Appeals from the Superior Court of the District of Columbia (CA-490-00). (Hon. John H. Bayly, Jr., Motions Judge, and Hon. Zoe Bush, Trial Judge ).
The opinion of the court was delivered by: Glickman, Associate Judge
Before RUIZ, REID and GLICKMAN, Associate Judges.
These appeals, arising under Maryland law, require us to delve into the meaning of an agreement furnishing security for the payment of a promissory note and the requirements of former Article 9, the Secured Transactions Article, of the Uniform Commercial Code. The parties' disputes began when National Housing Partnership ("NHP") defaulted on a $3.2 million note payment, leading Municipal Capital Appreciation Partners I, L.P. ("MCAP") to foreclose on the collateral and acquire it for $1.4 million. In the ensuing litigation, NHP was held liable for the entire amount of the deficiency and for MCAP's attorneys' fees and costs. We now reverse that judgment and remand for further proceedings.
NHP is a District of Columbia partnership that was established at the direction of Congress to foster private investment in low and moderate income housing.*fn1 NHP acquired and managed affordable multifamily housing projects through limited partnerships, in which it served as the general partner.
In August 1984, NHP entered into a Purchase Agreement with Laurel Kimberly Associates to acquire Kimberly Gardens, a 172-unit housing project in Laurel, Maryland. As part of the purchase price, NHP agreed to furnish the seller a secured, long-term note in the amount of $1,401,600, under which all payments of principal and interest at the rate of nine percent per annum would be deferred until the end of the term. The term of this deferred note was ten years, with the purchaser having the option to extend the maturity date by five years. NHP also agreed to an initial cash payment of $230,000; a three-year installment note for $409,000; and the assumption by the purchaser of an existing low-interest mortgage that was insured by the United States Department of Housing and Urban Development ("HUD"). The original principal amount of the HUD mortgage was $2,708,800.
Prior to the closing, NHP assigned its rights, title and interest under the Purchase Agreement to Kimberly Associates Limited Partnership ("KALP"), a Maryland single-asset real estate limited partnership formed for the purpose of owning and managing Kimberly Gardens. NHP was the general partner and one of two limited partners of KALP. Thereafter, on December 13, 1984, KALP signed and furnished the seller a $1.4 million Acquisition Note ("Note") and the other documents necessary to complete the purchase. The Security Agreement, executed by NHP, provided that in the event of default, the seller would be entitled to foreclose on NHP's partnership interests in KALP, its rights with respect to KALP, and all monies owed to NHP by KALP, in order to satisfy the outstanding debt.
Following its acquisition by KALP, Kimberly Gardens was renamed Cherry Branch Townhomes ("Cherry Branch"). In 1993, KALP exercised its option to extend the maturity date of the Note by five years, to December 13, 1999.
In late 1997 or early 1998, roughly two years before the Note's maturity date, MCAP paid $1.9 million in cash to acquire the Note from Laurel Kimberly Associates, together with all rights of the secured party under the Security Agreement. A year or so later, NHP was acquired by AIMCO, a real estate investment trust that was one of the country's largest owners and operators of affordable multifamily housing, with approximately 1,600 properties in forty-seven states.
The price that MCAP paid for the Note was heavily discounted. When the Note came due on December 13, 1999, KALP owed $3,293,760 in deferred principal and interest. As MCAP may have foreseen, NHP preferred to lose Cherry Branch (KALP's sole asset) rather than pay off the Note. In deciding to cause KALP to default on the Note payment, NHP understood that the Note was non-recourse, so that if the forfeited collateral (i.e., NHP's interests in KALP) was worth less than the debt, NHP would not be liable to MCAP for the difference.
As NHP anticipated, MCAP elected to enforce its security interest. On January 3, 2000, MCAP sent NHP a formal notice of foreclosure on the collateral. The notification stated that MCAP would sell NHP's partnership interests in KALP at a public auction on January 25, 2000 and enclosed the advertisement for the foreclosure sale that MCAP would place in the Official Notices section of The Washington Post on January 4, 11, and 18, 2000. These advertisements ran as planned and elicited three telephone inquiries from persons expressing interest in the sale. MCAP responded to these inquiries by providing additional information to the callers.
