Toney Schloss Properties Corp. v. Union Federal Sav. & Loan Ass'n

• Decision Date: 06 January 1964
• Docket Number: No. 102,102
• Citation: 233 Md. 224,196 A.2d 458
• Parties: TONEY SCHLOSS PROPERTIES CORP. v. UNION FEDERAL SAVINGS & LOAN ASSOCIATION.
• Court: Maryland Court of Appeals

Page 224

233 Md. 224

196 A.2d 458

TONEY SCHLOSS PROPERTIES CORP. v. UNION FEDERAL SAVINGS & LOAN ASSOCIATION.

No. 102.

Court of Appeals of Maryland.

Jan. 6, 1964.

David M. Blum, Baltimore (Nyburg, Goldman & Walter, Baltimore, and Arnold Fleischmann, Towson on the brief), for appellant.

Charles C. W. Atwater and Walter C. Mylander, Jr., Baltimore (Thomas A. Garland, Harvey M. Lebowitz and Hoffberger & Hollander, Baltimore, on the brief), for appellee.

Before BRUNE, C. J., and HENDERSON, PRESCOTT, HORNEY and MARBURY, JJ.

PRESCOTT, Judge.

From the chancellor's finding that appellant's mortgage was subordinate to a construction mortgage of the appellee (both secured by the same property) this appeal was taken.

The question involved is whether the appellant's mortgage, which it subordinated to a construction mortgage given to the appellee, is inferior to such construction mortgage, where, at the time of settlement, the appellee paid to full amount of the loan to the mortgagor, which, in accordance with its agreement to do so, deposited the same in the name of two trustees to secure its application periodically to the making of improvements upon the realty, or, as an alternative, the repayment of the loan, and the trustees make payments to the mortgagor which they were not required to make, because contrary to the schedule for such payment in the trust agreement.

Marcie Homes, Inc. (Marcie Homes), by virtue of a deed dated December 30, 1959, from Sherwood Acres, Inc., duly recorded, was the owner of lots 5 and 7, Block F, as shown on the Plat of Section 4, Stevenson Ridge, and lot 3, Block D, as shown on the Plat of Section 6 of said subdivision. Title to these lots was encumbered by a prior mortgage from Sherwood Acres, Inc., to Dan Schloss, et al., dated May 1, 1957, duly recorded covering a large tract. Appellant is the assignee of this mortgage.

On July 5, 1961, Marcie Homes executed the mortgage here in question to appellee in the amount of $83,500. The full amount of the recited principal was paid to the mortgagor, which deposited the same with two trustees under the terms of a collateral trust agreement. One of the trustees was an officer of appellee and the other was associated with the firm of attorneys which represented it. Their duty under the agreement was to release the fund to the mortgagor in fixed stages as construction of improvements upon the three lots progressed.

It was a prerequisite of the loan that the appellee's mortgage be a first lien, and in prior cases, appellant had executed releases. However, on this occasion, appellant delivered to The Title Guarantee Company (which settled appellee's loan) a waiver of the priority of its mortgage in favor of the one about to be executed to appellee. This waiver was misplaced and not recorded. At a later date, appellant executed a 'Confirmatory Waiver of Priority of Mortgage,' which is expressly stated to be made as of July 5, 1961, and recites appellee's then recorded mortgage, for $83,500, as to which it waived its priority.

On February 2, 1962, the mortgage being in default, foreclosure proceedings were instituted by appellee. A sale was afterward held, reported to the court, and ratified over appellant's exceptions, which were dismissed as such, but a hearing was later had in which they were 'taken as a Petition for Declaratory Relief,' addressed to the proceeds of sale by order of the court.

Appellant argues, 'it is settled in Maryland that when a lender under a mortgage * * * to secure future advances, with actual knowledge of an [intervening] mortgage * * * of a third person, voluntarily makes an advance he could not have been compelled to make, that as to such voluntary advance the claim of the lender is inferior to the third party's mortgage * * *,' citing Ewing Co. v. Krafft Co., 222 Md. 21, 158 A.2d 654, and Blaustein v. Aiello, 231 Md. 375, 190 A.2d 639, and comparing Rupp v. M. S. Johnston Company, 226 Md. 181, 172 A.2d 875. It then asserts that the factual situation in the case at bar brings the case squarely within the foregoing rule. We agree with the above statement of the law, and reaffirm our holdings in the cases named; however, we are unable to concur in the claim that the factual situation in the instant case brings it within the ambit of the rule stated.

