). See Maryland Rules (1986), Court Administration Rule 1230, Appendix F, Code of Professional Responsibility, Rule 1-102(A)(4). ¹ In the refinancing of a mortgage on an office building, Clements, one of a group of investor-borrowers, did not personally and affirmatively disclose to the new lender an arguably effective, prior assignment of rents for security purposes which would not be released as part of the transaction. We shall dismiss the charge because, under all of the facts here, there is legally insufficient proof to establish a violation by clear and convincing evidence.

The premises 9301 Annapolis Road, Lanham, Prince George's County, Maryland are improved by a three-story office building (the Property). In 1980 the Property was owned by 9301 Annapolis Road Limited Partnership consisting of Sigitas Zubkus, Jack Diener and Idalee Diener (collectively, the Zubkus Group). The Property was encumbered by a first deed of trust in favor of Baltimore Life Insurance Company (Baltimore Life) in the original principal amount of $325,000. That loan was further secured by a financing statement recorded in the county land records. A second lien against the Property was a deed of trust in favor of Union Trust Company of Maryland (Union Trust) in the original principal sum of $105,000.

During the same period Clements was practicing law with a firm of four attorneys, Callahan and Clements, whose principal office was in Crofton, Anne Arundel County. The attorney who was listed fourth on the firm's letterhead was Thomas E. Kelly, Jr. (Kelly). He has since died. Clements was also a manager for Stewart Title Guaranty Company (Stewart Title), a title insurer headquartered in Houston, Texas. Clements's responsibility was overseeing Stewart Title agencies in Maryland, the District of Columbia and West Virginia. Stewart Title of Maryland, Inc. (Stewart Md.), a company in which Clements was a shareholder, was an agent for Stewart Title. The president of Stewart Md. was Christina Dunn, then Christina Ellison (Dunn). The offices of Stewart Md. were next to the building in Crofton where the Callahan and Clements offices were located. One of Clements's business associates in personal investments was his accountant, Joseph Poole (Poole). Another of Poole's clients was a New York resident, Gene Michael Hostage (Hostage).

In 1980, Clements, Poole, and Hostage purchased all of the partnership interests of the 9301 Annapolis Road Limited Partnership (ARLP). The buyers agreed to assume the existing deeds of trust and to pay the sellers approximately $229,000 on a deferred basis, evidenced by promissory notes to the selling Zubkus Group. The notes were secured by a third deed of trust on the Property.

Baltimore Life then took the position that the third trust violated the terms of its loan and threatened foreclosure. In an effort to stave off foreclosure, the Zubkus Group, represented by their independent counsel, and ARLP, represented by Clements, took at least four steps: (1) The Zubkus Group released the third trust; (2) ARLP, as debtor, executed a financing statement to the Zubkus Group as creditor; (3) ARLP covenanted that it would not further encumber the Property; and (4) Clements and Poole executed on behalf of ARLP, as its general partners, an "Assignment of Leases, Rents and Profits as Additional Collateral Security," dated January 29, 1981.

The assignment was copied into the Land Records of Prince George's County on January 30, 1981, but, for reasons which have not been fully explained in the record in this case, the document was never indexed. This lack of indexing has led to an assumption or conclusion, embodied in the testimony of a number of witnesses in this case, including Clements, that the recording was legally ineffective. ² Clements testified, without contradiction, that counsel representing the Zubkus Group undertook to record the assignment. His testimony also strongly suggested that the lack of indexing may not have been accidental. The instruments described as items (1), (2) and (3) above were recorded and apparently indexed but have not been introduced in evidence in these proceedings.

The above-described modifications to the security held by the Zubkus Group did not deter Baltimore Life from pursuing foreclosure. As a result, ARLP concluded that it would have to refinance. In order to buy time to arrange long term refinancing, ARLP also sought an interim loan with which to purchase the note held by Baltimore Life. Poole then brought another of his clients into the picture, a shipping consultant, Altaf Ali (Ali). In return for a twenty percent interest in the Property, and with an assurance that he would be reimbursed by April 10, 1981, Ali agreed to provide the funds for the purchase of the Baltimore Life note. That purchase was accomplished on March 10.

