Suburban Mortgage v. Exel Properties

UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

SUBURBAN MORTGAGE ASSOCIATES,
INCORPORATED,
Plaintiff-Appellant,

v. No. 98-1290

EXEL PROPERTIES, LIMITED; JOEL B.
HART; MATTHEW C. HART,
Defendants-Appellees.

Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Walter E. Black, Jr., Senior District Judge.
(CA-95-3784-B)

Argued: March 3, 1999

Decided: April 16, 1999

Before WILKINS and WILLIAMS, Circuit Judges, and LEE,
United States District Judge for the Eastern District of Virginia,
sitting by designation.

_________________________________________________________________

Vacated and remanded by unpublished per curiam opinion.

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COUNSEL

ARGUED: Robert Kelso Taylor, PATTON BOGGS, L.L.P., Wash-
ington, D.C., for Appellant. John Anthony Wolf, OBER, KALER,
GRIMES & SHRIVER, P.C., Baltimore, Maryland, for Appellees.
ON BRIEF: Kenneth A. Grigg, Ruth L. Ramsey, Michael T. Wood,
PATTON BOGGS, L.L.P., Washington, D.C., for Appellant. J. Kirby
Fowler, Jr., OBER, KALER, GRIMES & SHRIVER, P.C., Baltimore,
Maryland, for Appellees.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

Suburban Mortgage Associates, Inc. (Suburban) filed suit in the
Circuit Court of Montgomery County, Maryland, asserting that Exel
Properties, Ltd. and its principals, Joel and Matthew Hart (collectively
Exel), breached their contract when Exel declined to accept proffered
financing of $4.4 million without remitting the contractually required
commitment fee. Exel removed the case to the United States District
Court for the District of Maryland on diversity grounds and filed a
counterclaim for breach of contract asserting, among other things, that
Suburban concealed relevant facts regarding the source of the financ-
ing and thereby breached the implied duty of good faith and fair deal-
ing. After a six-day jury trial, the jury concluded that Exel was not
liable for breach of contract, finding against Suburban on the primary
claim. Additionally, the jury's verdict favored Exel on its counter-
claim. The jury declined, however, to award damages.

Suburban appeals, asserting that the district court erred when it
failed to sustain its motion for directed verdict on the counterclaim.1
We conclude that two of the four theories presented to the jury in sup-
port of Exel's counterclaim did not state a cognizable action under
Maryland's implied duty of good faith and fair dealing. Because the
jury rendered a general verdict, we do not know the ground for its
verdict. Accordingly, we vacate the district court's judgment on the
_________________________________________________________________
1 Suburban raised two additional issues on appeal. Because this first
issue is dispositive, however, we do not reach them.

2
counterclaim and remand for proceedings consistent with this opin-
ion.

I.

Exel, a limited partnership formed in 1992 for the purpose of pur-
chasing the Shoppes at Loggers Run (the Shoppes), a shopping center
in Boca Raton, Florida, sought refinancing of the Shoppes in 1994 in
order to use the proceeds of the refinancing to purchase an additional
shopping center. C. Robert Burgess, president of MortgagePro Ser-
vices Corp., a commercial mortgage brokerage in Florida, recom-
mended Suburban for the refinancing. Burgess informed Exel that
Suburban participated in a conduit lending program with Merrill
Lynch. Exel was especially interested in Suburban's lending program
because of the Merrill Lynch connection. Exel believed that if the
loan refinancing the Shoppes was backed by Merrill Lynch, it would
open the door to a long-term financing relationship between Exel and
Merrill Lynch.

Subsequently, on September 13, 1994, Exel filed a loan application
with Suburban requesting financing of $4.8 million. The application
gave Suburban the exclusive right during a sixty-day period to pro-
vide a loan commitment for the refinancing of the Shoppes. If Subur-
ban committed to fund Exel's loan and issued a closing confirmation,
Suburban was entitled to a commitment fee of 2% of the loan pro-
ceeds, regardless of whether Exel accepted the loan on the proffered
terms. Suburban, however, was ultimately under no obligation to fund
the loan. Even if it did offer to fund the loan, Suburban was not
required under the terms of the loan application to provide the full
$4.8 million requested by Exel. Further, nowhere in the loan applica-
tion did it specify that the source of the funds should be Merrill
Lynch.

