«REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 1246 September Term, 2013 GREENTREE SERIES V, INC. v. C. LARRY HOFMEISTER, JR., ET AL. ...»
As will be discussed infra, the primary argument made by Greentree in this appeal is that under the dictates of Md. Rule 14-305(g), the circuit court did not have the discretion to order both a resale of the Property at the defaulting owner’s risk and expense and to order as well a forfeiture of the deposit made by the defaulting purchaser. But before reaching that issue, we will address two subsidiary ones that were raised below and decided by the circuit court. The first of those issues is whether the forfeiture of the deposit can be justified based on Greentree’s breach of the terms of sale that were set forth in the newspaper advertisement that preceded the June 30, 2011 auction. As mentioned supra, the advertisement said that if the purchaser defaulted, the Property would be resold at the risk and expense of the defaulting purchaser and the $33,000 deposit would be forfeited.
In White v. Simard, 152 Md. App. 229, 241 (2003), aff’d, 383 Md. 257 (2004), Judge
Sally D. Adkins, speaking for this Court, said:
The purchase and sale transaction at any judicial sale is governed by
general principles of contract, with the court acting as vendor:
Talbert v. Seek, 210 Md. 34, 43, 122 A.2d 469 (1956) (quoting [Edgar G.] Miller, [Jr., Equity Procedure] § 510 at 602 , and Hanover Fire Ins. Co.
v. Alexander Brown & Sons, 77 Md. 64, 71, 25 A. 989 (1893)); see also McCann v. McGinnis, 257 Md. 499, 505, 263 A.2d 536 (1970)(“The court is the vendor in the case of a sale under the power contained in a mortgage, just as it is a vendor in any other chancery sale.”).
* * *
Hanover Fire Ins. Co., 77 Md. at 71, 25 A. 989; see also Plaza Corp. v. Alban Tractor Co., Inc, 219 Md. 570, 578, 151 A.2d 170 (1959)(“When [the trustee] reported the offers of the bidders for the property to the court, no contracts of sale had been completed and no title had been transferred to the prospective purchasers”)[.] Id. at 241-42.
Judge Adkins also pointed out in White that “trustees must act equitably toward contract purchasers” (citing Stewart v. Devries, 81 Md. 525, 526-27 (1895)) and that courts will strike down contracts that are contrary to public policy. Id. at 249.
At first blush, it might appear that the issue of whether the defaulting purchaser’s deposit should be forfeited could be resolved by simply applying the words of the newspaper advertisement, which said, in plain English, that the $33,000 deposit would be forfeited if the purchaser did not pay the balance due “within ten (10) days of the final ratification.” In arriving at the conclusion that the forfeiture provision was unenforceable as a penalty, the circuit court used the definition of “forfeiture” set forth in Black’s Law
Dictionary, (9th ed. 2009), viz.:
1. The divestiture of property without compensation.
2. The loss of a right, privilege, or property because of a crime, breach of obligation, or neglect of duty. Title is instantaneously transferred to another, such as the government, a corporation, or a private person.
3. Something (esp. money or property) lost or confiscated by this process; a penalty.
In this appeal, neither party contends that the circuit court erred in using Black Law Dictionary’s definition of “forfeiture.” We agree that the court did not err in this regard.
Using the aforementioned definition, if the terms of the ad were enforced, Greentree would have automatically lost all rights to the return of the deposit once it defaulted.
In Zorzit v. 915 W. 36th Street, LLC, 197 Md. App. 91, 102 (2011), we said “‘the purchase and sales transaction at any judicial sale is governed by general principles of contract, with the court acting as vendor.’” (quoting this Court’s opinion in White v. Simard, 152 Md. App. at 241). And, as already mentioned, in the case sub judice the circuit court held that the forfeiture of deposit provision in the advertisement could not be enforced as a matter of contract law, because it constituted an invalid liquidated damage clause and therefore, to enforce it would be “akin” to enforcing a penalty.
