Parker v. Columbia Bank

• Citation: 91 Md.App. 346,604 A.2d 521
• Decision Date: 01 September 1991
• Docket Number: No. 1109,1109
• Parties: Robert I. PARKER, et ux. v. The COLUMBIA BANK, et al. ,
• Court: Court of Special Appeals of Maryland

Page 346

91 Md.App. 346

604 A.2d 521

Robert I. PARKER, et ux. v. The COLUMBIA BANK, et al.

No. 1109, Sept. Term, 1991.

Court of Special Appeals of Maryland.

April 14, 1992.

Albert D. Brault (Brault, Graham, Scott & Brault and Stephen H. Ring, on the brief), Rockville, for appellants.

James T. Heidelbach (Brian C. Parker and Gebhardt & Smith, on the brief), Baltimore, for appellees.

Argued before WENNER, DAVIS and MOTZ, JJ.

MOTZ, Judge.

In these difficult economic times with falling real estate prices, lender liability suits have become one of the few "growth industries." This appeal is a part of that "industry," involving, as it does, a number of issues concerning a bank's duties and responsibilities to its borrowers. This case arises out of two actions, now consolidated, relating to a residential construction loan secured by appellants, Robert and Margaret Parker ("the Parkers"), from appellee, The Columbia Bank ("Columbia"). The Parkers appeal the order of the Circuit Court for Montgomery County granting Columbia's motion to dismiss ¹ the Parkers' suit for fraud, fraudulent concealment, negligent misrepresentation, negligence, breach of fiduciary duty, and breach of contract; and the order of that court ratifying the foreclosure sale by Columbia of real estate used by the Parkers to secure this construction loan.

(i)

During 1988, the Parkers, physicians employed at the National Institutes of Health, began to look for a larger home in Montgomery County. After "many drives throughout Montgomery County" they met George Evangelos Paleologos ("Paleologos"), a builder who had contracted with friends of the Parkers to construct a custom home in Brookeville, Maryland. Paleologos introduced the Parkers to a project in which his construction company, Evangelos Enterprises, Ltd. ("Evangelos"), planned to build a group of seven custom homes in a subdivision known as "Brookeville Farms." Dr. Parker ² spoke with Paleologos and other subdivision buyers, "observed the displays" in Paleologos' sale office and "the work under way" on Paleologos' own house. From these conversations and observations, Dr. Parker "gained the impression that he [Paleologos] was competent." After several meetings with Paleologos, the Parkers believed that Paleologos "could build the house" the Parkers "wanted at a price [they] could afford."

On September 21, 1988, the Parkers entered into a contract with Evangelos for the construction of a 5,000-square-foot house at a cost of $385,000. The Parkers "selected a floor plan and numerous features that customized the house to meet the specific needs of [their] family. The construction documents called for more than 5,000 square feet of finished living space, 7 bedrooms, 5 full and 2 half baths, 10-foot ceilings on the first floor, a soaring cathedral ceiling 27 feet high in the family room, 3 fireplaces, huge arched windows, and other features that made this the home [the Parkers] felt [they] could keep forever." In order to verify that Paleologos could build this house for $385,000, Dr. Parker asked him if he could and the builder "said yes."

On October 15, 1988, the Parkers entered into a contract with the "Brookeville Development Partnership" for the purchase, at the price of $160,000, of the lot on which the house was to be built. While the land contract stated that the seller of the property, the Brookeville Development Partnership, "is not involved in the construction or development of the home," Paleologos signed the land contract on behalf of the seller. The land contract, but not the construction contract, included a provision that its execution would be contingent on the Parkers' obtaining a loan to finance the purchase.

Over the following weeks, the Parkers sought a lender to finance the purchase of the land, the construction of the house, and the mortgage. They spoke with representatives of three banks regarding financing. In late October and early November, they contacted Mr. Clements, a loan officer at Sandy Spring Bank, who had provided funding for two other couples, friends of the Parkers, in the Brookeville Farms development. Dr. Parker told Mr. Clements that he was "looking for financing that would provide 80% of the appraised value, which was expected to be between $700,000 and $750,000." As Dr. Parker recognized, "this would result in financing essentially 95-100% of the construction and land costs." Mr. Clements, according to Dr. Parker, "did not believe his Bank's loan board would allow such a financing package." Accordingly, the Parkers submitted no loan application to Sandy Spring. Dr. Parker next spoke to Mr. Bollinger at First Annapolis Savings & Loan. Paleologos, who told Dr. Parker that "he was also dealing" with First Annapolis, referred Dr. Parker to that institution. Again, Dr. Parker "asked for a package that would essentially finance 95% of the construction and land costs, based on 80% of the appraised value as completed." Again, the loan officer indicated that the "Bank could not do that." Again, no loan application was submitted.

