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Talbot Bank of Easton Maryland v. Albertson

Superior Court of Delaware, Kent

June 5, 2013

THE TALBOT BANK OF EASTON MARYLAND, Plaintiff,
v.
KIRK D. ALBERTSON, and EDWARD M. ALBERTSON, Defendants.

Submitted: March 8, 2013

David J. Weidman, Esq., Sergovic, Carmean & Weidman, P.A., Georgetown, Delaware for Plaintiff.

Robert K. Beste, III, Esq., Smith, Katzenstein & Jenkins, LLP, Wilmington, Delaware for Defendants.

OPINION

Robert B. Young J.

SUMMARY

In this case, involving alleged defaults on notes associated with realty obligation, Talbot Bank of Easton, Maryland ("Plaintiff"), has filed for Summary Judgment. Because, as has been described in a prior decision (May 15, 2012), Kirk D. Albertson and Edward M. Albertson ("Defendants"), were in a posture to alienate the property through a mortgage, Defendants' affirmative defense claiming a lack of such ability is not well taken. Accordingly, Plaintiff's Motion for Summary Judgment in its favor as to that affirmative defense is GRANTED.

Because Defendants raise factual issues relative to other affirmative defenses, Plaintiff's motion thereon is DENIED.

Thus, Plaintiff's motion is GRANTED in part and DENIED in part.

FACTS

On June 13, 2008, Defendant Kirk Albertson executed a Note with two co-obligors William G. Haddaway ("Haddaway") and Roger Brown ("Brown") for a commercial loan of $350, 000.00. Haddaway, a co-obligor, and his wife Dawn Hinkle ("Hinkle"), gave a mortgage on real property they owned to secure the Note and Haddaway's guaranty. Brown, one of the co-obligors also gave a mortgage on his home property to secure the note and his guaranty. On February 13, 2009, an entity named Rokabil Motors, LLC executed a Note for $75, 000.00. Defendants executed a mortgage in connection with that Note, pledging the same two parcels. Kirk Albertson executed unconditional guarantees on both June 13, 2008 and February 13, 2009, to secure Plaintiff's interest further in the two Notes. Simultaneously, Defendants delivered to Plaintiff, a mortgage in the amount of $350, 000.00. The mortgage was given to secure the repayment of that Note. The Defendants claim that they jointly relied on the mortgages signed by Haddaway and Brown in giving their mortgages on the subject property.

Kirk Albertson defaulted on both Notes, as he failed to make payments as they became due. Plaintiff filed this foreclosure action on the mortgages given by Defendant's described above. There is an additional mortgage, in the amount of $200, 000 in a separate foreclosure proceeding. The filings provided by Plaintiff do not state when the default occurred. At the time of filing $355, 672.32 was due under the first loan, and $78, 429.81 was due under the second, plus appropriate interest accruing. Plaintiff also claims attorney's fees up to 20% of the unpaid balance.

In December 2008, Plaintiff released Brown from his obligations under the $350, 000.00 Note and Guaranty, releasing his home property from the mortgage which secured that Note. The record is silent regarding whether or not Plaintiff received consideration for the release of Brown and his security. Plaintiff did not seek or receive consent from Defendant Edward Albertson to the release of the security Brown had provided. Additionally, the release documents fail to contain any express reservation of Plaintiff's rights against either of the defendants, or the property in question. Plaintiff alleges that Kirk Albertson consented to the release of Brown's financial obligations by signing a redemption agreement on December 1, 2008.

In April 2010, Plaintiff released the security furnished by Haddaway and Hinkle to secure the $350, 000.00 Note and Guaranty. According to Plaintiff, it only released its lien on the Haddaway property because that real estate did not have sufficient equity to secure Plaintiff's interest in the loan. It did not release Haddaway from his personal obligations under the Note. He was personally liable on that debt until it was discharged, by the United States Bankruptcy Court, District of Maryland, Baltimore Division, on April 22, 2011. There was no consideration paid to Plaintiff. Defendants allege that this release was granted as a favor to Hinkle, who is a long-time employee of Plaintiff. Plaintiff did not seek or receive consent from Edward Albertson for the release of the security furnished by Haddaway and Hinkle, nor did the release documents contain any express reservation of Plaintiff's rights against Defendants, or the property in question. Plaintiff also released the property furnished by Haddaway and Hinkle to secure the $75, 000.00 Note in April 2010. No consideration was given to Plaintiff for that release.

Before the Court is Plaintiff's Motion for Summary Judgment regarding the validity/invalidity of the Defendants' three affirmative defenses to the foreclosure action.