In Blood v. Gibbons, 288 Md 268, 274 (1980), the Court was called upon to interpret
a real estate contract that included the following provision:
FORFEITURE OF DEPOSIT... If the Purchaser shall fail to make full settlement the deposit herein provided for may be forfeited at the option of the Seller, in which event the Purchaser shall be relieved from further liability hereunder unless the Seller notifies the Purchaser and the Broker in writing within 30 days from the date provided for settlement herein of his election to avail himself of any legal or equitable rights, other than the said forfeiture, which he may have under this contract. In the event of the forfeiture of the deposit or in the event of an award of damages by a court or a compromise agreement between Seller and Purchaser, the Seller shall allow the Broker onehalf thereof as compensation for services, said amount not to exceed the amount of the full brokerage fee....
Id. at 269-70.
In Blood, the contract purchaser defaulted and “the sellers assert[ed] that the forfeiture of deposit provision in the contract... permit[ted] the election of any legal or equitable rights in addition to the forfeiture of the deposit.” Id. at 271.
Relying, in part, on Casey v. Jones, 275 Md. 203 (1975), the Blood Court said:
The forfeiture of the deposit under the contract provision in this case can be supported on the theory that it was in the nature of liquidated damages rather than a penalty. See Macon v. Zeiler, 233 Md. 160, 163-64, 195 A.2d 687 (1963); Alois v. Waldman, 219 Md. 369, 377, 149 A.2d 406 (1959).
Liquidated damage, of course, is a specific sum of money agreed upon as the amount of damages to be recovered for breach of the agreement. Traylor v.
Grafton, 273 Md. 649, 661, 332 A.2d 651 (1975). A provision for such damages is enforceable unless it is shown that the provision is actually designed as a penalty. Id. In this case there is no contention that the forfeiture clause constituted a penalty. It should furthermore be recognized that if a deposit is forfeited as liquidated damages, a claim may not then be made for actual damages. See Macon v. Zeiler, supra, 233 Md. at 164; Alois v.
Waldman, supra, 219 Md. at 377. Although a deposit may be treated as a fund out of which damages may be paid, Macon, supra, 233 Md. at 164; Alois, supra, 219 Md. at 377; Royer v. Carter, 37 Cal. 2d 544, 233 P.2d 539, 541 (1951), the language in the instant contract provision, construed in light of Casey, does not permit such a construction.
We conclude that once the seller elected to declare a forfeiture of the deposit, he was thereby precluded from pursuing other legal or equitable remedies.
288 Md. at 274.
In the case at hand, the provision in the advertisement for sale of the Property that preceded the first sale is quite different from the contractual provision construed in Blood, supra. Here, if the provisions of the advertisement were enforced, there would be no possibility that the defaulting bidder would know, prior to resale, what damages he or she would have to pay as a result of the default.
There are three essential elements of a valid and enforceable liquidated damages clause. “First, such a clause must provide ‘in clear and unambiguous terms’ for ‘a certain sum’[.]” “Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach[.]” “Thirdly, liquidated damage clauses are by their nature mandatory binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact[.]” While the language used by the parties is instructive in determining the validity of a liquidated damages clause, “[t]he decisive element is the intention of the parties—whether they intended that the sum be a penalty or an agreed-upon amount as damages in case of a breach and this is to be gleaned from the subject matter, the language of the contract and the circumstances surrounding its execution.” Board of Education of Talbot County v. Heister, 392 Md. 140, 156 (2006) (internal citations omitted).
