Federal Land Bank of Baltimore, Inc. v. Esham

• Citation: 43 Md.App. 446,406 A.2d 928
• Decision Date: 09 October 1979
• Docket Number: No. 905,905
• Parties: FEDERAL LAND BANK OF BALTIMORE, INC., et al. v. Otis G. ESHAM et al.
• Court: Court of Special Appeals of Maryland

Page 446

43 Md.App. 446

406 A.2d 928

FEDERAL LAND BANK OF BALTIMORE, INC., et al. v. Otis G. ESHAM et al.

No. 905.

Court of Special Appeals of Maryland.

Oct. 9, 1979.

David H. Clark and George G. Strott, Jr., Salisbury, with whom were Cullen Clark & Insley, Salisbury, on the brief, for appellants.

Gary A. Goldstein and Stanton J. Levinson, Baltimore, with whom were Schimmel & Tatelbaum, P. A., Baltimore, on the brief, for appellees.

Argued before MOORE, LOWE and MELVIN, JJ.

MOORE, Judge.

This complex appeal and cross-appeal have their origins in the decline, fall, and dismemberment by foreclosure sale of the Esham chicken enterprises on the Eastern Shore of Maryland. Originally, there were three separate actions two in Baltimore City and one in Wicomico County which were consolidated for trial in the Circuit Court for Wicomico County. The trial court refused to grant either side the complete relief which was sought, and both sides then appealed to this Court.

The mortgagees, Federal Land Bank of Baltimore, Inc. and Marva Production Credit Association (hereinafter Banks), as appellants, principally complain of an alleged computational error by the lower court in its attempt to sort out the accounting muddle remaining in the wake of the mortgagors' default and the foreclosure of the various mortgages. The mortgagors, Otis G. Esham, members of his family, and family-owned corporations (hereinafter Eshams), as cross-appellants, object to the following aspects of the foreclosure proceedings: (1) the Banks' attempted foreclosure on individually owned property in contravention of an agreement between the parties; (2) the payment to the Trustee in Bankruptcy of $275,000 from the proceeds of a foreclosure sale pursuant to a settlement agreement between the Banks and the Trustee; (3) the inadequacy of the price for property purchased by the Banks at foreclosure; (4) the sale at foreclosure of Worcester County property in Wicomico County; and (5) the lack of notice provided to the Eshams in advance of the sale of chattels at foreclosure.

I

Appellant Banks are federally-chartered ¹ institutions designed to provide financial assistance to farmers. The Federal Land Bank supplies long-term loans while the Production Credit Association furnishes loans of short duration. Between 1970 and 1974, the Banks made seven loans, secured by mortgages or deeds of trust, to the Eshams to finance their chicken processing business.

Otis G. Esham was the controlling force behind the Esham integrated poultry business which consisted of several corporate entities, the chief of which was Maryland Chicken Processors, Inc. Although Mr. Esham was the dominant figure in the business, his wife, and their sons and their wives were all involved in some facet of the operations, particularly as signatories on the notes evidencing the debts owed to the Banks. The notes, mortgages, and deeds of trust executed by the Eshams were signed in both corporate and individual capacities and encumbered both corporate and individual property.

In early 1974, the Eshams began to experience severe financial problems. Later that same year, the Banks, in an attempt to forestall financial disaster, agreed to finance a "grow-out" operation at the Esham hatcheries. This permitted the production of all chicks that had already been hatched for the current market season. ² All proceeds from the "grow-out" were to be applied to the Eshams' debt of $3,007,935.73. Unfortunately, however, this arrangement did not produce funds sufficient to satisfy the outstanding debts. As a consequence, in July 1974, Maryland Chicken Processors, Inc. was forced into bankruptcy, and John A. Payne of Snow Hill was appointed the Trustee.

Under federal bankruptcy law, an automatic stay prohibited the sale of corporate property, by foreclosure or otherwise. Since the Trustee opposed the lifting of the stay, the Banks, in December 1974, filed a complaint in the bankruptcy proceeding to have it removed. In an effort to resolve the controversy, the Banks and the Trustee participated in several hearings before the bankruptcy court in early 1975. By October 1975, however, the stay was still in effect. While awaiting a decision on the Banks' complaint, the Trustee and the Banks were able to reach a settlement agreement whereby the Trustee would consent to the foreclosure sales in exchange for the sale proceeds from the foreclosure on six corporate farms. ³ The Eshams were not parties to the agreement, which was approved by the bankruptcy court on October 23, 1975.

