Pease v. Wachovia SBA Lending, Inc.

• Decision Date: 21 October 2010
• Docket Number: No. 76, Sept. Term, 2009.,76, Sept. Term, 2009.
• Citation: 416 Md. 211,6 A.3d 867
• Parties: William PEASE, et al. v. WACHOVIA SBA LENDING, INC.
• Court: Maryland Court of Appeals

6 A.3d 867

416 Md. 211

William PEASE, et al.

v.WACHOVIA SBA LENDING, INC.

No. 76, Sept. Term, 2009.

Court of Appeals of Maryland.

Oct. 21, 2010.

Michael S. Myers (Robert B. Scarlett & Croll, P.A., Baltimore, MD), on brief, for appellants.

Diane Festino Schmitt (Matthew T. Vocci of Ober, Kaler, Grimes & Shriver, Baltimore, MD), on brief, for appellee.

Argued before BELL, C.J., HARRELL, BATTAGLIA, GREENE, MURPHY, ADKINS, BARBERA, JJ.

HARRELL, J.

In this appeal, the parties ask us to consider and shape the contours of Maryland Code (2006 Repl.Vol.), Courts and Judicial Proceedings Article, § 5-408,¹ which serves as a statute of frauds in the regulatory scheme for credit agreements. William and Michele Pease (Appellants)-husband and wife and guarantors on a Small Business Administration (hereinafter "SBA") commercial loan financing substantially their acquisition of a plumbing business-appeal from the denial by the Circuit Court for Baltimore City of their motion to open, modify, or vacate confessed judgments in favor of Wachovia SBA Lending, Inc. (hereinafter "Wachovia" or Appellee), entered against them upon default under the underlying note. In arguing that the confessed judgments should be opened, modified, or vacated, the Peases claim essentially that: (1) the Circuit Court erred in refusing to consider their allegations and evidentiary proffers that Wachovia and its representatives induced them, fraudulently and negligently, to enter a series of related loans through certain oral representations and omissions; or, (2) that, had certain information been disclosed to them by Wachovia, they would not have consummated the SBA commercial loan and guarantees. In response, Wachovia argues that § 5-408-also coined the "Maryland Credit Agreement Act"-bars the admission of these alleged oral representations, as they were not set forth in writing. We hold, as explained more fully infra, that, to the extent the Peases' assertions of negligence, fraud, and breach of fiduciary duty were advanced with an eye towards filing counterclaims against Wachovia in the suit on the commercial loan andguarantees, such assertions do not seek to enforce or modify a "credit agreement" (or constitute a defense to a "credit agreement") within the reach of § 5-408, and thus the Maryland Credit Agreement Act does not apply to bar the Circuit Court from considering the sufficiency of the allegations under Md. Rule 2-611(d). To the extent the Peases' assertions were advanced, however, with an eye towards seeking a declaration that the credit agreement represented by the SBA commercial loan and guarantees was void ab initio, we hold that the Maryland Credit Agreement Act would apply to bar the Circuit Court from considering such allegations in this matter. We vacate the judgment of the Circuit Court and, as explained infra, remand to that court for consideration of whether the Peases alleged sufficiently one or more tortious acts, that may be plead as counterclaims, so as to justify opening, modifying, or vacating the confessed judgments.

FACTS AND LEGAL PROCEEDINGS

William Pease (hereinafter "William") and Michele Pease (hereinafter "Michele")were the former owners and operators of a successful plumbing business in Richmond, Virginia. In 2005, the Peases, in relocating their family to Maryland, decided to sell their business in Virginia and purchase an existing plumbing business in Maryland. They eventually settled in Harford County, Maryland, and purchased a residence for $820,000, paying $300,000 in cash and financing the remaining $520,000. Around the same time, William learned from a business brokerage firm that David Kolper was seeking to sell his Maryland-based plumbing company, Bush Plumbing & Heating, Inc. (hereinafter "Bush"). The Peases established two entities, which they would own, to purchase Bush: VLP Industries, Inc., a Maryland corporation, and VLP Real Estate, LLC, a Maryland limited liability company. To finance the purchase of Bush, William contacted Wachovia to obtain an SBA loan. He was ultimately referred to Jeffrey ²Martin (hereinafter "Martin"), Wachovia's agent, senior commercial business lender, and business development officer.

