Relating to Real Estate

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Relating to Real Estate March 2012

Gordon Feinblatt's Real Estate publications keep you updated on legal developments affecting Maryland real estate. Learn more about Gordon Feinblatt by clicking here.

In this issue:

The Saga of Ground Leases Continues:
Court of Appeals Strikes Penalty for Failure to Register with the SDAT;
Anne Arundel County Circuit Court Rejects Elimination of Ejectment and Re-Entry Rights

Editor’s Note: The November, 2011 issue of Relating to Real Estate included an article about Muskin, Trustee v. State Department of Assessments and Taxation. Muskin held that extinguishment could not be a penalty for failure to register ground leases. In that article, in light of Muskin we anticipated more developments regarding the 2007 Maryland ground rent laws. The Circuit Court of Anne Arundel County recently held that the elimination of ejectment as a remedy is unconstitutional. In order to present a coherent story about the recent changes affecting Maryland ground rents as of the beginning of February, 2012, we have updated the November article.
 
In 2006, the Baltimore Sun ran a number of articles describing horror stories of homeowners losing their properties because of delinquencies in the payment of small amounts of ground rent. In many cases, the costs and attorneys’ fees that the ground lessees were required to pay far exceeded the amount of the rent that was due.
These extreme cases attracted the attention of the Governor and the Maryland General Assembly. The response was Chapter 290 of the Laws of 2007. This law provided for a registration system for ground rents that would be accessible online at the Maryland State Department of Assessments and Taxation (SDAT). It also provided that if the ground leaseholder failed to register by September 30, 2010, the ground lease was extinguished and rent was no longer payable to the owner of the ground lease.
On October 25, 2011, the Maryland Court of Appeals ruled in Muskin, Trustee v. State Department of Assessments and Taxation, 422 Md. 544, 30 A.3d 962, 2011 Md. LEXIS 644 (Md. Oct. 25, 2011), by a vote of five to two, that the part of Chapter 290 that extinguishes ground rents that were not registered is unconstitutional as a violation of the Maryland Declaration of Rights and Constitution. The Court emphasized that it was making its decision under Maryland law. It assumed that under applicable federal decisions, this scheme might well have passed muster under the U.S. Constitution. However, the Court noted that sometimes Maryland law may impose greater limitations than the U.S. Constitution.
In reaching its decision, the Court found that Chapter 290 would have retrospectively abrogated vested rights of ground rent owners. In evaluating whether a statute operates retrospectively, the Court looked to issues of fair notice, reasonable reliance, and settled expectations.
As to the first requirement of fair notice, the Court held that there was no problem because the registration deadline of September 30, 2010 was more than three years following enactment of Chapter 290.
However, the Court went on to say that Chapter 290, to the extent that it provided for forfeiture of unregistered ground rents, violated the reasonable reliance and settled expectations of the owners. The Court said, “Ground rent leases, established through transactions consummated many years ago, create rights and obligations for ground rent owners and leaseholders.… [T]he extinguishment and transfer provisions of the statute are retrospective in application because, upon failure to register timely, the SDAT is required to reach back in time and divest the reversionary interest of the ground rent owner and cancel his/her/its right to receive future ground rent from the leaseholder.”
The Court went on to determine that the owner of a ground rent is possessed of vested rights under the law and that these rights may not be retrospectively impaired. After analyzing various causes of action in which courts approved of restrictions on certain remedies, the Court went on to describe vested real property and contract rights as “almost sacrosanct in our history.” The Court further determined that the forfeiture provisions of Chapter 290 constitute an unconstitutional deprivation of the property of the ground rent owners without just compensation.
Two judges dissented, believing that the Maryland Constitution permits the type of prospective condition on the retention of a vested right so long as the holder of the right had a sufficiently reasonable time and opportunity to protect it by complying with the statute.
Of interest is what is left of the legislature’s attempt to address what it perceived to be a serious problem. The Court of Appeals did not strike down the registration requirements of the new law. It suggested other approaches that would not be impermissibly retrospective. Expressly mentioned were a regulation whereby the failure to register a ground lease triggers an interim consequence such as restrictions on collecting rents prospectively, or denial of access to the courts for the collection of ground rents until the ground rent is registered.
On December 20, 2011, the Circuit Court for Anne Arundel County, in Braverman, et al. v. State of Maryland, 02-C-07-126810, invalidated Chapter 286 of the Laws of 200. Chapter 286 was an integral part of the General Assembly’s attempt to cure its perceived problems of the ground rent system. This statute sought to eliminate a ground lease holder’s right to eject a delinquent ground lease tenant and re-enter the property (based on the ground lessor’s reversionary interest). In reviewing the decision of the Court of Appeals in Muskin, the Anne Arundel County court concluded that “the bundle of vested rights involved in ground rent leases includes the right of ejectment and re-entry upon a default of a ground lease.” In so holding, the Circuit Court invalidated the legislative scheme to substitute those rights with a system of lien creation and foreclosure, expressly rejecting the State’s argument that these enforcement tools were merely remedies and subject to legislative removal. The Court found instead that the ground lessor’s remedies constituted vested property rights.
As a result of the decisions in Muskin and Braverman, the guts of the attempted legislative overhaul of the ground rent ownership and enforcement practices lie in ruins. The registration system remains, but no one knows what the consequences, if any, will be if a ground rent is not registered.
As anticipated, legislation in response to these decisions has been introduced in the 2012 session of the General Assembly. An example is Senate Bill 135/House Bill 177, which would delete the extinguishment provisions of current law but maintain the registration requirements for ground leases. It would also prohibit holders of ground leases from collecting their ground rent payments or seeking a monetary judgment during the period that a ground lease is not registered. As suggested above, such an interim consequence may or may not pass constitutional muster. This remains to be seen.
We continue to confidently predict battles on ground rents in the legislative and judicial arenas for years to come.
For questions, please contact Searle Mitnick at (410) 576-4107.
 