When the foreclosure sale was advertised, the Eshams obtained a temporary injunction enjoining it; but they ultimately stipulated to an order of sale, and the injunction was lifted. On December 5, 1975 the sale took place. Pursuant to the settlement agreement, the Banks paid the Trustee $275,000, representing his share of the proceeds. In accounting for this payment on their own books, the Banks listed it as an expense of the sale, thereby charging $275,000 to the Esham Account.

At the foreclosure sale the Banks themselves purchased three corporate properties processing plants at Nanticoke and Snow Hill and a hatchery at Parsonsburg for $330,000. They subsequently entered into a contract for the sale of the foreclosed properties along with the Laurel, Delaware feed mill (which was not subject to immediate foreclosure) to a third party, Champion Chicken Products Corporation. The Eshams and the Banks had stipulated that $500,000 of the $1,500,000 contract price would be allocated to the Delaware feed mill, giving the Eshams a credit of $500,000 towards their debt. There remained the sum of $1,000,000 which was allocated to the three farms that had been purchased by the Banks for $330,000. In order to avoid showing a "profit" of $670,000 ($1,000,000 minus $330,000) and acting upon the advice of tax counsel, the Banks on their own books credited the Esham account with the "profit," thereby showing no gain for tax purposes on the resale of the farm property to Champion Chicken Products Corporation. The Eshams, however, were not given notice of the $670,000 credit, and apparently, the Banks never intended that the Eshams would actually receive the credit. A Statement of Account prepared by the Banks for trial did not include the $670,000 credit in computing the total amount of the Esham indebtedness. ⁴

Not content with the conduct and outcome of the foreclosure sale, the Eshams filed numerous exceptions thereto on January 5, 1976. Sixteen days later, the circuit court ratified the foreclosure sale of all properties except the St. Martins Farm which was individually owned by Otis and Elizabeth Esham; the court deferred a decision on the issue of the Eshams' personal liability. The parties subsequently entered into a stipulation on March 5, 1976 whereby the Eshams would permit ratification of the sale of the St. Martins Farm in exchange for the Banks' promise not to sell at foreclosure any of the remaining Esham properties until a final resolution had been reached on the Eshams' exceptions to the foreclosure. The Eshams did, however, waive their objection to the place of sale of the St. Martins Farm.

Based upon this stipulation, the Circuit Court for Wicomico County (Pollitt, J.) ratified the St. Martins Farm sale, but reserved for future hearing the issues raised in the exceptions "insofar as they relate to the personal obligations of the Eshams or the responsibility of any property owned by the Eshams individually for any part of this mortgage indebtedness, Except that those exceptions related to the jurisdiction of sale and the County in which said sales took place are overruled and not preserved for further hearing." (Emphasis added.)

On October 12, 1976, prior to the settlement of the case with the secured creditors or the final determination of the reserved exceptions, and notwithstanding the above stipulation, the Banks advertised a foreclosure sale of the Eshams' Home Farm. ⁵ When reminded of the stipulation, however, the Banks discontinued all attempts to sell the property.

As a result of the foregoing events, the Eshams instituted three actions two in equity and one at law against the Banks. As previously noted, exceptions to the foreclosure sale of December 5, 1975 were filed on January 5, 1976 in the Circuit Court for Wicomico County. Thereafter, on January 20, 1976, an action in equity was filed in the Circuit Court of Baltimore City asking for injunctive and declaratory relief and ancillary damages with respect to activities surrounding the December 5, 1975 foreclosure sale. Finally, on July 7, 1977, the Eshams filed a suit at law in the Superior Court of Baltimore City claiming damages in connection with the attempted foreclosure sale of the Home Farm in October 1976. The Declaration was in two counts: Count I alleged a breach of contract stemming from a claimed violation of the March 1976 stipulation barring further foreclosures, and Count II, premised upon the identical facts, alleged slander of title. These actions were consolidated for trial in the Circuit Court for Wicomico County. All parties agreed that if a breach of contract or slander of title was found to have occurred, then the law action would be returned to the Superior Court of Baltimore City for a jury trial on the issue of damages.

In July 1978, trial was held before Judge James A. Perrott, Associate Judge of the Supreme Bench of Baltimore City, and Judge Richard M. Pollitt, Associate Judge of the Circuit Court for Wicomico County. At the close of the week-long trial, the consolidated cases were held Sub curia to allow the filing of post-trial memoranda of law, and to give the court an opportunity to digest the massive amount of conflicting financial and accounting testimony that had been presented. After further oral argument, Judge Pollitt, speaking for himself and Judge Perrott, rendered an oral opinion.

The court's findings consisted...