On November 22, 1994, Suburban Mortgage issued a Mortgage
Loan Commitment (the Commitment) to Exel. The Commitment
incorporated by reference the terms and conditions of the loan appli-
cation, and contained an integration clause that provided, "[t]here is
no understanding with respect to the Loan, whether written or oral,
except as expressly set forth herein or expressly incorporated herein
by reference." (J.A. at 532 (¶ 8).) The Commitment further stated that

3
Suburban's obligation to fund the loan was conditioned on its discre-
tionary decision to issue a closing confirmation no later than forty-
five days from the date of the Commitment. Additionally, in para-
graph ten, the Commitment provided that "[i]n the event of a dispute
arising under the Application or this Commitment, the prevailing
party shall be entitled to recover from the other its reasonable attor-
neys' fees and costs actually incurred." (J.A. at 532 (¶ 10).) Such dis-
putes were to be governed by the substantive law of Maryland. The
Commitment became void if the borrower did not sign the Commit-
ment and submit the balance of the application fee within five days.
Exel signed the Commitment and remitted the balance of the applica-
tion fee, $5,500, the next day, November 23, 1994.

Although Suburban continued to process the loan, and Exel contin-
ued to submit documents, the closing confirmation was not issued
within the forty-five day window outlined in the Commitment. At no
time after the forty-five day deadline passed did Exel instruct Subur-
ban to stop processing the loan. Similarly, at no time did Suburban
execute a written extension of the forty-five day time period.2

Unbeknownst to Exel, Merrill Lynch had unilaterally terminated its
conduit financing agreement with Suburban on November 14, 1994.3
Nevertheless, Merrill Lynch indicated that it would continue to pro-
cess some of the loans that were already in progress, including the
Exel loan. Merrill Lynch's preliminary oral approval of Exel's loan
package in November prompted Suburban to issue the Commitment.
On the basis of the preliminary oral approval, Suburban continued to
process the loan and continued to assure Exel that its prospects of
obtaining full funding of $4.8 million from Merrill Lynch were good.
Ultimately, Exel's loan was approved by Merrill Lynch; however, it
_________________________________________________________________
2 The Commitment stated that all changes must be memorialized in
writing and signed by both parties.
3 It is undisputed that Suburban knew that Exel understood that the
financing for its loan would come from Merrill Lynch. Further, Suburban
acknowledged that it never told Exel that the conduit funding relation-
ship had been terminated. It was hotly contested at trial, however,
whether Suburban understood that the funding from Merrill Lynch was
essential to Exel's willingness to pursue the loan.

4
was approved for only $3.2 million, a significantly smaller sum than
requested.

Suburban also submitted the final loan package to Morgan Stanley,
with whom it hoped to establish a new conduit financing arrange-
ment. On February 17, 1995, a representative of Morgan Stanley
orally committed to funding the loan for $4.4 million dollars, condi-
tioned upon inspecting the property. Later that day, a representative
of Suburban contacted Exel and presented "a good news, bad news
scenario." (J.A. at 264.) The bad news was that Merrill Lynch was
only willing to refinance the Shoppes for $3.2 million and the good
news was that Suburban could nevertheless provide $4.4 million to
Exel with the backing of Morgan Stanley. Exel wanted to proceed
with the loan quickly and made arrangements for a Morgan Stanley
representative to inspect the property right away. After viewing the
property, Morgan Stanley made an oral commitment to Suburban that
it would approve the loan. Immediately thereafter, on February 21,
1995, Suburban issued its closing confirmation for $4.4 million.

By this time, however, Exel was shocked that the financing was not
coming from Merrill Lynch and as a result had lost faith in Subur-
ban's ability to close the deal. After a meeting between Exel and a
representative of Morgan Stanley during which the Morgan Stanley
representative indicated that the $4.4 million was not a firm offer,
Exel became further frustrated by the potential delay and concluded
that Suburban had been misleading it. After Exel expressed these feel-
ings to Suburban, a conference call took place in which representa-
tives of Exel, Suburban, and Morgan Stanley all participated. During
the call, the Morgan Stanley representative reiterated that it had not
made a firm commitment to provide funding to refinance the
Shoppes. Upon its receipt of that confirmation that the Morgan Stan-
ley offer was not firm, Exel immediately stated that the deal with
Suburban was "dead" and that it would obtain financing from another
lender. (J.A. at 379.)