Despite Lease-Leaseback, Property is Eligible for Tax Exemption

In a recent case, the Maryland Court of Special Appeals held that where a non-profit corporation ground leases property to a for-profit entity that constructs a building and other improvements on the property, the property is still deemed to be owned by the non-profit corporation. Therefore, the non-profit corporation is eligible to seek a charitable exemption for the property from real property taxes. This is the result even if the documents refer to the fact that the for-profit entity owns title to the improvements during the period of the ground lease.

In Supervisor of Assessments of Baltimore County v. Greater Baltimore Medical Center, Inc., 202 Md. App. 252 (Dec. 1, 2011), Greater Baltimore Medical Center, Inc. (GBMC), a non-profit hospital, engaged in a lease-leaseback arrangement with a for-profit developer, BHI LLC (BHI). The steps of the transaction were: (1) GBMC ground leased land on its campus to BHI, (2) BHI obtained a leasehold mortgage loan and constructed a medical office building, garage and related improvements (the “Improvements”) on the land, and (3) BHI leased the Improvements back to GBMC.

The parties recorded certain documents in the land records for this transaction: a Memorandum of Lease relating to the ground lease, a Reciprocal Parking Easement allowing shared use of the parking garage for the office building as well as other buildings on the GBMC campus, and the Leasehold Deed of Trust securing the construction loan made to BHI. Additional documents were executed, but were not recorded: the Ground Lease (only the Memorandum of Lease was recorded), the lease of the Improvements back to GBMC, and a Construction Escrow and Security Agreement requiring that the loan proceeds be used to construct the Improvements.

After the Improvements were completed, GBMC applied for a charitable property tax exemption. The qualification for that exemption, which is set forth in Section 7-202(b) of the Tax-Property Article, generally requires that two tests be satisfied: (1) the property must be used for a charitable or educational purpose; and (2) the property must be owned by a type of entity listed in the statute, of which a non-profit hospital is one. GBMC’s application was denied by the State Department of Assessments and Taxation and, following GBMC’s appeal, was denied by the Tax Appeals Board. These denials were apparently based upon the theory that GBMC was not the owner of the Improvements.

GBMC appealed to the Tax Court, which held that GBMC was “the record owner of both the land and the improvements,” Id. at 289, and was, therefore, eligible to apply for the charitable property tax exemption. The Tax Court then remanded the case to the Tax Appeals Board and then to the Supervisor for a determination as to whether the statute’s charitable or educational use requirement had been met. The Supervisor of Assessments appealed to Baltimore County Circuit Court, which affirmed the Tax Court’s ruling. The Supervisor of Assessments then appealed to the Maryland Court of Special Appeals, asserting that BHI was the owner of the Improvements and, as a for-profit entity, was not entitled to a charitable exemption. The Court of Special Appeals only addressed the issue of property ownership as a prerequisite to the charitable property tax exemption. The Court noted that the issue of the use of the property as satisfying the charitable property tax exemption was subject to determination by the Supervisor of Assessments and would then be subject to appeal.

The Court of Special Appeals noted that real property is taxable to its owner, and that “the record owner, as listed in the land records, is the owner of real property for tax assessments purposes.” Id. at 292. Because GBMC was reflected in the land records as the record owner of the land, it was also deemed to be the owner of the Improvements because “improvements affixed to the land are considered part of the real property and ownership of the improvements follows title to the land.” Id. at 293. Therefore, the Court reasoned, for someone other than the record owner of the land to be considered the owner of the Improvements, there “must be a recorded deed or other instrument of record showing a transfer of title to the improvements to another owner.” Id.

While several of the transactional documents stated that BHI was the owner of title to the Improvements during the term of the ground lease, neither of the recorded documents which mentioned this (the Easement Agreement and the Leasehold Deed of Trust) contained language actually “transferring GBMC’s record title ownership of the land or the Improvements to BHI LLC.” Id. at 300. Therefore, the Court reasoned, these documents were not sufficient to effect a transfer of title to the Improvements to BHI. Similarly, the unrecorded documents stating this were insufficient to effect a transfer to BHI because the relevant Maryland statute (Section 3-101 of the Real Property Article) “requires all transfers in property ownership to be recorded.” Id.

The Court described the transactional documents as showing “contractual ownership” of the Improvements by BHI, but said they were insufficient to “show title or record ownership of the Improvements by BHI LLC.” Id. Thus, “record title always remained in GBMC, even if contractual ownership of the Improvements was held by BHI LLC.” Id. Therefore, GBMC was the owner of the land and the Improvements for property tax purposes and was entitled to seek an exemption from property tax, subject to satisfying the exempt purpose use requirement.

