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Intervest National Bank v. Robert Welch

April 7, 2011


The opinion of the court was delivered by: Savage, J.


Intervest National Bank ("INB") initiated this action seeking judgment against Robert G. Welch and Robert B. Welch (collectively "guarantors") as guarantors of a defaulted mortgage note. In their answer to INB's complaint, the guarantors deny any obligation under the guaranty and raise multiple affirmative defenses, including that the underlying mortgage was unenforceable, and the guaranty is ambiguous and invalid. Intervest has now moved for summary judgment, contending there is no genuine issue of material fact regarding the validity of the note or the amount owed, including the fair market value of the subject property and the applicable interest rate, because those issues had been litigated and decided in a mortgage foreclosure proceeding in Maryland. Addressing defendants' defenses, INB argues that the note is enforceable despite a drafting error and the guaranty is enforceable and unambiguously requires guarantors to assume 50% of Fron LP's indebtedness under the mortgage and the note.

Opposing summary judgment, the guarantors make four arguments. First, they claim that the validity of the note, the amount of indebtedness, and the market value of the foreclosed property were not actually litigated and decided in the Maryland proceeding, and they are not precluded from raising those issue in this matter because they were neither parties to nor in privity with the defendant in the Maryland action. Second, the note is unenforceable as a result of INB's unilateral drafting mistake. Third, an ambiguity in the guaranty creates a genuinely disputed issue of material fact regarding the extent of their liability. Fourth, the interest rate is illegal. For the first time, at oral argument, the guarantors asserted that the guaranty limits their obligation to payment of insurance premiums and real estate taxes only, and not the debt.

Because there is no genuine dispute as to the validity of the note, the amount owed, the applicable interest rate, and the extent of the defendants' obligations under the guaranty, plaintiff's motion for summary judgment shall be granted.


In February 2005, a mortgage broker approached INB seeking a loan on behalf of Fron-DJW, LLC ("Fron LLC"). At that time, Robert G. Welch advised the broker that Robert

B. Welch was a principal, the manager and a member of Fron LLC and that Dennis Fronheiser, Linda Fronheiser, and Donna Jean Welch LLC were the other principals and members of Fron LLC.*fn1 Robert B. Welch, on behalf of Fron LLC, signed a commitment letter on March 15, 2005, accepting a mortgage loan from INB in the amount of $4,250,000.00 to purchase the property located at 85 Chestnut Point Road, Perryville, Md.*fn2

The following day, Robert G. Welch, Robert B. Welch's father, advised INB that the borrower should be changed to Fron-DJW, LP ("Fron LP"), whose general partner was Fron-DJW GP LLC ("Fron GP LLC").*fn3 The principals of Fron LP were Fron GP LLC, Linda and Dennis Fronheiser, and the Donna Jean Welch Irrevocable Trust (the "Trust").*fn4

On April 7, 2005, the commitment letter was modified to reduce the amount of the loan to $4,210,000.00 and to require that Robert B. Welch and the other principals of the borrower jointly and severally guarantee 50% of the loan.*fn5 Robert B. Welch signed the modified commitment letter on behalf of Fron LLC.*fn6

During the process of drafting the mortgage loan papers, INB's counsel forwarded to Fron LP's attorney a draft promissory note and mortgage identifying Fron LLC as the borrower.*fn7 Fron LP's attorney returned the documents with his edits, which included changing the borrower from Fron LLC to Fron LP in the body of the Note and its signature block.*fn8

Closing on the loan occurred on June 1, 2005.*fn9 At closing, Robert B. Welch, on behalf of Fron LP, executed the Mortgage, Settlement Disclosure/Notice and Agreement, Buyer/Borrower's Affidavit and Agreement, Purchaser's Settlement Statement, and Notice of Waiver of Rights.*fn10 He also executed the Note, which identified the borrower as Fron LP in the body of the Note but listed Fron LLC as the borrower in the signature block.*fn11

Fron LLC does not exist. The parties failed to notice this discrepancy at the time.

On November 1, 2005, in connection with the Mortgage and Note, guarantors executed a continuing guaranty (the "guaranty"). The guaranty was retroactive to June 1, 2005.*fn12

From June 1, 2005 through January, 2008, Fron LP made the required mortgage payments.*fn13 In early 2008, Fron LP fell behind in its payments. Ultimately, on June 1, 2008, it defaulted on the Mortgage.*fn14

On June 11, 2008, INB filed a complaint in strict foreclosure against Fron LP in the Circuit Court for Cecil County, Maryland.*fn15 In its answer, Fron LP expressly admitted that it had executed the Note in favor of INB and had failed to make the requisite payments.*fn16

On June 1, 2009, the court granted a Joint Motion for Order of Court Directing Sale. In the joint motion, the parties agreed that "Fron executed a Judgment Note ("Note") and a Mortgage (the "Mortgage") in favor of INB [Intervest National Bank]". They also requested that the court find Fron LP in default under the Note and the Mortgage; fix the amount of debt, interest and costs; and issue a decree for the sale of the mortgaged property.

On June 9, 2009, the court issued a Decree for Sale of Mortgaged Property, directing a foreclosure sale of the subject property.*fn17 It found:

* "[T]hat a default has occurred under the Note and Mortgage which are the subject of this action, and that the default occurred when Defendant failed to make timely payments under the Note"; and

* "[T]he amount of Defendant's debt as of May 21, 2009 is: $5,189,435.52, which includes (i) $4,024,571.56 of principal;

(ii) $81,161.96 for unpaid interest at the contract rate of six percent (6.0%) per annum accrued from February 1, 2008 through June 1, 2008; (iii) $949,799.70 for unpaid interest at the default rate of twenty-four percent (24%) per annum accrued from June 2, 2008 through May 21, 2009; (iv) $63,150.00 for the "Fee Payment" due and payable under Section 1(f) of the Mortgage; (v) $3,313.90 for late charges due and payable under the Note and Mortgage; (vi) $5,899.28 for appraisal and travel expenses incurred and paid by Plaintiff and required to be paid by Defendant pursuant to the Mortgage; and (vii) $61,539.12 for attorney fees and expenses incurred and paid by Plaintiff and required to be paid by Defendant pursuant to the Mortgage[.]"

Pursuant to the Decree and after publication of the sale, the property was sold to INB as the successful bidder for $500,000.00 on October 27, 2009. The court issued its final ratification of sale on April 20, 2010. Despite INB's demand under the guaranty, defendants have made no payments to INB.

Fron LP filed timely exceptions to the auditor's report. It disputed the calculation of interest, costs and expenses, and argued that the foreclosure sale price of the property did not reflect its fair market value at the time of the foreclosure sale.

On February 18, 2011, the Maryland court granted in part and dismissed in part Fron LP's exceptions. Noting that "the difference between the appraisal and the sale price, in and of itself, is not a sufficient reason to modify the sale price," the court dismissed Fron LP's exception to the market value of the property. However, it granted the exception as to the applicable interest rate, reducing it from 24% to 6%. The court remanded the matter to the auditor for a recalculation of the default interest at a rate of 6% per annum.

On remand, the auditor recalculated the interest as directed by the court. Applying a 6% interest rate, the auditor calculated Fron LP's total indebtedness at the time of the foreclosure sale at $4,429,908.87. After deducting the net proceeds of the sale from the debt, he fixed the deficiency at $4,000,412.98.

The Amended Audit was submitted on March 2, 2011, and ratified by the ...

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