Relating to Real Estate

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Relating to Real Estate - December 2016

In this issue:

 

Better Late Than Never: Court's Delay in Ratifying Foreclosure Sale is Not Grounds for Abating Interest

In AMT Homes, LLC v. Fishman , 228 Md. App. 302, 137 A.3d 1056 (2016), the Court of Special Appeals (CSA) held that the circuit court's delay, resulting from judicial backlog, in ratifying a foreclosure sale did not constitute grounds for reducing the interest that the foreclosure purchaser was obligated to pay. Practical Considerations

The time in which the circuit court generally enters orders of ratification in foreclosures will vary by county, depending on the procedures followed by the clerks' offices, the number of judges available to sign orders, and similar factors.  An attorney representing a prospective foreclosure purchaser should get a sense from the circuit court or from local practitioners of the general timing of the court in entering orders of ratification, and factor into the bidding strategy the likely interest accrual.

Alternatively, a prospective purchaser might consider paying the balance of the purchase price to the trustee right after the time for filing exceptions to the sale expires, assuming no exceptions have been filed.  Although the purchaser would not receive a deed for the property until the sale is actually ratified, there would be no "unpaid purchase price" on which interest would accrue.  Of course, this would not be possible where the purchaser is obtaining purchase money financing, but in a situation where the purchaser has the funds, it could be a device to stop the interest accrual on the purchase price.  The purchaser would need to evaluate the risks associated with payment of the funds to the trustee, including the nature and titling of the account in which the funds will be held.                                   Read the full case summary.

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In Bankruptcy, a Claim Arises Even When a Cause of Action Does Not Exist

In In re Alder , No. 10-28229-JS, 2016 WL 5947220 (Bankr. D. Md. Oct. 13, 2016), the United States Bankruptcy Court for the District of Maryland ruled that a Chapter 7 debtor was discharged from his liability for contribution to a co-guarantor of a commercial lease even though the cause of action for contribution did not occur until after bankruptcy was filed.  The court based its ruling on the definition of "claim" under the Bankruptcy Code, which broadly defines the term to include any contingent or unmatured claim.  If a claim arises before a bankruptcy case is filed and the debtor receives a discharge in the case, then the discharge is applicable to the claim, and the creditor is automatically enjoined from taking any action to collect it.  Because the creditors/co-guarantors in Alder pursued a lawsuit against the debtor after bankruptcy on the contribution claim and after having notice of the bankruptcy filing, the court held the co-guarantors in contempt for violation of the discharge injunction and ordered that they pay the legal expenses incurred by the debtor, in the amount of $6,368.70.  While the court did not make new law with its ruling, attorneys and parties who are unfamiliar with the Bankruptcy Code sometimes believe that a claim does not arise until a cause of action accrues, which is the rule under state law.  The Bankruptcy Code's broad definition of "claim" means that even contingent and unmatured claims arising from a lease or loan guaranty that has not been breached as of the time of the bankruptcy filing are discharged if the debtor receives a discharge in the bankruptcy case.  Anyone who pursues a claim after a debtor is discharged can be held in contempt of court and sanctioned.  Instead, a proof of claim should be filed in the bankruptcy case. For questions, please contact Larry Coppel (410) 576-4238.

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Landlord Barred from Enforcing Profit Sharing Provision in Bankruptcy

Most commercial landlords are aware that a lease requiring a landlord's consent to an assignment is unenforceable in a federal bankruptcy case.  But is a provision requiring a tenant to share its profit on an assignment of a lease enforceable in bankruptcy?In Angelone v. The Great Atlantic & Pacific Tea Co. (In re: The Great Atl. & Pac. Tea Co., Inc.) , No. 15-CIV-8932 (NSR), 2016 WL 6084012 (S.D.N.Y. Oct. 17, 2016), a landlord objected to A&P's auction sale of one of its leases on the basis that the lease required A&P to share 50% of any net profit received from the sale with the landlord.  The bankruptcy court overruled the objection and the landlord appealed.  The U.S. District Court for the Southern District of New York affirmed.  The court based its ruling on Section 365(f) of the Bankruptcy Code, which the court said is intended to maximize the value of a debtor's assets for the benefit of creditors.  Under Section 365(f)(1) a trustee may assign a lease notwithstanding a lease provision that "prohibits, restricts, or conditions" the assignment of the lease.  The court held that a lease provision requiring the tenant to share its profit on a lease assignment with the landlord is a "condition" of the lease that is unenforceable under the provisions of Section 365(f)(1) and its underlying policy. As a result, the landlord could not share A&P's profit from the sale.  The district court's ruling is consistent with decisions of other courts on the same issue. For questions, please contact Larry Coppel (410) 576-4238.

