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

• Decision Date: 13 September 1979
• Docket Number: No. 87,87
• Citation: 416 A.2d 1265,286 Md. 28
• Parties: Paul R. HOFFMAN et ux. v. KEY FEDERAL SAVINGS AND LOAN ASSOCIATION.
• Court: Maryland Court of Appeals

Page 28

286 Md. 28

416 A.2d 1265

Paul R. HOFFMAN et ux. v. KEY FEDERAL SAVINGS AND LOAN ASSOCIATION.

No. 87.

Court of Appeals of Maryland.

Sept. 13, 1979.

Leo Howard Lubow, Baltimore (Michael L. Schwartz and Freishtat & Schwartz, Baltimore, on the brief), for appellants.

Franklin Goldstein, Baltimore (Melnicove, Kaufman & Weiner, P. A., Baltimore, on the brief), for appellee.

Before MURPHY, C. J., and SMITH, DIGGES, ELDRIDGE, ORTH and COLE, JJ.

SMITH, Judge.

We shall here hold that allegations of usury presented by appellants, Paul R. Hoffman and wife, against Key Federal Savings and Loan Association, should have been submitted to a trier of fact.

For purposes of our decision the facts are gleaned from the amended declaration. Prior to January 29, 1976, Key Federal issued a "construction-permanent" loan commitment to the Hoffmans for the purpose of erecting a home. Settlement was held on January 29 at which time $14,000 was paid over to the Hoffmans. They endorsed this sum to two individuals who were trustees under an agreement entered into at the same time. This trust agreement, appended to the declaration, recited that $14,000 had been borrowed from Key Federal and that a mortgage had been executed to Key Federal to secure repayment of that sum. It further stated that the mortgage proceeds had been turned over to the trustees, "to be deposited by said Co-Trustees, in their own names, with Key Federal . . . as a pending fund to secure the erection of the aforesaid improvements and should be advanced to (the Hoffmans) during the course of the construction of said improvements in installments . . . ." The agreement then went on to provide for various payments totalling $50,500 to be made at the time of the completion of specified work insofar as the erection of the home in question was concerned. The declaration stated that in addition to the $14,000 the Hoffmans paid $53,000 to the trustees to be held by them in the trust account. ¹ Examples of the payment schedule are that $10,100 was to be disbursed "(w)hen the roof and outside walls (were) sheathed and (the) house (was) completely enclosed" and $7,500 was to be paid out "(w)hen (the) roof (was) complete, (and the) plumbing, heating and electric wiring (were) roughed in." The agreement provided that if the Hoffmans stopped work for a period of 20 consecutive days or failed to have the improvements completed within nine months, the trustees, in either instance in their discretion, had the authority to use the balance of the loan "towards the cost of completing said improvements" or to pay Key Federal "on account of its aforesaid mortgage loan."

The amended declaration alleged:

The Trustees were officers, agents and employees of Key Federal and were acting on behalf and under the control and direction of Key Federal. The monies endorsed to the Trustees were placed in a trust account subject to the sole control of the Trustees acting for and on behalf of Key Federal . . . .

The Hoffmans executed a promissory note in the amount of $14,000 payable with interest at the rate of 7 3/4% per annum. The note specified that it should be payable in monthly installments of $105.75 beginning on May 1, 1976, and continuing on the first day of each month thereafter until April 1, 2001. These installments included principal and interest. Payment of the note was secured by a deed of trust covering the land upon which the home was to be erected.

The Hoffmans were "billed and paid interest on the full amount of the loan from January 29, 1976 through October, 1976, even though the monies in the trust account were partially advanced and disbursed as completion of the residential home progressed." They paid "approximately $800.00 in interest between January 29, 1976 and the date the last advance was made pursuant to the terms of the Trust Agreement." The narr. alleged that this trust agreement "was created by Key Federal merely as a subterfuge to evade the Maryland usury law," that "(t)he requirement of the payment of the interest on the full amount of the monies held in the trust account prior to their disbursement (was) in violation of (Maryland Code (1975)) § 12-101, et seq., Commercial Law Article," and that approximately $800 in "usurious and illegal interest" was in fact paid.

A second count contained allegations relative to interest on escrow funds in a context not pertinent to the issues now before the Court.