PRACTICE TIPS:

This case turned on the fact that the transactional documents did not actually contain granting language conveying title to the Improvements to BHI. Had the documents that were recorded contained such language, the Court may have concluded that the documents were sufficient to vest record title to the Improvements in BHI. That would have eliminated the availability of the charitable exemption from property tax. This should be borne in mind in drafting documents in this type of transaction.

Note that the treatment of this transaction for federal income tax purposes may be different than the treatment for Maryland property tax purposes. For example, the party deemed to be the owner of the Improvements, the characterization of the ground lease and the leaseback of the Improvements, as well as the treatment of the payments under those leases may be different under federal income tax laws. Therefore, particular attention should be paid to the federal tax consequences in structuring such a transaction.

For questions about this, please contact Seth Rotenberg at (410) 576-4179.

Court Locates an Easement for the Parties

In USA Cartage Leasing, LLC v. Baer, 202 Md. App. 138 (2011), the Maryland Court of Special Appeals held that where the parties could not agree on the location of an unlocated express easement, a court of equity has the power to determine the location of the easement by balancing the equities of the parties.

The case involved a subdivision of one lot into two parcels. One parcel was conveyed to a third party. In the deed to the third party, the grantor reserved a 25 foot wide non-exclusive easement over the lot which was conveyed. The deed did not contain a detailed description of the easement and referred only to its starting part from a public road.
Subsequently, the actual location of the easement became a matter of dispute between the owner of the dominant lot with the benefit of the easement and the owner of the servient lot upon which the easement was located.

The owner of the servient lot upon which the easement was located contended that the purported easement was not valid since it failed to satisfy the statutory requirement of Section 4 101(a)(1) of the Real Property Article of the Annotated Code of Maryland which requires that every deed must contain a description of the property sufficient to identify it with reasonable certainty.

The Cartage court rejected the position of the owner of the servient lot and held that where an express easement has been established without fixing its location, and the location of the easement cannot be established either (a) by reference to a road or way in existence at the time of the deed; (b) by a subsequent and unopposed long-term use by the dominant owner; or (c) by a subsequent agreement of the parties, the court may establish the location of the easement. The easement would be located so as to be the least onerous to the owner of the property burdened by the easement while, at the same time, being of reasonable convenience to the owner of the property benefiting from the easement, taking into consideration the purposes of the easement.

Although Cartage does give some degree of comfort to those parties to an easement agreement where the specific location of the easement may not be described in sufficient detail to comply with the statutory requirements, the decision underscores the importance of providing a detailed and ascertainable description of the easement – otherwise, the specific location of the easement may be determined by the court and not by the parties, or the court may invalidate it entirely.

For questions about this, please contact Tim Chriss at (410) 576-4237.

Lessons from Fortress v. Dechert: Implications for Maryland Opinion Practice of a New York Court’s Dismissal of a Suit against a Law Firm over an Opinion Letter Given in a fraudulent Transaction

 
IMPLICATIONS FOR MARYLAND OPINION PRACTICE OF A NEW YORK COURT’S DISMISSAL OF A SUIT AGAINST A LAW FIRM OVER AN OPINION LETTER GIVEN IN A FRAUDULENT TRANSACTION

In the Summer of 2010, the legal opinion world1 was rocked by news that the claim of affiliates of Fortress Investment Group against the law firm Deckert LLP for $50 million in damages arising from a legal opinion letter given by Dechert, had survived a motion to dismiss. That world settled down somewhat on Nov. 29, 2011 when a New York intermediate appellate court dismissed Fortress’s claims against Dechert. Fortress Credit Corp. v. Dechert LLP, 89 A.D. 3d 615, 934 N.Y.S.2d 119 (2011).

BACKGROUND

Dechert issued a legal opinion letter to Fortress, the lender, in a fraudulent financing that was arranged by Marc S. Dreier.

Dreier, who was then an attorney and had represented the purported borrowers (Solow Realty & Development Company, LLC and affiliates) on litigation matters for a number of years, forged the signatures of the borrowers on the loan documents and other documents, and he misappropriated the loan proceeds after they were wired to his trust account.
In May, 2009 Dreier pleaded guilty in federal court to orchestrating a massive Ponzi scheme and to conspiracy to commit securities fraud and wire fraud, money laundering, securities fraud, and wire fraud. He was sentenced to 20 years in prison and disbarred.

According to court pleadings, starting in 2005, ostensibly on behalf of the borrowers, Dreier arranged with the lender to borrow money to finance the purchase of foreign real estate assets. Dreier acted as a limited guarantor and manager of the loans.

The initial loan of $25 million closed in January 2006, and it was extended and increased in 2007 to approximately $50 million. In 2008, the lender agreed to loan the borrowers an additional $50 million, but the lender insisted that the borrowers hire an independent law firm to issue an opinion letter to the lender. Dreier engaged Dechert to serve in that role and paid it $100,000.

The lender made the additional loan of $50 million to the borrowers, but the borrowers had no knowledge of it, did not authorize it, did not sign the loan documents, and never received the loan proceeds. Dechert, the law firm that was supposedly representing the borrowers, had no direct contact with the borrowers or any of their officers or employees.
Dechert’s only contact regarding the borrowers was with Dreier. Dechert undertook no due diligence to determine the involvement, or lack of involvement, of the borrowers in the loan transaction.