During the period between March and August of 2005, William alleged that he spoke with Martin at least twice a week, and repeatedly told Martin that he did not want his new residence to be "implicated in the financing or to, in any manner, pledge or utilize the new home as collateral toward repayment of the [SBA] loan." Allegedly, Martin informed William that, pursuant to Wachovia's normal lending procedures, the only way the Peases would not be required to pledge their house as collateral on the SBA loan was if they had less than twenty-percent equity in the value of the home. Because the size of the Peases' down payment put the amount of equity in the home above twenty percent, Martin suggested the Peases encumber the home with a home equity line of credit with Wachovia, which would decrease the amount of equity in the property below the twenty-percent threshold. The Peases applied for and received from Wachovia a $218,000 line of credit on their residence, which reduced their personal equity in the home to ten percent. The Peases contend that Wachovia and Martin misrepresented verbally that this "artificial loan" would safeguard the residence from foreclosure were the commercial loan to go into default and the personal guarantees triggered. In reality, however, because the commercial loan documents (including the guarantees) provided no such restriction on Wachovia's abilities to execute on the Peases' assets in the event of default, Wachovia could foreclose on the home under those circumstances notwithstanding the home equity loan gambit. Thus, the Peases allege that these statements regarding protecting the residence from foreclosure were made to induce them into agreeing to enter the SBA loan.

At the same time, William began the process of reviewing the business affairs and finances of Bush to ensure the company was valued as estimated by Kolper. According to William, as part of his due diligence in reviewing the business affairs and finances of Bush, he required Kolper and the business brokerage firm to provide various documentation, including:profit and loss statements for the duration of Bush's operations, prior tax returns, a list of employees, a list of contracts, a list of accounts receivables, and various other documentation. Such documentation was submitted to Wachovia's certified appraiser, Scott Gabehart, who, after conducting an independent financial analysis for Wachovia and the Peases, valued Bush at $950,000 as a going concern. Further, aseparate real estate appraiser valued the real property on which the Bush business was located at $450,000.

A few weeks prior to settlement on the SBA loan, Martin allegedly admitted to William that, according to the documentation supplied to Wachovia, Bush's financial health was weaker than Kolper had indicated. A centerpiece of the Peases' grievance is the allegation that Wachovia possessed certain negative financial information that it withheld from them.³ Allegedly, the Peases did not discover this negative financial information until after settlement. They claim that they would not have proceeded with the purchase of Bush had they known of the later-discovered negative financial information. In any event, because the financial state of Bush was not as Kolper had stated, Martin classified the proposed transaction as a "very tight" deal; that is, he was not sure whether Wachovia would approve the SBA loan now. The Peases allege that Martin urged William to cause VLP Industries, Inc. to execute a promissory note in the amount of $95,000, payable to Kolper, as additional financing for the purchase of Bush and as a way to ensure that Wachovia could authorize the financing for the balance of the purchase price. Allegedly,Martin represented verbally to William that the $95,000 promissory note would be " hold-back money" that the Peases could utilize in the event that Bush incurred any liability as a result of its operations prior to the transfer of Bush. While Martin characterized this "hold-back money" as a safety precaution to protect against any outstanding issues associated with the purchase of Bush, the Peases maintain that this loan was merely a device for Wachovia to shift some of the risk exposure on the SBA loan from itself to the Peases.

Settlement on the purchase of Bush took place on 19 August 2005, whereby Bush's operating assets were transferred to VLP Industries, Inc., and the real property on which Bush was situated was transferred to VLP Real Estate, for a total purchase price of $1,494,075.49. On the same day, to finance the majority of the purchase price, VLP Industries, Inc. executed a commercial loan with Wachovia in the amount of $1,118,300. The Peases personally guaranteed the loan, and both William and Michele signed the loan agreement, which contained the following confessed judgment clause:

CONFESSION OF JUDGMENT. If payment of the indebtedness ... shall not be made when due and at maturity ... the undersigned hereby authorize and empower any attorney of any Court of Record within the United States to appear for the undersigned in any Court ... and confess judgment against the undersigned either jointly or severally in favor of the Holder of this Note for the amount then due thereon, with the interest thereon aforementioned and the cost of suit and attorneys' fees of fifteen percent (15%)....

Less than one week after settlement, the Peases paid back the $218,000 home equityloan, plus $2,570.74 in related loan fees and interest. On the $95,000 hold-back note, however, the Peases made no payments to Kolper. Further, on 30 November 2007, VLP Industries, Inc. defaulted on the commercial loan, on which $1,112.312.34 was owed at that time. On that same date, Wachovia accelerated the commercial loan and informed both...