Opinion ID: 1925272
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Heading Rank: 3

Heading: A. Good Faith Efforts and the Financing Contingency Clause

Text: When a contract for the purchase of real property contains a financing contingency clause, Maryland law follows the common law rule and imposes an implied obligation on the buyer to take bona fide, reasonable and prompt action to obtain the financing specified in the clause. See Traylor v. Grafton, 273 Md. 649, 689, 332 A.2d 651, 675 (1975). The question presented in this case is the interaction between this implied obligation and the express requirements imposed on the appellants by ¶ 20 of the purchase agreement. To resolve this question, we must interpret the language of ¶ 20 of the agreement. Under Maryland law, the interpretation of a contract, including the question of whether the language of a contract is ambiguous, is a question of law subject to de novo review. See Towson v. Conte, 384 Md. 68, 78, 862 A.2d 941, 946 (2004). We have long adhered to the objective theory of contract interpretation, giving effect to the clear terms of agreements, regardless of the intent of the parties at the time of contract formation. Id. at 78, 862 A.2d at 946-47. Under the objective theory: A court construing an agreement under [the objective theory] must first determine from the language of the agreement itself what a reasonable person in the position of the parties would have meant at the time it was effectuated. In addition, when the language of the contract is plain and unambiguous there is no room for construction, and a court must presume that the parties meant what they expressed. In these circumstances, the true test of what is meant is not what the parties to the contract intended it to mean, but what a reasonable person in the position of the parties would have thought it meant. Dennis v. Fire & Police Employees Ret. Sys., 390 Md. 639, 656-57, 890 A.2d 737, 747 (2006) (quoting General Motors Acceptance v. Daniels, 303 Md. 254, 261, 492 A.2d 1306, 1310 (1985) (internal quotations omitted)). The resolution of the dispute between appellants and appellees requires us to determine the proper construction of the first sentence of ¶ 20, which provides that [b]uyer agrees to make written application for the financing as herein described within five (5) days from the date of Contract Acceptance. In particular, we need to determine how many financing applications this provision obligates the buyer to make. Applying the objective theory of contract interpretation, we conclude that the first sentence of ¶ 20 imposes an obligation on the buyer only to make one application for the financing described in ¶ 19. Given that the sentence does not contain an article directly preceding written application, a reasonable person reading this language would assume that a, the indefinite article, was intended. The indefinite article, when used in this way, is synonymous with at least one. See, e.g., Abtox, Inc. v. Exitron Corp., 122 F.3d 1019, 1023 (Fed.Cir.1997) (interpreting a similar use of the indefinite article in a patent claim to mean one or more). We hold that appellees would only need to make one written application for the financing described in ¶ 19 to discharge their express obligation under the first sentence of ¶ 20. With the issue of the proper construction of the first sentence of ¶ 20 resolved, we turn to the issue of the interaction between the express obligations imposed on appellants by the financing contingency clause and the common law implied obligation to take bona fide, reasonable, and prompt action to obtain the financing specified in the clause. In District Realty Title Insurance Corp. v. Jack Spicer Real Estate, Inc., 280 Md. 422, 426, 373 A.2d 952, 955 (1977), we held that [a]s a general rule, implied terms of a contract are utilized only in order to supply the place of a missing express term; therefore, where an express term exists, it negatives an implied, inconsistent term relating to the same aspect of the contract. The application of this holding resolves the issue before us. In District-Realty, we applied this principle concerning the relation between express and implied terms to a dispute over a title insurance contract. Spicer contracted to purchase real property, which he intended to finance with the proceeds of a deed of trust loan on the property. Id. at 424, 373 A.2d at 953-54. The mortgage company that made the loan conditioned the granting of the loan upon its obtaining a first lien on the property. Id. at 424, 373 A.2d at 954. As a result, Spicer provided the mortgage company with an interim binder issued by District-Realty. Id. Afterwards, Spicer obtained a combination mortgagee-owner title insurance policy from District-Realty. Id. at 424-25, 373 A.2d at 954. When, after