Relating to Real Estate

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Relating To Real Estate August 2014

In this issue:

FEDERAL COURT STRIKES MERS SYSTEM IN PENNSYLVANIA BUT MARYLAND DEEDS OF TRUST DIFFER FROM PENNSYLVANIA MORTGAGES

On June 30, 2014, in Montgomery County, Pennsylvania, Recorder of Deeds v. MERSCORP, Inc. and Mortgage Electronic Registration Systems, Inc., No. 11-CV-6968, 2014 WL 2957494 (E.D. Pa. 2014), the United States District Court for the Eastern District of Pennsylvania ruled that assignments of mortgages are required to be recorded under Pennsylvania law, and in so doing toppled the MERS electronic recording system of residential mortgages in that state.

The court reached this result by finding that mortgages and assignments of mortgages are conveyances of real property, that a note and the mortgage that secures it are inseparable, that an assignment of a note is additionally a conveyance of the corresponding mortgage, and that any failure to properly record the assignment of the note in a county courthouse is a violation of 21 Pa. Stat. Ann. § 351.

Pending appeal, this decision potentially turns the current residential loan investment market in Pennsylvania upside down because, prior to this decision, borrowers and lenders regularly named MERS (Mortgage Electronic Registration Systems, Inc.) as the mortgagee in residential mortgage loan documents.

MORE.

IF A TREE FALLS IN MARYLAND, WHO IS RESPONSIBLE?

We are often asked: What happens if a tree falls in Maryland? Or, what can you do when branches or roots of a tree growing on your neighbor’s property encroach onto your property and cause you damage?

In Melnick v. C.S.X. Corp., et al., 312 Md. 511, 540 A.2d 1133 (1988), the Maryland Court of Appeals held that a landowner does not have a cause of action against an adjoining landowner when trees, vines, roots, and other plants or plant debris from the adjoiner’s property encroach upon and cause damage to the landowner’s property. Instead, the landowner is limited to the self-help remedy of cutting encroaching branches, vines, and roots back to the property line without the right to reimbursement from the adjoining landowner for any damages and without the right to compel removal of the offending tree or plant.

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GREEN BUILDING CODE CHANGES IN BALTIMORE CITY COULD IMPACT BUILDING MODIFICATIONS

A bill now under consideration by the Baltimore City Council could make it more difficult to make modifications of many existing non-residential and multifamily buildings and to obtain exceptions based on cost, feasibility, or historic nature of the building.

City Council Bill No. 14-0413 proposes to repeal the City's existing green building code and replace it with a modified version of the 2012 International Green Construction Code (IgCC). For the most part, the changes will offer developers and builders additional flexibility to determine which green building standard best suits their particular projects; however the current draft of the bill does not adopt the IgCC sections for modifications of existing buildings.

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CONSIDER BECOMING A MORTGAGEE-IN-POSSESSION WHEN YOUR BORROWER WITH INCOME-PRODUCING PROPERTY DEFAULTS

Lenders’ counsel typically take steps to prevent their clients from being deemed to be mortgagees-in-possession of distressed real property. However, under some circumstances it may be advantageous for a lender to become a mortgagee-in-possession.

In a recent action in Baltimore City, on behalf of the holder of a loan that was in default, we obtained a court order in a foreclosure case that gave the lender the right to collect the rents from the tenants of a multi-family project and to take over the operation of the property prior to the foreclosure sale. PP Baltimore 3 LLC v. Quantum Leap Investments LLC, in the Circuit Court for Baltimore City, number 24-O-12-002132.

Typically, when a lender wants to capture the rents and provide for the operation of income-producing property, it petitions a court to obtain the appointment of a receiver. In this case, however, we considered the benefits of the lender being a mortgagee-in-possession and pursued that course.

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GUARANTOR MAY BE LIABLE FOR PAYMENTS MADE BEFORE THE DATE OF THE GUARANTOR’S RELEASE IF THOSE PAYMENTS ARE SET ASIDE AS FRAUDULENT CONVEYANCES

In the case of In re MS Grand, Inc., No. AP 12-1481, 2014 WL 2795239 (Bankr. E.D. Va. June 19, 2014), a landlord was sued by a bankruptcy trustee who claimed that rent payments made prior to bankruptcy should be avoided as fraudulent transfers under the Maryland Uniform Fraudulent Conveyance Act (“Md. UFCA,” which is subtitle 2 of title 15 of the Commercial Law Article of the Maryland Code). The landlord then sued SuperValue, Inc., which had guaranteed the lease. SuperValue defended on the basis that it had received a release by the landlord at the time the lease was assigned to the current tenant. The release provided that it was effective for all obligations that arose before the date of the release, but that SuperValue was not released for liabilities that accrued after the date of the release. It is noteworthy that the release did not specifically contain a carve-out for avoidance claims as to rent payments made prior to the date of the release.

