Relating to Real Estate

Relating to Real Estate - November 2019

IN THIS ISSUE:

BUBBA GUMP SHRIMP WINS ITS CASE AGAINST HARBORPLACE BUT CANNOT KEEP THE DAMAGES AWARDED

CIRCUIT COURT SAYS GOODWILL IS SUBJECT TO RECORDATION AND TRANSFER TAXES

THIRD CIRCUIT: A TAX SALE MAY BE AVOIDED AS A PREFERENCE

BANK DID NOT LOSE ITS LIEN WHEN IT ERRONEOUSLY RELEASED A MORTGAGE

COLLEGE'S PROPERTY REVERTS TO PRIOR OWNER WHEN NOT USED AS REQUIRED

FAILURE TO OBJECT TO BANKRUPTCY SALE CAUSES AGENCY TO LOSE VALUABLE EASEMENT

SPEAKING OF REAL ESTATE

Bubba Gump Shrimp Wins Its Case Against Harborplace But Cannot Keep the Damages

We learned the following from the decision of the Maryland Court of Special Appeals about Bubba Gump Shrimp Co. Restaurants, Inc.’s litigation against its landlord at Harborplace:

Ashkenazy has done a deplorable job of maintaining Harborplace. But you already knew that if you have been to Harborplace since 2012 or if you have read about the receivership that has been put into place.
Bubba Gump’s claim for lost profits as a result of customers staying away because of the condition of Harborplace was considered too speculative. Bubba Gump could not prove the extent of such damages with reasonable certainty, and therefore its demand for such damages was denied by the Circuit Court for Baltimore City.

The case is AAC HP Realty, LLC v. Bubba Gump Shrimp Co. Restaurants, Inc., No. 1076, Sept. Term 2018 (Md. Ct. Spec. App. Oct. 31, 2019).

Contact Ed Levin | (410) 576-1900

Circuit Court Says Goodwill Is Subject to Recordation and Transfer Taxes

The Circuit Court for Baltimore County recently held that the portion of a sale of three senior living facilities relating to the goodwill of the business was subject to recordation and transfer taxes. In the Matter of Shelter Senior Living IV, L.L.C. v. Montgomery County, Clerk of the Circuit Court for Montgomery County, Baltimore County, and Clerk of the Circuit Court for Baltimore County, Circuit Court for Baltimore County, Case No. 03-C-18-009042 (Aug. 2, 2019).

The owner of senior living facilities in Rockville, Towson and White Marsh sold them in July 2014 for a total of $93,400,000. Of that amount, the parties claimed that $48,114,221 was for the goodwill of the enterprises and was not subject to recordation or transfer tax. The parties also claimed that these taxes were not due on $3,143,579, the price for the tangible personal property, because sales tax was applicable to that.

Recordation and transfer taxes were tendered with the deeds based on the consideration of $40,142,200 for the real property. The clerks rejected that. To get the deeds recorded, tax was paid on $90,256,421, the purchase price less the value of the tangible personal property. The taxpayer filed for a refund, which was denied, so it appealed to the Maryland Tax Court, which sided with the taxing authorities. On further appeal, the Circuit Court for Baltimore County affirmed the decision of the Tax Court.

Contact Ed Levin | (410) 576-1900

Contact Doug Coats | (410) 576-4002

Third Circuit: A Tax Sale May Be Avoided as a Preference

In a decision that will likely rekindle the discussion of whether a transfer of property resulting from a properly conducted tax sale or foreclosure sale may be avoided in bankruptcy, the U.S. Court of Appeals for the Third Circuit held, in a case of first impression, that a Chapter 13 debtor may avoid a transfer of the debtor’s property to a tax sale purchaser made during the 90-day period prior to bankruptcy as a preference. Hackler v. Arianna Holdings, Inc. (In re Hackler & Stelzle-Hackler), 938 F.3d 473 (3d Cir. 2019). The property, which was valued at $335,000, was transferred to the holder of a $45,000 tax lien, who had moved to foreclose the debtor’s right of redemption under New Jersey law.

In general, under §547(b) of the Bankruptcy Code, a transfer of a debtor’s property to a non-insider creditor within 90 days prior to the debtor’s bankruptcy filing may be avoided as a preference if (i) the transfer was made on account of an antecedent debt while the debtor was insolvent, and (ii) the effect of the transfer was to give the creditor more than the creditor would have received, before any transfer, in a Chapter 7 case pending at that time. Based on facts showing that the tax lienholder received property worth $345,000 to satisfy a $45,000 debt, which was substantially more than what the creditor would have been paid in a Chapter 7 bankruptcy case, the Third Circuit concluded that the tax lienholder received a preference.

Bank Did Not Lose Its Lien When It Erroneously Released a Mortgage

In Trinity 83 Development, LLC v. Colfin Midwest Funding, LLC, 917 F.3d 599 (7th Cir. 2019), the U.S. Court of Appeals for the Seventh Circuit, applying Illinois law, ruled that an erroneously filed satisfaction of a mortgage, which was corrected two years later by the filing of a cancellation of the satisfaction prior to the mortgagor’s bankruptcy filing, did not result in a loss of the mortgage lien in the bankruptcy case.

