Opinion ID: 2299567
Heading Depth: 1
Heading Rank: 2

Heading: Origin Of The Dispute

Text: On September 22, 1989, Edward and Ilene Richman, respondents here, borrowed $500,000 from petitioner, First Women's Bank of Maryland (FWB), to finance the purchase and development of certain land in Haymarket, Virginia. The note required repayment within 18 monthsby March 21, 1991but it contained a provision allowing the maturity date to be extended until September 21, 1991, if the Richmans were not in default, requested the extension in writing, and paid a 1% extension fee. The original note was secured by a deed of trust on 9.2 acres of property and the assignment of certain partnership interests. It appears that $350,000 of the loan was used to pay for the purchase of the property and the balance of $150,000 to create an interest reserve fund, to carry the property for two years. The deed of trust created a first lien on 1.8 acres and a second lien on 7.4 acres. In February, 1991, after the bank allegedly threatened not to grant even the extension to September, which the note called for, the parties commenced negotiations regarding an extension of the loan beyond September 21, 1991. Those negotiations produced a new arrangement that took effect in March, 1991, although there is some dispute over when the various documents evidencing the new arrangement were signed and a great deal of dispute over some of the circumstances leading to them. Under a Modification and Restatement of Deed of Trust Note, the maturity of $448,585 was extended until March 1, 1992, with the right of the Richmans to an additional six-month extension if they were not in default, requested the extension in writing, and paid an extension fee of 1.5%. The Modification agreement required the Richmans to make monthly principal payments of $2,000, commencing April 1, 1991, together with interest on the unpaid principal balance at the rate of 2% above prime. A condition of the new arrangement was that the Richmans deposit $50,000 with the bank, to secure the monthly payments of principal and interest. In an affidavit, Ms. Richman acknowledged the right of the bank to withdraw $5,500 per month from that reserve account. Under the new arrangement, the bank released its second lien on the 7.4 acres in return for other security. One item of new securitythe one that lies at the heart of this disputewas a hypothecation agreement signed on March 15, 1991, under which the Richmans pledged to the bank a securities account they had with Shearson Lehman Brothers, to the extent of $125,000. That account was to serve as additional collateral for the loan. In the hypothecation agreement, the Richmans warranted that they had the authority to execute the agreement and that they would cause the signatory authority on the account to be transferred to the bank upon the declaration of a default and a written request from the bank. The dispute itself arose from the fact that Shearson Lehman had an internal policy of not permitting the hypothecation of accounts to a bank, and, in conformance with that policy, it refused to honor the hypothecation. The hypothecation agreement contained an acknowledgment to be executed by Shearson Lehman, which, when the agreement was sent to it by FWB, the firm declined to sign. [1] The bank later contended that the Richmans were aware, when they signed the hypothecation agreement, that Shearson Lehman would refuse to honor the hypothecation, that the bank was unaware of that policy, and that it was thereby defrauded by the Richmans into releasing its lien on the 7.4 acres. The Richmans, on the other hand, contend that they were unaware of the Shearson Lehman policy but that the bank had discovered it prior to effecting the extension, and that the bank nonetheless insisted on the hypothecation in order to create a condition that could not be fulfilled and thus engineer a default. The issue, in colloquial terms, was who knew what when?