Fairfax Sav., F.S.B. v. Ellerin

• Decision Date: 01 September 1992
• Docket Number: No. 331,331
• Parties: FAIRFAX SAVINGS, F.S.B. v. Charles ELLERIN, et al
• Court: Court of Special Appeals of Maryland

Page 685

94 Md.App. 685

619 A.2d 141

FAIRFAX SAVINGS, F.S.B. v. Charles ELLERIN, et al.

No. 331 Sept. Term, 1992.

Court of Special Appeals of Maryland.

Jan. 27, 1993.

Reconsideration Denied Feb. 23, 1993.

Certiorari Granted March 26, 1993.

George A. Nilson, argued (Kurt J. Fischer, Marta D. Harting and Piper & Marbury, on the brief), for appellant

David Freishtat, argued (Freishtat & Sandler, on the brief), Baltimore, for appellees.

Argued before BLOOM, WENNER and CATHELL, JJ.

BLOOM, Judge.

The predisposition of many persons to use their ingenuity to seek gainful advantage over others often takes some of them on a sojourn of dealings which are tainted by their false assertions or suggestions, or their failure to reveal certain relevant information to their unsuspecting and trusting prey. ¹

A jury determination that appellant embarked upon such a "sojourn of dealings," labeled in the pleadings and referred to in the testimony as "fraud," is at the heart of this appeal. The principal questions raised at trial were: (1) whether appellant, Fairfax Savings, F.S.B., committed fraud in its dealings with appellees, Charles and Naoma Ellerin and Louis and Gloria Seidel, who guaranteed three loans to Sherwood Square Associates (Sherwood), a limited partnership in which Messrs. Ellerin and Seidel were general partners; and (2) whether punitive damages could and should be awarded upon a finding that fraud was committed. What is at issue before this Court is whether the jury's verdicts resulted from one or more judicial errors in rulings made during the trial and in instructing the jury as to the law of the case at the conclusion of the trial.

Sherwood, as may be surmised, defaulted on the loans, and Fairfax brought a separate action on each loan against the guarantors in addition to an action against the general partners and, finally, an action against Charles Ellerin, individually. Appellees, as guarantors, filed counterclaims in which they alleged fraud, duress, and negligent misrepresentation and sought compensatory and punitive damages. The action against Ellerin individually resulted in a verdict for him, and is not involved in this appeal. The judgments appealed from represent the net result of directed verdicts in favor of Fairfax and against the partners and guarantors in the aggregate amount of $4,371,401.96 and jury verdicts in favor of appellees in the aggregate amount of $13,005,966.08 on the fraud counts in their counterclaims.

Two of the issues raised by appellant concern jury instructions; the others concern an evidentiary ruling, denial of appellant's motion for summary judgment, and a ruling by the court that, as a matter of law, appellant had waived a contractual obligation of the debtor and guarantors. Appellant's assertion of error in instructing the jury on the elements of fraud was not preserved for appellate review, and we perceive no reversible error in the court's rulings on the evidence, the summary judgment motion, or the waiver

                issue.   We believe, however, that the court's instruction to the jury with respect to punitive damages was deficient.   We shall vacate the judgment for punitive damages and remand for a new trial on that issue
                

I FACTUAL BACKGROUND

The litigation in this case has a long and complicated history. In December of 1983 Fairfax F.S.B. (then Fairfax Savings Association) made three loans, totalling $5.7 million, to Sherwood Square Associates for the acquisition and renovation of four "shell" buildings located in the City of Westminster. The buildings were to be renovated into a shopping and office facility. Charles Ellerin and Louis Seidel were the general partners of Sherwood and the owners of Tri-Ess, Inc., the general contractor for the project. Ellerin and Seidel, together with their wives, Naoma Ellerin and Gloria Seidel, and Tri-Ess, Inc., as guarantors, joined with Sherwood in entering into a Development Agreement, a Loan Agreement, and a Completion Guaranty with Fairfax and the city. The city issued two Industrial Revenue Bonds (IRB's) in the amounts of $3,050,000 and $1,800,000, respectively, which were both subsequently acquired by Fairfax, and Fairfax made an additional conventional loan to Sherwood of $850,000. ² The Completion Guaranties, two identical sixteen-page documents, required the guarantors to guarantee completion of the facility and repayment of the IRB loans up to $2.3 million (a $1.15 million guaranty on each loan). The guarantors' liability would be reduced in proportion to the leasing of the facility, eventually terminating upon its completion and the leasing of 70% of its total square footage, i.e., a "rent roll" formula. The Development Agreement required Sherwood to guarantee completion of the project and to post $50,000 security.