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MDE ACCEPTING RENTAL PROPERTY REGISTRATION APPLICATIONS

As of January 1, 2015, owners of rental properties built before 1978 are required to register them with the Maryland Department of the Environment (MDE). Before that date, owners of rental properties built before 1950 were required to register them with the MDE and to comply with a lead paint risk reduction standard.

The change as to the properties that must be registered was put into law by House Bill 644, or Chapter 387 of the Laws of Maryland of 2012. That law had a delayed effective date with respect to properties built between 1950 and 1978. In 1978, lead paint was prohibited nationally.

At the beginning of July, 2014, the MDE began accepting registration application for the properties built between 1950 and 1978. Owners of these properties may register them online with the MDE at www.mde.maryland.gov/LeadRegistration. There is a registration fee of $30.00 per year for each rental unit. The MDE has said that failure to register, certify, or follow approved lead-safe work practices may subject property owners to thousands of dollars in fines and potential lawsuits.

COURT OF APPEALS APPROVES BALTIMORE CITY’S “QUICK-TAKE” CONDEMNATION

In Makowski v. Mayor & City Council of Baltimore, 94 A.3d 91 (Md. June 24, 2014), the Court of Appeals affirmed a decision of the Circuit Court for Baltimore City which authorized the City to proceed with the “quick-take” condemnation of property within the Middle East community that is slated for redevelopment by the East Baltimore Development Initiative (EBDI).

The City desired to acquire 900-902 N. Chester Street, which was owned by Edward J. Makowski, because it was part of the 88 acres near the Johns Hopkins Medical Campus that EBDI is redeveloping in order to address “on a comprehensive basis the blight and disinvestment on the neighborhood.” The property is across the street from a newly constructed school and within the footprint of a planned biotechnology and life sciences facility. Makowski was the last remaining property owner in Block 1587, which consisted of almost 150 properties, to convey or agree to convey his property to the City.

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COVENANT LIMITING DEVELOPMENT TO ONE HOUSE PER LOT IS STILL IN EFFECT AND HAD NOT BEEN WAIVED

The Court of Special Appeals recently held that homeowners could not build a second house on the land that they owned due to an 80 year old plat and a set of covenants despite their claims that the same issue had been resolved in prior litigation and that the homeowners association had waived the covenants. Shader v. Hampton Imp. Ass’n, Inc., 94 A.3d 224 (Md. Ct. Spec. App. June 26, 2014).

In 1930, the Hampton Company (predecessor to Hampton Improvement Association, Inc.) recorded a plat subdividing the Hampton estate in Baltimore County, and in 1931 it recorded restrictive covenants that affected the property. One of the restrictions was that no more than one dwelling could be erected on a lot. In 2002 Mr. and Mrs. Scott Shader bought two parcels of land there. One of those parcels was 2.246 acres and was a lot as shown on the 1930 plat. The other parcel was 1.475 acres and was a part of a lot shown on the 1930 plat. The deed that created the second parcel contained a restriction that it could not be used for a dwelling. The Shaders lived in a house on the first parcel, and they wanted to build a house on the second parcel.

MORE.

FORECLOSURE SALE RATIFIED DESPITE
CLAIM OF AN OFFER HIGHER THAN THE AUCTION PRICE

In Johnson v. Nadel, 94 A.3d 149 (Md. Ct. Spec. App. June 25, 2014), the Court of Special Appeals ratified a residential foreclosure sale notwithstanding the borrower’s contention that a third party offered to pay more than the foreclosing lender bid at the auction sale.

The trustee brought an action to foreclose on a deed of trust secured by residential property in Montgomery County after default by the borrower. The original amount of the loan was $696,500. The borrower requested foreclosure mediation, and the foreclosure action was stayed as a result, although the mediation proved unsuccessful. The borrower presented contracts to the lender for $601,000 and $550,000, which the lender rejected. Those contracts did not address a junior mortgage or an IRS tax lien on the property.

The property went to sale, and the lender bought it for $617,605. The trustee reported the sale to the Circuit Court for Montgomery County, and 28 days later the borrower filed exceptions. The basis was that the borrower had obtained an offer for $650,000.