settlement, Spicer's attorney absconded with the $8,000.00 he was to pay to the vendor of the property, Spicer initiated an action to recover this amount under its title insurance policy with District-Realty. Id. at 425, 373 A.2d at 954. The trial court, after a bench trial, ruled in favor of Spicer, concluding that, even though the title insurance policy did not expressly cover settlement, there was an implied obligation under the policy to give Spicer clear title, and that this implied obligation was breached because the attorney's failure to deliver the funds to the vendor after settlement caused a vendor's lien to arise on the property. Id. at 425-26, 373 A.2d at 954-55. We reversed the judgment of the trial court, holding that the court erred in concluding that there was such an implied obligation under the title insurance policy. Id. at 426, 373 A.2d at 955. We began by holding that the interim binder provision was incorporated into the title insurance contract between Spicer and District-Realty. Id. Then, we applied the general rule discussed above concerning the relation between express and implied contract terms and held that there was no implied obligation under the title insurance contract to provide title free of vendor's liens, because the interim binder provision excluded coverage for vendor's liens. Id. at 426-29, 373 A.2d at 955-56. Applying the rule concerning the relation between express and implied contract terms we employed in District-Realty to the present case, we hold that, to the extent that the implied obligation to take bona fide, reasonable, and prompt action to obtain the financing specified in a financing contingency clause in a real estate sale contract would under the facts of this case impose an obligation on appellants to make more than one bona fide and reasonable application for a financing commitment, this obligation to make more than one such application is negated by the express provision in the first sentence of ¶ 20 that, as we held supra, imposes an obligation on the appellants only to make one such application. [4] As we held in District-Realty, an express term negates an implied, inconsistent term relating to the same aspect of the contract. Id. at 426, 373 A.2d at 955. The implied obligation to take bona fide, reasonable, and prompt action to obtain the financing specified in a financing contingency clause, to the extent it imposes an obligation to make more than one bona fide, reasonable written application for a financing commitment, is inconsistent with the first sentence of ¶ 20, which obligates appellants only to make one such application. Therefore, following District-Realty, it is negated by the express provision contained in the first sentence of ¶ 20. Our interpretation of the financing contingency clause is similar to the treatment of real estate contract financing contingency clauses in other jurisdictions. In Stevens v. Cliffs at Princeville Associates, 67 Haw. 236, 684 P.2d 965 (1984), the Supreme Court of Hawaii addressed the issue of whether a real estate buyer had used due diligence in attempting to obtain financing. The real estate contract in Stevens contained a financing contingency clause that, like the clause in the instant case, expressly indicated that a single application for financing was sufficient to discharge the buyer's obligation to seek to obtain the financing specified in the contract. Stevens, 684 P.2d at 969 n. 2. [5] The Stevens court held that, under this clause, the buyers discharged their obligation by making one good faith application for financing. Id. at 971. Although the buyers in Stevens did attempt to obtain additional financing, the court expressly held as a matter of law that the buyers were not obligated to apply to alternate lenders. Id.; see also Fallah v. Hix, 268 A.D.2d 501, 702 N.Y.S.2d 352, 353 (N.Y.App.Div. 2000) (holding that buyer who made only one application for financing exercised due diligence in seeking financing under real estate sale contract because the contract did not require the [buyer] to apply to more than one lender). By contrast, cases that have held that the implied duty to take bona fide, reasonable, and prompt action to obtain the financing specified in a financing contingency clause may not be satisfied simply by making one application for financing are distinguishable from the instant case and from Stevens, as the financing contingency clauses in these cases did not contain express language indicating the number of applications for financing that the buyer was obligated to make. See, e.g., Betnar v. Rose, 259 Ark. 820, 536 S.W.2d 719, 720, 723-24 (1976) (holding that there was an issue of material fact as to whether buyers made reasonable efforts to obtain financing under provision of escrow agreement providing that the Escrow Deposit is