In 2006, a bank made a $2,000,000 loan secured by real property. After the loan was sold six years later, even though the loan was still outstanding the loan servicer recorded a mortgage satisfaction indicating that the loan had been paid and the mortgage released. The lender discovered the mistake two years later and recorded a document cancelling the mortgage satisfaction. During the period between the time of the mortgage release and the date of its cancellation, no one recorded a lien on the property. Thereafter, the borrower filed a bankruptcy case and an action against the lender, alleging that the filing of the release extinguished the mortgage debt and lien.

On appeal from decisions of the bankruptcy and district courts in favor of the lender, the Seventh Circuit held that under Illinois law the mistaken release of a mortgage is ineffective as between the lender and the borrower. However, a third party who records a lien during the period in which the lien was released of record may obtain priority as if the mistakenly released mortgage were not in effect.

College's Property Reverts to Prior Owner When Not Used as Required

In December 2008, the predecessor to the Spruill Trust conveyed farm property in Anne Arundel County to Baltimore’s Sojourner-Douglass College. The deed provided that title to the property would revert to the grantor at such time as the property was no longer being used by the college for “agricultural or educational purposes.”

By 2015, the college ceased operations after losing its accreditation and was no longer using the property for any purpose. However, in January 2015, the college granted a mortgage on the property to a lender in order to further secure a prior loan that the college used for its general operations. In February 2018, the college filed a Chapter 11 bankruptcy case and a Chapter 11 trustee was appointed. The Spruill Trust filed a complaint in the bankruptcy case for a declaratory judgment regarding the ownership of the farm property as of the college’s bankruptcy filing. Although conceding that it was not using the property for any purpose as of 2015, the college argued that its mortgaging of the property for a loan that was used for its operations was sufficient to constitute use for “agricultural or educational purposes.”

Failure to Object to Bankruptcy Sale Causes Agency to Lose Valuable Easement

In the recent decision of the U.S. Court of Appeals for the Fifth Circuit in Port of Corpus Christi Authority v. Sherwin Alumina Company, L.L.C. et al (Matter of Sherwin Alumina Co., L.L.C.), 932 F.3d 404 (5th Cir. 2019), a Chapter 11 plan was filed that proposed for Sherwin to sell certain property free and clear of all interests under §363(f) of the Bankruptcy Code. The Port of Corpus Christi Authority, which owned a large parcel adjacent to the Sherwin property, held an easement granting it use and access to a private roadway on Sherwin’s land. Although the port was on notice of Sherwin’s plan and even made a bid to buy the property, the property was sold to a third party free and clear of “interests” except for certain designated interests. The port’s easement was not excepted from the sale. Nevertheless, the port did not oppose the sale or confirmation of Sherwin’s plan.

After the port learned that its easement would not be honored, it sued to regain its easement. It claimed that the port was protected by sovereign immunity from losing its easement or that the sale was procured by fraud. On appeal, the Fifth Circuit affirmed decisions of the bankruptcy and district courts dismissing the port’s claims. The Fifth Circuit rejected the port’s additional argument, that the sale did not comply with §363(f), because the port had waived its objection to the sale by failing to oppose confirmation of Sherwin’s plan.

Speaking of Real Estate

PUBLICATIONS

Ed Levin, with contribution from Doug Coats, wrote “Court: Goodwill is subject to recordation, transfer taxes,” which was published in the print edition of The Daily Record on September 19, 2019.

PRESENTATIONS

Ed Levin was a panelist on “Navigating UCC Issues in Real Estate Finance Opinions: The New ABA/ACMA/ACREL/ACCFL UCC Opinion Report,” Stafford webinar, on September 5, 2019, with R. Marshall Grodner, Baton Rouge, Louisiana.

Caroline Sweet Co-Chaired the Maryland State Bar Association’s Advanced Real Property Institute (“ARPI”), held on November 7, 2019 at the Sheraton Columbia Town Center Hotel in Columbia, Maryland. Bill Shaughnessy and David Beugelmans were panelists on an ARPI panel entitled, “Solar Dirt: Real Estate Issues for Solar Facilities,” for which Caroline Sweet served as moderator. Larry Coppel was a panelist on an ARPI panel entitled, “Chapter 11, the Maryland Commercial Receivership Act, and Commercial Real Estate Issues.” Ed Levin and Searle Mitnick served on the ARPI Program Committee.

The Real Estate Practice Group hosted the second annual Relating to Real Estate Breakfast & Seminar on November 14, 2019, at the Delta by Marriott Baltimore North Hotel at Cross Keys. Danielle Zoller moderated the Seminar, at which Doug Coats presented “An Update on O-Zones”, a follow-up to his presentation on Opportunity Zones from last year’s Seminar; Andrew Wichmann spoke on “Blockchain & the Law”; Katherine Pinkard, President of Pinkard Properties, discussed “Blockchain & Real Estate”; and Bill Shaughnessy lectured on “In the Weeds: Marijuana & Real Estate.” Searle Mitnick delivered closing remarks.

Date

November 21, 2019

Relating to Real Estate