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Conversion Claim May Lie Against Escrow Holder That Improperly Disbursed Funds

In Roman v. Sage Title Group, LLC , 229 Md. App. 601 (2016), the Court of Special Appeals held that an action for conversion will lie if funds are held in and improperly disbursed from an escrow account, even if other funds are in the same escrow account. Conversion is a cause of action that originally existed if a person found lost goods but refused to turn them over to the true owner.  Because identifiable goods were necessary to support an action for conversion, the Court of Appeals has held that as a rule money, an intangible, is not subject to a claim for conversion.  Allied Investment Corp. v. Jasen, 354 Md. 547, 560, 564 (1999).  The court in Jasen allowed for an exception for the conversion of specific segregated or identifiable funds – but only so long as the funds do not lose their specific identity. In Roman, the plaintiff, Robert Roman, sued Sage Title Group, LLC for improperly disbursing funds that were held in an escrow account with other money.  Sage Title kept a ledger that accounted separately for each property for which escrowed funds were applicable.  The Court of Special Appeals held that this was sufficient for Roman to pursue a claim for conversion.  The court stated, "We will not ban a conversion claim simply because funds were located in a single escrow account, without looking at the purpose of the account, the duties of the account holder, and whether the funds were sufficiently specific, separate, and identifiable." For questions, please contact Ed Levin (410) 576-1900.

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A Bathtub Full of Marijuana Plants May Not Get You Evicted Under RP §8-402.1 if You Are a Section 8 Tenant

In Hosford v. Chateau Foghorn LP , 229 Md. App. 499 (2016), the Court of Special Appeals held that federal law does not preempt a Maryland landlord-tenant statute that permits eviction only if a tenant breaches a lease and "the breach was substantial and warrants an eviction."  Wesley Hosford, who is disabled, has been a resident of Ruscombe Gardens apartments in Baltimore City since 1989.  Chateau Foghorn LP ("Foghorn"), the landlord, hired an exterminator because of bedbug infestation.  Exterminators observed a marijuana plant growing in Hosford's bathtub and reported it to the police.  The police confirmed that the plant was marijuana, and Hosford was charged with possession.  The charge was not prosecuted. Foghorn filed an eviction action under §8-402.1 of the Real Property Article of the Maryland Code.  It contended that Hosford engaged in drug-related criminal activity, therefore violated a clause in his lease, and hence should be evicted forthwith.  Hosford moved for a jury trial, and the case was transferred to the Circuit Court for Baltimore City.  Hosford contended that even if he breached the lease, he could not be evicted unless the court determined that the breach was "substantial" and "warrants eviction." Read more.

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"Wild Card" Rule Permits Judgment Creditor to Attach Corporate Interest of Judgment Debtor

In Burnett v. Spencer , 230 Md. App. 24 (2016), the Court of Special Appeals held that Maryland Rule 2-651 may be the basis for a court to enter a charging order against a corporate interest held by a judgment creditor. Cereta Spencer was awarded $3,700,000 by the Circuit Court for Baltimore County in her divorce from Steven Burnett, and she obtained judgments against him totaling over $2.5 million, which she had difficulty collecting.  She was able to get the circuit court to charge Burnett's interests in CAEI Corporation, of which Burnett was the principal shareholder, under Rule 2 651. The Court of Special Appeals affirmed the decision of the trial court, ruling that the so-called "wild card" provision for collecting judgments contained in Rule 2-651 is effective even though there is no statute that provides a charging order as a remedy against shareholders in favor of their creditors. As a result of the decisions of the circuit court and of the Court of Special Appeals, Spencer's chances of collection are substantially enhanced. For questions, please contact Ed Levin (410) 576-1900.

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Making Illegal Campaign Contributions to the County Councilman Cannot be Considered in Challenge of PUD Approval

