Kronovet v. Lipchin

Decision Date17 June 1980
Docket NumberNo. 137,137
Citation288 Md. 30,415 A.2d 1096
Parties, 16 A.L.R.4th 942 Saul Duff KRONOVET, General Partner, t/a Twin Towers Associates et al. v. Marc J. LIPCHIN et al.
CourtMaryland Court of Appeals

Alfred L. Scanlan, Washington, D. C. (William W. Cahill, Jr., Baltimore, Christopher C. Sanger, Henry S. Ruth, Jr., William N. Eskridge, Jr. and Shea & Gardner, Washington, D. C., on brief), for appellants.

Allan J. Malester, Baltimore (Lawrence D. Coppel, Gloria M. Belgrad and Gordon, Feinblatt, Rothman, Hoffberger & Hollander, Baltimore, on brief), for appellees.



This appeal presents questions between developers-mortgagors and the permanent lender arising out of two actions by the lender to enforce remedies on default. The instant actions are but part of the panoply of litigation brought in the wake of the collapse of a multi-million dollar real estate venture. After trial the Circuit Court for Prince George's County found for the lender. Certiorari was issued prior to consideration of the developers' appeal by the intermediate appellate court.

In affirming the decree below, we shall hold in response to the contentions raised that:

1. The transaction is not usurious under Maryland law, which the parties chose by contract as controlling the interest aspects of their transaction;

2. There was no error in the admission of certain expert testimony;

3. The principal debt carries interest at the contract rate after default and without reduction to 6% following the decree here appealed; and 4. The modified stay of proceedings entered by a federal bankruptcy court, which permitted determination of the issues below, but not enforcement of that determination, does not deprive the issues of "justiciability."

The real estate project, "Presidential Towers," is a 509 unit highrise apartment house, consisting of two 20-story towers connected at ground level by a one-story common lobby. Presidential Towers is located at the intersection of Metzerott Road and New Hampshire Avenue in Prince George's County, Maryland. Appellants are the owners, in the form of limited partnerships, of the leasehold and reversionary interests, and their managing agent. Appellees are the permanent lender, Jamaica Savings Bank ("Jamaica"), a New York mutual savings bank, and its substituted trustees under consolidated deeds of trust securing notes purchased by Jamaica on August 25, 1971 in the roll over to permanent financing.

On December 22, 1976 Jamaica, alleging default and relying on provisions in the deeds of trust, brought an action on the equity side of the court below to obtain possession of the project and control of the rent collections (the "Possession Action"). 1 On December 28, 1976 Jamaica followed up by docketing foreclosure proceedings (the "Foreclosure Action"). These actions were consolidated. The defendants asserted usury and that Jamaica had agreed to forbear exercising its remedies for default. A bifurcated trial of the forbearance issue resulted in dismissal of that defense on December 5, 1977. That determination is not questioned on this appeal.

The owners of the project then sought the protection afforded under the Federal Bankruptcy Act. On December 20, 1977 each filed petitions under Chapter XII in the United States District Court for the Southern District of New York resulting in stays of the Possession and Foreclosure Actions. 2 On March 10, 1978 the stay was modified "to permit the completion of the Possession Action." 3

Our scene shifts back to Maryland for trial of the usury issue. The August 25, 1971 permanent financing by Jamaica carried interest at 8.375% per annum. Borrowers asserted that New York law applied under which the interest ceiling was 7.5%. 4 Jamaica argued that Maryland law applied and, because the loan was for the purpose of carrying on a commercial enterprise or investment, there was no statutory limit. 5

The parties start from a common premise, i. e., that the law applicable to interest and usury has been contractually chosen in the consolidation and extension agreement (the "C&E") of August 25, 1971. It provides in immediately successive paragraphs as follows:

The parties hereto agree that this Agreement has been negotiated in the State of New York and that this agreement shall be enforced under, and in accordance with the laws of the State of New York, and all the parties for all purposes hereunder do hereby agree and do hereby submit to the jurisdiction of the Courts of the State of New York. (The "New York Clause").

The Note secured hereby is transacted solely for the purpose of carrying on or acquiring a business or commercial investment within the meaning of Section 7 of Article 49 of the Maryland Code, Annotated, and this instrument is not a purchase money deed of trust. (The "Maryland Clause").

