C. Phillip Johnson Full Gospel Ministries Inc. v. Investors Financial Serv. Llc.

• Decision Date: 28 January 2011
• Docket Number: Sept. Term,2008.,No. 115,115
• Citation: 12 A.3d 1207,418 Md. 86
• Parties: C. PHILLIP JOHNSON FULL GOSPEL MINISTRIES, INC.v.INVESTORS FINANCIAL SERVICES, LLC.
• Court: Maryland Court of Appeals

418 Md. 86

12 A.3d 1207

C. PHILLIP JOHNSON FULL GOSPEL MINISTRIES, INC.

v.INVESTORS FINANCIAL SERVICES, LLC.

No. 115

Sept. Term

2008.

Court of Appeals of Maryland.

Jan. 28, 2011.

Eric H. Kirchman (Kirchman & Kirchman, Washington, D.C.), on brief, for appellant.Jeffrey B. Fisher (The Fisher Law Group, PLLC, Upper Marlboro, MD) on amicus curiae brief.Alan D. Eisler (Meyers, Eisler & Leathman, LLC, Rockville, MD), on brief, for appellee.Debra Gardner, Esq., Jessica Weber, Esq., Francis D. Murnaghan Appellate Advocacy Fellow, Public Justice Center, Baltimore, MD, for Amicus Curiae brief of Public Justice Center.Argued before BELL, C.J., HARRELL, BATTAGLIA, GREENE, MURPHY, ADKINS and BARBERA, JJ.BATTAGLIA, J.

This case may best be compared to “The Never Ending Story,” ¹ as it has been briefed and argued before this Court on three separate occasions, beginning with our original grant of certiorari on the issue of consideration and followed by our issuance of orders requesting additional briefs on jurisdiction and thereafter, again, on the validity of deeds in lieu of foreclosure when executed at the time of settlement of a loan. We have now reached the end of our journey.

The instant contretemps involves a lender, Investors Financial Services, LLC (“Investors”), a Maryland company with its principal place of business in Silver Spring, and a borrower, C. Phillip Johnson Full Gospel Ministries, Inc. (“Ministries”), which executed a Deed in Lieu of Foreclosure regarding land in Martinsville, Virginia. Ministries, in a four-count Complaint seeking damages for breach of contract and for declaratory relief, had challenged the validity of the Deed in Lieu in the Circuit Court for Montgomery County, on the basis that the Deed in Lieu was not supported by consideration. After the Circuit Court ruled that no consideration was required because the Deed in Lieu was executed under seal, Ministries noted an appeal to the Court of Special Appeals, raising the following question:

1. Is a contract under seal, which recites the consideration upon which it is to be supported valid, even though the consideration is not given?

Prior to any proceedings in the intermediate appellate court, we granted certiorari on our own initiative. Gospel Ministries v. Investors Financial, 406 Md. 443, 959 A.2d 792 (2008).

After oral argument, we requested that the parties submit supplemental briefs addressing two additional questions:

1. On what legal and factual bases may the Maryland courts exercise jurisdiction and venue over the subject matter and relief sought in this matter?

2. Can a declaratory judgment action be used to litigate defenses to a foreclosure action?

After re-argument on these issues, “in light of recent statutory reforms in foreclosure law,” we again ordered that briefing and re-argument be scheduled and invited the submission of amicus curiae briefs,² on the following additional and what will ultimately turn out to be the dispositive issue:

Is a deed in lieu of foreclosure executed as a precondition to originating a loan, before any default in the loan, valid under Maryland law, to support conveyance of marketable title upon default, but without foreclosure, in light of the borrower's equity of redemption, see, e.g., Restatement (Third) of Property: Mortgages, Sec. 3.1(b), cmt. a; see also Md.Code (1974 Vol.), Sec. 7–101(b) of the Real Property Article; Simard v. White, 383 Md. 257, 269–90, 859 A.2d 168, 175–97 (2004)?We shall vacate the judgment of the Circuit Court for Montgomery County because, under Maryland law, a deed in lieu of foreclosure may not be executed at the outset of a mortgage, before any default occurs, as it clogs the equity of redemption.