In connection with the additional $50 million loan, on June 25, 2008, Dechert, as “special corporate counsel” to the borrowers and Dreier (collectively, the “Loan Parties”) rendered an enforceability opinion in favor of the lender. That opinion provided “each of the Transaction Documents constitutes the valid and binding obligation of each of the Loan Parties . . . enforceable against such Loan Party in accordance with its terms.” Dechert’s letter also included the opinion that “each of the Loan Parties has duly executed and delivered each of the Transaction Documents to which it is a party.”

With those opinions in hand, the lender funded the $50 million loan.

CAUSES OF ACTION

If a lender wants to collect damages for harm caused by a third-party opinion letter written in connection with a loan, it must first find one or more viable causes of action to pursue against the law firm that gave the opinion. Because the opinion issuer represents the borrower (and perhaps other loan parties, such as guarantors) and delivers the opinion letter on their behalf to the lender, the lender is not the client of the law firm that renders the opinion.

In other words, the lender is a “nonclient” as to the law firm. The Fortress court found the lender could not sue Dechert for legal malpractice because they did not have an attorney-client relationship.

Also, as a general matter, the opinion giver does not have a contract with the lender, and so there is no legal “privity” (the nexus that is often required to bring a successful lawsuit) between them. However, New York courts have fashioned an exception to this rule.

The Fortress Court cited Prudential Insurance Company of America v. Dewey, Ballantine, Bushby, Palmer & Wood, 80 N.Y.2d 377, 605 N.E.2d 318, 590 N.Y.S.2d 831 (1992), for the proposition that in New York, to permit recovery for pecuniary loss sustained as a result of another’s negligent misrepresentations, there must be a showing that there was either actual privity of contract between the parties or a relationship “so close as to approach that of privity,” sometimes referred to as “near privity.”2

In satisfaction of this requirement, the Court in the Fortress case found that the lender’s Complaint alleged a “near privity” relationship because it averred that the purpose of the opinion letter was to aid the lender in deciding whether to enter into the loan, Dechert was aware that the lender was relying on the opinion in determining whether to make the loan, and Dechert showed its understanding of this reliance by addressing the opinion letter to the lender.

Stated differently, under New York law, a law firm that represents a borrower may have liability to a lender in connection with an opinion letter issued in a loan transaction.

LAW FIRM NOT LIABLE

Although it held that the lender could sue Dechert because it found “near privity,” the Fortress Court ultimately declined to hold Dechert liable for damages to the lender.
The court noted that because the complaint did not allege that the lender advised Dechert that its obligations were not limited to the review of only specified documents and the complaint did not allege that the lender advised Dechert that it needed to investigate, verify, and report on the legitimacy of the loan transaction, the lender could not establish that Dechert breached a duty of care.

The court also found that Dechert had no reason to suspect that the borrowers were not actually participants in the loan transaction or that their signatures had been forged.
The court found that Dechert’s statements in the opinion letter were not misrepresentations, as would be required to find liability under the Prudential, because the opinion letter stated that Dechert had not made an independent inquiry into the accuracy of the factual representations or certificates.

The court also rejected the claim that Dechert was liable for fraud. The complaint alleged that Dechert acted recklessly for failing to confirm that the borrowers were actually involved in the loan, but the court held that this was not a sufficient allegation of scienter (guilty knowledge), a necessary element in an action for fraud. The court based this holding on its findings that there were no allegations that Dechert made a knowingly false statement or that it knowingly participated in the fraud.

EXPLICIT ASSUMPTIONS

Significantly, Dechert included in its opinion letter an assumption that the signatures on all of the documents were genuine and an assumption that all of the documents it had seen were authentic. The court said that the opinion letter “was clearly and unequivocally circumscribed by the[se] qualifications.”

Essentially, these assumptions had the effect of enabling Dechert to issue the opinion letter as if the certificates of the borrowers, the resolutions of the borrowers, and the loan documents were authorized by the borrowers and that they were properly signed and delivered by them. As it turned out, all of these documents were forged by Dreier, but the court allowed the opinion to be read as if all of the documents were approved and signed by the borrowers. Therefore, the court held that the lender’s complaint failed to state a cause of action against Dechert for breach of fiduciary duty.

Accordingly, the Court reversed the decision of the trial court and ordered that the case against Dechert be dismissed.

Notwithstanding the law firm’s role in the fraud perpetrated by Marc Dreier, Dechert has avoided liability to the lender for now.

Dechert allegedly did no due diligence before issuing its letter, did not even meet with, correspond with, or otherwise communicate with its “clients,” and rendered its opinion letter based on forged entity certificates, entity resolutions, and loan documents. It can be inferred from the fact that Dechert received a fee of $100,000 for only a few days’ work that it should have known that something was amiss.

Despite this, the Court read the assumptions that Dechert included in its opinion letter literally and interpreted the letter in the fictional world that the opinion letter described.

OPINION GIVERS’ LIABILITY

The basis for finding possible liability for a lawyer who issues a legal opinion to a nonclient under Maryland law is somewhat different than under New York law, as set forth in Fortress. v. Dechert, and Prudential Insurance Company of America v. Dewey, Ballantine, Bushby, Palmer & Wood.

In legal malpractice actions in Maryland, without a contractual relationship or equivalent between a lawyer and the prospective plaintiff, no tort duty can be imposed on the lawyer where the lawyer’s negligence causes only an economic loss. This is the strict privity rule.

