Mt. Vernon Sav. and Loan v. Partridge Associates
| Decision Date | 22 December 1987 |
| Docket Number | Civ. No. JFM-83-176. |
| Citation | 679 F. Supp. 522 |
| Parties | MOUNT VERNON SAVINGS AND LOAN ASSOCIATION, et al. v. PARTRIDGE ASSOCIATES, et al. |
| Court | U.S. District Court — District of Maryland |
Steven K. White, Squire, Sanders & Dempsey, Washington, D.C., for plaintiffs.
Christopher Sanger, Tucker, Flyer, Sanger & Lewis, Washington, D.C., Michael Schatzow, Melnicove, Kaufman, Weiner, Smouse & Garbis, Baltimore, Md., for defendants.
Plaintiff in this action is the Federal Savings and Loan Insurance Corporation ("FSLIC"), the receiver for the original plaintiff, Mount Vernon Savings and Loan Association, which has been declared insolvent. Defendants are Partridge Associates, a limited partnership, and American Housing, Inc. and MIW Investors of Washington ("MIW"), its general partner and one of its limited partners.1 FSLIC asserts a contract claim against Partridge Associates for failing to pay for 2.6 million dollars of mortgages which FSLIC contends were turned over by Mount Vernon to Partridge Associates pursuant to a Memorandum of Understanding between them dated January 19, 1982. FSLIC seeks to hold MIW liable on this claim on the ground that MIW, although nominally a limited partner, took part in the control of the partnership's business.
Partridge Associates, American Housing and MIW have all filed counterclaims. Partridge Associates and American Housing allege that Mount Vernon breached a contract which it had made to provide permanent financing to Partridge Associates. MIW alleges that Mount Vernon committed fraud by representing to MIW that there was a balance outstanding on one of the mortgage loans transferred by Mount Vernon to Partridge Associates when, in fact, the loan had been paid off and Mount Vernon had wrongfully retained the proceeds. The parties have moved for summary judgment as to all of the claims which they have asserted against one another.2
In 1971, MIW sold to one David Dreyfuss an apartment project in Columbia, Maryland known as Partridge Courts. As part of that transaction, MIW took a note from Dreyfuss in the amount of $4,826,000. Over the next ten years Dreyfuss paid off only $3,000 on the principal amount of the loan, and the note became an unproductive asset in MIW's portfolio. In 1981 MIW entered into an agreement with Dreyfuss whereunder MIW repurchased Partridge Courts by assuming the outstanding balance of $4,823,000 on the note and paying certain other consideration not relevant here.
MIW's plan was to convert Partridge Courts into a condominium complex. In October 1981 Partridge Associates was formed for that purpose. MIW was one of two limited partners and owned a 50% interest in the partnership; Friendship Services, Inc., a subsidiary of Friendship Savings and Loan Association, was the other limited partner and owned a 48% interest; American Housing was the general partner and owned a 2% interest. Only $2,000 in capital was contributed to Partridge Associates by the partners (in amounts proportionate to their respective shares).
MIW assigned to Partridge Associates its rights under the repurchase agreement with Dreyfuss. MIW also agreed to lend $6,000,000 to Partridge Associates. $4,823,000 of this loan was used by Partridge Associates to purchase from MIW the 1971 Dreyfuss note. The remainder of the loan proceeds were to be used to fund construction. The principal amount of the loan was to be repaid from release fees generated by the sale of the individual condominium units at Partridge Courts. The interest rate on the $6,000,000 loan was substantially greater than the interest rate had been on the 1971 Dreyfuss note, and MIW therefore contemplated that it would benefit from what was in effect the exchange of the two notes. The $6,000,000 loan was not to be secured by a deed of trust on Partridge Courts but by various negotiable home mortgage notes unrelated to Partridge Courts. Friendship Savings guaranteed to MIW that it would pledge $2,600,000 of such notes. Another $4,300,000 of such notes were obtained by Partridge Associates from Dominion Federal Savings and Loan Association in exchange for an assignment of the Dreyfuss note and its supporting deed of trust on Partridge Courts.
In late 1981, E. Mitchell Fry, Jr. — who with one Anthony Koones controlled the Friendship defendants and American Housing — approached James F. Russell, II, the president of Mount Vernon, about participating in the Partridge transaction. His purpose was to have Mount Vernon enter into an agreement with Partridge Associates similar to the $4,300,000 Dominion Federal transaction, whereby Partridge Associates would purchase $2,600,000 in negotiable residential mortgage notes from Mount Vernon. These notes were to replace the notes which Friendship had agreed to pledge to MIW.
For reasons which are not clear, Russell agreed to Fry's proposal.3 On January 19, 1982, Fry, on behalf of American Housing, Partridge Associates and Friendship Services, and Russell, on behalf of Mount Vernon, signed a Memorandum of Understanding under which Mount Vernon agreed to make a $2,600,000 loan to Partridge to be used for the purchase of 2.6 million dollars worth of residential mortgage loans. Two days later, Russell delivered to Fry mortgages in that face amount, and subsequently MIW agreed to accept these mortgages as substitute collateral for the similar Friendship notes.4
Mount Vernon was never paid a single penny for its mortgages, and no loan documents between Partridge Associates and Mount Vernon were ever executed. Subsequently, the Partridge transaction turned sour, and, in November 1982, MIW sent Partridge Associates a notice of default under the $6,000,000 loan. When MIW sought to foreclose upon the Mount Vernon notes, Mount Vernon instituted an action in the District of Columbia against Riggs National Bank (which was holding the notes as custodian), seeking an injunction to prevent their turnover to MIW. When Mount Vernon's motion for a preliminary injunction was denied, MIW foreclosed upon the notes. As a result, Mount Vernon suffered a $2,600,000 loss.
FSLIC's claim against Partridge Associates and American Housing is based upon the January 19, 1982 Memorandum of Understanding. That Memorandum provided as follows:
Partridge Associates and American Housing contend that the Memorandum of Understanding was no more than an agreement to agree and, as such, was unenforceable. In support of this argument, they rely upon Grooms v. Williams, 227 Md. 165, 175 A.2d 575 (1961), Helferstay v. Creamer, 58 Md.App. 263, 473 A.2d 47 (1984), and First National Bank of Maryland v. Burton, Parsons Co., 57 Md.App. 437, 470 A.2d 822, cert. denied, 300 Md. 88, 475 A.2d 1200 (1984).
The cases cited by defendants do indicate that courts will not order the parties to negotiate under an agreement to agree or convert into a binding contract what is in reality no more than an agreement to agree by adding a critical contract term which has been left unresolved by the parties. These cases might be controlling here if this case were simply one in which the parties had entered into the Memorandum of Understanding, and one of them thereafter had sought specifically to enforce it. That is not all that is involved, however. What Partridge Associates and American Housing ignore is that, after the Memorandum of Understanding was executed, Russell delivered to Fry 2.6 million dollars worth of mortgages for which Mount Vernon was never paid and which Partridge Associates used as security for its loan from MIW. These facts clearly differentiate the present case from Grooms, Helferstay and First National Bank.
Defendants also make several subsidiary arguments. First, they contend that loan documentation submitted to Mount Vernon by counsel for Partridge Associates after the Memorandum of Understanding was executed (as well as similar earlier proposed documentation) indicate that Mount Vernon's pledge of collateral to Partridge Associates was intended to be without recourse. Second, they assert that FSLIC...
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