NHP raised no objection to the foreclosure arrangements, the notification it received, or the advertisements in The Washington Post. However, NHP found itself in a dispute with MCAP over whether the foreclosure would wipe out NHP's right to be repaid approximately $3 million on account of outstanding partnership loans that it had extended to KALP. To preserve its rights as a creditor of KALP, NHP sued MCAP in the Superior Court of the District of Columbia on January 24, 2000, the day before the foreclosure sale was to be held. The complaint sought, inter alia, a judicial declaration that the Note was non-recourse and that NHP's loans would survive the foreclosure as valid, continuing debts of KALP.
Because of a snowstorm on January 25, and with NHP's agreement, MCAP adjourned the public foreclosure sale to February 2, 2000. MCAP advertised the postponement in the Public Sale Notices section of The Washington Post on January 29. NHP did not object to this advertisement or seek to enjoin the foreclosure sale.
On February 2, the foreclosure sale of NHP's interests in KALP went ahead at the District of Columbia offices of MCAP's legal counsel. NHP's representatives attended the auction but did not bid on the collateral securing the Note. MCAP was the only bidder and purchased the collateral for $1,411,385.60. According to MCAP, its bid was discounted to reflect the fact that NHP's lawsuit had created a $3 million cloud against the collateral. As the deferred principal and interest had risen by February 2 to $3,332,928, a deficiency of $1,921,542.40 remained. MCAP asserted that, under the terms of the Security Agreement, NHP was liable for this deficiency, and on February 24, 2000, MCAP made a formal, written demand on NHP for its payment. Disagreeing with that position, NHP refused MCAP's demand.
In the ensuing months, NHP twice amended its complaint in Superior Court, eventually seeking a declaratory judgment (1) that it had no personal liability for any deficiency due on the Note after application of the foreclosure sale proceeds, and (2) that its loans to KALP were valid obligations not extinguished by the foreclosure and inherited by MCAP.*fn2 Count III of NHP's Second Amended Complaint alleged that, by virtue of MCAP's failure to repay NHP's loans, the foreclosure sale had resulted in a de facto surplus, rather than a deficiency, to which NHP was entitled. MCAP answered NHP's complaints and counterclaimed for a deficiency judgment. MCAP's counterclaim also sought damages from NHP for mismanagement of KALP and waste of the Cherry Branch property.
The parties eventually filed cross motions for summary judgment. On March 29, 2002, the motions judge granted partial summary judgment on the recourse and loan claims to MCAP. The decision turned on the proper construction of the Security Agreement. On the recourse claim, the judge ruled that the Security Agreement unambiguously rendered NHP personally liable for any deficiency resulting from the foreclosure sale. Whether the foreclosure sale had been conducted in a commercially reasonable manner, as legally required, and the amount of any recoverable deficiency, were factual issues that remained to be resolved at trial. On NHP's loan claim, the judge ruled that the definition of "collateral" in the Security Agreement encompassed NHP's right to repayment of its loans to KALP, and that the loans were extinguished by MCAP's foreclosure. As a corollary, the judge awarded summary judgment to MCAP on Count III of NHP's Second Amended Complaint, which asserted that MCAP's failure to repay the loans had resulted in a surplus rather than a deficiency after the foreclosure sale.*fn3
After this summary judgment decision, the case was reassigned to a different judge for trial. Several months prior to trial, NHP moved for leave to amend its reply to MCAP's counterclaim in order to assert its own compulsory counterclaim. Citing appraisals that had valued the Cherry Branch property owned by KALP at $8.8 to $8.9 million, NHP's counterclaim alleged that but for MCAP's failure to market the collateral in a commercially reasonable manner, the proceeds from the foreclosure sale would have exceeded the amount of the indebtedness and yielded a surplus to which NHP would have been entitled. In opposition to the motion, MCAP argued that the belatedly proffered counterclaim duplicated Count III of NHP's Second Amended Complaint, on which MCAP had been granted summary judgment. Persuaded by MCAP, the trial judge denied NHP leave to amend its reply.
