Hoffman v. Key Federal Sav. and Loan Ass'n, 60

• Court: Court of Special Appeals of Maryland
• Citation: 392 A.2d 1121,40 Md.App. 438
• Docket Number: No. 60,60
• Parties: Paul R. HOFFMAN et ux. v. KEY FEDERAL SAVINGS AND LOAN ASSOCIATION.
• Decision Date: 13 October 1978

Page 438

40 Md.App. 438 392 A.2d 1121 Paul R. HOFFMAN et ux.
v.
KEY FEDERAL SAVINGS AND LOAN ASSOCIATION. No. 60. Court of Special Appeals of Maryland. Oct. 13, 1978.
Certiorari Granted Nov. 16, 1978.

[392 A.2d 1122] Leo Howard Lubow, Baltimore, with whom were Michael L. Schwartz and Freishtat & Schwartz, Baltimore, on the brief, for appellants.

Franklin Goldstein, Baltimore, with whom were Melnicove, Kaufman & Weiner, P. A., Baltimore, on the brief, for appellee.

Argued before DAVIDSON, WILNER and COUCH, JJ.

WILNER, Judge.

Page 439

Appellants, Paul and Judith Hoffman, for themselves and a class they seek to represent, appeal from an order of the Circuit Court for Baltimore County sustaining appellee's demurrer to Count I of their Amended Declaration, without leave to amend, and from the court's refusal to allow the action to proceed under Maryland Rule 209 as a class action. ¹ The principal question is whether the court erred in concluding, from the facts alleged in Count I (and the exhibits incorporated in it), that a certain loan transaction between the parties was not usurious.

The loan transaction in question was in the nature of construction financing convertible into a "permanent" mortgage, in order to allow the Hoffmans to build a home on a lot they purchased in Howard County. Appellants used $53,000 of their own money, and desired to borrow $14,000 from appellee, Key Federal. Pursuant to a previous commitment letter, Key Federal agreed to make the loan, settlement of which occurred on January 29, 1976.

At that time, and in accordance with the terms of the commitment letter, Key Federal delivered to the Hoffmans its check for $14,000, the full proceeds of the loan. The Hoffmans immediately endorsed that check (and delivered as well one of their own for $53,000) to Robert L. Kolscher and George G. Wachter, trustees. The delivery of these funds was accompanied by the execution of a trust agreement governing, among other things, the future disbursement of the funds. The $14,000 loan was evidenced by a promissory note, secured by a deed of trust upon the Hoffmans' lot and improvements. The note required repayment in [392 A.2d 1123] equal monthly installments of $105.75, principal and interest, commencing May 1, 1976, and continuing for the ensuing 25 years. Interest commenced running on the $14,000 from the date of closing, and, apparently, was separately billed for the period from January 29, 1976, through April 30, 1976 the construction

Page 440

period. An annual interest rate "on the unpaid balance" was stated in the note to be 73/4%.

The critical agreement, in terms of the legal issue presented, is the trust agreement between the Hoffmans and the two trustees, both of whom are alleged to be "officers, agents and employees of Key Federal and were acting on behalf and under the control and direction of Key Federal." The agreement recited the loan from Key Federal, and stated that a "condition precedent" to the loan was that the Hoffmans erect and complete certain improvements within nine months from that date. It stated further that "for the purpose of guaranteeing the completion of said improvements", the Hoffmans had turned over to the trustees the proceeds of the mortgage loan, and that such proceeds were "to be deposited by said Co-Trustees, in their own names, with Key Federal Savings and Loan Association as a pending fund to secure the erection of the aforesaid improvements". These funds were to be advanced to the Hoffmans in six installments as certain specified levels of completion were achieved.

