Equitable Trust Co. v. Imbesi

• Decision Date: 10 March 1980
• Docket Number: No. 8,8
• Citation: Equitable Trust Co. v. Imbesi, 287 Md. 249, 412 A.2d 96 (Md. 1980)
• Parties: The EQUITABLE TRUST COMPANY v. Thomas L. IMBESI et al. Misc.
• Court: Maryland Court of Appeals

Page 249

287 Md. 249

412 A.2d 96

The EQUITABLE TRUST COMPANY v. Thomas L. IMBESI et al.

Misc. No. 8.

Court of Appeals of Maryland.

March 10, 1980.

Gary C. Duvall, Towson, for appellant.

Thomas L. Hudson, Towson (Frank A. LaFalce and Cook, Howard, Downes & Tracy, Towson, on the brief), for appellees.

Argued before SMITH, DIGGES, ELDRIDGE, COLE and DAVIDSON, JJ.

SMITH, Judge.

We shall here hold that in Maryland an agreement between a borrower and a lender that a borrower will neither convey nor encumber specified land creates no lien in favor of the lender.

Under Maryland Code (1974) § 12-601, Courts and Judicial Proceedings Article, jurisdiction is granted to this Court to "answer questions of law certified to it by . . . a United States District Court . . . if there is involved in any proceeding before the certifying court a question of law of this state which may be determinative of the cause then pending in the certifying court and as to which it appears to the certifying court there is no controlling precedent in the Court of Appeals of this state." Pursuant to that authority, the United States District Court for the District of Maryland certified to us the following questions:

(1) Is a "covenant not to encumber or convey real property", such as Plaintiff's Exhibit 2, an equitable lien or mortgage so that it is paramount to subsequent mortgages or judgment liens on the same property?

(2) Is extrinsic testimony concerning the intent of the parties to a "covenant not to encumber or convey real property" admissible for purposes of deciding certified question (1)?

Because we regard the instrument here as unambiguous, under our parol evidence rule we shall also answer the second question in the negative.

I

Thomas L. Imbesi (Imbesi) and his son borrowed $60,000 from The Equitable Trust Company, a Baltimore bank. Imbesi executed an assignment of certain life insurance to secure repayment of the debt together with an instrument entitled "Covenant Not to Encumber or Convey Real Estate." It mentioned certain real estate and said that so long as Imbesi was indebted to Equitable he would "not make, or cause to be made any deed of trust, mortgage, conveyance or any other instrument or agreement having the effect of a lien upon or conveyance of the real estate (then) owned by (him)" and thereafter mentioned. ¹ The instrument was acknowledged before a notary public and recorded among the land records of Baltimore County. The recordation tax placed upon instruments securing debts was paid. The loan was for use in a business which apparently was carried on by the son.

A little more than a year later the son borrowed a substantial sum from another Baltimore bank. Imbesi guaranteed payment of that loan, signing a guaranty on the form of the Small Business Administration. That indemnity agreement was secured by a mortgage on the land mentioned in the covenant not to encumber. This mortgage also was duly recorded among the land records of Baltimore County.

The second bank ultimately entered judgment against Imbesi. The judgment was assigned to a corporation in which Imbesi held a large interest.

A suit to foreclose the covenant not to encumber was filed by Equitable in the Circuit Court for Baltimore County. Defendants included Imbesi, the second bank, and the assignee of the judgment. Thereafter the mortgage of the second bank was assigned to the Small Business Administration. It then was substituted as a defendant in the foreclosure proceeding. SBA promptly removed the case to the United States District Court for the District of Maryland.

II

Although we have reason to believe that covenants such as that here in issue have been somewhat widely used in recent years by some Maryland banks, this is a case of first impression in this State. Moreover, very few courts seem to have had similar instruments before them.

Equitable is of the view that the instrument here, "on its face, (is) precisely the type of agreement which creates an equitable lien or mortgage."

We start with the fact that this instrument by no stretch of the imagination can legitimately be called a mortgage and that it does not even purport to be in the form of a mortgage. In Bank v. Lanahan, 45 Md. 396 (1876), Judge Alvey set forth for the Court the characteristics of a mortgage:

By the legal, formal mortgage, as distinguished from instruments held to be mortgages by construction of Courts of Equity, the property is conveyed or assigned by the mortgagor to the mortgagee, in form like that of an absolute legal conveyance, but subject to a proviso or condition by which the conveyance is to become void, or the estate is to be reconveyed, upon payment to the mortgagee of the principal sum secured, with interest, on a day certain; and upon nonperformance of this condition, the mortgagee's conditional estate becomes absolute at law, and he may take possession thereof, but it remains redeemable in equity during a certain period under the rules imposed by Courts of Equity, or by statute. (Id. at 407.)