Dr. Parker then spoke with Michael T. Galeone, a senior vice president of Columbia Bank. ³ On January 7, 1990, the Parkers made an application to Columbia for a construction loan. Dr. Parker again explained that he "was looking for financing on 80% of the appraised price rather than 80% of the purchase price." Moreover, Dr. Parker alleges he told Galeone that "if the house could not be built for this, we could not proceed with the project." Mr. Galeone asked Dr. Parker "what he knew about" Paleologos and "how" Dr. Parker "came to know" Paleologos. Dr. Parker, in response, related his conversations with Paleologos and observations of Paleologos' own house and sales displays, which are outlined above. Dr. Parker provided Galeone with Paleologos' address and telephone number so Columbia could do its own check on the qualifications of the builder.

The Parkers allege that, over the next two months, they spoke with Galeone on numerous occasions and he "intentionally cultivated a relationship of trust and confidence with" them and they "came to regard him and Columbia as an adviser and consultant with respect to the project." They further allege that, to induce them to enter into a construction loan with Columbia, Galeone represented that: (1) he was "experienced in the placement and administration of loans similar to the construction loan needed for the house" while in fact he had never administered a loan involving draw payments to a builder; (2) Columbia had "thoroughly investigated" Paleologos and determined he was qualified to undertake this project, while in fact this investigation was "perfunctionary" and overlooked information which would show he was not qualified; (3) Galeone and Columbia would protect the Parkers' interest, as well as Columbia's, throughout construction of the house, while in fact Galeone had no intention of protecting the Parkers' interest unless it coincided with Columbia's; (4) construction draws would only be issued after Columbia had obtained inspections to insure that work had been done in accordance with the draw schedule, while in fact Columbia intended to advance funds, if requested by Paleologos, ahead of the draw schedule and regardless of inspections; and (5) in response to the Parkers' specific inquiries, "Galeone told them that in the event of a default by the builder Columbia would find or recommend another builder and would see that the house was completed within budget," while in fact Columbia intended to provide no such protection to the Parkers.

On March 3, 1989, Columbia issued a commitment letter to the Parkers for financing the project. The bank undertook to provide financing for 96% to 97% of the costs of the project, i.e., the Parkers would provide $21,290 and Columbia would loan them $529,000. The Parkers accepted Columbia's offer of financing the next day, March 4, 1989. On March 17, 1989, the Parkers and Columbia entered into a written construction loan agreement in the amount of $529,000 to cover the Parkers' purchase of the land and the construction loan. They allege that they had "little or no experience in matters relating to real estate," that Galeone knew this, and that "but for" Galeone's representations set forth above, they "would not have entered into the loan agreement with Columbia." At closing, Columbia disbursed $234,290 of the loan proceeds to the Parkers, $85,000 of which was paid by the Parkers to Evangelos and the remainder of which was used by the Parkers to pay the balance of the purchase price for the land.

In administering the loan, Columbia did not adhere to the draw schedule set forth in the Parkers' construction contract with Evangelos. The Parkers allege in their amended complaint that another draw schedule was substituted by Columbia and Evangelos without the Parkers being advised of its terms, but Dr. Parker explains in his affidavit that he and Galeone did discuss amending the draw schedule. ⁴ In any event, the construction loan entered into by Columbia and the Parkers provides that disbursements of the construction loan "will be made by two party checks payable to both the Borrowers and their general contractor, unless Lender exercises its rights hereunder to make disbursements directly to any party." ⁵ Columbia, in fact, released all loan draws to the Parkers in the form of a two-party check payable to the Parkers and Paleologos as follows: $85,000 at closing on March 17, 1989; $55,000 on May 31, 1989; $50,000 on June 29, 1989; ⁶ and $110,000 on September 18, 1989. In addition to personally signing each draw check, the Parkers talked with Paleologos "at least 2-3 times a week from mid-March, 1989 through mid-November, 1989." They also frequently talked with other families who were having houses built by Evangelos in Brookeville Farms.

At the same time that Columbia was developing its relationship with the Parkers, it was, according to the...