The present case began with a purchase of improved land (“Property”) located in Martinsville, Virginia, by Ministries from the Catholic Diocese of Richmond, to be used as a church. Ministries turned to Investors, a Maryland limited liability company with its principal place of business in Silver Spring, Montgomery County, Maryland, to obtain financing. As part of the financing, Ministries issued a Promissory Note to Investors for $93,000, which was used to finance the Property. The Note was secured by two deeds: a Deed of Trust, which included an acceleration clause containing a Power of Sale, ³ as well as a Deed in Lieu of Foreclosure, which Ministries also was required to execute at closing. The Deed in Lieu purported to grant to Investors title to the Property “in order to avoid foreclosure of the ... Deed of Trust,” immediately upon default for any reason. The Deed in Lieu provided, in relevant part:

THIS DEED IN LIEU OF FORECLOSURE, made this, by and between C. Phillip Johnson Full Gospel Ministries, Inc., a Washington, D.C. corporation, party (ies) of the first part, and Investors Financial Services, LLC party (ies) of the second part:

WHEREAS, the party (ies) of the first part is the obligor named in a separate Note dated April 5, 2005 in the original principal sum of Ninety-three Thousand and zero cents ($93,000.00) which Note is secured by a Deed of Trust dated April 5, 2005 and to be recorded among the Land Records of the Commonwealth of Virginia, City of Martinsville; and

WHEREAS, the party (ies) of the second part are the holders of the aforesaid Note and the secured party (ies) under the aforesaid Deed of Trust; and

WHEREAS, for diverse reasons, the party of the first part has been unable to pay the indebtedness evidenced by the aforesaid Note as the installments have become due and payable and has been unable to perform the several covenants set forth in the aforesaid Deed of Trust; and

WHEREAS, in order to avoid foreclosure of the aforesaid Deed of Trust, the party (ies) of the first part desires to convey the subject property to the parties of the second part in exchange for the cancellation of the existing indebtedness owed to the parties of the second part in the amount of the debt owed;

NOW, THEREFORE, in consideration of the relinquishment of indebtedness, and other good and valuable consideration, receipt of which is hereby acknowledged, the party of the first part does hereby grant unto parties of the second part in fee simple, all that piece or parcel of land, together with the improvements, rights, privileges and appurtunances to the same belonging, situate in the Commonwealth of Virginia, described as follows to wit:

SEE ATTACHED LEGAL DESCRIPTION

Also known as: 704 East Church Street, Martinsville, Virginia 24112

Subject to covenants, easements, and deeds of trust and restrictions of record.

AND the said party (ies) of the first part covenants that he/she/it/they will warrant specially the property hereby conveyed; and that it will execute such further assurances of said land as may be requisite.

Although granted at the time of loan origination, the Deed in Lieu was phrased in the present perfect tense: “WHEREAS, ... [Ministries] has been unable to pay the indebtedness evidenced by the aforesaid Note as the installments have become due and payable and has been unable to perform the several covenants set forth in the aforesaid Deed of Trust[,]” (emphasis added), was executed under seal and was held in escrow by Investors. The Disclosure Statement for the Deed in Lieu provided:

The undersigned Borrower hereby acknowledge [sic] and agree [sic] as follows:

1. As a part of the financing for the property known as 704 East Church Street, Martinsville, Virginia 24112 by Investors Financial Services, LLC in the amount of $93,000.00 on April 5, 2005 the Borrower have [sic] executed a Deed in Lieu of Foreclosure;

2. The Deed in Lieu of Foreclosure conveys title to the property to Investors Financial Services, LLC;

3. Investors Financial Services, LLC will hold the Deed in Lieu of Foreclosure and not record it in the land records so long as Borrower is not in default in the repayment of the financing;

4. Investors Financial Services, LLC will record the Deed in Lieu of Foreclosure and take over title to the property if the Borrower are [sic] two (2) payments past due and have [sic] not made satisfactory payment arrangements;

5. If the Borrower are [sic] past due, it is the Borrower's responsibility to contact [Lender's Counsel] to make satisfactory payment arrangements;

6. If the Borrower do [sic] not contact [Lender's Counsel], no further notice will be given to the Borrowers [sic] before the Deed in Lieu of Foreclosure is recorded;

7. Once the Deed in Lieu of Foreclosure is recorded, the Borrowers [sic] will no longer own the Property and the debt will be cancelled.

Several months later, Ministries defaulted on the Note, and Investors recorded the Deed in Lieu in the land records of Virginia, without any foreclosure proceedings. Ministries filed a four-count Complaint in the Circuit Court for Montgomery County, Maryland. One count alleged breach of contract, which was premised on the theory that Investors was “required by the terms of the contract” to conduct a public sale of the Property, rather than simply record the Deed in Lieu, stating, in relevant part:

12. Investors materially breached its Contract with the Ministries by filing [sic] to have the real property sold at a public sale as required by the terms of the contract of the parties. ⁴

Ministries sought damages in the amount of $200,000 plus interest on its breach of contract count. Another count seeking a declaratory judgment under Section 3–409 of the Courts and Judicial Proceedings Article, Maryland Code (1974, 2006 Repl.Vol.),⁵ asked the Circuit Court to determine whether the Deed in Lieu was invalid for lack of consideration.⁶ The other two original counts, alleging breach of contract regarding late fees and unjust enrichment, were dismissed with prejudice by the Circuit Court Judge and are not part of this case.

The parties filed cross motions for summary judgment. Investors contended that the circuit court lacked “subject matter jurisdiction to invalidate the deed...