In general, under New York law, the exception to the strict privity rule is “near privity”; in Maryland the exception is the third party beneficiary rule.

“To establish a duty owed by the attorney to the nonclient the latter must allege and prove that the intent of the client to benefit the nonclient was a direct purpose of the transaction or relationship.” Flaherty v. Weinberg, 303 Md. 116, 121-23 (1985). See, generally, Section C.4., Preliminary Considerations, Liability in the 2007 Report on Lawyers’ Opinions in Business Transactions by the Special Joint Committee of the Section of Business Law and the Section of Real Property, Planning and Zoning of the Maryland State Bar Association, Inc., revised as of October 6, 2009, found at http://msba.org/docs/opinionmatters.asp (the “2007 Maryland Opinion Report”).

Specifically with respect to opinion letters, the Maryland Opinion Report added that “a third party addressee of an opinion in a business transaction would probably be able to recover against the opinion giver if the addressee can establish that it reasonably relied on the opinion, that it suffered a loss proximately caused thereby, and that the opinion giver was negligent.” Maryland Opinion Report at page 24.

MARYLAND OPINION REPORT ON EXECUTION AND DELIVERY OPINIONS

Opinions on execution and delivery of loan documents are regarded as being subsumed by, or part of, enforceability opinions. In order for loan documents to be enforceable, they must be executed and delivered by the proper persons, so if an enforceability opinion is given, an execution and delivery opinion is implicitly a component of the enforceability opinion. See §10.4 of the Third-Party Legal Opinion Report, including the Legal Opinion Accord (the “Accord”), 47 BUS. LAW. 167 (1991) and 29 REAL PROP. PROB. & TR. J. 487 (1994), and Maryland Opinion Report, Section D.4, page 53.

However, in third-party opinion letter practice throughout the United States, including Maryland, as a matter of form the execution and delivery opinion is generally stated separately from the enforceability opinion. (Note that the illustrative opinion letter that is part of the Accord is an exception to this rule.) The execution and delivery opinion was set forth as a separate paragraph in the opinion letter that Dechert issued to Fortress.

The Maryland Opinion Report puts the execution and delivery opinion in a separate paragraph in the sample opinion language of the Maryland Opinion Report (page 51) and in the four illustrative opinions that are part of the Maryland Opinion Report.

ASSUMPTIONS REGARDING EXECUTION AND DELIVERY OPINIONS

As to the assumptions that relate to the execution and delivery opinion, in the commentary to the sample language on execution and delivery, the Maryland Opinion Report states, “The opinion giver may assume that the individuals signing the transaction documents have the legal capacity to do so and that the signatures are genuine.” Id. at page 53.

Section D.17 of the Maryland Opinion Report lists assumptions that are implicit in third-party legal opinions that are given with reference to the Maryland Opinion Report. Two of the implicit assumptions are that the documents submitted to the opinion giver are authentic and that all signatures on the transaction documents are genuine. These are the same two assumptions that were in the opinion letter discussed in the Fortress case that saved Dechert from being liable for damages.

The Maryland Opinion Report notes that instead of the assumption that “all signatures are genuine,” some opinion letters include the assumption that “all signatures other than the borrower’s are genuine” – carving the borrower’s signatures out of the assumption. The latter assumption is often found in forms prepared by recipients of opinion letters.

When an opinion giver uses the latter assumption, the opinion giver would be vouching for the signatures of its own client (the borrower). Regarding this, the Maryland Opinion Report states, “In the view of the Committee, such an assurance is not an opinion of law but the guarantee of a fact that may be outside of the knowledge of the opinion giver. The Committee believes that such a request is inappropriate in most instances and that the language [that is underlined above] should be omitted.” Id. at page 176.

HOW TO AVOID GIVING AN EXECUTION AND DELIVERY OPINION

If an opinion giver is going to render an enforceability opinion and does not want to vouch for the signatures of its clients, it may do so in several ways.

It can omit a separate opinion stating that the documents have been executed and delivered by the borrower, but because an enforceability opinion encompasses an execution and delivery opinion, this is not sufficient by itself.

The most direct way is for the opinion letter to include an assumption that the clients have executed and delivered the documents, and to not include an execution and delivery opinion.

Without an assumption that the clients have executed and delivered the documents, the opinion letter can explicitly include assumptions that all documents submitted to the opinion giver are authentic and that all signatures on the transaction documents are genuine. Dechert included such explicit assumptions in its opinion letter, and the appellate division in Fortress placed a great deal of weight on them.

Alternatively, a lawyer in Maryland issuing an opinion letter may include these assumptions by reference to the Maryland Opinion Report.

Each of the illustrative opinion letters at the end of the Maryland Opinion Report includes as its last paragraph a statement that it is to be interpreted in accordance with the Maryland Opinion Report. If an opinion letter contains such a provision, all of the implicit assumptions from the Maryland Opinion Report are deemed to be included within it. Therefore, in such a situation, the assumptions regarding genuineness of all signatures and authenticity of documents would be deemed part of the opinion letter, even if they are not explicitly stated in the opinion letter.

Section B of the Maryland Opinion Report, on page 6, provides that the authors of the Report believe that the Report reflects customary practice in Maryland. Therefore, if an opinion letter is rendered under Maryland law, as a matter of customary practice in Maryland, these assumptions should be read as being part of the opinion letter.

