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Failure to Serve Necessary Defendants Means Their Interests Continue After Tax Sale Foreclosure of the Equity of Redemption

In PNC Bank, National Association v. Braddock Properties, 215 Md. App. 415, 81 A.3d 560 (2013), the Court of Special Appeals considered an action regarding the foreclosure of the equity of redemption after a tax sale. The Court held that the interest of PNC Bank as beneficiary of the deed of trust on the property was not terminated in the foreclosure proceedings even though PNC Bank, in its capacity of a judgment creditor, received actual notice of the foreclosure proceedings. This was because the trustees under the PNC Bank deed of trust were not served in the foreclosure action.

BBR Properties, L.L.C. borrowed $395,000 from Farmers and Merchants Bank, which loan was secured by a deed of trust encumbering 14.3 acres of real property in Frederick County. Farmers and Merchants merged into PNC Bank, which became the beneficiary of the deed of trust. BBR Properties did not pay its real property taxes, and Frederick County sold the property to Braddock Properties L.L.C. at a tax sale. Thereafter, the substitute trustees under the deed of trust filed a foreclosure action at the direction of PNC. PNC also obtained a separate judgment against BBR Properties.

Braddock filed an action to foreclosure the equity of redemption on June 3, 2011, but it did not name PNC or its substitute trustees as defendants. On August 30, 2011 the Circuit Court for Frederick County entered an order foreclosing the equity of redemption on the property.

Both PNC Bank and the substitute trustees filed motions to vacate, alter, or amend the order. On November 8, 2011 the Circuit Court denied PNC’s motion, but granted the motion of the substitute trustees.

PNC and the substitute trustees requested that Braddock provide them with information about what documentation and how much money was required to redeem the property. Braddock refused to provide the information. (As it turned out, neither PNC Bank nor its substitute trustees had a need to redeem the property.) On July 5, 2012 the Circuit Court denied motions filed by each of the parties. An appeal to the Court of Special Appeals ensued.

In its published opinion, the Court of Special Appeals summarized the steps that are required in a tax sale proceeding and in a proceeding to foreclosure the equity of redemption after a tax sale. After six months after a tax sale, the purchaser at a tax sale may file a complaint to foreclose the equity of redemption. The property may be redeemed until a court enters a final judgment. Before that, certain notices must be given to persons with an interest in the property.

The Court pointed out that there are two different kinds of parties with interests in the property. There are “necessary defendants” who must be served with a summons and a copy of the complaint. Necessary defendants include the record title holder, the holder of ground rents on the property, any mortgagee or assignee of a mortgagee, the trustee of a deed of trust or the beneficiary of a deed of trust who has filed a request for notice of sale, and the government of the county where the property is located.

The holders of other interests in the property, who are denominated “other interest holders,” are only entitled to receive a copy of the notice of publication.

In the subject case, PNC Bank held two separate interests. As the holder of a judgment, PNC Bank was an “other interest holder.” Because of that interest Braddock mailed to PNC Bank copies of the order of publication and the complaint.

As the holder of the promissory note secured by a deed of trust on the property, PNC claimed entitlement to “necessary party” status. The Court of Special Appeals held, based on a technical reading of the Tax-Property Article § 14-836 that because the underlying security instrument was a deed of trust and not a mortgage, PNC Bank was not a mortgagee. Therefore, the Court denied PNC Bank’s claim to be a “necessary defendant.”

On the other hand, the substitute trustees under the PNC Bank deed of trust were “necessary parties” under TP § 14-836. The substitute trustees themselves were not served with a summons, and therefore the deed of trust was not affected by the foreclosure of the equity of redemption. This was the result even though PNC Bank and its counsel had actual knowledge of the proceedings.

The Court of Special Appeals based its interpretation of TP § 14-836 on a distinction between mortgages and deeds of trust. Mortgages may only be assigned by instruments that are recorded among the land records. Hence, it is always possible to identify the mortgagee by performing a title search. On the other hand, the beneficiary of a deed of trust changes when the promissory note that evidences the underlying debt is endorsed from one holder to another – and this is typically done off-record and is not determinable from a title examination.

As a result, Braddock’s failure to name the substitute trustees as a party and to serve them did not invalidate the foreclosure proceeding. It did, however, mean that Braddock, the purchaser of the property, took title subject to the PNC Bank deed of trust.

PRACTICE NOTE: The difference in the way that mortgages and deeds of trust are assigned that was noted by the Court of Special Appeals is the reason that deeds of trust are used for most secured transactions in Maryland. Lenders typically desire to be able to transfer their interests in loans and in the security for loans without having to record a document in the land records. They can do this if they use deeds of trust. If they use mortgages, they must record assignments of mortgages in order for transfers to be effective.

For questions about this, please contact Ed Levin at (410) 576-1900.

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Date

05.16.14

Type

Publications

Authors

Levin, Edward J.

Teams

Real Estate