Daily Development for Monday, March 22, 1999

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

Thanks to Kevin Shephard of the Maryland Bar for the tip on this case.

MORTGAGES; RELEASE; CONTRACT INTERPRETATION; AMBIGUITY: Maryland court rules that presence or absence of ambiguity in a contract is a question of law, subject to de novo review, and that provision for release that is susceptible of clear interpretation and application, will be applied as written despite its harsh or clumsy application to facts.

Calomiris v. Woods, (No. 70, 1998 Term) (Md. 3/15/99)

In 1992, Developer acquired a 38 acre parcel from Simpson for $1.2 million. Developer and Simpson agreed to a purchase money mortgage in the amount of $654,000 on Lot 26 a six acre lot that was part of the larger parcel.

The $752,100 figure apparently was set at 115% of the principal amount of the mortgage.

In 1995, Developer subdivided Lot 26 into two lots, added additional unencumbered land to one of the lots and sold that land to Builder. Builder built a home on the newly created lot and sold the finished house and lot to Woods six months later. But Builder did not record its deed from Developer until three days after it had sold the lot to Woods. The Woods deed was not recorded until three weeks after that. By then, the Simpson mortgage was in default; and in fact a foreclosure sale occurred three hours prior to the recordation of the Woods deed.

It is not clear from the court's statement of facts what conversations transpired among the parties concerning the release of lot 26 during the period from 1992 to 1996, or how much Woods knew about all these problems. It does appear that Woods had title insurance, and that the title insurance company was willing to pay a release price to Simpson to get Lot 26 released from the mortgage.

A number of parties filed exceptions to the foreclosure sale, and as part of that legal action Developer sought reformation of the original mortgage and, in the alternative, asked the court to find the release clause in the mortgage ambiguous and to set a reasonable release price for Lot 26.

The trial court granted summary judgment to Simpson on the reformation claim. Apparently there was no evidence that Simpson really intended different language in the mortgage. The parties had used a form instrument and this language was added separately.

Nevertheless, the trial court granted the right to Developer (and, by extension, Woods' title insurer) to obtain a release of the property through a formula based upon the ratio of the acreage of lot 26 to the total acreage in the mortgaged parcel. Apparently the trial court was persuaded that the language in the release clause was a remnant from earlier negotiations in which the parties did intend that the mortgage cover property that was or would be subdivided. It stated that "the parties never intended to create a situation where one lot ... would bear the entire burden of the mortgage."

To reach this conclusion, of course, the court had to hear evidence of the parties' negotiations. It did so on the ground that the release clause was ambiguous with regard to its application to unsubdivided property. The trial court apparently concluded that it was inappropriate to read the clause as requiring that in order to release a portion of the mortgaged property without recording a subdivision plat, Developer would have to pay 100% of the mortgage amount. It stated that such a reading was "an unfair and unreasonable result."

The intermediate Maryland court of appeals affirmed, stating that the trial court's determination was not "clearly erroneous."

On appeal to Maryland's highest court, the Court of Appeals, held: Reversed.

The court noted that parole evidence generally ought not to be considered in interpreting and applying a written contract. It cited Professor Farnsworth's view that parties, in adopting certain contract language, may be intending specifically to resolve uncertainty caused by prior inconsistent oral discussions, and to admit evidence of such discussions may be to introduce considerations that the parties clearly had rejected.

The court agreed that the general view inhibiting consideration of parole evidence is subject to an exception when a contract term is ambiguous. But it pointed out that, upon review, the question of whether a contract clause is ambigous is a question of law, not of fact, and de novo review is called for. Here it differentiated the standard of review that ought to be applied to a determination of whether a contract is ambiguous and that to be applied to a trial court's assessment of the facts adduced once the trial court has made the determination of ambiguity.

"The standard of review afforded the trial court's ruling on ambiguity differs from the standard applied to a trial court's factual findings based on parol evidence after the court has determined that the contract language is ambiguous. Should the appellate court agree with the trial court's finding of ambiguity, it will apply a clearly erroneous standard to the trial court's assessment of the construction of the contract in light of the parol evidence received. In sum, on appeal, de novo review applies to the initial determination of whether contractual language is ambiguous, and the clearly erroneous standard comes into play only after the trial court's finding of ambiguity is upheld."

Reviewing the trial court's conclusion de novo, the Court of Appeals could not agree that parole evidence should have been admitted to interpret the parties' agreement in the release clause, because the clause was unambiguous and susceptible to a single clear meaning.

The court agreed that context and purpose of a contract clause should be taken into account, The true test of what is meant is not what the parties to the contract intended it to mean, but what a reasonable person in the position of the parties would have thought it meant. Consequently, the clear and unambiguous language of an agreement will not give away to what the parties thought that the agreement meant or intended it to mean. But that this did not mean that a court should reinterpret the statement of the contracting parties' intent simply because the court believes that their conclusion is unreasonable.

Here, the court points out that the definition of what constitutes a "lot" within the meaning of the clause was clear from other parts of the contract. Although the fact that Lot 26 was never subdivided does lead to the conclusion that the only release price is the payment of the entire $752,000 an amount greater than the face amount of the mortgage that is what the parties agreed. The Developer could have avoided the result by recorded a subdivision plat before selling any portion of the property.

The court concludes with a discussion of the fact that courts should be particularly cautious in reinterpreting the contractual intent of the parties with regard to real estate agreements which are not only subject to the parole evidence rule but also the Statute of Frauds.

Comment 1: All in all, a splendid victory for us "strict constructionists." To read the Maryland opinion, it would appear that this is just standard fare for court review of commercial real estate contracts. The opinion is chockablock full of quotable language to put before a court to support application of the contract. The editor is not certain that all Maryland opinions reflect this salutory philosophy, but, hey, let's take what we can get.

Comment 2: Of course, the Developer perhaps didn't anticipate that it was agreeing to a release clause that in effect did not permit sale of parcels subject to the mortgage without prior subdivision, but the Developer presumably had good legal counsel or should have known that good legal counsel was required for deals like this. If the Developer didn't get what it wanted, its beef is with its lawyers, not with the other side.

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