Legal Bulletins
Refunds of Recordation Taxes
On behalf of five clients, including banks and real estate companies, the Gordon Feinblatt, LLC real estate group has filed formal claims as allowed by the Tax Property Article of the Maryland Code for refunds of recordation taxes paid to Howard County, Maryland totaling more than $450,000 on transactions valued at more than $90,000,000. You will be interested in these actions if you are forced to pay recordation taxes on indemnity deeds of trust (“IDOTs”) and you believe those taxes are not your obligation to pay.
In each of these cases, an IDOT was used to secure a loan on the subject property. Howard County refused to record deeds for the properties in subsequent transactions until the recordation taxes on the IDOTs were paid. Our clients paid the recordation taxes to get their deeds recorded, and now we have filed claims seeking refunds. Howard County’s method of collecting the tax is different from the practices of Baltimore City and every other county in Maryland. We also believe that it is contrary to formal opinions of the Maryland Attorney General.
In most of the cases for which we have filed claims, a default occurred under a loan that was secured by an IDOT, and the lender foreclosed. In one case our client purchased property after the IDOT securing the property had gone into default and the lender agreed to release its lien for less than its debt. When the purchasers of the properties, either at the foreclosure sales (be they the foreclosing banks or third party purchasers) or directly from the owner, attempted to record their deeds, they tendered all recordation and transfer taxes due on those deeds. However, Howard County refused to accept those deeds for record without the additional payment of the recordation tax on the IDOTs which had been foreclosed or released.
Our claims assert that Howard County has no legal basis for denying the recordation of new deeds even if recordation taxes on prior IDOTs have become due and have not been paid.
IDOTs have been used as financing devices in Maryland for decades. The structure for an IDOT transaction involves a loan to a person or an entity (the “borrower”) and the guaranty of that loan by a different person or entity (the “guarantor”). In order to secure the guaranty, the guarantor grants to the lender a mortgage or deed of trust (the IDOT) on property that the guarantor owns. Importantly for the IDOT structure, the guarantor cannot be primarily liable on the loan from the lender to the borrower when the IDOT is recorded. In other words, when the IDOT is recorded the guaranty must be contingent on the occurrence of some event, such as a default under the loan to the borrower.
If the guarantor is not primarily liable on the loan, the secured debt on which the recordation tax is based “has not been incurred” by the guarantor within the meaning of as interpreted by the Maryland Attorney General. The recordation tax will become due if and when the guarantor becomes primarily liable on its guaranty, which then is no longer subject to a contingency. However, we believe that it is the guarantor’s obligation to pay the recordation tax then due on the IDOT, and it is not the obligation of a lender or a third-party purchaser.
If you are hold or are involved with an IDOT that is in default or has been subject to foreclosure and you have been required to pay recordation taxes on it, or if you have any questions about IDOTs or recordation or transfer taxes generally, please contact one of the following attorneys or any other member of Gordon Feinblatt’s Real Estate Practice Group.
Ed Levin at 410-576-1900, Neil Schechter at 410-576-4236 or Bill Shaughnessy at 410-576-4092.