In this case, the two remedies allowed for in the advertisement of sale, when read in tandem, do not meet any of the liquidated damages criteria as set forth in Heister, supra. At the time of Greentree’s initial default, “a certain sum” to be paid upon default could not be ascertained because the amount of damage that Greentree might be forced to pay could increase after the Property was resold if the purchaser at resale bid less than was originally bid by the defaulting purchaser or the amount payable would also increase, if the new purchaser’s bid was higher than the initial bid but not high enough to cover additional interest and cost of resale. The third criterion also was not met because when the Substitute Trustees ran the ad, they must have intended that the forfeiture of deposit would be a penalty against the defaulting purchaser because, no matter what happened upon resale, the Substitute Trustees (acting on behalf of Wells Fargo) would have $33,000 more in hand than they would have had if there had been no default. The second criterion was not met for the same reason. Thus, we agree (albeit for different reasons) with the circuit court’s holding that the newspaper ad calling for the forfeiture of the deposit was a penalty and could not be enforced as a valid liquidated damage clause.3
The unclean hands doctrine is applicable only if a party, who has engaged in fraudulent, illegal, or inequitable conduct, asks a court of equity for relief. Wells Fargo Home Mortgage Inc. v. Neal, 398 Md. 705, 729 (2007). Also, for the doctrine to be applicable, the fraudulent, illegal or inequitable conduct must relate to the matter with relation to which the party seeks assistance. Id. at 729-30. A party is not guilty of fraudulent or illegal conduct by merely breaking a contractual obligation. The circuit court evidently believed that the unclean hands doctrine was here applicable because Greentree’s actions were inequitable in that it twice failed to go to settlement when scheduled, which resulted in a delay in settlement of over one year. But the failure to go to settlement was simply a breach of contract and, for purposes of applying the unclean hands doctrine, a party does not act “wrongfully” simply by breaching a contract. See Simard v. Burson, 197 Md. App. 396, 416n.11 (2011); aff’d, 424 Md. 318, 332 (2012). While it is true that Greentree’s contract breaches caused a delay, the Substitute Trustees (in the final auditor’s report) received interest for every day of that period of delay. And, after expenses, the Substitute Trustees benefitted by their dealings with Greentree by recovering over $38,000 dollars more than they would have received if there had been no default. Under such circumstances, (...continued) enforce the provisions as set forth in the newspaper advertisement that called for forfeiture of the deposit in the event of default.
Greentree’s conduct cannot be accurately characterized as “inequitable.” Thus, Greentree’s claim was not barred by the unclean hands doctrine.
We turn now to address Greentree’s main argument, i.e., that under the provisions set forth in Md. Rule 14-305(g) the circuit court had no right to order, on February 10, 2012, that the deposit be forfeited and that the Property be resold at the risk and expense of Greentree.
Similarly, in Greentree’s view the circuit court also erred in August 2013 when it, in effect, ratified that earlier order. Greentree argues that upon default, the trustee can A) order the sale of the property at the defaulting purchaser’s risk and expense, or B) “take any other appropriate action.” Here, the circuit court interpreted Md. Rule 14-305(g) as giving it the “discretion” to order both the forfeiture of the initial deposit and order a resale at the risk and expense of Greentree. According to the circuit court, ordering the forfeiture of the deposit amounted to “other appropriate action.” In their brief, the appellees’ sole argument is that the court did have such discretion and did not abuse it under the circumstances of this case.
Resale. If the purchaser defaults, the court, on application and after notice to the purchaser, may order a resale at the risk and expense of the purchaser or may take any other appropriate action.
The most recent Court of Appeals case concerning Rule 14-305(g) is Burson v.
Simard, 424 Md. 318 (2012). In Burson, David Simard bid $192,000 at a foreclosure sale, but defaulted after the sale was ratified by the circuit court. Id. at 322. The property was resold by the Substitute Trustees at a second sale to Stan Zimmerman, who bid $163,000.
Id. Zimmerman also defaulted. The property was sold for a third time to a purchaser who bid $130,000. Id. at 323. The third sale was ratified and this time there was no default. On appeal, the Court was required to interpret the phrase “at the risk and expense of the defaulting purchaser” as used in Rule 14-305(g). Id. at 322. Simard readily admitted that he was liable for the risk and expense of the initial sale, but claimed that he was not responsible for the risk and expenses connected with the second resale. Id. at 323. In Burson, the Court held that “[a]bsent special circumstances, a defaulting purchaser at a foreclosure sale of property is liable, under Rule 14-305(g), for only the one resale resulting from his or her default. Id. at 322. In reaching that result, the Burson Court started out by
setting forth the appropriate standard for interpreting the Maryland Rules, viz.:
Because our interpretation of the... Maryland Rules [is] appropriately classified as [a] question[ ] of law, we review the issues... to determine if the trial court was legally correct[.] Davis v. Slater, 383 Md. 599, 604, 861 A.2d 78, 80-81 (2004). As we observed in Zetty v. Piatt, 365 Md.
141, 152-153, 776 A.2d 631, 637-38 (2001):