Crown Oil and Wax Co. of Delaware, Inc. v. Glen Const. Co. of Virginia, Inc.

• Decision Date: 11 September 1990
• Docket Number: No. 104,104
• Citation: 320 Md. 546,578 A.2d 1184
• Parties: CROWN OIL AND WAX COMPANY OF DELAWARE, INC., et al. v. GLEN CONSTRUCTION COMPANY OF VIRGINIA, INC. Sept. Term 1989.
• Court: Maryland Court of Appeals

Page 546

320 Md. 546

578 A.2d 1184

CROWN OIL AND WAX COMPANY OF DELAWARE, INC., et al. v. GLEN CONSTRUCTION COMPANY OF VIRGINIA, INC.

No. 104 Sept. Term 1989.

Court of Appeals of Maryland.

Sept. 11, 1990.

C. Allen Foster (Steven D. Hedges, Patton, Boggs & Blow, Greensboro, N.C., and John A. Moag, Jr., Patton, Boggs & Blow, Baltimore), all on brief, for petitioners.

John Anthony Wolf (John F. Morkan, III, Ober, Kaler, Grimes & Shriver, Baltimore), all on brief, for respondent.

Argued before MURPHY, C.J., and ELDRIDGE, COLE, RODOWSKY, McAULIFFE, ADKINS ^* and CHASANOW, JJ.

RODOWSKY, Judge.

"It is an ancient rule of the common law that a person who did not enter into a contract, or succeed to the interest of those who did, has no right of action for its breach, although he sustained damage thereby." Levy v. Glens Falls Indem. Co., 210 Md. 265, 270, 123 A.2d 348, 351 (1956). In this case we examine the concept of a "successor" in the context of steps in the development of a parcel of unimproved, commercially zoned realty. The issue is whether, under a construction contract signed, as owner, by a corporation controlled by two individuals developing the property, the contractor is obliged to arbitrate claims on behalf of a limited partnership used by the same two individuals to syndicate the project.

On the south side of the intersection of Interstate Route 270 and Maryland Route 85 in Frederick County lies a 7.009 acre portion of a former farm. In February 1982 this portion was one of the assets owned by Crown Oil & Wax Company of Delaware, a Delaware corporation (Crown Inc.). An experienced real estate developer, Edward J. Joyeusaz, a/k/a Ed Joy (Joy), for some time had been interested in acquiring the parcel for development as a hotel. Crown Inc. had defaulted on a bank loan secured by its stock. On February 28, 1982, Joy and his C.P.A., tax adviser and co-investor, Robert S. Understein (Understein), purchased from the bank 100% of the stock in Crown Inc. Joy, as "trustee," acquired 93.75% of the shares and 6.25% were acquired by R.U. Associates Limited Partnership, of which Understein was general partner. ¹ Other assets of Crown Inc. at the time of its acquisition were three other parcels of land, seven gasoline stations and a tax loss carry forward in excess of $800,000. Joy testified that the plan was to develop the seven acre parcel through a partnership that would be syndicated through a private offering.

By letter dated January 9, 1984, and addressed to "Frederick Inn Limited Partnership," attention Joy, Quality Inns International, Inc. (Quality Inns) advised that the addressee's application for a Quality Inns franchise had been approved. Frederick Inn Limited Partnership did not exist of public record. An attorney in Understein's office had not yet prepared the papers for that partnership. Later, when the attempt was made to register a partnership in that name, the name was not available. The name Frederick Hotel Limited Partnership (FHLP) was then used. FHLP is at the center of the present controversy.

The franchise agreement with Quality Inns for the subject project was entered into April 9, 1984, by Crown Inc. A typewritten addendum to the printed franchise contract permitted, without payment of additional fees to the franchisor, transfer of that franchise to a partnership in which Joy's Park, Inc. and Jefferson Investments Limited Partnership (Jefferson) would be general partners. Joy's Park, Inc. was a wholly owned subsidiary of Ed Joy Real Estate Inc., which was owned or controlled by Joy. Understein was general partner of the limited partnership that was general partner of Jefferson. FHLP, as it was ultimately formally documented, satisfied this criterion for franchise transfer.

With the franchise in hand, Joy directed his attention to obtaining financing. On June 4, 1984, Citizens Savings & Loan Association, Inc. (Citizens) issued a commitment to Crown Inc. for a $1,155,000 loan secured by the seven acres and by the personal liability of Joy and Understein. That loan closed on June 13. Approximately $1 million of the loan proceeds were used for partial releases of mortgages on the parcel and the balance was used for preconstruction expenses of development. ²

Bids from a number of general contractors were received by Joy in late June, and he selected Glen Construction Company of Virginia, Inc. (Glen), which he had used as general contractor for other projects. The final version of the written construction contract was not executed until more than a year later. Construction work, however, actually commenced in the field in August 1984.