The Court of Appeals in Kenwood Gardens Condominiums, Inc. v. Whalen Properties, LLC , 449 Md. 313 (2016), held that illegal campaign contributions from the landowner to a Baltimore County councilmember who was instrumental in obtaining a planned unit development ("PUD") approval on certain property was not a sufficient basis to invalidate the PUD approval.  The Court's decision was based on its view that introduction and passage of a resolution is a legislative action, which is subject to limited judicial review, and that the appearance of impropriety was not sufficient to negate the presumption of validity of the legislative act. In so doing, the Court of Appeals affirmed the unreported decision of the Court of Special Appeals entitled Kenwood Gardens v. Whalen Properties, LLC, which we wrote about in the November 2015 issue of Relating to Real Estate. In Baltimore County in order for a property to be designated as a PUD, the owner must submit an application to the county councilmember for that district.  Substantive review of the application may begin only after the County Council passes a resolution.  Then various county agencies review the request, leading up to a public hearing before an administrative law judge ("ALJ").  A party may appeal the decision of an ALJ to the Board of Appeals.  Subsequent appeals may be taken to the circuit court and then to the Court of Special Appeals. In the subject case, Whalen Properties LLC filed a PUD application on August 9, 2011, and a community meeting occurred on September 1, 2011.  On September 19, 2011 Councilman Thomas Quirk submitted to the County Council a resolution (the "Bill"), which was unanimously approved on June 6, 2012.  The Bill exempted property in certain areas, including the Whalen property, from some general compatibility requirements of the Baltimore County Code.  A neighbor, Kenwood Gardens Condominiums, Inc., protested that this was an improper "special law." Read more.

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$300,000 in Attorneys' Fees at Stake: Statute of Limitations on a Claim for Reimbursement of Legal Fees Does Not Begin to Run until there is a Verdict in the Underlying Case

You can imagine how upset Gwen Muse-Evans must have been.  She bought a house on a cliff overlooking the Chesapeake Bay and then found out that it had latent material defects.  These included unusual erosion that could not be corrected because of the presence of a federally-protected endangered species.  Then she sued the seller and the real estate agent for failure to disclosure the defects.  She was not only unsuccessful in that suit but was ordered to pay over $300,000 for the legal fees incurred by the defendants.After Muse-Evans lost a jury trial on the issue of liability of the seller and broker for the problems with the house, litigation focused on the legal fees.  A clause in the contract of sale provided that the prevailing party would be reimbursed for its attorneys' fees from the other party.  Another clause indemnified the broker against loss, including legal fees, unless the broker lost its case.  But Muse-Evans claimed that the seller and broker were barred from pursuing their claims for legal fees because the contract was signed in 2006 and that the applicable limitations period had run.In Muse-Evans v. Thaggert , Court of Special Appeals, No. 0237, Sept. Term, 2014 (March 9, 2015), the Court of Special Appeals disagreed with Muse-Evans.  It stated that a cause of action does not accrue until there is a verdict in the underlying case because only then can you tell who the prevailing party is.  Therefore, the statute of limitations had not expired when the litigation about attorneys' fees was filed. Further, the court held that the broker's right to indemnification was not just for liability – which would have required that there be a judgment against it; the indemnification provision in the contract covered loss, and loss included attorneys' fees incurred in the litigation of the underlying claim. PRACTICE NOTE:  Make sure the indemnification provisions in your contracts extend to loss and liability.  This will provide you with a benefit for loss you may sustain that goes beyond any liability that you may incur. For questions, please contact Ed Levin (410) 576-1900.

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Speaking of Real Estate

Recognition The Best Lawyers in America® has named Gordon Feinblatt to its 2017 Metropolitan Baltimore Tier 1 "Best Law Firms" List in 19 areas of practice including Real Estate. The other Gordon Feinblatt practices so named are Arbitration, Banking and Finance Law, Corporate Law, Employment Law - Individuals and Management, Environmental Law, Family Law, Financial Services Regulation Law, Government Relations, Health Care Law, Litigation - Commercial, Environmental and Real Estate, Mediation, Real Estate Law, Securities Regulation, Tax Law, and Technology and Information Technology Law.  Firms included in the 2017 "Best Law Firms" List are recognized for professional excellence with consistently impressive ratings from clients and peers.  Achieving a Tier 1 ranking signals a unique combination of a quality law practice, breadth of legal expertise, professionalism, and integrity. Presentations Ed Levin was a panelist on "Subordination, Non-Disturbance and Attornment Agreements in Commercial Leasing and Real Estate Finance," Strafford Webinar, November 10, 2016. Publication Seth Rotenberg wrote "Better Late Than Never:  CSA holds that Court's Delay in Ratifying Foreclosure Sale Not Grounds for Interest Abatement," which was published in The Daily Record, Baltimore, Maryland at http://thedailyrecord.com/2016/10/05/seth-m-rotenberg-foreclosure-interest-abatement/ and in the print edition on October 6, 2016. Recent Transaction Ed Levin and Richard Topaz assisted a client on its recent sale of two medical office buildings.  Each of the office buildings was a commercial condominium unit, and both of the buildings were subject to long-term ground leases.

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