Sherwood defaulted on the loan in November 1985. Fairfax sued Sherwood and the partners in two cases, seeking $1,671,740 and $2,823,689, the balance on the loans, and sued the guarantors in three other cases. ³ Confessed judgments were docketed, but the guarantors moved to vacate the confessed judgments on the ground that the Completion Guaranty had been altered to extend their liability past the point of actual completion. This alleged alteration took place after the guarantors' attorney had reviewed what were supposed to be final prior drafts of the closing documents but before settlement, when the documents were executed. ⁴ Sometime between December 23 and December 29, the date of closing, sections 3.1(b), (c) and 8.1 of the Completion Guaranty and section 4.1 of the Loan Agreement were altered to impose $2.3 million in IRB guaranties on the Guarantors and $4.85 million in post-completion guaranties on Ellerin and Seidel as general partners. The motion to vacate was granted; the guarantors filed an answer and counterclaim alleging fraud, duress, and negligent misrepresentation, claiming $6 million in compensatory and $10 million in punitive damages. The Guaranty and Partnership cases were consolidated.

A jury trial began on 2 September 1987 and ended on 2 October 1987 when the jury, having found that Fairfax had fraudulently included a payment guarantee in the Completion Guaranty documents but that the guarantors had ratified the fraud, awarded Fairfax $2,303,946 against the An appeal was taken from that judgment, and on 9 February 1989 this Court reversed it. Ellerin v. Fairfax Sav. Ass'n, 78 Md.App. 92, 552 A.2d 918, cert. denied, 316 Md. 210, 557 A.2d 1336 (1989).

                guarantors.   The court then entered judgment in the amount of $5,263,688.75 against Ellerin and Seidel in the Partnership cases
                

A fifth suit was filed by Fairfax on 23 December 1988, alleging the use of a fraudulent financial statement by Ellerin. That case was consolidated and tried with the others. The result was a hung jury.

A third trial began on 10 April 1991. At that trial, Fairfax offered testimony to show that the post-completion payment obligation of the borrowers was inadvertently left out of the loan document circulated on 22 December. Richard Jacobs, the loan officer who prepared the documents for closing, testified that it was always understood that the guarantors would personally guaranty the loan. Jacobs, along with David Blum, the former partner of Weinberg & Green's real estate department who drafted the loan documents, and Jack Stollof, senior executive vice president of Fairfax Savings Bank, testified that the executed Completion Guaranties contained the terms that were agreed upon during a telephone conference call held one week to ten days before closing. Ellerin and R. Bruce Alderman, Ellerin's counsel, denied the existence of the alleged conference call.

Blum further testified that he personally escorted Alderman to a reading room on the first day of closing, handed him the corrected Loan Documents, and indicated that Alderman remained in the room for one to two hours. All of that testimony was denied by Alderman.

Ellerin and Seidel offered testimony to the effect that the terms of the personal guaranty were established in three Commitment Letters prepared by Fairfax. Prior to this transaction, Ellerin had rejected a loan with another bank because it required a post-completion guaranty of $1,300,000. No IRB post-completion guaranties existed in the Alderman testified that he did not participate in the alleged conference call prior to settlement and could not recall whether any changes had been brought to his attention by Fairfax. Although it is his practice to inquire of any changes, he could not recall making this inquiry and concluded that, since he did not read the final Loan Documents at closing, he must have made the inquiry and received some indication from Fairfax's counsel that no changes had been made.

                Loan Documents or Commitment Letters until mid-December, shortly before closing.   Based upon the Commitment Letters, which Ellerin and Seidel believed to control the terms of the loan, and their reliance upon the statement of their attorney that he had reviewed the loan documents, neither partner read or reviewed any of the documents signed at closing
                

David Bielawski, bond counsel for the City of Westminster and the sole unbiased witness of the proceeding, testified that he was unaware of any addition to the Completion Guaranties and did not re-read any of the loan documents at closing.

Under the Loan Agreement, completion of the facility required Sherwood to provide an architect's certificate to Fairfax indicating that the two larger buildings were completed according to the plans and specifications, and to submit proof that all contractors and subcontractors had been paid. The partners admitted that an architect's certificate was not filed.

At trial, the partners took the position that Fairfax had waived the completion requirements by releasing retainage funds to the guarantors, ⁵ converting the loans from construction to permanent status, accepting three and three-quarters percent...