STANDARD OF REVIEW

Summary judgment is appropriate where the record exhibits no genuine issue of material fact so that the movant is entitled to judgment as a matter of law.[1]"Summary judgment may not be granted if the record indicates that a material fact is in dispute, or if it seems desirable to inquire more thoroughly into the facts in order to clarify the application of the law to the circumstances."[2] The movant bears the initial burden of establishing that no genuine issue of material fact exists.[3] Upon making that showing, the burden shifts to the non-movant to show evidence to the contrary.[4] When considering a motion for summary judgment, the Court considers the facts in the light most favorable to the non-movant.[5]

DISCUSSION

In their Answer to the Complaint, Defendants asserted the following affirmative defenses: 1) Edward Albertson was an accommodation party under Title 6 of the Delaware Code, and thus, should be released from the mortgages; 2) the Albertsons should be discharged from the mortgages because Plaintiff released other co-obligors; and 3) that the mortgages did not cover Kirk Albertson's possessory interest in the property. Plaintiff's Motion for Summary Judgment concerns the validity/invalidity of these defenses. It is Plaintiff's position that they are invalid as a matter of law, entitling it to summary judgment.

I. Accomodation Party

Defendants' first affirmative defense is that Edward Albertson was an accommodation party, and thus should be released from the mortgage. The Defendants cite only the Restatement (Second) of Contracts §294 in support of this position. This defense is inapplicable under the circumstances in the present case. Though the defense is entitled "Release; Discharge; Accord and Satisfaction, " the basis of the defense actually centers upon Edward Albertson's claim that he is an accommodation party. The concept of an accommodation party comes from Title 6 of the Delaware Code, which sets forth the Delaware Uniform Commercial Code. The relevant sections for this matter are 6 Del. C. §419 and/or 6 Del. C. §3-605. The Code provides the narrow set of circumstances under which an accommodation party may be discharged from his or her obligation. However, review of the filings demonstrates that both parties agree that the UCC is inapplicable here. Edward Albertson signed only the two mortgages, which are not "instruments" under the law. As the UCC is not applicable to the situation, Edward Albertson cannot validly claim to be an accommodation party, a status that exists only as a creature of the UCC.

Disputing that result, Defendants cite the Restatement (Second) of Contracts §294 in support of this defense. Were the Court to assume that the Restatement (Second) of Contracts §294 is law in this State, it would not apply to Edward Albertson. §294 provides as follows:

§294. Effect of Discharge on Co-promisors
(1) Except as stated in §295, where the the obligee of promises of the same performance discharges one promisor by release, rescission or accord and satisfaction,
(a)Co-promisors who are bound only by a joint duty are discharged unless the discharged promisor is a surety for the co-promisor;
(b)Co-promisors who are bound by joint and several duties or by several duties are not discharged except to the extent required by the law of suretyship.
(2)By statute in many states a discharge of one promisor does not discharge other promisors of the same performance except to the extent required by the law of suretyship.
(3)Any consideration received by the obligee for discharge of one promisor discharges the duty of each other promisor of the same performance to the extent of the amount or value received. An agreement to the contrary is not effective unless it is made with a surety and expressly preserves the duty of his principal.[6]

Edward Albertson did not have a joint duty under §294(1)(b) as a co-promisor, because he signed only the Mortgages and no Notes. Thus, even if §294 were to be adopted as law it would be inapplicable to Edward Albertson. Summary judgment is GRANTED in favor of Plaintiff as to Defendants' first affirmative defense.

II. Release of Surety

Defendants' second affirmative defense is that Plaintiff's release of a principal discharged the suretyship of Edward Albertson. It is Defendants' position that this defense is supported by one of two possible Restatement rules. In a 1946 opinion, the Court of Chancery acknowledged that Delaware follows Restatement (First) of Security §122, [7] which states:

§122. Release of Principal.
Where the creditor releases a principal, the surety is discharged unless
(a)the surety consents to remain liable notwithstanding the release, or
(b)the creditor in the release reserves his rights against the surety.[8]

In the present case, Edward Albertson did not consent or agree to remain liable when Plaintiff released Brown and his property from the $350, 000.00 Note and Mortgage. In fact, Edward contends that he would not have been willing to sign the $350, 000.00 mortgage except for the fact that Brown, co-obligor, had also given a mortgage on his own properties to secure the Note. Plaintiff's release documents contained no express reservation of its rights against Edward Albertson or his property. For these reasons, Defendants argue that Edward Alberton and his property interests were discharged as surety on the $350, 000.00 Note when Brown was released. Consequently, they argue, Edward Albertson is entitled to partial summary judgment on that part of Plaintiff's claim.