The trial judge (Haile, J.) referred to our opinion in Tri-County Fed. S. & L. v. Lyle, 280 Md. 69, 371 A.2d 424 (1977). In that case the borrowers executed a note and a deed of trust to a lending institution to secure the repayment of $60,000. They in fact received this sum from the lender. They paid $15,000 of the money thus obtained to the seller of the lot upon which the deed of trust was placed. The borrowers endorsed the remaining balance of $45,000 back to the lender. It then deposited that sum in the same account where its other funds were maintained. No escrow account of any kind was established. The lender charged interest on the full $60,000. The $45,000 was to be disbursed by the lender in certain installments as work progressed on a home. Judge Singley observed for the Court, "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." Id. at 73, 371 A.2d at 426. In this case the trial judge observed, "(B)y dictum (Lyle ) seems to say that . . . if the money were not in the sole control of the lender the decision would not apply." He stated he would "decide the case on the assumption that the law of Maryland is that in a situation where the construction loan money is trusteed . . . and the trustees enter into an agreement with the borrowers and certify as trustees for the borrowers . . . , that the money is under the borrowers' control or at least their partial control even though subject to restrictions." Accordingly, he "sustain(ed) the argument of (Key Federal's) counsel based on the dictum in the Tri-County case in the Court of Appeals, 280 Md. 69, 371 A.2d 424." Because he had made this ruling, the trial judge did not rule on the second point raised by Key Federal. As the trial judge put it, this was "the contention . . . that even if this money was sitting around for nine months, even if the borrowers were paying interest on it, when you add that to the seven and three-quarters percent calculated over the whole loan it is not actually usurious."

The Court of Special Appeals in Hoffman v. Key Fed. Sav. & L. Ass'n, 40 Md.App. 438, 392 A.2d 1121 (1978), affirmed the judgment below. However, it did so on the basis of the second contention to the trial judge, that over the entire 25-year life of the deed of trust the effective rate of interest would be less than the statutory maximum of 10%.

Hoffman petitioned us for the writ of certiorari, posing the question of "(w) hether the lower court erred in holding that Key Federal . . . did not practice usury when it charged interest on a sum not part of an unpaid balance." Key Federal filed an answer and a conditional cross-petition. See Maryland Rule 813 a. In the cross-petition we were asked to address the question of whether the Court of Special Appeals had "incorrectly reject(ed) the decision of the Circuit Court for Baltimore County that the Amended Declaration and the exhibits in this case establish as a matter of law that the $14,000.00 of construction money was held in escrow for the Hoffmans by their Trustees, under a Trust Agreement and, therefore, was part of the unpaid balance." We granted the writ in order that we might consider both questions.

For the purpose of determining whether a trial judge has erred in sustaining a demurrer without leave to amend we are required to assume the truth of all material facts which are well pleaded as well as all inferences which can reasonably be drawn from those well pleaded facts. Arnold v. Carafides, 282 Md. 375, 382, 384 A.2d 729 (1978); Krieger v. J. E. Greiner Co., 282 Md. 50, 52, 382 A.2d 1069 (1978); Zion Evang. Luth. Ch. v. St. Hwy. Adm., 276 Md. 630, 632, 350 A.2d 125 (1976); and Schwartz v. Merchants Mort. Co., 272 Md. 305, 307-08, 322 A.2d 544 (1974).

In considering this case we first note two opinions of our predecessors, Plitt v. Kaufman, 188 Md. 606, 53 A.2d 673 (1947), and Andrews v. Poe, 30 Md. 485 (1869). In Plitt Judge Delaplaine said for the Court:

This Court has held that no device or subterfuge of the lender will be permitted to shield him in taking more than the legal interest on a loan. In whatever part of the transaction usury may lurk, or in whatever form it may take, or under whatever guise the lender may attempt to evade the law, the court will seek to ascertain what the contract actually was between the parties and give the debtor relief. Andrews v. Poe, 30 Md. 485; Brenner v. Plitt, 182 Md. 348, 34 A.2d 853 ((1943)). (Id. 188 Md. at 611, 53 A.2d at 675.)

In Andrews Judge Robinson said for the Court:

Now, if there be a principle clearly established by judicial decision, it is that the laws against usury ought to be strictly enforced. Such, indeed, has been the uniform course of decisions under statutes penal in their character, and by which the usurious contract was wholly avoided, or the userer visited with the penalties of the law; and there is certainly no reason why, in this State, the law should be less rigidly enforced, where no contract is set aside or penalty imposed, but the excessive interest alone forfeited. It has so happened, from the earliest times to the present, that every device and shift which the wit of man could suggest, have been invoked to exempt contracts for illegal interest from the operation of the law, but courts have not hesitated, in every case, to tear off, with unsparing hands, the mask under which it has been attempted to conceal the usury,...