Relating to Real Estate

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Relating to Real Estate March 2016

In this issue:

Reducing Recordation Taxes in the Post-IDOT Era

For many years, the vehicle of choice to avoid paying recordation taxes in Maryland was the indemnity deed of trust or indemnity mortgage (either of which is called an "IDOT"). Statutes passed in 2012 and 2013 have limited the use of IDOTs, but there remain other ways to structure financings in order to reduce or avoid the payment of recordation taxes.

IDOTs were used if the owner of the land that secured the loan was not the borrower of the loan, but instead was a guarantor and the guaranty agreement provided that the guarantor was not primarily liable when the loan was made. With such a structure, an IDOT could be recorded without payment of a recordation tax.

In a special session in 2012, the Maryland General Assembly passed a law that taxed any IDOT that was given in connection with a loan of $1,000,000 or more. That limit was too restrictive, and a year later it was raised to $3,000,000. See Chapters 267 and 268 of the Laws of Maryland of 2013.

Importantly, the 2013 legislation included provisions that amended and expanded the exemptions for supplemental and refinancing instruments. Before July 1, 2013, if a commercial borrower refinanced with a new lender it could avoid paying recordation taxes only if the new lender purchased the original loan and then modified it to serve its purposes. This was often a costly and complicated undertaking because the original lender and the new lender needed to agree on a purchase and sale agreement for the loan, including negotiating any warranties about the loan, and the original note needed to be endorsed and delivered to the new lender. If the foregoing occurred, the borrower would only have to pay recordation tax on the difference between the original loan amount and the new loan amount.

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"Best" Is Not Always Best When It Comes to Knowledge

The term "knowledge" is used in affidavits, applications, representations, warranties, third-party opinion letters, and in other legal contexts to indicate that statements are not guaranteed to be true but are correct based on the information of the person making the statement, giving the representation, or rendering the opinion. When the term "knowledge" is used, it is very important to determine whether "knowledge" is limited to what the person is aware of at that moment, or whether it applies to what that person knew at any time, extends to what the person had the ability to find out, or even includes what other people may know.

Different information is included within the term "knowledge" depending on whether it is qualified in some manner and what that qualifier is. A person who makes a statement or representation limited by "knowledge" may, but may not, need to take particular steps, perform certain investigations, and check with others to avoid legal liability. Contrary to what many people think, the term "best knowledge" is not always best from the perspective of the recipient.

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I Don't Care How Long That Shed Has Been There!

In Montgomery County, MD v. Bhatt, No. 36, Sept. Term 2015 (Md.Ct.App. Jan. 22, 2016), the Court of Appeals held that a person may not adversely possess against a railroad that has not abandoned its right-of-way, and as a result the person did not acquire title to the property on which he constructed improvements.

Bhatt owns a house and lot which back up to the Capital Crescent Bike Trail in Chevy Chase. That trail is built in a right-of-way which was the B & O Railroad Georgetown Branch line that operated as a freight railroad until 1985. The right-of-way was 90 feet wide. B & O was acquired by the Chessie System and became what is now the CSX Railroad.

CSX quitclaimed the right-of-way to Montgomery County (the "County") in 1988 pursuant to the National Rails-to-Trails program. The County holds the right-of-way in a "rail bank" until it decides if it is going to restore some form of rail service in the right-of-way. It appears that the right-of-way is intended to form part of the future Purple Line of the DC Metro system.

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"Inaction" by Government May Constitute a "Taking" of Property

In Litz v. Maryland Department of Environment, No. 23, Sept. Term 2015 (Md.Ct.App. Jan. 22, 2016), the Maryland Court of Appeals held that a property owner has a claim that government has "taken" property when a governmental entity has failed to act in the face of an affirmative duty of the government to do so, and that inaction causes the owner to lose all effective value of its property. This case is significant because the Court embraced a "novel" theory that governmental "inaction" -- as opposed to affirmative acts of government -- can be a basis for a condemnation claim.

By way of background, the Maryland Constitution prohibits a governmental "taking" of private property for public use without just compensation. This "eminent domain" provision is commonly encountered when a local government institutes formal action -- condemnation proceedings -- to acquire private property for public use (e.g., road-widening). Additionally, courts have acknowledged that a "taking" can occur as an "inverse condemnation" -- where "property has been taken in fact by the governmental defendant, even though no formal exercise of the power of eminent domain" has occurred. Inverse condemnation claims typically arise in situations where governmental regulations effectively deny an owner the physical or economically viable use of property (e.g., downzoning property to no effective use).