This would be the case even if the opinion letter does not specifically incorporate the Maryland Opinion Report by reference, and even if the opinion letter does not explicitly state assumptions regarding the genuineness of all signatures and the authenticity of documents.

On the other hand, if an opinion letter includes the assumption that “all signatures other than the borrower’s are genuine,” and the letter includes an enforceability opinion (whether or not it includes a separate execution and delivery opinion as well), the opinion giver would be providing assurance to the lender that the signatures of the borrower on the documents are not forgeries.

CONCLUSION

There are lessons to be learned from the Fortress case. First, even if a law firm that gives an enforceability opinion in a loan transaction includes explicit assumptions about the authenticity of documents and the genuineness of signatures, it is prudent to check with the borrower directly to confirm that it has signed the papers.

The second lesson is not from the outcome of the Fortress case, but it emerges from an analysis of the case. It is this: it is not good practice to include in an opinion letter an opinion that has been assumed away, and thus is intended to have no meaning. A court may not come to that conclusion.

For example, an execution and delivery opinion is contradicted by the opinion giver’s assuming the authenticity of documents and the genuineness of all signatures. Therefore, if an opinion letter has both a freestanding execution and delivery opinion and assumptions on authenticity of documents and the genuineness of signatures (as the Dechert letter did), the opinion giver will contend that the assumptions control and the execution and delivery opinion has no meaning.

However, a court may instead decide that at least some effect should be given to every single opinion in an opinion letter. Thus, the giver of such an opinion letter described above may be at risk of having a court give effect to the execution and delivery opinion and not to the assumptions that would have negated that opinion.

Dechert may have avoided liability for now, but this case may not be over yet. Fortress has filed a motion for leave to appeal the intermediate appellant court’s decision.
If you have questions about this, please contact Ed Levin at (410) 576-1900.

Editor’s Note: This article appeared in the Daily Record on January 17 and 18, 2012. The author wishes to thank Cheri Wyron Levin for her editorial advice and suggestions on this article.

________________________________________________________________________________
Endnotes:

1 “Legal opinion world” is meant to include those involved in real estate financings, particularly lenders, borrowers, participants, syndicators, rating agencies, and their counsel. In many loan transactions there is often the requirement that the borrowers’ counsel provide legal opinion letters to the lenders, and the lenders rely on those letters to satisfy part of their due diligence.
2Prudential involved a law firm that issued an opinion that mortgage loan documents were enforceable “in accordance with [their] respective terms” even though the mortgage inadvertently left out three zeros from the amount secured.

Recent Cases Provide Guidance on Prescriptive Easements

The Maryland Court of Special Appeals recently decided two cases about prescriptive easements. In the first, the Court held that the provisions of a written easement agreement could be expanded by prescription. In the second, the Court held that a use that was originally permissive could be terminated by the burdened owner, even if the owners of both the burdened and benefited properties had changed.

USE OF PROPERTY BEYOND THE TERMS OF A WRITTEN EASEMENT

In Turner v. Bouchard, 202 Md. App. 428 (2011), an opinion written by Judge Albert Matricciani, the Court of Special Appeals held that a person could expand an express easement with a prescriptive easement over adjoining property where that person’s use of the expansion area was adverse, exclusive, and continuous for more than 20 years.
The parties to the case were owners of adjacent lots in Lusby, Calvert County. In 1975, Luther and Dorothy Muth sold a lot (Lot 16) to the Bouchards. (Mrs. Bouchard has since died; Mr. Bouchard continues to own the property.) At the same time, the Muths conveyed to the Bouchards a separate, recorded easement over a small portion of the adjacent lot (Lot 17) to serve as a driveway for ingress and egress. In 1980, the Muths conveyed Lot 17 to the Bouchards and the parents of the Turners, the defendants in the case. In 1984 the Turners’ parents purchased the interests of the Bouchards in Lot 17. In 2005 the Turners bought Lot 17 from their parents.

From the beginning of their ownership of Lot 16, the Bouchards, and later their tenants, used more of Lot 17 than was described in the easement agreement. That additional property is called the “Disputed Area.”

The Bouchards filed suit in the Circuit Court for Calvert County to establish their rights in the Disputed Area. The circuit court held that the Bouchards had a prescriptive easement and therefore had the right to continue to use the Disputed Area. The Turners appealed, and the Court of Special Appeals affirmed.

The Court of Special Appeals held that the person claiming a prescriptive easement initially has the burden to show that the easement had the requisite character for the necessary period of time, but once the movant has done so, the burden shifts to the owner of the burdened land to prove that the use was permissive. The circuit court found that there was no evidence that the Turners had given permission for Bouchard’s use of the Disputed Area.

The Court of Special Appeals analyzed the following three elements of prescriptive easements in the context of Turner:

1. Adverse.

The “adverse” requirement means that the use of the easement must be without license or permission of the landowner. Turner contended that because there was an express easement over a portion of Lot 17, the use by Bouchard of the Disputed Area was permissive. The Court of Special Appeals rejected this argument and held that without other evidence that Turner had granted Bouchard a right to use the Disputed Property, Bouchard’s use of it was adverse.