In Ewing, this Court was called upon, for the first time, to answer certain aspects of the rule as stated above. There, a construction loan was granted on two vacant lots. No money passed at the settlement and the instrument securing the loan referred only to the total consideration, making no reference to installment advances. However, the parties had an oral agreement as to disbursements, which was embodied in a separate schedule. The lender made a number of advances in accordance with the schedule, but the borrower was not entitled to the last advance of $8,300, which was made by the lender with actual knowledge of intervening liens. It will be noted that the lender did not pay to the borrower or his agent, at the time of settlement, the amount of money to be loaned, or any part thereof. In fact, it was uncontroverted that the transaction therein involved was one that involved 'future advances.' In the instant case, the whole amount of money loaned was paid to the borrower, which turned it over to two trustees to make disbursements in accordance with the trust agreement. The lender made no further nor future advances. We held in Ewing the because the deed of trust there given was to secure future advances and the lender's claim was based upon a voluntary payment of an advance made at a time when the lender had actual notice of intervening liens, the lender's claim was subordinate to the intervening liens.

In deciding Ewing, Judge Hammond, for the Court, referred to R. Dorsey Watkins' (now Judge Watkins) splendid article 'Maryland Mortgages for Future Advances' in 4 Md.L.Rev. 111, and the case of Housing Mortgage Corp. v. Allied Const. Inc., 374 Pa. 312, 97 A.2d 802. Judge Watkins' article was written shortly after this Court had decided Neeb v. Atlantic Mill & Lumber Realty Co., Inc., 176 Md. 297, 5 A.2d 283 (1939). It will be referred to later. Judge Watkins states that mortgages for future advances are 'mortgages intended to be security from their date of execution (or recordation) for loans and advances thereafter (emphasis ours) to be made * * *. Their effect was to permit the right of the mortgagee to be determined as regards other lienors or encumbrancers, not by the date or dates upon which such advance or advances were made, but by the date (or recordation) of the mortgage itself, subject in some cases to the question of notice to the mortgagee [not involved in the case at bar] * * *, and to the further question of whether his advances were optional or obligatory.' See also 1 Jones, Mortgages (8th ed.), § 447, et seq., especially § 457. It will be pointed out below that the Maryland decisions hold that mortgages made under the attendant circumstances of the instant case are not to secure 'future advances,' and Judge Watkins specifically notes that fact in his article.

We revert, momentarily, to Rupp, Aiello, and Housing Mortgage Corp., all mentioned above. There is nothing in this opinion that conflicts with the holdings in those cases. In Housing Mortgage Corp., there was no question but that the mortgages involved therein were to secure 'future advances.' The mortgagee retained the money to be loaned and advanced it according to the terms of an agreement between the parties. These factors are not present in the case at bar. Also in Rupp, it was uncontroverted that the recorded instrument there involved was to secure 'future advances.' The real question there involved, was whether the advances became liens from the date of recordation of the deed of trust, or whether they became liens upon the dates of the advances. And in Aiello, we assumed that the deed of trust was to secure 'future advances.'

We now consider the Maryland cases that we think are controlling. Although there are quite a number of them making the same holdings, Western National Bank v. Jenkins, 131 Md. 239, 101 A. 667, seems to be a leading case upon the subject under consideration and the facts therein are almost identical with those involved herein. There, a mortgage was given to one Jenkins to secure a loan made to a realty company to aid it in the building of a number of houses. Checks for the money loaned were drawn by Jenkins to the order of the realty company, which by prearrangement, were endorsed by the mortgagor and deposited in a trustee's account. It had been agreed that the trustee should make periodic payments on account as the work on the houses progressed. It was also agreed that in the event of a default under the agreements, the trustee should have the right to 'return the remainder of said fund to the mortgagee,' or at the option of the mortgagee, apply the same to the completion of the houses. There was no provision for any future loans, and no evidence that any such were ever made or contemplated. The Western National Bank obtained two subsequent mortgages on the same property, and a contest arose as to which of the mortgages had precedence.

The Bank attacked the Jenkins mortgage on the ground that it was to secure 'future advances or loans,' and since the amounts of the same and the times when they were to be made were not stated in the mortgages, they were void under 'Section 2, Article 66 of the Code. ¹ ' The Court said the questions posed were: '[f]irst, what is a mortgage for future loans or advances? and, secondly, is the Jenkins mortgage such a mortgage' and that upon the facts and circumstances, 'considered in connection with the law, common and statutory, upon the subject of mortgages for future loans and advances, appear to us to present no real difficulty.' The Court pointed out that Jenkins passed over to the mortgagor at the time of the...