Hand v. Manufacturers Trust, 109 September Term, 2007.

• Citation: 952 A.2d 240,405 Md. 375
• Decision Date: 24 July 2008
• Docket Number: No. 109 September Term, 2007.,109 September Term, 2007.
• Parties: Patrick T. HAND, Successor Guardian of the Property of Clifton D. Smith v. MANUFACTURERS & TRADERS TRUST CO., et al.
• Court: Court of Special Appeals of Maryland

952 A.2d 240 405 Md. 375 Patrick T. HAND, Successor Guardian of the Property of Clifton D. Smith
v.
MANUFACTURERS & TRADERS TRUST CO., et al. No. 109 September Term, 2007. Court of Appeals of Maryland. July 24, 2008.

[952 A.2d 241]

George E. Meng (Meng & Alpert, LLC, Upper Marlboro), on brief, for Petitioner.

Matthew J. MacLean (Anne E. Langford of Pillsbury, Winthrop, Shaw, Pittman, LLP, Washington, DC), on brief, for Respondents.

ARGUED BEFORE BELL, C.J.,^* RAKER, HARRELL, BATTAGLIA, GREENE, MURPHY, and DALE R. CATHELL, (retired, specially assigned), JJ.

[952 A.2d 242]

DALE R. CATHELL, Judge (retired, specially assigned).

Patrick T. Hand, Successor Guardian of the Property of Clifton D. Smith, petitioner, presents two questions as follows:¹

I. WHERE CLAIM IS AGAINST A GUARDIAN, DOES THE DEFENSE OF LACK OF LEGAL CAPACITY TO THE CLAIM OF A HOLDER IN DUE COURSE, AS SET OUT IN COMMERCIAL LAW ARTICLE, § 3-305(a)(1)(ii), RELATE ONLY TO AN INDIVIDUAL'S MENTAL STATE?

II. DOES THE DEFENSE OF ILLEGALITY TO THE CLAIM OF A HOLDER IN DUE COURSE AS SET OUT IN COMMERCIAL LAW ARTICLE, § 3-305(a)(1)(ii), RELATE ONLY TO SITUATIONS WHERE THERE IS A DIRECT STATUTORY EXPRESSION THAT AN INSTRUMENT, ITSELF, ARISING FROM A PARTICULAR CONTRACT OR TRANSACTION IS VOID?

In the circumstances of this case we answer no to the first question and yes to the second question, and shall affirm the judgment of the Court of Special Appeals.²

952 A.2d 243

Relevant Facts

We note that, although at one point a deed of trust (encumbering Maryland real property) was relevant and was involved in this particular issue, in the present nature of the case we are concerned primarily with a promissory note and the obligations of a holder in due course of such a note and the defenses, if any, that a maker of a promissory note may have vis à vis such a holder in due course.³ All parties agree that the respondent in this case, Manufacturers & Traders Trust Co., et al. ("M & T"), is a holder in due course of the promissory note here at issue.

Ms. Cordelia Smith was appointed as the guardian of the property of her child, Clifton Smith, by the court in the District of Columbia where they were then residing.⁴ They thereafter moved to Maryland where the proceeds of a settlement in respect to Clifton's injuries were used to buy them a home.

Thereafter, Cordelia Smith, while a resident of Maryland, contacted a mortgage broker for the purpose of securing financing to pay her bills, using the property of the estate in Maryland, which was titled as "Cordelia Smith, Guardian of Clifton Dominick Smith, a Minor Child," as collateral security for the repayment of the loan. She obtained a loan at this first financing of $69,000, and executed a bill obligatory (promissory note) and a Deed of Trust as Guardian. She then almost immediately obtained refinancing in the amount of $93,500 through the same process, i.e., the execution of a bill obligatory collaterally secured by a deed of trust and the guardianship property. The proceeds from this refinancing were used, for the most part, to pay off the first indebtedness. The first financing transaction is not before this Court. It is only the refinancing that is presently at issue.

All of the instruments for the financing and refinancing were signed by Cordelia Smith in her capacity as Guardian of the Property of Clifton Dominick Smith, a Minor Child. Cordelia Smith, as Guardian,

952 A.2d 244

neglected to obtain permission from the court in the District of Columbia in respect to the execution of the deed of trust. The law in the District of Columbia required that she get approval from that jurisdiction's court for such transactions involving the real property of her ward. Petitioner (the successor guardian), in his brief, relies on D.C.Code § 21-157 (2001),⁵ the relevant parts of which are reiterated in petitioner's brief, as follows:

"Where it appears to the court by proof that it would be for the advantage of the infant to raise money by mortgage ... the court may, on the application of the guardian ... decree⁶ a conveyance of the property, by mortgage or deed of trust...."

The property at issue, however, is situate in Maryland, where such approvals, generally, are not required under the Maryland statutes, infra.

