Present: All the Justices
JIM CARPENTER COMPANY, ET AL.
v. Record No. 962510
OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR.
January 9, 1998
JILL MYERS POTTS, ET AL.
FROM THE CIRCUIT COURT OF KING GEORGE COUNTY
Richard H.C. Taylor, Judge
The primary issue we consider in this appeal is whether the
chancellor properly considered parol evidence to limit the lien
of a third deed of trust to the amount of the net proceeds of the
sale of a lot encumbered by that deed of trust.
BACKGROUND
The real property that is the subject of this appeal is Lot
23 in the Eden Estates subdivision in King George County.
Southface Associates, Inc. (Southface), a land developer,
acquired Lot 23 along with forty-five other lots in the Eden
Estates subdivision by deed dated July 28, 1989. To finance the
transaction, Southface executed a first deed of trust in favor of
King George State Bank and a second deed of trust in favor of the
former owner of the property. The second deed of trust provides
for the partial release of its lien upon the payment to the
noteholder of a fixed fee of $8,409.09 per lot. For purposes of
this appeal, it is undisputed that the first deed of trust
provides for the partial release of its lien upon the payment of
a fixed release fee of $9,000 per lot.
At the time of its acquisition of the Eden Estates lots,
Southface was indebted on open accounts with Jim Carpenter
Company, a building material supplier, and The Lester Group,
Inc., the latter's parent company, (collectively, Jim Carpenter)
in an amount in excess of $300,000. Shortly thereafter,
Southface became financially endangered and proposed a plan to
Jim Carpenter under which Southface might be able to "survive
th[e] economic decline" and Jim Carpenter might recover on its
accounts with Southface. As a part of this "workout agreement,"
Jim Carpenter extended a credit line note of $100,000 to
Southface, secured by a third deed of trust on the Eden Estates
lots. Prior to agreeing to this workout plan, Jim Carpenter
received an independent appraisal of these lots that showed they
were encumbered by the previously mentioned deeds of trust and
were valued at between $22,000 and $26,000 each without
improvements. In essence, the parties anticipated that the sale
of individual lots would provide Southface with the needed cash
flow to enable it to continue in operation and to pay its
indebtedness to Jim Carpenter.
As will become apparent, the partial release provision in
the deed of trust in favor of Jim Carpenter is of particular
significance in this appeal. The deed of trust contains a
provision permitting partial releases and shows several notations
referencing certificates of partial satisfaction and release
concerning lots other than Lot 23. However, neither this deed of
trust, nor the note it secures, contains specified terms for
partial releases or an express provision for the payment of a
fixed release fee per lot. Both are silent in that regard.
On February 20, 1990, Southface conveyed Lot 23 to W. T.
Anderson Home Builders, Inc. (Anderson) for $24,000, the
undisputed fair market value of the lot at that time. The fixed
partial release fees were paid from the sale proceeds in
accordance with the provisions of the first two deeds of trust,
and Lot 23 was released by the respective trustees under those
deeds of trust. After the further payment of sales commissions
and closing costs, the net proceeds from the sale were $4,527.72.
Southface did not pay these proceeds to Jim Carpenter and,
although the law firm handling the closing sought a release of
the property, no release from Jim Carpenter's deed of trust was
1
given. On July 20, 1990, Anderson conveyed Lot 23 with
improvements to Jill Myers Potts for $155,000. Potts executed a
deed of trust on the property to secure a note with her mortgage
lender in the amount of $115,000. 2
On November 4, 1991, King George State Bank conducted a
foreclosure sale on the thirty-six lots still owned by Southface.
The net proceeds from the sale did not extinguish the first deed
of trust. Meanwhile, Southface became insolvent and filed
bankruptcy proceedings.
