Dominion Nat. Bank v. Sundowner Joint Venture

• Decision Date: 05 November 1981
• Docket Number: No. 285,285
• Citation: 436 A.2d 501,50 Md.App. 145
• Parties: DOMINION NATIONAL BANK et al. v. SUNDOWNER JOINT VENTURE et al.
• Court: Court of Special Appeals of Maryland

Page 145

50 Md.App. 145

436 A.2d 501

DOMINION NATIONAL BANK et al. v. SUNDOWNER JOINT VENTURE et al.

No. 285.

Court of Special Appeals of Maryland.

Nov. 5, 1981.

Sally D. Adkins and Raymond S. Smethurst, Jr., Salisbury, with whom were Adkins, Potts & Smethurst, Salisbury, on the brief, for appellants.

William G. Duvall, with whom were David B. Douse and Webb, Burnett & Duvall, Salisbury, on the brief, for appellees.

Argued before MORTON, MASON and WILNER, JJ.

WILNER, Judge.

On September 28, 1977, two actions were filed in the Circuit Court for Worcester County, each seeking judgment on a promissory note executed on behalf of an entity known as Sundowner Joint Venture (SJV). The defendants in each case were the same-SJV, alleged to be a general partnership, and twenty individuals and one corporation alleged to be the partners in the joint venture. In one case (No. 7264), the sole plaintiff was Dominion National Bank (Dominion); in the other (No. 7265), Dominion had two co-plaintiffs-John T. Hazel, Jr. and M. Charlotte Garner.

After an avalanche of pleadings, the court entered summary judgments in favor of the plaintiffs on the two notes. As to SJV, the judgments were in the amounts requested ($340,554 plus collection fee in No. 7264 and $399,104 plus collection fee in No. 7265), but with respect to the twenty-one partners sued individually, the judgments were several rather than joint, and were limited in each instance to their respective percentage shares of the joint venture. In most cases, this was five percent, or $17,027 in No. 7264 and $19,955 in No. 7265. ¹ No one was happy with that result, and so we have cross-appeals.

The court reached its decision by finding, essentially, that (1) the notes were validly executed on behalf of the joint venture, (2) SJV was (and is) a general partnership, (3) the joint venture agreement, however, manifested an intent to limit the individual liability of the partners to their respective percentage shares, (4) on May 2, 1974, the parties entered into a novation, (5) at that time, the plaintiffs were aware of those provisions in the joint venture agreement serving to limit the individual liability of the partners, and (6) as a result, the plaintiffs were deemed to have consented to such limitations and are bound by them. ²

The plaintiffs-appellants here-concur with the court's conclusions that the joint venture is a general partnership and that the two notes were validly issued on its behalf. They argue, however, that (1) the May, 1974, agreement did not constitute a novation, and (2) the joint venture agreement does not and cannot serve to limit the individual liability of the partners for joint venture obligations to third parties. Cross-appellants-being SJV alone in No. 7264 and SJV and two of its partners (Charles Fulton and Murray's Leasing Co.) in No. 7265 ³-contend that there was a genuine dispute of material fact as to whether the two notes were validly issued, and that the court erred in granting summary judgments in any amount. Beyond that, along with the other appellees, they argue that the court was correct in limiting the liability of the various partners.

The notes in question and the issues that they generate arise from a complex set of transactions involving the Sundowner Mobile Home Park, located in Ocean City.

It appears that in March, 1972, one Gerald Exten contracted to purchase the mobile home park from Kathleen Pokusa for $1.1 million. The actual conveyance, however, was made not to Exten but to a limited partnership known as Sundowner Limited Partnership (SLP), in which Exten was a general partner and in which William DiLoreta, M. Charlotte Garner, Phillip L. Green, and John T. Hazel, Jr. were limited partners. Settlement occurred in May 1972.

Shortly thereafter, Exten interested a number of investors in purchasing the mobile home park on a leaseback arrangement. To that end, the following transactions occurred:

(1) On August 29, 1972, an Agreement of Sale was apparently executed in which SLP agreed to sell the property to Gene A. Murray and John A. Fitzgerald as trustees or agents for an entity to be formed. Unfortunately, the parties have not reproduced the Agreement in the record extract (and we are not disposed to search through a ten-volume record to look for it), and we are therefore not privy to all of its terms. On the same day, a lease was entered into between "Gene A. Murray and John M. Fitzgerald, and/or assigns, Lessor" and Exten Associates, Inc., Lessee, in which the corporate lessee leased the Sundowner Mobile Home Park for a period of twenty years, commencing January 15, 1973, at a rental of $150,000 a year plus annual escalations of 2% after the first year. Murray and Fitzgerald each signed the lease as "trustee."