Defendants have also directed the Court to another potentially applicable Restatement rule. The Restatement of Security has been revised. §122 now appears in modified form as §39 in the Restatement (Third) of Suretyship and Guaranty. It reads in relevant part:

§39. Release of Underlying Obligation
To the extent that the obligee releases the principal obligor from its duties pursuant to the underlying obligation:
(a) . . . .
(b)the secondary obligor is discharged from any unperformed duties pursuant to the secondary obligation unless:
(i) the terms of the release effect a preservation of the secondary obligor's recourse (§38)
or (ii) the language or circumstances of the release otherwise show the obligee's intent to retain its claim against the secondary obligor.
(c) if the secondary obligor is not discharged from its unperformed duties pursuant to the secondary obligation by operation of paragraph (b), the secondary obligor is discharged from those duties to the extent:
(i) of the value of the consideration for the release;
(ii) that the release of a duty to pay money pursuant to the underlying obligation would otherwise cause the secondary obligor a loss; and
(iii) that the release discharges a duty of the principal obligor other than the payment of money;
(d)the secondary obligor has a claim against the obligee to the extent provided in §37(4).[9]

Delaware case law reveals no Delaware case adopting §39 in place of §122. However, even if §39 were to be applied, Plaintiff would still not be entitled to summary judgment because a trial would be required to allow the trier of fact to apply §39(b)(ii) to the language and circumstances of the release, in order to determine if Plaintiff's intent was to retain a claim against Edward Albertson. Further, even if it were to be found that Plaintiff intended to retain its claim, the trier of fact would be required to apply the §39(c) factors to determine the extent to which Plaintiff's claim against Edward Albertson was discharged by the release of Brown. At this stage of the proceedings, the record contains little evidence concerning the release of Brown, or the amount of consideration given for the release.

While Defendants' Response mentions that partial summary judgment on this issue could be granted in its favor, the Response does not serve as a proper motion for partial summary judgment. Plaintiff has not been provided an opportunity to respond to that contention, the cited passages of the Restatement, or to argue which, if any, section is applicable. Nevertheless, Defendants' second affirmative defense is not invalid. At the very least, it raises issues of material fact. Therefore, Plaintiff's Motion for Summary Judgment is DENIED as to Defendants' second affirmative defense.

The Defendants also raise issues of fact with regard to the release of the property of Haddaway and Hinkle from their Mortgages without the release of Haddaway, personally, from his obligations on his Note and Guaranty. It is Defendants' position that a different rule is applicable in this situation, Restatement (First) of Security §132:

§132. Surrender or Impairment of Security by Creditor. Where the creditor has security from the principal and knows of the surety's obligation, the surety's obligation is reduced pro tanto if the creditor
(a)surrenders or releases the security, or
(b)willfully or negligently harms it, or
(c) fails to take reasonable action to preserve its value at a time when the surety does not have an opportunity to take such action.[10]

Defendants' cite this rule in support of a complex argument regarding Plaintiff's release of the property of Haddaway and Hinkle from their Mortgages. In essence, the Defendants' claim that there are issues of fact about timing, the April 2011 Haddaway bankruptcy, and the amount of payment which Plaintiff could have obtained in exchange for the release of Haddaway and Hinkle. This portion of Defendants' Response simply raises additional material issues of fact. It is unnecessary to engage in a detailed discussion of these specific fact issues, as the Court has already found reason to bar Plaintiff's claim for summary judgment based on the fact issues surrounding the release of Brown.

III. Conveyance of Possessory Interests

The final affirmative defense claimed by Defendants is that the mortgages failed to convey their possessory interests. Specifically, Defendants argue that the whole interest in the property was not conveyed by the mortgage, because (on breach of a condition subsequent) some of the interest reverted back to the Will, thereby vesting interest in heirs at law. It is, therefore, Defendants' position that they did not hold the whole interest allegedly conveyed.

By deed dated October 31, 1991, Edward and Dolores Albertson acquired the property as tenants by the entireties. Subsequently, Edward transferred his interest in the property to Dolores, vesting in her sole title. Upon Dolores' death in December 2005, the property passed in accordance with her Will. It provided Edward with a life estate, upon the condition subsequent that he pay and discharge all expenses related to the property. After Edward's interest is terminated the remainder of the interest in the property was to pass to Kirk. In March 2007, reserving a life estate for Edward, the property was deeded to Kirk and Edward together by quitclaim deed. All of these events occurred before the mortgages were entered. The Court considered the Defendants' affirmative defense in a case involving the same Defendants and a different mortgage.[11] The Court found:

as a result of the quitclaim deed, Edward's life estate in the property merged into an undivided half interest as a tenant in common. Where a life tenant becomes vested with a remainder interest, the two interests merge. Hence, when Kirk granted his remainder interest to himself and Edward, Edward's life estate merged into the conveyed interest. Edward holds an undivided one half interest as tenant in common. Kirk maintains the other undivided half interest as tenant in common. Those interests, taken together, constitute the ownership and possessory rights of the property in its entirety.[12]

The Court rejected the Albertson's affirmative defense in that matter, and for the same reasons set forth in that decision, the identical affirmative defense is invalid here. For that reason, summary judgment is GRANTED in favor of Plaintiff as to Defendants' third affirmative defense.

CONCLUSION

Plaintiff's Motion for Summary Judgment is GRANTED in part as to Defendants' first and third affirmative defenses and DENIED in part as to Defendants' second affirmative defense.

IT IS SO ORDERED.


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