Thereafter, on July 17, 1992, the substitute trustee under
Jim Carpenter's deed of trust commenced foreclosure proceedings
against Lot 23, seeking recovery of the full face amount of the
credit line note, interest from its date of inception, costs and
1
The facts surrounding the request for the release and Jim
Carpenter's refusal to grant a release were strongly disputed by
the parties. The record is clear, however, that no release for
Lot 23 was recorded in the land records of King George County.
2
Potts was not married at the time of this conveyance and
the deeds were recorded in the name "Jill Myers."
related fees. In response, on July 31, 1992, Potts and her
mortgage lender filed a bill of complaint seeking an injunction
to prohibit Jim Carpenter from conducting a foreclosure sale.
The chancellor referred the matter to a commissioner in chancery
for evidentiary proceedings. By subsequent order, the chancellor
permitted Potts to add Anderson as a defendant and amended the
prior decree of reference to include matters concerning
Anderson's potential liability to Potts.
Anderson then filed a third-party bill of complaint against
the attorneys, a paralegal, the title insurance companies and
title insurer (hereafter, the third-party defendants) who
participated in the closings of the conveyances of Lot 23 from
Southface to Anderson and from Anderson to Potts. Anderson
asserted theories of breach of contract and breach of
professional responsibility by these parties, jointly and
severally, and sought damages in the amount of its liability, if
any, to Potts.
On March 22, 1995, Anderson sought to have the issues raised
in its third-party action included in the decree of reference.
The third-party defendants opposed this motion, and Anderson then
withdrew the motion before the commissioner. Accordingly, the
commissioner did not take evidence concerning Anderson's
third-party claims or address them in his report to the
chancellor.
At the subsequent hearing before the commissioner, Michael
Maurice Rafferty, president of Southface, testified at length
concerning the business relationship between Southface and Jim
Carpenter and the purpose of the credit line note secured by the
deed of trust in favor of Jim Carpenter. As noted above,
Southface was in financial difficulty and it owed considerable
sums on open accounts to Jim Carpenter. The note and deed of
trust, although for considerably less than the total
indebtedness, was intended to give Jim Carpenter "some
protection" for those accounts and to permit Southface to
continue to receive supplies from Jim Carpenter. Rafferty
explained that without further sales of the lots, Southface "had
no possible way of paying" its debt to Jim Carpenter. With
regard to the silence in the deed of trust on specified terms for
partial releases or a fixed partial release fee for individual
lots sold, Rafferty testified that it was mutually understood by
Southface and Jim Carpenter that, upon the sale of one of the
lots, Jim Carpenter would receive the net proceeds from that sale
after payment of the release fees to the two superior note
holders, sales commissions, and closing costs. Rafferty
maintained that this understanding was reached between himself on
behalf of Southface and Tommy Morris Mayo, corporate credit
manager, on behalf of Jim Carpenter.
Mayo's testimony at the hearing was not wholly inconsistent
with Rafferty's testimony regarding the parties' agreement
concerning the payment of release fees. Mayo testified that the
agreement was that he and Rafferty "would talk about the release
of a lot and based upon that conversation [Mayo] would release
the lot." He maintained, however, that because no such
conversation ever took place with regard to Lot 23, no release
was granted. Mayo acknowledged that some lots were released in
accordance with Rafferty's version of their agreement and that
this was done because "I was trying to keep [Southface] afloat as
best I could." 3
Sandra H. Stein, Southface's general manager, testified that
prior to each sale of a lot, she would contact Jim Carpenter's
local credit manager in order to reach an agreement on a release
fee. In some instances, Jim Carpenter would require no release
fee at all in consideration of periodic payments being made by
Southface on its general indebtedness.
Additional testimony from expert witnesses confirmed that an
"established business custom" or "business practice" in the real
estate development business is that the amount of the partial
release fee on unimproved lots covered by a blanket deed of trust
will not exceed the net sales price. One expert, Gordon B. Gay,
explained that where undeveloped lots are encumbered by first and
second deeds of trust, "the third is basically the net proceeds
type of arrangement." He further explained that the benefit to
be gained by the parties by having an unstated release fee in the
third deed of trust is that "[i]t makes it more flexible between
the lender and the debtor" and "[i]t helps in a workout
situation."