to be refunded back to [buyer] if a loan cannot be obtained, where the buyer made one application for financing and was rejected, and there was evidence that other lenders were willing to lend to the buyer); Fry v. George Elkins Co., 162 Cal.App.2d 256, 327 P.2d 905, 906-07 (1958) (upholding trial court finding that buyer failed to make a good faith attempt to obtain refinancing of loan encumbering property despite having made two applications for the specified refinancing, where the relevant contract provision provided that [t]he completion of this escrow is subject to buyer being able to refinance [the loan encumbering the property] to $20,000.00 at 5% per annum, maturing over a period of 20 years). In reliance on our holding that the appellants were obligated to make only one bona fide, reasonable application for the financing specified in ¶ 19, the trial court's grant of summary judgment in favor of the appellants on the issue of whether appellants discharged their obligations under the financing contingency clause was correct. The standards for our review of a trial court's grant of summary judgment are well-settled; we briefly review them here. The question of whether a trial court's grant of summary judgment was proper is a question of law subject to de novo review on appeal. Livesay v. Baltimore, 384 Md. 1, 9, 862 A.2d 33, 38 (2004). In reviewing a grant of summary judgment under Md. Rule 2-501, we independently review the record to determine whether the parties properly generated a dispute of material fact and, if not, whether the moving party is entitled to judgment as a matter of law. Id. at 9-10, 862 A.2d at 38. We review the record in the light most favorable to the nonmoving party and construe any reasonable inferences that may be drawn from the facts against the moving party. Id. at 10, 862 A.2d at 38. Applying these standards to the instant case, we conclude that there were no remaining issues of material fact with respect to whether the appellants had failed to fulfill their obligations under the financing contingency clause. As a preliminary matter, we hold, as did the trial court, that the June 6th addendum created a new contract, as the original contract was void for failure of a condition precedent. The May 4th addendum made the appellants' obligation to go through with the purchase contingent upon their entering into a contract for the sale of their then-current home by May 24th. As appellants did not enter into such a contract by May 24th, time was of the essence with respect to this portion of the contract, and appellees were not responsible for appellants failure to enter into such a contract, the sale contract entered into on April 12th was void for failure of a condition precedent. See Kimm v. Andrews, 270 Md. 601, 612-15, 313 A.2d 466, 472-74 (1974) (where time is of the essence with respect to a condition precedent, general rule is that contract is no longer viable unless failure of the condition is due to the conduct of the party not seeking to enforce the contract). Thus, as the parties do not dispute that they intended to be bound by the June 6th addendum, it gave rise to a second contract for sale, and was not simply a modification of the original contract. With this preliminary matter clarified, we turn to the summary judgment motion itself. The facts that appellees pointed to in their opposition to the appellants' summary judgment motion all tended to show that appellants failed to act to obtain alternate financing after their initial application to NovaStar was rejected because of the low appraisal. Appellees did not point to any facts that would give rise to an inference that appellants acted in bad faith or acted unreasonably with respect to their initial application to NovaStar. Given our holding that the financing contingency clause did not place any further obligation upon the appellants, it follows that the undisputed facts in the case establish that appellants discharged their obligations under the financing contingency clause. Accordingly, the trial court's grant of summary judgment to appellants on this issue was proper, as the appellants were entitled to judgment as a matter of law. The financing contingency clause created a condition precedent to the appellants' obligation to go through with the purchase of the property. See Traylor, 273 Md. at 688, 332 A.2d at 674-75. When appellants failed to obtain a written financing commitment for the financing described 30 days after the June 6th acceptance date, despite having fulfilled their obligations under the financing contingency clause to obtain such financing, the condition precedent was not satisfied, appellants no longer had any obligation to complete the purchase of the property, and were entitled to the return of their deposit by the express terms of ¶ 20.