In Litz, the property owner (Litz) owned and operated a commercial recreational camp, centered upon a lake, at which fishing, swimming, and boating activities occurred. The lake was within the limits of a local town, the Town of Goldsboro in Caroline County. Goldsboro had a population of 246 at the 2010 United States Census. The areas surrounding the lake were served by private septic systems (for which Goldsboro issued permits) and contained stream tributaries and town drainage systems that flowed into the lake. As a result of failing septic systems in the area, and their discharges into the town drainage systems and streams that flowed into the lake, the lake became contaminated. The failure of the septic systems and the contamination of the streams/drainage systems and lake occurred over a number of years and were known to the local town and the Maryland Department of Environment ("MDE"). In fact, 14 years prior to the commencement of litigation, Goldsboro and MDE entered into a Consent Order which required the town to take certain actions regarding the failed septic systems, to submit to MDE for review and approval a plan and schedule for construction of a public sewer system, and to implement such plan. Neither Goldsboro nor MDE took action under the Consent Order. Ultimately, the lake became so contaminated that the recreational camp business was destroyed and the Litz's property became substantially devalued, resulting in the property being sold at a mortgage foreclosure.

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Rain Tax Is a Tax, but Synagogue Is Not Exempted from Paying It

Shaarei Tfiloh Synagogue is one of Baltimore's most recognizable and beloved religious buildings. Known as "the synagogue in the park," it was constructed between 1921 and 1927. Most notable is its large copper dome which towers above a stone structure with stained glass windows on Auchentoroly Terrace, adjacent to Druid Hill Park.

Much less beloved is Section 4-201.1 of the Environmental Article of the Maryland Code, the statute that authorizes the imposition of a charge on property owners to provide funds for stormwater management and the protection of streams and wetlands (unaffectionately known as the "rain tax").

Baltimore City implemented the rain tax by enacting a Stormwater Remediation Fee, based on the amount of impervious surface located on the property. Baltimore City Code, Article 27, §2-1 et seq.

A recent decision by the Circuit Court for Baltimore City, In the Matter of the Petition of Shaarei Tfiloh Congregation, Case No. 24-D-15-002026, held that Shaarei Tfiloh Congregation was obligated to pay the rain tax as adopted for Baltimore City.

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When Is a Deed in Lieu of Foreclosure Not a Deed?

A deed in lieu of foreclosure may be taken by a lender under a workout agreement after its loan goes into default. However, depending upon the terms of the agreement, the lender's deed may be no better than the mortgage or deed of trust that it was granted in the first place.

In 364 N.B.E. Corp. v. Edge Capital, LLC et al. (In re 364 N.B.E. Corp.), 2015 WL 9581323 (Bankr. E.D.N.Y. December 29, 2015), the debtor asked the court to declare that a deed in lieu of foreclosure that was recorded prior to the debtor's bankruptcy was no more than a mortgage under New York law. The debtor's claim was based on Section 320 of the New York Real Property Law, which provides that a deed conveying real property must be considered as a mortgage if it "appears to be intended only as security in the nature of a mortgage . . ."

Under the facts of 364 N.B.E. Corp., the debtor executed the deed in lieu under the terms of a workout agreement which provided that the deed would be held in escrow "as security" for the debtor's performance of a modified mortgage, and that the deed could be recorded upon a default under the agreement. The debtor defaulted and the deed was recorded shortly before the debtor filed for bankruptcy. Based on its interpretation of the workout agreement, the court held that the deed appeared to be intended as security for a debt and, therefore, "was functionally a mortgage." As a result, the debtor could redeem the property by payment of the debt before a foreclosure sale or, presumably, under a confirmed Chapter 11 plan.

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Transfer to Hide Property from Collection Efforts Found to Be a Fraudulent Conveyance

In Marquitta Russell, et al. v. Pessin Katz Law, P.A., f/k/a Hodes, Pessin & Katz, P.A., No. 1783, Sept. Term, 2014, unreported (filed Oct. 30, 2015), the Court of Special Appeals affirmed the judgment of the Circuit Court for Baltimore City setting aside the transfer of property from Marquitta Russell to her mother, Juanita Russell, and ordering that Pessin Katz Law, P.A. ("PKL") could levy on the property in the amount of Marquitta's unpaid attorneys' fees.
PKL represented Marquitta from 2007 to 2010 in connection with Marquitta's challenge to the validity of a will left by her aunt. Marquitta's aunt had conveyed to Marquitta property located at 1826 Madison Avenue in Baltimore City (the "Property"). PKL withdrew its representation of Marquitta in late 2010 or early 2011, and filed a complaint against her on January 17, 2012 to recover $111,839.91 in unpaid attorneys' fees. PKL also filed a separate action against Marquitta and Juanita to set aside Marquitta's conveyance of the Property to Juanita in late 2011, alleging that the conveyance was an attempt by Marquitta to protect the Property from later collection efforts. (The deed conveying the Property from Marquitta to Juanita stated that the consideration for the transfer was forgiveness of a $50,000 debt owed by Marquitta to Juanita.) The Circuit Court for Baltimore City consolidated the two cases.

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Borrowers Were on Inquiry Notice of Fraud so Their Claims Were Stale

Suzanne Scales Windesheim, et al. v. Frank Larocca, et al., 443 Md. 312, 116 A.3d 954 (2015), involved a class action lawsuit brought by three married couples (the "Borrowers") alleging that several realtors and lenders (the "Defendants") engaged in a "buy-first-sell-later" mortgage fraud scheme. The Court of Appeals held that the Borrowers were on inquiry notice that their loan transactions were not proceeding as they expected when they signed their mortgage applications, and thus the three-year statute of limitations began to run at that time. Accordingly, the Court of Appeals concluded that the Borrowers' claims were time-barred.