3
Mayo testified at length concerning the dispute over
payments made to Jim Carpenter that were applied to the open
account and not the secured note. In addition, the parties
presented voluminous evidence in an attempt to prove or disprove
that Southface had actually paid the net proceeds of the sale of
Lot 23 to Jim Carpenter. However, the commissioner and the
chancellor found that Jim Carpenter did not receive these
proceeds. The record supports that finding.
Consistent with this practice, the evidence showed that on
eight lots Jim Carpenter released its deed of trust in exchange
for payments on the secured note in amounts not exceeding the net
proceeds to Southface from the sales of the lots. In two
instances, Jim Carpenter released lots subject to its deed of
trust without payment.
In his report to the chancellor, the commissioner found that
the evidence warranted consideration of the parol evidence
concerning established business practice and the course of
dealing between the parties. Based on that evidence, the
commissioner recommended that Jim Carpenter be limited to
recovering no more than the net proceeds of the sale of Lot 23
from Southface to Anderson.
After receiving objections from the parties, the chancellor
entered a final decree, adopting the commissioner's factual
findings, and awarded judgment to Potts, requiring Jim Carpenter,
upon receipt of payment of $4,527.72, to issue a release from the
third deed of trust on Lot 23. In accord with the commissioner's
recommendation, no interest, attorney's fees, or costs related to
the note or deed of trust were awarded to Jim Carpenter. The
decree further assigned full liability for the payment due Jim
Carpenter, including the commissioner's fee and related costs, to
the third-party defendants. Anderson was "dismissed" from the
suit. We awarded Jim Carpenter an appeal and accepted
assignments of cross-error from the third-party defendants.
DISCUSSION
We first consider whether the chancellor erred in
considering parol evidence to establish terms for a partial
release fee where the deed of trust provided no terms beyond
permitting partial releases. In doing so, we are cognizant of
the well established standard applicable to the use of parol
evidence in contract disputes. 4 As we said in Pulaski National
Bank v. Harrell, 203 Va. 227, 123 S.E.2d 382 (1962):
The rule which excludes parol evidence when
offered to vary the terms and conditions of an
integrated written contact has nowhere been more
strictly adhered to in its integrity than in Virginia.
It, in effect, declares that, where parties have
reduced their contract to a writing which imposes a
legal obligation in clear and explicit terms the
writing shall be the sole memorial of that contract,
and it is conclusively concluded that the writing
contains the whole contract, and is the sole evidence
of the agreement.
Id. at 233, 123 S.E.2d at 387; see also Erlich v. Hendrick Const.
Co., Inc., 217 Va. 108, 112, 225 S.E.2d 665, 668 (1976).
In Erlich, we held that admission of parol evidence was not
proper to prove the existence of an oral agreement to extend a
completion deadline by altering a term in an integrated and
unambiguous contract. Id. at 112-13, 225 S.E.2d at 668-69. In
doing so, we rejected the argument that the silence of the
contract as to possible modification of that term rendered the
terms for modification of the contract subject to construction by
reference to parol evidence. Id.
In other instances, however, we have held that parol
4
For purposes of our analysis in this appeal, we make no
distinction between a contract and a deed of trust. See
Commonwealth v. Jones & Robins, Inc., 186 Va. 30, 41 S.E.2d 720
(1947).
evidence may be properly admitted to prove the existence of
additional terms to an agreement where the agreement is silent,
so long as the addition of such terms is not inconsistent with
the express terms of the written instrument. See, e.g., Durham
v. National Pool Equipment Co. of Va., 205 Va. 441, 447, 138
S.E.2d 55, 59 (1964)(where two contracts between the parties did
not deal with the subject matter of a third agreement, parol
evidence was admissible to prove existence of terms of that
agreement). In doing so, we recognized an exception to the parol
evidence rule commonly called the "partial integration doctrine."