II.

Thereafter, Suburban filed a breach of contract action in the Circuit
Court for Montgomery County, Maryland. Suburban asserted that

5
Exel failed to remit the commitment fee due upon issuance of the
closing confirmation pursuant to a clause in the loan application:

Within five (5) days after issuance of the Closing Confirma-
tion, Applicant shall pay to Lender a Commitment Fee in
the amount of 2.0% of the Final Loan Amount set forth in
the Commitment. If the Loan does not close in a timely
manner for any reason other than a default by Lender, then
the Preliminary Commitment Fee or Final Commitment Fee,
as applicable, for such Loan shall be retained by Lender as
liquidated damages.

(J.A. at 520 (¶ V.2).) Because Exel had never paid the commitment
fee of $88,000 due to Suburban upon Exel's receipt of the closing
confirmation dated February 21, 1995, which confirmed that Subur-
ban would provide a loan of $4.4 million to refinance the Shoppes,
Suburban claimed that Exel breached the contract and owed $88,000
in damages.

Exel removed the case to the United States District Court for the
District of Maryland on December 11, 1995.4 Approximately one year
later, on January 7, 1996, Exel moved for leave to file a counterclaim.
The district court granted Exel's motion. In the counterclaim, Exel set
forth four misrepresentation-type claims as breaches of the implied
duty of good faith and fair dealing: (1) that Suburban breached the
contract because Suburban was aware of the importance of the Merrill
Lynch relationship to Exel and nevertheless failed to disclose that
Merrill Lynch had terminated the conduit financing arrangement and
that Suburban had sought alternative funding from Morgan Stanley;
_________________________________________________________________
4 The case was removed pursuant to 28 U.S.C.A. § 1441(b) (West
1994) (providing that defendants may remove cases from state court to
federal court if the federal court originally would have had jurisdiction).
In this case, the district court could assert jurisdiction due to the parties'
diversity of citizenship. See 28 U.S.C.A.§ 1332 (West 1993 & Supp.
1998). Suburban is a Maryland corporation with its principal place of
business in Maryland. Exel is a Florida partnership with its principal
place of business in Florida. Additionally, the original amount in contro-
versy was $88,000. See 28 U.S.C.A. § 1332(a) (West Supp. 1998) (stat-
ing that the amount in controversy must exceed $75,000).

6
(2) that Suburban misrepresented that Morgan Stanley had approved
the $4.4 million loan when, in fact, it had not done so; (3) that Subur-
ban failed to keep Exel accurately informed regarding its lack of
progress with Merrill Lynch; and (4) that Suburban should have
informed Exel that it submitted Exel's loan package to an entity other
than Merrill Lynch. In addition, Exel claimed that Suburban breached
the contract when it failed to issue the closing confirmation within the
forty-five days specified in the contract documents and breached the
contract by incompetently processing its loan request. Finally, Exel
asserted that Suburban issued a false and baseless closing confirma-
tion in order to create Exel's obligation to pay the $88,000 fee. Exel
pleaded damages of $550,000 resulting from the long delay it experi-
enced before eventually obtaining financing from another source.

Both the claim and the counterclaim proceeded to a jury trial. At
the close of Suburban's evidence, Exel moved for judgment as a mat-
ter of law, pursuant to Federal Rule of Civil Procedure 50(a), on the
primary claim. The district court denied the motion. At the close of
all evidence, Suburban moved for a directed verdict on Exel's
counterclaim.5 The district court also denied this motion, and sent
both the primary claim and the counterclaim to the jury.

The jury was instructed on, inter alia, four possible bases for a
finding of breach of contract on Exel's counterclaim: (1) Suburban
issued a baseless closing confirmation; (2) Suburban failed to meet its
contractual deadlines; (3) Suburban failed to disclose Merrill Lynch's
decision to terminate the conduit program; and (4) Suburban misrep-
resented the true status of the loan processing. The final two theories
were based upon the implied contractual duty of good faith and fair
dealing. As a result, the jury was also given a general instruction on
that legal theory:

The duty of good faith obligates a party to exercise good
faith in performing its contractual obligations. However, the
duty of good faith and fair dealing may not override or mod-
ify explicit contractual terms. Good faith includes honesty
_________________________________________________________________
5 A motion for directed verdict is equivalent to a motion for judgment
as a matter of law under Federal Rule of Civil Procedure 50. See Fed. R.
Civ. P. 50, Advisory Committee Notes on 1991 Amendment.

