Frank M. Ewing Co. v. Krafft Co.

Decision Date15 March 1960
Docket NumberNo. 150,150
Citation222 Md. 21,158 A.2d 654
PartiesFRANK M. EWING CO., Inc. v. KRAFFT COMPANY et al.
CourtMaryland Court of Appeals

Carlyle J. Lancaster and T. Hammond Welsh, Jr., Hyattsville (Welsh, Dyer & Lancaster, Hyattsville, and Betts, Clogg & Murdock, Rockville, on the brief), for appellant.

John C. Keating, Bethesda, for Krafft Co., by E. Austin Carlin, Bethesda, for James G. Hollis (J. Willard Nalls, Jr., Bethesda, on the brief), for Rose Hill Estates, Inc., and H. Ralph Miller, Silver Spring, on the brief, for John G. Salsman, appellees.



On the morning of the day of sale under foreclosure of a construction deed of trust, appellant Frank M. Ewing Co., Inc., the assignee of the note secured by the deed, handed Charles Galeano, president of Custom Line Homes, Inc., the builder and maker of the note, a check for $8,300 purporting to be the final advance under the deed, and was immediately given back the endorsed check to be applied in reduction of the builder's large debt to the Ewing company. The court auditor, in an amended account, disallowed the $8,300 claim of the Ewing company against the proceeds of sale, as previously directed by the chancellor who overruled exceptions to the amended account, thereby occasioning this appeal.

In August 1955 Custom Line Homes, Inc., was granted by the B. F. Saul Company of Washington a construction loan of $36,500 on two lots in Montgomery County. On August 30, a note for $36,500 payable to Everett B. Bean, a nominee of the Saul company, was executed, as was the deed of trust securing it. Simultaneously, a completion bond was given by Custom Line Homes, Inc., and by Galeano and his wife, with Frank M. Ewing, president and majority owner of the Ewing company, dealers in building supplies, as surety for the 'exclusive protection of the lender' against mechanics' liens and loss by reason of non-completion of the houses to be built. No money was paid on August 30. An oral understanding as to disbursements had been reached and was embodied by Saul in a schedule, it being contemplated that so much would be paid when first and second floor joists, respectively, were up, so much when house was 'fully roofed and weatherboarded,' so much when ready for plaster, and so on. The final payment of $4,150 on each house was scheduled when the houses were finished and liens released.

During the course of the construction of the houses the Saul company made disbursements from time to time, as had been contemplated. The final disbursements of $4,150 on each house were not made because the houses were never finished by Custom Line Homes, Inc., and there had been no release of liens. (The purchaser at foreclosure of one of the houses spent over $5,000 to finish it and make it saleable.) Galeano ran into financial difficulty with the houses here involved and others he was building individually and in the name of another corporation. The Ewing company furnished materials on credit to Custom Line Homes, Inc., Galeano personally, and to his other corporation, much of them with knowledge of his insolvency and the existence of outstanding junior mortgage liens and mechanics liens. At the time of the foreclosure, Galeano owed the Ewing company about $33,000, some $12,000 of which was for materials furnished Custom Line Homes, Inc.

Early in 1958 the Ewing company attempted to buy up for twenty-five cents on the dollar the claims of the various creditors of Custom Line Homes, Inc., who had taken second and third deeds of trust or secured mechanics' liens or judgments covering the lots and houses here involved. This effort proved unsuccessful. In March 1958 Mr. Ewing wrote Saul a letter requesting foreclosure under the deed of trust (the note was in default) and agreeing to bid at the sale the amount due on the note. Saul instituted proceedings and the sale was advertised for April 15, 1958.

On the morning of April 15, the Ewing company paid Saul the exact amount it had advanced on the note of August 30, 1955, plus interest--a principal amount of $28,200 to which was added interest of $1,590.18, or a total of $29,790.18--and took an assignment of the note. Thereafter on the same morning, the Ewing company issued its check for $8,300 to Custom Line Homes, Inc., in reliance upon the prior agreement of Galeano to immediately endorse and return the check. This was done and the check deposited in the account of the Ewing company in the bank on which it was drawn. The testimony leaves no doubt that if it had not been sure that Galeano would return the check it would not have been issued. Custom Line Homes, Inc., was given credit for $8,300 on the amount it owed the Ewing company. Mr. Ewing testified frankly that he thought his company, as holder of the note, had a right to make the $8,300 advance to the borrower to bring the amount borrowed to $36,500, the face amount of the note, and that his purpose was to bring about a partial payment on the large sum due him by Galeano, even though this would be at the expense of the other creditors.