In High Knob, Inc. v. Allen, 205 Va. 503, 138 S.E.2d 49,
(1964), we explained that the partial integration doctrine
recognizes that the final form of a contract between parties may
not reflect the complete agreement of the parties or accurately
reflect the course of dealing between parties based on their
complete agreement. In such circumstances, "[w]here the entire
agreement has not been reduced to writing, parol evidence is
admissible, not to contradict or vary its terms but to show
additional independent facts contemporaneously agreed upon, in
order to establish the entire contract between the parties." Id.
at 506, 138 S.E.2d at 52. In High Knob, we went on to recognize
the "collateral contract doctrine" that parol evidence is also
admissible as "proof of a prior or contemporaneous oral agreement
that is independent of, collateral to and not inconsistent with
the written contract, and which would not ordinarily be expected
to be embodied in the writing." Id. at 506-07, 138 S.E.2d at 52.
But cf. Wilson v. Holyfield, 227 Va. 184, 188, 313 S.E.2d 396,
398 (1984)(absence of terms normally found in a contract is
insufficient in and of itself to render the contract subject to
judicial construction). In High Knob, we held that where the
contracts of sale of various lots were silent as to the lots'
source of water, and the deeds and covenants restricted the right
to establish wells, parol evidence was admissible to prove an
oral agreement by the seller to provide hook-ups to its water
system. 205 Va. at 508, 138 S.E.2d at 52.
Here, Carpenter's deed of trust expressly provides for
partial releases for individual lots, but is silent as to the
terms under which such releases would be given. This renders the
present case similar to High Knob and distinguishes it from
Wilson. Unlike the contract in Wilson, Carpenter's deed of trust
is not wholly silent on the subject matter at issue. Rather, as
in High Knob, Carpenter's deed of trust contains a provision that
cannot be implemented absent additional terms or a collateral
agreement.
Accordingly, we hold that the evidence supports the
chancellor's finding that this deed of trust is an incomplete
integration of the agreement between Jim Carpenter and Southface.
Based upon the testimony about established business practices
and the actual course of dealing between the parties to the deed
of trust, the evidence is sufficient to establish the parties'
agreement that Jim Carpenter would release its deed of trust on a
particular lot in return for payment by Southface of an amount
not more than the net proceeds of the sale of that lot. This
conclusion does not alter any term of the deed of trust. It is
then clear that the chancellor properly determined that Jim
Carpenter was entitled to recover from Potts the amount of
$4,527.72, the net proceeds to Southface from the sale of Lot
23. 5
Jim Carpenter further asserts that the chancellor erred in
failing to award prejudgment interest because the note secured by
its deed of trust provided for a specific rate of interest. This
Court has previously addressed this precise assertion with regard
to the rate of interest specified in a note.
Where a specified rate of interest is contracted for
upon an obligation, and the rate is lawful, that rate
will continue to apply after maturity of the
obligation, and even after judgment, until the debt is
fully paid. The reason for this is the court's lack of
power to dispense with the obligations of lawful and
valid private contracts.
Fleming v. Bank of Virginia, 231 Va. 299, 307, 343 S.E.2d 341,
345 (1986).
Thus, we agree that Southface was obligated to pay the rate
of interest specified in the note from its inception. However,
as we have already explained, regardless of Southface's
obligation under the note, the amount of lien of the deed of
trust securing that note with reference to Lot 23 was fixed at
the time of sale of that lot at a maximum of $4,527.72. To the
extent that interest continued to accrue thereafter against the
unpaid balance of the note, that liability could not increase the
5
Jim Carpenter also asserts that any non-written agreement
as to partial release fees was an improper oral modification of
the note. We disagree. The note and deed of trust, though
related, are distinct and separate. The trial court did not
modify the note. Rather, it merely clarifies the security for
that note with reference to Lot 23.
lien on Lot 23. 6
Relying on a provision of its deed of trust that requires
the grantor to reimburse the trustees and beneficiaries "for all
reasonable costs, charges and attorney's fees incurred" in any
suit "affecting the premises or title thereto or the interest of
[the] Trustees or Beneficiaries," Jim Carpenter asserts that the
chancellor erred in failing to award attorney's fees and related
costs it expended in defending the present suit. The provision
further states that the costs and fees "shall be secured hereby
as a further charge and lien upon the premises."