Clements and Poole (ten percent each) as general partners, and Hostage (sixty percent) and Ali (twenty percent) as limited partners, formed Saudi Limited Partnership (Saudi) for the purpose of taking title to the Property. In the meanwhile Clements was seeking a loan from John Hanson Savings & Loan, Inc. (John Hanson), through its service corporation. On April 15 the John Hanson executive committee approved in principal a loan to the individuals comprising Saudi for $475,000, with interest of sixteen percent per annum and three points, for a minimum five year term, with twenty-five year amortization, to be guaranteed by the principals and their wives, provided that a new M.A.I. appraisal of the Property valued it at $650,000 or more.

Under date of April 10, Stewart Md., through Dunn, issued to John Hanson a binder for mortgagee title insurance. Among the "requirements to be complied with" that binder listed the following:

"Item 8. Subordination to the lien to be insured hereunder [of] a Financing Statement dated January 29, 1981 and recorded among the Land Records of Prince George's County, Maryland in Liber 5367, folio 251 and a Covenant Not To Encumber dated January 29, 1981 and recorded among the Land Records of Prince George's County, Maryland in Liber 5367, folio 253, securing Sigitas Zubkus, Jack Diener and Idalee Diener, his wife."

The original of the binder, produced at the hearing before Judge Nalley from the files of John Hanson's loan closing department, was stamped as having been received by John Hanson on April 16, 1981, at an office in Forestville, Maryland. According to Carlton M. Green (Green), the general counsel of John Hanson, a Mr. Wilbert in the loan closing department would have been responsible for review of that binder.

By binder No. 324009 dated April 16, Stewart Md. deleted Item 8 from the binder dated April 10.

On April 16 John Hanson issued a written commitment to its service corporation to make a $475,000 loan, and by written commitment dated April 20 the service corporation committed to the individuals comprising Saudi. That commitment contains two paragraphs numbered fourteen, one entitled "ASSIGNMENT OF RENT " and the other captioned "LEASES." The borrowers agreed that they would not assign the rents without John Hanson's consent and that, in the event of their default, they would assign the rents and the leases to John Hanson. The individual partners of Saudi and Saudi, by Clements, formally accepted the commitment by their signatures executed on the twenty-fifth and twenty-sixth of April.

By another binder dated April 22, Stewart Md. cancelled its original binder of April 10 and its endorsement 324009 which had eliminated Item 8. Apparently that same day Stewart Md. issued a new binder to John Hanson, No. 290291, bearing the "effective date" of April 10. ³ The only special requirements for policy issuance were (1) a deed from ARLP to Saudi; (2) release of the deed of trust securing the note previously held by Baltimore Life and then held by Ali; (3) release of the deed of trust securing Union Trust; (4) a deed of trust from Saudi to John Hanson; and (5) a financing statement from Saudi to John Hanson. In other words, Stewart Title would insure a first lien to John Hanson despite whatever transaction had produced both the recorded financing statement and the covenant not to encumber, made with respect to the Property in favor of the Zubkus Group, and reported to John Hanson in the binder received on April 16.

Binder No. 290291 was obtained by general counsel for John Hanson, for use in preparing a note and deed of trust for the loan. Green had never seen the binder of April 10 and knew nothing of any arrangements between ARLP and the Zubkus Group. He first learned of the assignment of rents to the Zubkus Group when John Hanson's loan went into default approximately two years later, after the Property had been acquired, apparently subject to, or with an assumption of, the debt to John Hanson, by Practical Investment Corporation. By letter of April 24, 1981, Green transmitted to Clements certain documents for early execution, subject to the satisfaction of open loan conditions.

That same date Michael Hall (Hall), a John Hanson vice president who was responsible for loan commitments, transmitted loan instructions to the firm of Callahan and Clements, as settlement attorneys. Among the documents required were: "Insurance policy...