The Court held that the failure of the Turners or their parents to protest the use of the Disputed Area before 2006, when they posted “No Trespassing” signs, in light of their knowledge of that use (or opportunity to find out about it), was acquiescence, not permission.

2. Exclusive

The Court of Special Appeals held that the “exclusive” requirement means “the claim of user must not depend on the claim of someone else,” citing Shuggars v. Brake, 248 Md. 38, 45 (1966). In Shuggars, the Court of Appeals said, “Even though a claimant may not have been the only user, it is sufficient if he used the way under a claim of right independently of others.” Given this definition, the Court of Special Appeals found that Bouchard satisfied the “exclusive” requirement.

3. Uninterrupted and Continuous for 20 Years.

In order to satisfy the requirement that the use be “uninterrupted and continuous” for 20 years, the easement need not be used every day, but “the claimant must exercise the right more or less frequently according to the nature of the use to which enjoyment may be applied.” The circuit court had found the adverse use began again in 1984, when the Bouchards sold their interest in Lot 17, and that it continued for 22 years until the Turners protested in 2006. From 1980 to 1999, the Bouchards rented Lot 16 to others, and the tenants used the Disputed Property as the Bouchards did. The Court permitted the Bouchards to tack the time that their tenants used the Disputed Property onto the period when they themselves used it.

A PRESCRIPTIVE EASEMENT MAY EXPAND A WRITTEN EASEMENT

The Court of Special Appeals concluded in Turner, “While the law may disfavor easements by prescription, that policy cannot be twisted to protect landowners who sleep on their rights.” The Court found that as to the Disputed Area, the Bouchards had satisfied the three requirements to establish a prescriptive easement – adverse, exclusive, and continuous use for 20 years – and it therefore affirmed the circuit court’s decision.

ONCE PERMISSION IS GRANTED, IT IS DIFFICULT TO ESTABLISH A PRESCRIPTIVE EASEMENT

Rupli v. South Mountain Heritage Society, Inc., 202 Md. App. 673 (2011), an opinion authored by Retired Judge James Kenney, involved the failed efforts of a landowner (Brenda Rupli) in Burkittsville, Frederick County to continue to use the well that was located on her neighbor’s property. Before 1973, the neighbor’s predecessor had granted permission for the prior owner of Rupli’s property to use the well. Both properties changed hands, and in 2005 the new owner of the property with the well, South Mountain Heritage Society, Inc., instructed Rupli to disconnect from its well. She refused to comply.

On September 14, 2009, South Mountain sought declaratory relief in the Circuit Court for Frederick County concerning the use of the well and to quiet title to the well. Rupli alleged that the conditions for a prescriptive easement were met. However, in the opinion of the circuit court, the original use of the well was pursuant to permission, and Rupli had the burden to show adverse use, which she was not able to do. The circuit court granted summary judgment in favor of South Mountain.

On appeal, Rupli argued that the transfers of both parcels of property from the persons who owned them at the time of the grant of the license converted her use of the well to an adverse use. As discussed by Judge Kenney, in some other states, the transfer of either of the burdened or benefited estates creates an implicit revocation of permission and triggers a presumption that the subsequent use is adverse.

However, the Court of Special Appeals stated that the creation of a prescriptive easement is not favored by the law. It held that, in Maryland, “notwithstanding the revocation by implication of the license following the conveyance of the servient [burdened] or dominant [benefited] estate, or both, if the original possession is not adverse, the presumption of permissive use continues in the absence of affirmative evidence that the character of the use has changed.” Without such evidence, the Court of Special Appeals affirmed the decision of the circuit court and denied Rupli any right to the well.

PRACTICE POINTERS

As noted above, a requirement of a prescriptive easement is that its use be adverse to the interest of the owner of the burdened estate. Therefore, that person may defeat a claim of a prescriptive easement by granting permission to the user. This can be done orally, but from an evidentiary perspective, it is better for the owner of the burdened estate to set forth in a writing that the user has permission or a license to use the property, or a portion of it, for a particular purpose. The owner of the burdened estate should make clear that the permission or license is revocable at any time.

Depending on the property and its use, the owner of the burdened estate may want to have the writing provide that the user will be liable for, and indemnify the owner against, any damages; that the user will maintain insurance and name the owner as an additional insured; and that the user must maintain the property and restore it when the permission is terminated. For the purpose of making a record, the user should sign the writing to acknowledge receipt, and if the writing addresses issues relating to liability, indemnification, insurance, maintenance, and restoration, the user should certainly sign it.

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

A version of this article was published in The Daily Record on February 20, 2012.

Court Permits Foreclosure Sale to Proceed Despite “Under-Indorsed” Note

In Anderson v. Burson, No. 8, September Term, 2011 (Md. Ct. Ap. Dec. 20, 2011), the Maryland Court of Appeals permitted a residential foreclosure sale to proceed even though the mortgage note had been “under-indorsed.” The Court used the term “under-indorsed” because the note itself was not in the possession of the original payee, it was not indorsed at all, and the allonge that the trustees claimed related to the note was deemed by the Court of Special Appeals to be void.

Judge Glenn Harrell, writing for Maryland’s highest court, affirmed the decision of the Court of Special Appeals, which had affirmed the earlier decision of the Circuit Court denying injunctive relief to the homeowners (the Andersons). This action permits the substitute trustees to foreclose on a residential mortgage.