The agreement prohibited the commencement of any work until written authorization was received from Key Federal. However, once such authorization was received, work must commence within 30 days; otherwise, the agreement "may be voided by the Co-Trustees and all monies paid to Key Federal . . . on account of their mortgage loan. . . . " ² In that event the Hoffmans released the trustees from "any suits, legal actions, etc.", and "by the signing of this agreement . . . hereby expressly give their permission to the said Co-Trustees to follow the above stated course of action." In similar vein, the agreement provided that, if work on the improvements stopped for a period of 20 consecutive days, or was not completed within nine months, the trustees, "in their discretion, have the authority to use the balance of the aforesaid loan then in their hands towards the cost of

Page 441

completing said improvements or to pay (Key Federal) on account of its aforesaid mortgage loan."

Finally, the agreement provided that "by the acceptance of this trust by the (trustees) and the agreement by them to perform the duties imposed upon them . . . they do not assume any personal responsibility, and (the Hoffmans) do . . . not hold them responsible and do . . . expressly release them from such responsibility and no claim shall be made upon them for or on account of any matter or thing in excess of the sum of money paid into their hands or such balance thereof as may be remaining and undisposed of in accordance with the terms and agreements as hereinbefore set forth."

Pursuant to this agreement, the trustees deposited the entire sum (presumably the $67,000) in a noninterest bearing account at Key Federal, withdrawing and disbursing the same as construction proceeded. Although the Amended Declaration did not specifically allege this, the court, in lieu of granting leave to amend, considered the pleading as implicitly alleging that, while on deposit with Key Federal, these funds were not segregated in any way, but were instead intermingled with Key Federal's general funds, and were thus usable and used for the general purposes of the association.

The basis of the Hoffmans' complaint is that, between January 29, 1976 (the date of closing) and the time the last advancement was made pursuant to the trust agreement, the Hoffmans paid $800 in interest to Key Federal, this being interest on the Full amount of the $14,000 loan for that period, notwithstanding that the loan proceeds were advanced in installments. Their claim [392 A.2d 1124] is that they were required to pay interest on amounts that had not been advanced to them, and that did not, therefore, constitute an "unpaid balance" upon which interest could properly be charged. This $800, they assert, amounted to usury in that it constituted interest on amounts not actually lent to and within the exclusive control of the Hoffmans; and they sought as damages $2,400. ³ In

Page 442

addition, as representatives of a class, on behalf of each other person in the class who obtained a residential construction loan from Key Federal under similar arrangements, they claimed the greater of $500 or treble the amount of "usurious" interest charged.

Appellants' theory of recovery emanates primarily from the principles announced by the Court of Appeals in Tri-County Fed. S. & L. v. Lyle, 280 Md. 69, 371 A.2d 424 (1977); and, in large part, the initial question is whether the transaction alleged here is but a variation upon a theme or something substantially different from that considered by the Court in that case.

Lyle also involved a residential construction loan, obtained in order to finance both the purchase of a lot and construction of a house on it. At closing, a check for $60,000 was issued to the Lyles, which they immediately endorsed back to the savings and loan association. The association then paid out $15,000 to the seller of the lot, that being the purchase price of the property, but retained the balance of $45,000, which became part of its general funds. No separate escrow account was maintained. The $45,000 was to be paid out by the association in nine installments as work progressed. Evidencing the transaction was a note for $60,000, bearing interest at the rate of 8% per annum, secured by a deed of trust.

Five months later, before any part of the $45,000 had been disbursed, the Lyles abandoned their plans and repaid the association $15,000 plus $573.29 accrued interest on the $60,000. During the interim, an additional $1,600 in interest had been paid. Thereafter, Mr. and Mrs. Lyle sued to recover three times the amount of interest paid on the $45,000. With respect to this undisbursed sum, the Court stated, at page 73, 371 A.2d at page 426:

"At no time was this under the Lyles' control, or under their partial control, as it might have been had it been held in escrow by others for their account, even though subject to restrictions. It was deposited in Tri-County's general account, and remained there from the day the Lyles signed the note until repayment was made."

Page 443

For that reason, said the Court, that sum was not part of any "unpaid balance" owed by the Lyles, and any interest charged on it was usurious. At page 76, 371...