A bench trial of the remaining issues took place in January 2003. The testimony centered on two issues: (1) whether MCAP had conducted the foreclosure sale in a commercially reasonable manner, and (2) whether NHP had committed waste of the Cherry Branch property. On August 15, 2003, the judge issued her decision. On the first issue, the judge rejected NHP's claim that MCAP had publicized the foreclosure sale inadequately and should have sold the collateral privately rather than at a public auction. Rather, the judge observed that a public sale of the partnership interests in KALP was consistent with the Maryland Uniform Commercial Code and the terms of the Security Agreement; the sale was publicized in The Washington Post four times; and NHP was given an advance copy of the notice. "There is no evidence in this case," the judge found, "that a different type of notice, or private sale, is the accepted practice in the sale of partnership interests in real property." (Emphasis added.) Accordingly, the judge upheld the commercial reasonableness of the foreclosure sale and ordered NHP to pay MCAP the entire $1.9 million deficiency, plus interest from the date of foreclosure and reasonable attorneys' fees. On the second issue, the judge found that NHP had not committed waste at Cherry Branch and, accordingly, denied MCAP's damages claim.
NHP noted a timely appeal from the trial court's rulings. MCAP did not cross-appeal.
Following the trial judge's ruling on the merits, disputes arose between the parties over the rate of interest on the deficiency judgment and the amount of the attorneys' fees recoverable. Eventually, on December 10, 2004, the judge ordered NHP to pay interest on the deficiency judgment from February 2, 2000, at the rate of twenty percent per annum (which was the "default rate" specified in the Security Agreement). The judge ruled that NHP also was liable for $1,063,547.72 in attorneys' fees and costs claimed by MCAP pursuant to the Security Agreement, but not for any interest thereon. Both NHP and MCAP appealed the judge's rulings on these issues.
NHP seeks reversal on several grounds. NHP challenges the two summary judgment rulings that, under the Security Agreement, (1) NHP was liable for any deficiency amount on the Note after the foreclosure sale, and (2) its loans to KALP were extinguished by the foreclosure sale. NHP argues that summary judgment was inappropriate in both instances because the Security Agreement was ambiguous and thus had to be construed in light of extrinsic evidence (necessitating a trial).
Additionally, NHP challenges the trial judge's finding that MCAP's disposition of the collateral securing the Note was commercially reasonable. Emphasizing the specialized nature of the collateral -- interests in a limited partnership owning a HUD-regulated multifamily housing project -- NHP contends that it was commercially unreasonable for MCAP (1) to sell the collateral at a public auction instead of through private channels, and (2) to publicize the sale only by means of classified advertisements in a general circulation newspaper such as The Washington Post.
NHP further contends that the trial judge erred in denying its motion for leave to assert a compulsory counterclaim for the surplus that should have been generated from the foreclosure sale, because the motions judge had not disposed of that claim on summary judgment. Finally, NHP also asserts that the trial judge erred by denying discovery with regard to MCAP's claimed attorneys' fees and by assessing interest on the deficiency judgment at the rate of twenty percent.
In its cross-appeal, MCAP only challenges the denial of interest on its attorneys' fees award.
We conclude that summary judgment was improvidently granted with respect to NHP's liability for the deficiency, but we uphold the award of summary judgment with respect to the extinguishment of NHP's loans to KALP. In addition, we direct the trial court to reconsider its determination that the foreclosure sale was commercially reasonable. Also, we hold that the grant of summary judgment on Count III of NHP's Second Amended Complaint did not bar NHP from belatedly asserting its compulsory counterclaim for the hypothetical surplus that would have been produced by a proper disposition of the collateral. In view of the ...