The two properties were sold for $45,000, although neither was finished. In a first account the auditor allowed the Ewing company the amount it had paid Saul and the $8,300, as well as accrued interest. The appellees excepted and Judge Pugh, after hearing, disallowed the $8,300 payment and ordered a new account. The Ewing company excepted to the disallowance of its $8,300 claim in the amended account and appealed from its ratification.

In his opinion Judge Pugh said 'to sanction such a transaction would be a travesty on justice * * *. It would be unconscionable for a Court of Equity to close its eyes to such a maneuver.' The Ewing company regards this language as a declaration it was guilty of actual or constructive fraud. We see no basis for such an inference if one was intended. Except for the equality compelled by the bankruptcy and insolvency statutes, and absent fraud, a debtor has the legal right to prefer a creditor, and the creditor is subject to no just criticism legally if he obtained a preference. Drury v. State Capital Bank, 163 Md. 84, 89-90, 161 A. 176; Wareheim v. Bayliss, 149 Md. 103, 107, 131 A. 27.

The matter before us turns simply on whether the law gives the Ewing company the benefit of the senior lien of the deed of trust as to the $8,300 it advanced with actual and complete knowledge of other outstanding liens which had attached after that of the deed of trust.

In answering the question we assume, without deciding, that the handling of the $8,300 check to Galeano, its immediate endorsement and redelivery, and the deposit of the check in the drawer's account in the drawee bank was not in effect the paper transaction it was literally--that is, we assume there was an effective advance of $8,300 and a payment on account of Galeano's debt to the Ewing company. On this assumption we find that the lien of the deed of trust does not encompass the $8,300 payment made by the Ewing company.

Mortgages, and deeds of trust in the nature of mortgages, 1 to secure future advances 'if bona fide made, have always been sanctioned by the common law, and if unexceptionable in other respects, their validity cannot be questioned in Maryland.' Wilson v. Russell, 13 Md. 494, 530. 1 Jones, Mortgages, Sec. 448 (8th Ed.). In Wilson this Court held in 1859 that the lien of such a mortgage or deed of trust covers, in preference to a claim under a junior intervening lien, an advance as to which the lender had no option and was obligated under the instrument to make, even though the advance was made with knowledge of the intervening encumbrance. In reaching its result, the opinion relied on the English case of Gordon v. Graham, 7 Vin.Abr. 52, pl. 3, 2 Eq. Cases Abr. 598, 22 Eng.Rep. 502 (Ch.1716), 2 which in 1861 was overruled by the House of Lords in the decision in Hopkinson v. Rolt, 9 H.L.C. 514, 11 Eng.Rep. 829. 3

In 1880 the overruling of Gordon v. Graham was called to the attention of this Court in Robinson v. Consolidated Real Estate & Fire Ins. Co., 55 Md. 105, 108, but the Court said, referring to Wilson v. Russell: 'The decision in 13 Md. does not rest, and was not placed solely on Gordon v. Graham; for this court * * * said that 'the weight of authority sustained the principle established in Gordon v. Graham."

There has been no modification in Maryland of the rule adopted in Wilson v. Russell as far as advances which the lender was obliged to make are concerned. Whether the same result follows there the lender with actual knowledge of the intervening liens voluntarily makes an advance he could not have been compelled to make, seems not, before this case, to have been directly presented for decision in this State. Whatever may be their answer to other phases of the subject, almost all jurisdictions agree in holding that under such conditions the claim of the lender is inferior to the lien of the intervening encumbrances. Watkins, Maryland Mortgages for Future Advances, 4 Md.L.Rev. 111, 119, note 23, says, referring to the great weight of general authority and to the mortgagee: 'If the future advances are optional, and not obligatory, he is postponed to intervening liens of which he had...

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