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SPEAKING OF REAL ESTATE

LAWYERS IN THE REAL ESTATE PRACTICE GROUP

Effective September 1, 2014, Neil J. Schechter, who is a member of Gordon Feinblatt’s Real Estate Practice Group, will become Of Counsel to Gordon Feinblatt. In addition, Neil will become the in-house, general counsel to the Urban Atlantic family of companies, including Mid City Urban, LLC. Urban Atlantic is a leader in urban real estate finance, investment and development with projects in Washington, D.C., Baltimore, and other cities on the East Coast. Urban Atlantic’s main offices are located in Bethesda, Maryland. Although Neil will spend the majority of his time at one or more of Urban Atlantic’s offices, he will continue to maintain an office at Gordon Feinblatt.

Richard H. Topaz joined Gordon Feinblatt as an Associate in the Real Estate Practice Group on August 4, 2014. Richard received his J.D. at Fordham University School of Law in May 2012, where he was an Associate Editor for the Fordham Intellectual Property, Media & Entertainment Law Journal. Richard received his B.A. in English at the University of Pennsylvania in Philadelphia in 2008. From 2012 to 2014, Richard was an associate in a law firm in New York. Richard is admitted to practice law in Maryland, New Jersey, and New York.

AWARDS / RECOGNITION

Gordon Feinblatt LLC is pleased to announce that 28 of our attorneys have been named The Best Lawyers in America® for 2015. Of the 28 Gordon Feinblatt lawyers selected, seven of the lawyers practice in the Firm’s Real Estate Practice Group. The lawyers in the Firm’s Real Estate Practice Group who were selected are: Timothy D.A. Chriss, David H. Fishman, Edward J. Levin, Searle E. Mitnick, Peter B. Rosenwald, II, William D. Shaughnessy, Jr., and Neil J. Schechter. The 2015 Edition of The Best Lawyers in America is based on more than 5.5 million detailed evaluations of lawyers by other lawyers.

Gordon Feinblatt’s Real Estate practice was top-ranked in the 2014 edition of Chambers USA: America’s Leading Lawyers for Business. Also, the following Gordon Feinblatt attorneys were ranked in the area of real estate: Timothy D.A. Chriss, David H. Fishman, and Edward J. Levin. Since 1999, Chambers & Partners has conducted research regarding the U.S. legal profession, identifying the leading lawyers and law firms through interviews with thousands of lawyers and their clients. Chambers & Partners bases its selections on in-depth interviews conducted with leading private practice attorneys and key inside counsel in the primary areas of commercial law. Attorneys are selected based on merit only.

David Fishman and Ed Levin were among the eight lawyers in Maryland named to Who’s Who Legal: Real Estate 2014. See WhosWhoLegal.com.

PUBLICATIONS

Edward J. Levin and Seth M. Rotenberg wrote “Rethinking the Need to Bring in a Receiver,” which was published in The Daily Record, Baltimore, Maryland (July 8, 2014); A version of that article is included in this issue.

Edward J. Levin wrote “If a Tree Falls in Maryland, Who Is Responsible?” published in The Daily Record, Baltimore, Maryland (July 24, 2014); A version of that article is included in this issue.

Edward J. Levin and Travis W. Dalton wrote “U.S. Court Strikes MERS System in Maryland, But Maryland Deeds of Trust Differ from Pennsylvania Mortgages,” or “Federal Court Strikes MERS System in Pennsylvania” published in The Daily Record, Baltimore, Maryland (August 4, 2014); A version of that article is included in this issue.

GORDON FEINBLATT WINS SOFTBALL CHAMPIONSHIP

On August 8, 2014, on the ten acres of grass and dirt adjacent to Pikesville Middle School, the Gordon Feinblatt Gophers captured its first Lawyers’ Softball League Championship in the more than forty-year history of the league. The Gophers won each of the three rounds of the playoffs against a higher seeded team that had beaten Gordon Feinblatt during the regular season. The semi-final game was a memorable 36-31 slugfest against a previously unbeaten team.

The Real Estate Practice Group contributed significantly. Ed Levin and Jeff Spatz were regular players, Bill Shaughnessy made a timely appearance in a pivotal regular season game, Searle Mitnick actively supported the team throughout the season, and Richard Topaz joined the firm – and the team – just in time to make an impact during the playoffs. Two of the contributors to this issue who are not in the Real Estate Practice Group played on the Gopher squad: Larry Coppel and Travis Dalton (who was also the team’s coach).