Mortgage Electronic Registration System (MERS) was the nominee beneficiary of the deed of trust. Maryland courts have not raised the type of objections to the involvement of MERS as has been raised in other jurisdictions around the country.

The background of the case involved multiple transfers of the original loan as part of a securitized loan transaction. The original note holder (Wilmington Finance, Inc.) transferred the note to Morgan Stanley Mortgage Capital Holding, Inc. (Morgan Stanley I), which transferred the note to Morgan Stanley ABS Capital I Inc. (Morgan Stanley II), which transferred the note to Deutsche Bank Trust Company Americas (Deutsche) as trustee of the Morgan Stanley Trust under the applicable pooling and servicing agreement (PSA).

Deutsche and the substitute trustees held the note, but, as noted above, it was not indorsed. Therefore, Deutsche was not a “holder” as defined under the Uniform Commercial Code. The substitute trustees, after two misfires at court hearings, produced what they said was an allonge from Wilmington to Deutsche. However, that was “anachronistically impossible” because Wilmington had no interest in the note at the time that the note was transferred to Deutsche. (Wilmington had already transferred its interest to Morgan Stanley I.)

The foregoing made Deutsche a “nonholder in possession with rights of a holder pursuant to Maryland Code, Commercial Law Article, Section 3-301(ii).” This is called the “shelter rule” because under this section Deutsche is entitled to the rights possessed by its predecessors.

Normally, the transferee must prove the validity of all prior transfers. This could have proven to be a difficult burden for Deutsche. However, the Court of Appeals held that the Andersons had conceded in their reply brief in the Court of Special Appeals both the transfer history of the note and that Deutsche was the current possessor of it. Therefore, the Court of Appeals affirmed the lower courts’ decisions and permitted the foreclosure sale to proceed.

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

In Foreclosure, Buyer May Not Be Charged for Trustees’ Legal Fees That Are Not Provided for in the Deed of Trust, Statute, or Rule

The Maryland Court of Appeals recently held in Maddox v. Cohn, No. 55, September Term, 2011 (Md. Ct. Ap. Jan. 24, 2012), that a lender cannot include as a term of a residential foreclosure sale that the purchaser must pay the fee of counsel to the trustees, set at $295.00, because such a fee was not authorized by a statute, the Maryland Rules of Procedure, or the deed of trust that was foreclosed.

The homeowner excepted to the ratification of the foreclosure sale. The Circuit Court for Wicomico County found that the fee would be improper, but it nevertheless ratified the sale. The Court of Special Appeals affirmed the decision of the trial court because although the fee was advertised, it was not actually charged in that case. (The lender bought the property at the foreclosure sale.) The Court of Appeals reversed these decisions and ordered that the property be re-sold.

The charge was for the legal fees of the attorneys representing the trustees for reviewing the documents by which the trustees would hold settlement and convey title. The Court of Appeals noted that the charge would not be included as a cost of the foreclosure proceeding or be subject to court review or audit. Most importantly, prospective purchasers are likely to reduce their bids by the amount of the charge. Therefore, the Court found that by imposing such a charge, the trustees were violating their duty to maximize the price for the property.

Retired Judge Dale Cathell wrote the opinion for the Court of Appeals. Judges Glenn Harrell and Mary Ellen Barbera issued a short concurrence.

PRACTICE POINTERS:

“Everyone else is doing it,” “It’s not that big of a deal,” and “It doesn’t even apply in this case.” These are all claims that the trustees made when the homeowner challenged the requirement that the purchaser at the foreclosure sale pay the trustees’ legal fees. The Maddox Court rejected all of them. The Court of Appeals has indicated that it will strictly review residential foreclosure cases, particularly in light of the recent legislative changes in this area.

Therefore, if a lender wants to include a charge in connection with a foreclosure proceeding, it must include reference to it in the deed of trust when it makes a loan. Conversely, if a charge is not specified in the deed of trust being foreclosed, and it is not authorized under the Maryland Rules or a statute, the lender should not try to impose it.

Although the focus of Maddox was on a residential foreclosure, the key concept that the Court found to be violated in that case applies equally to commercial foreclosures: The trustees have a duty to maximize the price obtained at the foreclosure sale. When the Maddox Court determined that there was a breach of this concept, it threw out the sale.

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

 

Speaking of Real Estate: Awards, Recognition, and Presentations
 

AWARDS / RECOGNITION

The following members of our Practice Group were recently named as Maryland Super Lawyers for 2012 in the area of Real Estate: Tim Chriss, David Fishman, Ed Levin, and Searle Mitnick. Also, Jeff Spatz was named as a Maryland Super Lawyers Rising Star for 2012.

David Fishman and Ed Levin are among nine Maryland lawyers named in The International Who's Who of Real Estate Lawyers 2011.

PRESENTATIONS

Searle Mitnick was a co-panelist on “HUD Practice in 2012: It’s Not Your Father’s (or even your most senior partner’s) HUD Anymore” at the Commercial Real Estate Discussion Group Lunch of the MSBA’s Section of Real Property, Planning and Zoning on January 17, 2012 at the Sheraton Baltimore City Center Hotel.

Ed Levin was the moderator at the “Baltimore County Real Estate Summit” sponsored by Bisnow on February 29, 2012 at Towson University, West Village Commons, Towson, Maryland.

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Date

03.01.12

Type

Publications

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Real Estate