Our previous analysis of Jim Carpenter's claim for interest
is also dispositive of its claim for attorney's fees and related
costs under this provision of its deed of trust. The amount of
the lien on Lot 23 under the deed of trust became fixed and
limited at the time of the sale of that lot by Southface to
Anderson. Thus, even if Jim Carpenter were entitled to some or
all of the costs and fees claimed, these would merely increase
the lien on the lots remaining after the sale of Lot 23. In
short, regardless of the total amount of principal, interest,
costs, and fees secured by Carpenter's deed of trust, the
chancellor properly determined that the extent of the lien
against Lot 23 was fixed at $4,527.72 at the time of sale from
6
The parties present differing views as to which interest
provisions of the Uniform Commercial Code and the Civil Procedure
Code, Title 8.01, were applicable to these proceedings. See,
e.g., former Code § 8.3-122 (repealed 1993) and § 8.01-122. Our
resolution of this issue does not require us to examine the
application of the relevant statues since, under any analysis,
the liability on Lot 23, whether for principal or principal and
interest, was fixed at the time of the sale to Anderson.
Southface to Anderson.
Finally, we turn to the assignments of cross-error by the
third-party defendants, challenging that portion of the final
decree that required them to pay the judgment of $4,527.72, the
commissioner's fee and other costs. For the reasons that follow,
we do not reach the merits of the assertions of the third-party
defendants.
A cross-bill filed against a third-party is a new suit.
Rule 2:14. Anderson based its third-party action on the theory
that, by breach of contract or by reason of malpractice, one or
more of the attorneys or title insurance companies was liable to
Anderson for any liability Anderson had to Potts. Potts did not
file a separate claim against any of these defendants. Thus, any
liability of the third-party defendants for the judgment and
costs of the principal suit must be premised necessarily on a
finding against Anderson on Potts' claim.
It is clear from the record that no direct evidence of the
contractual liability of the title companies and attorneys or of
their liability under a theory of professional malpractice was
presented at the commissioner's hearing. Similarly, the
commissioner did not receive direct evidence concerning the issue
of Anderson's liability to Potts.
Accordingly, as developed in the commissioner's hearing, the
record is inadequate to support the chancellor's decision to
assign liability to the third-party defendants. Because no
further evidence was taken as to these matters before the
chancellor, we cannot sustain that portion of the final decree
assigning liability of any kind to the third-party defendants.
Remarkably, Potts objected to the commissioner's failure to
address the issue of Anderson's liability in his report but has
not challenged the dismissal of Anderson in the final decree and,
accordingly, Anderson was not made a party to this appeal. By
failing to assign error to the dismissal of Anderson, Potts has
severed the chain of indemnification running to the third-party
defendants through Anderson, the party to whom she assigned
liability. There is no mechanism in our procedure permitting a
plaintiff to appropriate as her own the claims made by a
defendant against third-parties after the defendant has been
dismissed. Similarly, the unappealed dismissal of Anderson as a
party precludes us from remanding the case for further
proceedings to determine its liability, if any, to Potts.
For these reasons we will affirm the chancellor's award of
judgment of $4,527.72 to Jim Carpenter, but will reverse that
portion of the decree that assigns liability to the third-party
defendants for the judgment, commissioner's fees, and related
costs. The case will be remanded for the assignment of the
7
liability for fees and costs consistent with this opinion.
Affirmed in part,
reversed in part,
and remanded.
7
We express no opinion regarding Potts' right to recover
from any of the third-party defendants with whom she might be in
privity in a future independent action.