## Facts

- Sellers (Eunice L. Rockhill and The Flag Harbor Corp.) sold two adjoining parcels, including a marina, to the Beachems in 1975 and took purchase-money deeds of trust as security.
- After ice damage to the marina in 1977 and a disaster-area declaration, the Beachems obtained an SBA disaster loan intended for repairs and improvements.
- To qualify for the SBA loan, the Beachems requested that Sellers subordinate their purchase-money liens; Sellers executed unconditional subordination agreements dated November 4, 1977.
- The Beachems then executed and recorded deeds of trust to the SBA on November 14, 1977 to secure the disaster loan.
- Sellers were not parties to the SBA loan documents, and the SBA was not a party to the subordination agreements.
- The Beachems allegedly used SBA loan proceeds for personal purposes rather than property repairs and later defaulted on the SBA loan.
- The United States, on behalf of the SBA, filed a foreclosure petition; Sellers intervened and counterclaimed seeking a declaration that their liens retained (or should be restored to) first priority based on the SBA’s alleged failure to supervise disbursements.
- The federal district court certified to Maryland’s highest court a question of Maryland law presented on a motion to dismiss for failure to state a claim.

## Issues

1. Whether, under Maryland law, a construction/repair-purpose lender that gains lien priority through an unconditional subordination agreement owes a tort duty to the subordinating lienor to use reasonable care to ensure the borrower applies loan proceeds to the loan’s stated purposes.
2. Whether alleged failure to monitor the borrower’s use of proceeds, without more, can support relief undoing subordination and restoring the subordinating lienor’s priority.

## Decision

- The Court of Appeals of Maryland answered the certified question “no” on the facts alleged.
- A lender in the SBA’s position does not owe a tort duty to a subordinating lienor to supervise or control the borrower’s use of construction/repair loan proceeds merely because the lender obtained priority through subordination.
- Because no such duty exists under Maryland law on these allegations, the counterclaim premised on that duty failed to state a claim, supporting dismissal.

## Legal Principles

- A lender’s contractual obligations regarding disbursement and loan-purpose compliance generally run to the borrower absent an express undertaking to a third party.
- An unconditional subordination agreement, without agreed conditions binding the senior lender, does not by itself create tort duties from the senior lender to the subordinating lienor regarding administration of the borrower’s loan proceeds.
- Lien priority established by recorded instruments and voluntary subordination is not reordered solely because the borrower misapplies funds, absent a recognized legal basis (e.g., fraud, mistake, or an enforceable condition).

## Conclusion

Maryland law does not impose a tort duty on a construction/repair lender that attains priority by subordination to police the borrower’s use of loan proceeds for the benefit of the subordinating lienor; absent an express undertaking or other recognized ground for relief, the subordination remains effective and a counterclaim based only on negligent monitoring fails.


Rockhill v. United States, 418 A.2d 197 (Md. 1980)