(2) On February 6, 1973, SJV was created by means of the Sundowner Joint Venture Agreement. ⁴ The agreement recited that the purpose of the joint venture was to acquire and own certain described land, upon which the mobile home park was located. It appointed Murray and Fitzgerald as trustees for the joint venture and its members and authorized them to enter into a contract with SLP to acquire the property "under the terms and conditions set forth in an Agreement of Sale, the terms and provisions of which the Venturers are familiar." It further authorized the trustees to pay $1,800,000 for the property, as follows: $360,000 in cash; assumption of an existing first mortgage of $815,000 to Kathleen Pokusa; and execution of a second mortgage for the balance of $625,000 to SLP. In order to carry out their duties, the trustees were empowered to execute "such Contracts, Deeds, Mortgages, Bills Obligatory or other documents that may be required by law, and to do such acts and deeds which are necessary and proper to promote to (sic) the trust and the interest of the parties to the Joint Venture."

Paragraph 4 of the joint venture agreement, captioned "CAPITAL," listed the names and addresses of the twenty-one co-venturers and the percentage of interest held by each. It recited that each had contributed the percentage amount shown after his name, "which percentage shall represent his proportionate interest in the Joint Venture and its assets and his proportionate liability for the obligations of the Joint Venture." (Emphasis supplied.) Paragraph 5 obligated the venturers, upon call, to contribute "pro rata" such additional capital as necessary to pay "all current or due obligations of the Joint Venture..."; and paragraph 6 provided that net profits shall be divided and net losses shall be borne by the venturers "in the percentages set forth in paragraph 4 hereof."

(3) On February 1, 1973, settlement took place. The property was conveyed by SLP to Murray and Fitzgerald as trustees for SJV, ⁵ and, on behalf of SJV, they executed the two notes at issue here, each for $312,500, and a mortgage securing the same. In accordance with the joint venture agreement (and presumably the agreement of sale), the notes called for interest only for the first five years, with annual principal amortization to commence in the sixth year (1979) and continue until 1998 when the final installment would be due. Each note contained an "acceleration" clause, to the effect that the default in the payment of any installment of principal or interest would cause "the entire balance due hereunder to become immediately due and demandable...."

There is nothing in the record to show that the August, 1972, lease with Exten Associates was ever assigned to SJV, but we are told by appellants (without contradiction by appellees) that such an assignment was made. A more serious lapse was the fact that an existing mortgage on the property payable to the Hebron Savings Bank (Hebron) in an amount somewhere between $120,000 and $200,000-the record is not clear on the matter-was not paid at settlement, as it should have been; and it thus remained as a first lien on the property. That, indeed, is one basis of cross-appellants' claim that the trustees exceeded their authority in the transaction.

In March, 1973, SLP assigned one of the notes (that involved in No. 7264) to Exten who, in turn, endorsed and delivered it to Potomac Bank and Trust Co., the predecessor of appellant Dominion. At some point, not clear from the record, SLP assigned the other note to William DiLoreta as trustee for the four SLP limited partners-himself, Phillip Green, John T. Hazel, Jr., and M. Charlotte Garner. Eventually, Hazel and Garner became the sole beneficial owners of that note, and on December 10, 1976, they caused it to be endorsed by DiLoreta (as trustee) to Potomac Bank and Trust Co. as collateral security for certain obligations owing to the bank. The assignments of the notes to Exten and DiLoreta, respectively, were in distribution of the various partners' shares in SLP. Dominion, as Potomac's successor by merger, claims to be a holder in due course of both notes.

Some time in 1974, after the assignment of the first note to Potomac but before assignment to it of the second, Exten Associates became in default of its obligation under the lease, and suit was filed against it. Perhaps as a result of that default, SJV fell into default on both the Pokusa and SLP mortgages. In an effort to resolve the various difficulties, SJV, Exten Associates, SLP, Exten individually, and Potomac entered into a new agreement on May 2, 1974.

The agreement recited some of the above history and provided, in relevant part, for the following:

(1) The current arrearage due by Exten Associates on the lease was established as $140,267.

(2) Exten Associates agreed to discharge that arrearage by (1) servicing the Hebron mortgage, for which credit of $85,714 would be allowed, (ii) making a $50,000 interest payment on SJV's behalf on the Pokusa mortgage, and (iii) deliberating a promissory note in the amount of $4,613 to SJV's attorney. ⁶

(3) SJV agreed to dismiss the pending action against ...