7
 in fact. This duty of good faith and fair dealing prohibits a
party from acting arbitrarily, unreasonably, and in bad faith.
It also prohibits one party from acting in such a manner as
to prevent the other party from performing its obligations
under the contract.

(J.A. at 444.)

After deliberations, the jury returned its verdicts. On the primary
claim, the jury concluded that Suburban had not proven all the ele-
ments of breach of contract against Exel.6 Additionally, the jury
returned a general verdict on the four possible theories of liability
submitted to it for Exel's counterclaim against Suburban. The jury
found that Exel had proven breach of contract against Suburban. The
jury, however, did not award damages to Exel. After the verdict was
read, Suburban did not renew its motion for judgment as a matter of
law. See Fed. R. Civ. P. 50(b).

Exel then submitted a motion for attorneys' fees, pursuant to para-
graph ten of the Commitment which provided "[i]n the event of a dis-
pute arising under the [a]pplication or this Commitment the prevailing
party shall be entitled to recover from the other its reasonable attor-
neys' fees and costs actually incurred." (J.A. at 532.) Exel argued that
it was the prevailing party in the action because it had successfully
defended the primary claim by Suburban, and had been successful in
convincing the jury that Suburban had breached the parties' agree-
ment. Exel requested fees of $159,259.00 and costs of $9,799.30.
Suburban filed a responsive motion opposing Exel's request for fees.
Suburban also argued that it was the prevailing party and therefore
entitled to attorneys' fees because it had successfully fended off
Exel's counterclaim, which was worth more than five times as much
as Suburban's primary claim. Suburban requested fees of $88,140 and
costs of $6,044.09. After a hearing, the district court determined that
Exel was the prevailing party and awarded reasonable attorneys' fees
and costs in the amount of $122,593.14. (J.A. at 182.)

Suburban filed a timely notice of appeal.
_________________________________________________________________

6 Suburban does not appeal this determination.

8
III.

On appeal, Suburban makes three arguments. First, Suburban
argues that the district court erred when it denied Suburban's motion
for directed verdict on Exel's counterclaim because the counterclaim
was not based upon any contractual duty owed to Exel. Second, Sub-
urban maintains that insufficient evidence was presented to support
the jury's verdict in favor of Exel on the counterclaim. Third, Subur-
ban asserts that the district court erred when it determined that Exel
was entitled to its fees and costs as the prevailing party.

We agree with Suburban that the district court erred when it failed
to grant judgment as a matter of law in part. The final two theories
tendered by Exel in support of its claim for breach of contract fail as
a matter of law under Maryland's version of the implied contractual
duty of good faith and fair dealing. Thus, we conclude that the district
court should have eliminated those claims from the case in response
to Suburban's motion for directed verdict. Because the jury rendered
a general verdict, we vacate and remand7 for further proceedings con-
sistent with this opinion.8

A.

We review the district court's denial of Suburban's motion for
directed verdict de novo. See Princess Cruises, Inc. v. General Elec.
Co., 143 F.3d 828, 831 (4th Cir. 1998). Judgment as a matter of law
is appropriate when, viewed in the light most favorable to the non-
_________________________________________________________________
7 Because Suburban did not renew its motion for judgment as a matter
of law after the jury returned its verdict as required under Federal Rule
of Civil Procedure 50(b), our remedial powers are limited. See Benner
v. Nationwide Mut. Ins. Co., 93 F.3d 1228, 1234 (4th Cir. 1996). "In the
absence of a proper Rule 50(b) motion after the verdict, we cannot order
an entry of judgment contrary to that made by the district court . . . ." Id.
Rather, we may only vacate and remand, as we do here. See id.
8 As a result of our disposition, we need not reach the question of
whether sufficient evidence supported the jury's verdict on the counter-
claim. Also, because the results of any proceedings upon remand may
alter the prevailing party calculus, it would be inappropriately specula-
tive for us to address that issue.

