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JIM CARPENTER COMPANY, et al. v. POTTS, et al. (59934)


JIM CARPENTER COMPANY,
et al. v. POTTS, et al.


January 9, 1998
Record No. 962510

JIM CARPENTER COMPANY, ET AL.

v.

JILL MYERS POTTS, ET AL.

OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR.
FROM THE CIRCUIT COURT OF KING GEORGE COUNTY

Richard H.C. Taylor, Judge
Present: All the Justices


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
given.[1] 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
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."

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 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 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
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
liability for fees and costs consistent with this opinion.[7]

Affirmed in part,
reversed in part,
and remanded.

 

 

 

FOOTNOTES:

[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."

[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.

[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).

[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.

[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.

[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.

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