In 2006 and 2007, the Borrowers separately contracted with certain realtors (the "Realtor Defendants") to represent them in selling their current homes and purchasing new homes. The Realtor Defendants encouraged the Borrowers to use home equity lines of credit ("HELOCs") to extract equity from their current homes and use it to purchase new homes before selling their current homes, or "buy-first-sell-later." To effectuate the buy-first-sell-later arrangement, the Realtor Defendants advised each of the Borrowers to simultaneously apply for two loans: a bridge financing HELOC against their current homes and a primary residential mortgage for their new homes. To facilitate these loans, the Borrowers contacted Prosperity Mortgage Company ("Prosperity"). Prosperity pre-approved the Borrowers for primary residential mortgages for their new homes that were not contingent on the sale of their current homes. However, the Borrowers did not actually have sufficient funds to buy new homes without selling their current homes.

Unbeknownst to the Borrowers, Prosperity had to get a separate mortgage lender, National City Mortgage ("National City"), to provide the bridge financing HELOCs. Prosperity sent the Borrowers' financial information to Suzanne Scales Windesheim, a loan officer for National City, who completed the Borrowers' HELOC applications (the "HELOC Applications") without ever speaking with the Borrowers. Windesheim falsely represented on the HELOC Applications (1) that she had contact with the Borrowers to obtain their financial information, and (2) that the HELOCs would be secured by the Borrowers' primary residences. Based on these misrepresentations, National City approved the HELOCs.

Prosperity then submitted the Borrowers' applications for the primary residential mortgages (the "Primary Mortgage Applications") to its underwriters. Because the Primary Mortgage Applications would not be approved with the new debt created by the HELOCs and without the proceeds from the sales of the Borrowers' current homes, Prosperity had to create additional monthly income for the Borrowers. To accomplish this, Prosperity fabricated leases between the Borrowers and fictitious tenants, forged the Borrowers' signatures, and inserted the fraudulent rental income on the Primary Mortgage Applications. The Borrowers signed both the HELOC Applications and the Primary Mortgage Applications at the closings of the purchases of their new homes.

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Paving a Restaurant's Parking Lot Engenders Considerable Litigation

In Oregon, LLC v. Falls Road Community Association, No. 1234, Sept. Term, 2014, unreported (Md.Ct.Spec.App. Jan. 29, 2016), as part of a long string of legal proceedings pertaining to the repaving of a gravel parking lot at The Oregon Grill restaurant, the Court of Special Appeals vacated an injunction issued by the Circuit Court for Baltimore County.

The injunction arose from a long-contested legal battle over the 2006 repaving of the parking lot of The Oregon Grille, a well-known restaurant in Hunt Valley, Maryland. Oregon, LLC leased the property from Baltimore County in 1985 and, in 1995, received approval from Baltimore County's Board of Appeals to expand the size of the parking lot. The Board of Appeals subjected its approval to several conditions, including a requirement that the parking lot be surfaced with crushed stone or a similar material. In 2004, the Board of Appeals reiterated the parking lot surface requirements. However, in 2006 Baltimore County resurfaced the parking lot with bituminous asphalt paving and required Oregon, LLC to reimburse Baltimore County for the cost of the repaving.

In response to the repaving, Falls Road Community Association filed an action in the Circuit Court for Baltimore County against Oregon, LLC and Baltimore County. The action sought a declaratory judgment that the repaving violated the Board of Appeals' orders and that those orders were enforceable. The Association also sought an injunction requiring removal of the bituminous asphalt paving. In response, the circuit court held that the issuance of a declaratory judgment and an injunction was not authorized, and the Court of Special Appeals affirmed. However, the Court of Appeals held that a declaratory judgment issued in conjunction with an injunction could properly resolve the legal question and remanded the case to the circuit court.

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A Recorded Plat May Create an Easement

In Emerald Hills Homeowners' Association, Inc. v. Peters, No. 32, Sept. Term, 2015 (Md.Ct.App. Jan. 27, 2016), the Court of Appeals held that an easement may be created by a plat even without compliance with the requirements of the Maryland recording statute. Also, the Court held that because the beneficiaries of the easement were not parties to a subsequently recorded document, that document could not have had the effect of terminating the easement.

In reaching this result, the Court of Appeals affirmed the decision of the Court of Special Appeals in Peters v. Emerald Hills Homeowners' Association, Inc. v. Peters, 221 Md. App. 338 (2015), which reversed the decision of the Circuit Court for Harford County. The circuit court had found that an easement in favor of the Peters lot did not exist. See Relating to Real Estate, May, 2015.

Mr. and Mrs. William Peters purchased a lot near Bel Air and wanted to build a house on it. The lot had been reserved by the Peters' seller in an earlier conveyance when he sold a 64-acre tract to Victor Posner. The lot did not have direct access to a public street, but it was shown on a recorded plat, and notations on the plat gave the lot a non-exclusive easement over two small parcels that led to a public road.

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