The court below on May 7, 1979 held that the transaction was not usurious; made findings as to the amount of indebtedness, with interest, due to Jamaica as of January 1, 1979; granted "a permanent order of possession with respect to the mortgaged property"; and decreed that the plaintiffs may prosecute and complete the Foreclosure Action.

The decree further provided that

the portion(s) of this Decree granting the Permanent Order of Possession and permitting the prosecution and completion of the Foreclosure Action, are subject only to further lawful directives and orders of the Bankruptcy Court and the granting of such relief herein is not intended to be in contravention of any order of the Bankruptcy Court . . . .

A somewhat detailed statement of the facts is required to set forth the reasons which support the trial court's conclusions.

History Of The Transaction

The project was originally a venture of Realty Equities Corporation of New York ("Realty Equities") which in 1968 held the subject, then unimproved, property through its subsidiary, R.E. Americana Land Corporation, a Maryland corporation ("Land Corp."). A $400,000 land loan had been made to Land Corp. on December 11, 1968 by Benjamin C. Cohen of New York. The note, made and payable in New York, provided that New York law should govern. It was payable in one year and carried 18% per annum interest. 6 This note was secured by a deed of trust to Edward W. Nylen, Esq. and John D. Gilmore, Jr., Esq., of Maryland. We shall refer to this $400,000 secured indebtedness as "Loan A".

In 1969 a representative of Realty Equities approached one of the appellants, Saul D. Kronovet ("Kronovet"), concerning investment in the project. Kronovet is a member of the New York Bar. Negotiations resulted in participation by a group of investors led by Kronovet (the "Kronovet Group"). 7 A Maryland limited partnership, Twin Towers Associates ("Twin Towers"), was formed. A ground lease was created from Land Corp. to Twin Towers on December 16, 1969. Loan A was subordinated to the ground lease.

The Kronovet Group comprised the limited partners of Twin Towers and made an initial capital contribution, in installments, of $1,500,000. The general partner of Twin Towers was R.E.C. Americana Corporation ("Americana"), a Maryland corporation and a subsidiary of Realty Equities. Under its Articles of Limited Partnership the sole purpose of Twin Towers was to construct, manage and otherwise deal in the project, and its initial principal place of business was in Maryland.

Construction financing by American Security and Trust Company ("AS&T"), a District of Columbia trust company, had been arranged by Realty Equities. Initial closing of the $6,500,000 construction loan was on December 29, 1969. The note was made by Twin Towers and is dated in Maryland. This loan ("Loan B") carried interest at 8.75% per annum and was due December 31, 1971 or earlier, upon assignment to the then contemplated interim take out lender, I.F.C. Collateral Corporation. The note for Loan B provided it "shall be governed by and construed according to the laws of the State of Maryland," and also contained the following paragraph:

Borrower stipulates and warrants that the purpose of the loan evidenced hereby is for the purpose of a business or commercial investment within the meaning of Section 7 Chapter 453 of the Laws of Maryland 1968. Borrower further stipulates and warrants that all proceeds of said loan will be used for said business or commercial investment purpose.

The note was secured by a deed of trust made by Twin Towers in which Land Corp. joined for the purpose of extending the lien to its fee simple estate. Paragraph 25 of this deed of trust provided:

That the property herein mortgaged being located in the State of Maryland, this Deed of Trust and the rights and indebtedness hereby secured shall, without regard to the place of contract or payment, be construed and enforced according to the laws of the State of Maryland.

It appears from Kronovet's testimony that construction commenced utilizing equity capital, and that advances under the construction loan could not be obtained because of the outstanding lien of Loan A which Realty Equities had not paid. On August 13, 1970 Kronovet arranged for the holder of the Loan A note to be paid and the note was assigned to Kronovet. At that time the lien securing Loan A was subordinated to the construction loan. As part of the overall transaction a contract was made between the Realty Equities' interests and the Kronovet Group under which the latter could acquire at least part of the Realty Equities' position in the project.

In late December 1970 Twin Towers refinanced Loan A with, and borrowed an additional $100,000 from, the trustees of Guardian Mortgage Investors ("Guardian"), a Massachusetts business trust with its principal office in Jacksonville, Florida. A new note from Twin Towers and a new deed of trust by Twin Towers and Land Corp. were created for the $100,000 additional advance, due December 31,...

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