9
moving party, see Westfarm Assocs. Ltd. Partnership v. Washington
Suburban Sanitary Comm'n, 66 F.3d 669, 683 (4th Cir. 1995), and
"without weighing the credibility of the evidence, there can be but
one reasonable conclusion as to the proper judgment," Singer v.
Dungan, 45 F.3d 823, 826 (4th Cir. 1995) (citation omitted).

B.

By express contractual agreement, Maryland law governs this case.
See American Motorists Ins. Co. v. ARTRA Group, Inc., 659 A.2d
1295, 1305 (Md. 1995) (noting that Maryland law will recognize
choice of law provisions contained in contracts). Under Maryland
law, "in every contract there exists an implied covenant that each of
the parties thereto will act in good faith and deal fairly with the oth-
ers." Food Fair Stores, Inc. v. Blumberg, 200 A.2d 166, 174 (Md.
1964). However, "[t]o the extent that a duty of good faith and fair
dealing exists in Maryland, it is of very narrow scope." Dupont
Heights Ltd. Partnership v. Riggs Nat'l Bank, 949 F. Supp. 383, 389
(D. Md. 1996). The duty "does not change the terms of the contract."
Waller v. Maryland Nat'l Bank, 620 A.2d 381, 388 (Md. Ct. Spec.
App. 1993). Under Maryland law, the implied duty of good faith and
fair dealing "simply prohibits one party to a contract from acting in
such a manner as to prevent the other party from performing his obli-
gations under the contract." Parker v. Columbia Bank, 604 A.2d 521,
531 (Md. Ct. Spec. App. 1992).

Two of the four alternative theories sent to the jury in support of
Exel's breach of contract counterclaim had as their foundation the
duty of good faith and fair dealing: (1) that Suburban failed to dis-
close Merrill Lynch's decision to terminate the conduit program; and
(2) that Suburban misrepresented the true status of the loan process-
ing. These claims must fail as a matter of law.

Maryland courts have made clear that the duty of good faith and
fair dealing is limited to the scope of the contract documents and can-
not "obligate a lender to take affirmative actions that the lender is
clearly not required to take under its loan documents." Id. Both of
Exel's claims at issue here are based upon Exel's expectation that
Merrill Lynch would be the source for the funds it was seeking from
Suburban. Below, Exel asserted both that Suburban breached the con-

10
tract when it failed to inform it that Merrill Lynch had canceled the
conduit program and also that Suburban should have informed Exel
that it was having trouble attaining financing from Merrill Lynch
before it turned to Morgan Stanley as a source for the $4.8 million.
Unfortunately, however, Exel's expectations regarding Merrill Lynch
were never memorialized in the contract documents.

The facts are clear on this point. Exel signed and became bound by
two separate documents issued at different times over the course of
its business relationship with Suburban that made no mention of Mer-
rill Lynch, or of any particular source of funds. Without a specific ref-
erence to the ultimate source of its financing, Suburban was not
contractually bound to provide funding from Merrill Lynch, or even
to seek funding from Merrill Lynch. Under Maryland law, the implied
duty of good faith and fair dealing cannot act as a substitute for
express contractual terms and cannot change the terms of the contract.
See Waller, 620 A.2d at 388. Exel's understanding that Merrill Lynch
would be providing the money for the loan simply is not sufficient to
support a claim under the implied duty of good faith and fair dealing.
That duty is carefully circumscribed by express contractual terms. See
Parker, 604 A.2d at 531.

As noted above, Exel's factual claims are insufficient to support
recovery for breach of contract under the theory of breach of the
implied duty of good faith and fair dealing. Therefore, the district
court erred in rejecting in toto Suburban's motion for directed verdict.
Because it is impossible to determine whether the jury's general ver-
dict rests upon the legally erroneous theories, it"may not stand as the
basis for judgment." Flowers v. Tandy Corp. , 773 F.2d 585, 591 (4th
Cir. 1985); accord Barber v. Whirlpool Corp., 34 F.3d 1268, 1278
(4th Cir. 1994).

IV.

Accordingly, we vacate and remand for proceedings consistent
with this opinion.

VACATED AND REMANDED

11