It will be seen that this instrument has in it none of the requisites of a mortgage set forth for the Court by Judge Alvey in that case.

Equitable does not say that this is a proper mortgage, but suggests it is an equitable mortgage. Without exception, the instruments which we have held to be equitable mortgages have been ones which on their face appeared to be mortgages but which were defective in some manner. For instance, in LeBrun v. Prosise, 197 Md. 466, 477, 79 A.2d 543 (1951), Judge Markell quoted from Dyson v. Simmons, 48 Md. 207 (1878), where Judge Alvey said for the Court:

The principle is now so well settled, that it would seem to be beyond all question and controversy, that if a party makes a mortgage, or affects to make one, but it proves to be defective, by reason of some informality or omission, such as failure to record in due time, defective acknowledgment, or the like, though even by the omission of the mortgagee himself, as the instrument is at least evidence of an agreement to convey, the conscience of the mortgagor is bound, and it will be enforced by a court of equity. (Id. 48 Md. at 214.)

In Dyson the mortgage was recorded in Montgomery County where the land was situate, but the acknowledgment was taken before a justice of the peace in Frederick County. Our statute at the time required that if an acknowledgment were taken before a justice of the peace "out of the county . . . wherein the real estate or any part of it lies," then "the official character of the justice (was required to be) certified to by the clerk of the circuit or superior court under his official seal." ² This certificate was missing.

These principles relative to equitable mortgages were discussed for the Court by Chief Judge Hammond in Adams v. Avirett, 252 Md. 566, 250 A.2d 891 (1969). In that instance the purported acknowledgment of a deed of trust was made over the telephone to a notary whom the grantors never saw. In finding "that the deed of trust created an equitable lien fully valid as far as (the parties to it were) concerned," Judge Hammond said for the Court:

The law of Maryland is therefore that where one who has the right and power to do so intends by a writing to create a lien on his land to secure another but fails to create a statutorily valid security instrument, his expressed intention may be enforced in equity by the other party to the instrument. (Id. at 571, 250 A.2d at 893.)

The Court quoted from 5 H. Tiffany, The Law of Real Property § 1563 at 659-60 (3d ed., B. Jones 1939), and 4 American Law of Property § 16.30 (1952), observing that "Maryland decisions are in accord with the law set forth in Tiffany and the American Law of Property." Id. at 569.

In Lubin v. Klein, 232 Md. 369, 193 A.2d 46 (1963), the Court held that "a defectively executed mortgage c(ould) be recognized as an equitable mortgage only when the party who executed it had the power to charge the land, and there is no such power in a person acting under an unacknowledged power of attorney . . . ." Id. at 372, 193 A.2d at 49. Thus, it held "that the mortgage in th(at) case was void (except as between the parties) and did not create an equitable lien on the property." Id. at 372-73, 193 A.2d at 49.

Equitable liens have been held to arise in Maryland under circumstances other than those of some defect in a mortgage or deed of trust. See in this regard an annotation on equitable liens by William T. Brantly published in 1885 appearing opposite page 139 in his edition of Alexander v. Ghiselin, 5 Gill. 138 (1847). In Keyworth v. Israelson, 240 Md. 289, 214 A.2d 168 (1965), Judge Oppenheimer said for the Court:

An equitable lien is based on specific enforcement of a contract to assign property as security. The contract need not stipulate for the lien in express terms; it is enough if that is the fair and reasonable implication of the terms employed. A mere promise to pay a debt or obligation does not of itself, however, create a lien unless the intention to create it is apparent from the instrument and circumstances leading to it. Johnson v. Johnson, 40 Md. 189, 196 (1874). See 33 Am.Jur. Liens § 18 and 4 Pomeroy's Equity Jurisprudence §§ 1235-1237 (5th ed. 1941); but also see 41 Harv.L.Rev. 404 (1928). (Id. at 305, 214 A.2d at 177.)

This is in accord with 4 J. Pomeroy, Equity Jurisprudence § 1235 (5th ed., S. Symons 1941), cited in Keyworth, where it is stated:

The doctrine may be stated in its most general form, that every express executory agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund, therein described or identified, a security for a debt or other obligation, or whereby the party promises to convey or assign or transfer the property as security, creates an equitable lien upon the property so indicated, which is enforceable against the property in the hands not...