The bill obligatory and deed of trust involved here were assigned by the original creditor to Contimortgage Corporation and M & T subsequently succeeded to Contimortgage's interest. As previously stated, it is conceded by all parties that M & T is a holder in due course of the bill obligatory at issue in the case at bar.

In the meantime, Cordelia Smith, upon her own petition, was removed as Clifton's guardian by the District of Columbia court and Patrick T. Hand was appointed Clifton's Successor Guardian by the same court.⁷ No guardianship proceeding then existed in the State of Maryland, albeit the property at issue was in this State. Upon Clifton's reaching the age of 18 when he was no longer a minor, a new guardianship proceeding was then initiated in the State of Maryland where he was then (and had been) a resident, and Patrick Hand was appointed by the Maryland court as the Guardian of the property of Clifton Smith under that new guardianship.

Ultimately, the note at issue came in arrears and litigation was instituted in Maryland by M & T against Hand, Cordelia Smith and Clifton Smith, for the default in payment and a Declaratory Judgment count was included seeking a court order that M & T had the right to foreclose on the Deed of Trust and an order was sought authorizing M & T to, in fact, initiate foreclosure proceedings.

A default judgment was entered against Cordelia Smith. A trial was held. The Guardianship defended on the grounds that Ms. Smith had no authority to borrow money on behalf of the guardianship and to encumber guardianship property because of her failure to obtain the approval of the District of Columbia court before encumbering the property, even though the real property was situate in Maryland.⁸

952 A.2d 245

The trial court did not rule on whether M & T had the authority to institute foreclosure proceedings under the Deed of Trust.⁹

M & T took, and takes, the position that because it is a holder in due course it would take the bill obligatory free and clear of the asserted defenses (including the proffered defense that Cordelia Smith had not obtained permission from the court in the District of Columbia to execute the documents) in that M & T had no actual notice of the defect (if it is a defect). M & T prevailed at the trial level on the main issue but was not awarded the attorney's fees it had sought under the provisions of the note.¹⁰ Both parties appealed to the Court of Special Appeals — the Guardianship alleging for the first time that Cordelia Smith lacked legal capacity to sign the note and that the transaction was illegal for failure of court approval by the court of the District of Columbia. M & T appealed the failure of the trial court to award it legal fees.

In affirming the trial court, Judge Barbera, for the Court of Special Appeals, correctly resolved the issues, saying, in relevant part, as follows:

"The [trial] court found that M & T Bank purchased the Note for value, in good faith, and without notice that it contained an unauthorized signature. That finding is supported by evidence offered by M & T Bank. The evidence showed that M & T Bank had purchased the Note and the Deed of Trust for value and conducted an appropriate due diligence investigation prior to the purchase. The investigation included a review of the title commitment, which reflected that the Property was vested in `Cordelia A. Smith, Guardian of Clifton Dominick Smith, Minor Child.' M & T Bank's agents also reviewed the Deed of Trust.... Further, they confirmed that they had a copy of the order appointing Ms. Smith as Guardian....

We agree ... moreover, that there is no merit to appellant's claim that various loan documents should have raised questions.... None of these documents raises a concern about Ms. Smith's authority to sign as Guardian ...."

A Petition for Writ of Certiorari was filed by the Guardianship with this Court, which we granted at Hand v. Manufacturer's Trust, 402 Md. 355, 936 A.2d 852 (2007). No cross-petition was filed by M & T.

Discussion

Respondent asserts in its brief,¹¹ as follows:

"Throughout his brief, Mr. Hand refers to the Promissory Note as a `Deed of Trust Promissory Note,' attempting to superimpose laws relating to real estate conveyances onto the Maryland Uniform Commercial Code, which does not involve real estate.... In fact, the deed

952 A.2d 246

of trust on the property and the Promissory Note are separate instruments. The deed of trust is no longer at issue in this case, as Mr. Hand has sold the property, and the deed of trust has been released. At this stage, the case only involves the enforceability of the Promissory Note, and not the enforceability of the deed of trust."

We agree. Generally, bills obligatory which are secured by mortgages or deeds of trust are separate instruments and can be proceeded on separately. We noted in Katz v. Simcha Co., Inc., 251 Md. 227, 246 A.2d 555 (1968), a case in which it was argued that there were irregularities in District of Columbia foreclosure sales in respect to deeds of trust securing the promissory notes at issue in the Maryland case, as follows:

"The appellants advanced the argument that the appellee sued in the wrong cause of action and could not sustain a suit for a deficiency because the deed of trust did not contain a covenant to pay the debt. This was an action brought to obtain a judgment for the unpaid balance ... on the two promissory notes which were secured by two deeds of trust.... The action was not on the deeds of trust but rather on the obligation contained in the two notes which were secured by the deeds of trust. Appellants have not afforded us with any authority which would persuade us...