All of the construction contract negotiations were conducted within the framework of contract documents, which included the American Institute of Architects (AIA) Document A201-1976, "General Conditions of the Contract for Construction."

Glen prepared the initial, proposed contract. It named Joy as owner. That offer was signed and transmitted by Glen to Joy on September 13, 1984.

Joy was also negotiating a construction loan with Citizens, which on October 5 committed to lend an additional $8,853,000. That commitment was addressed to Crown Inc., Frederick Inn Limited Partnership, Joy and Understein. It stated that "Frederick Inn Limited Partnership is the developer of the Project." The commitment required that "a firm construction contract" be entered into between the borrower and Glen prior to the first disbursement. Written acceptance of that commitment by Crown Inc. and by "Frederick Inn Limited Partnership," acting through Joy and Understein as its "general partners," was dated October 25, 1984.

A certificate of limited partnership--for FHLP--was approved by the State Department of Assessments and Taxation October 30, 1984. The general partners were Joy's Park, Inc. (7.5%) and Jefferson (2.5%). The limited partners were Joy (67.5%) and Understein (22.5%), each as a "Trustee." As described in the certificate, FHLP's business was "building, developing and operating" a Quality Inn on the seven acre site.

The construction loan agreement with Citizens was executed on November 28, 1984. The borrower was FHLP, which was again described as developer, although the agreement recited that Crown Inc. was the fee owner. FHLP was maker of the note evidencing the loan. Crown Inc., Joy and Understein guaranteed the loan.

The proposed contract, tendered on September 13, 1984, by Glen to Joy, was used to satisfy the loan commitment's requirement for a firm construction contract. Joy struck his name as owner and inserted Crown Inc. As president of Crown Inc., he signed that writing under date of October 16, 1984.

The commitment also required a security assignment to Citizens, approved by the contractor, of the rights to enforce the construction contract. In satisfaction of this requirement, Crown Inc., FHLP and Joy executed, also on November 28, an assignment of the construction contract. Glen, acting through its president, signed a written acknowledgment of the assignment at the foot of the assignment. ^{3 3}

Glen and Joy continued to negotiate the construction contract. There were five additional versions drafted before the final version was fully executed on September 17, 1985. All of these versions name Crown Inc. as owner. ⁴

While the final form of the written contract was evolving, Glen was building and being paid monthly draws. The draws for September 1984 through February 15, 1985, were paid by checks bearing the printed name or description, "Frederick Inn Construction." These payments totaled $1,058,104.90. Beginning with the payment of March 13, 1985, and continuing each month through the payment of September 20, 1985, the draws were by checks on which FHLP's name was printed. These totaled $2,332,535.10.

At some point after construction commenced Glen received evidence of the owner's coverage for "all risks" builder's insurance. The policy was issued for one year beginning July 1, 1984, and originally named "Crown Oil Wax" as owner. By endorsement No. 1, effective July 1, 1984, the named insured was corrected, at a time not stated in the record, to read: "Crown Oil & Wax Co., Inc. t/a Frederick Inn, Edward Joyeusaz, Robert Understein, A.T.I.M.A." A further endorsement, also of undisclosed date but effective July 1, 1984, added Glen as an additional insured.

Sometime in 1985 limited partnership interests in FHLP were sold by private placement.

By letter dated October 29, 1985, on the letterhead of Crown Inc. and signed by Joy, "President," notice was given to Glen terminating the construction contract seven days thereafter. In November 1985, on a date not specified in this record, Glen demanded arbitration with Crown Inc.

By a document originally prepared for execution in 1984, but not signed until November 13, 1985, Crown Inc. and FHLP executed a letter of commitment for a ground lease of the hotel site from the former to the latter for a period of forty-eight years beginning July 1, 1984, on the terms outlined in that letter.

The shareholders of Crown Inc., by agreement dated November 15, 1986, formed Crown Oil & Wax Partnership (Crown Partnership) to which they contributed their shares in that corporation. This agreement named the beneficial owners for whom Joy and Understein had been holding the stock of Crown Inc. See n. 1, supra. The agreement also recited the partners' need for advice concerning impending changes in the income tax laws.

By a ground lease "made as of" the 1st day of July 1984 Crown Inc., the fee owner, leased the hotel site to FHLP for a term of six years beginning July 1, 1984, with the option in FHLP to extend for up to seven additional terms of six years each. This instrument was acknowledged by the parties before a notary public on December 9, 1986.

On December 2, 1986, Crown Partnership, as sole shareholder of Crown Inc., approved a plan of complete liquidation of Crown Inc., to be completed before the end of...