Relating to Real Estate

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Relating to Real Estate - September 2016

In this issue:

Lien under a Declaration for Water and Sewer Assessments Primes Subsequently Filed Deed of Trusts

In Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC, No. 1911, Sept. Term 2013 (Md. Ct. Spec. App. Aug. 31, 2016), the Court of Special Appeals held that water and sewer assessments in favor of a private utility company created under a declaration on a residential development in Prince George's County had priority over the lien of a subsequently recorded deed of trust from a homeowner in that development.  The court also decided that the lien of the declaration could be enforced without resorting to the Maryland Contract Lien Act (the "Act").

Saddlebrook West, LLC ("Saddlebrook") purchased unimproved land in Bowie in 1999 and entered into a memorandum of understanding with the Washington Suburban Sanitary District (WSSD) that authorized Saddlebrook to construct water and sewer extensions within the subdivision planned for the property.  On April 4, 2000 Saddlebrook as Declarant executed a declaration (the "Declaration") regarding deferred water and sewer charges in favor of Saddlebrook West Utility Company, LLC ("Utility"), its subsidiary.  The Declaration imposed an obligation on the owner of each lot in the subdivision to pay an annual water and sewer charge to Utility of $700 per year for 23 years.

The Declaration stated that it created a lien for repayment of the water and sewer charges, and that the lien had priority over any subsequent deed of trust, mortgage, or lien encumbering the lots.  The Declaration provided that if an owner failed to pay a water and sewer charge, the charges could be accelerated, the lien could be foreclosed like deeds of trust and mortgages, and the lien could be foreclosed under the Act.

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Ground Leases in Maryland - the Saga Continues This Time without Attorneys' Fees

In 2012 and 2014, we published articles on the judicial decisions that had profoundly affected the General Assembly's 2007 heavy-handed attempt to redress the grievances it perceived regarding Maryland ground rents and their collection. (See Relating to Real Estate March 2012 and Relating to Real Estate May 2014.)

To briefly review, in response to reported abuses by certain holders of Maryland ground rents, in 2007, the General Assembly established a registration system with the Maryland State Department of Assessments and Taxation ("SDAT"), extinguished ground rents that were not registered by a deadline it set, and otherwise restricted the ability of ground rent owners to collect unpaid rents.

In October of 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), that the part of the 2007 legislation that extinguished unregistered ground rents was unconstitutional as a violation of the Maryland Declaration of Rights and the Maryland Constitution.

In December of 2011, the Circuit Court for Anne Arundel County, in Braverman, et al. v. State of Maryland, 02-C-07-126810, invalidated another of the 2007 laws which sought to eliminate a ground lease holder's right to re-enter the property and eject a delinquent residential ground lease tenant.  The court held that, under the theory of ground leases, the lessor owns the reversionary interest and becomes entitled to possession of the property when the ground lease tenant defaults.

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Delaware Bankruptcy Court Holds that LLC Operating Agreement's Requirement that Lender/Member Authorize a Bankruptcy Filing is Void as Contrary to Federal Public Policy

On June 3, 2016 Bankruptcy Judge Kevin J. Carey of the Delaware Bankruptcy Court held in the case of In re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016) that a provision in an operating agreement of a Delaware limited liability company (the "LLC") requiring the consent of all members to a bankruptcy filing was void as contrary to federal public policy.  

In this matter, the LLC filed a Chapter 11 case on May 20, 2016, approximately five months after it entered into a forbearance agreement with the lender.  The forbearance agreement mandated that the LLC amend its operating agreement to require the unanimous consent of all members to a bankruptcy filing, and to also issue a single common membership unit (or "golden share") to the lender, making the lender a member.  The lender did not consent to the filing of bankruptcy, and immediately moved to dismiss the filing on the basis that the bankruptcy was not authorized by the LLC's operating agreement.
 
In his opinion denying the motion, Judge Carey equated the operating agreement provision requiring the consent to a bankruptcy filing by all members, including the lender, to a waiver of a right to file for bankruptcy.  Under well-established case law, a waiver of bankruptcy is unenforceable.

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Sheriffs' Sales Have Similar Effects as Foreclosure Sales

In Wills v. One West Bank, No. 30, Sept Term, 2014 (Md. Ct. Spec. App. August 11, 2016) (unreported), the Court of Special Appeals held that a sheriff's sale had the effect of discharging a deed of trust that was subordinate to the lien that was sold at the sale.

Jack Wills obtained a judgment against Stanley Carter in Prince George's County District Court in the amount of $11,000, and he recorded a notice of it in the circuit court on August 12, 2003.  Six weeks later Carter entered into a reverse mortgage transaction with Financial Freedom, Senior Funding Corporation, and the deed of trust evidencing that transaction was recorded on June 22, 2004.

In 2009, in connection with his judgment, Wills obtained a writ of execution against Carter.  Wills advised the sheriff of the Financial Freedom deed of trust, and he provided the address of Financial Freedom.  The sheriff conducted a sale at which the property was sold to Wills for $14,838.  The district court ratified the sale on October 23, 2009.  The sheriff executed a deed and delivered it to Wills, and Wills recorded it.

Financial Freedom received actual notice of the sale but took no steps to stop it or to intervene before the sale.  After the sale, its successor, Freedom Acquisition, filed a declaratory judgment action, contending that its deed of trust remained as a lien on the property.  The circuit court held that the sheriff's sale did not extinguish the junior lien.

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Use It or Lose It: Court of Special Appeals Upholds Constitutionality of Maryland Dormant Mineral Interests Act

In Harvey v. Sines, 228 Md. App. 283, 137 A.3d 1045 (2016), the Court of Special Appeals held that the Maryland Dormant Minerals Act (the "Act") is constitutional, finding that it does not impair vested rights or improperly take property without compensation.

The Maryland General Assembly passed the Act in 2010 to allow the owners of the surface estate to terminate severed mineral interests that have not been used for 20 years or more.  The Act is codified at §15-1201 et seq. of the Environmental Article ("Env.") of the Maryland Code.  The Maryland law was based on the Uniform Dormant Mineral Interests Act, which was designed "to enable and encourage marketability of real property and to mitigate the adverse effect of dormant mineral interests on the full use and development of both surface estate and mineral interests in real property."

Under the Act there is "use" of the mineral interest by an owner if any of the following occur: (i) active mineral exploration or exploitation; (ii) payment of taxes on a separate assessment of the mineral interest; (iii) recordation of an instrument that evidences the continued existence of the mineral interest; or (iv) recordation of a judgment or decree that makes a specific reference to the mineral interest.  Env. § 15-1203(c)(1).  An owner of a mineral interest may record a notice of intent to preserve the mineral interest, or a portion of it.  Furthermore, an owner of a mineral interest may record a "late notice of intent" to preserve the mineral interest after a case has been filed to terminate it unless the mineral interest has been unused for 40 years or more.

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No Private Right of Action under Real Estate Settlement Kickback Rule

In Fangman v. Genuine Title, LLC, 447 Md. 681, 136 A.3d 772 (2016), the Maryland Court of Appeals held that §14-127 of the Real Property Article of the Annotated Code of Maryland ("RP") does not contain a private right of action.

Edward and Vicki Fangman sought to represent a class of individuals (collectively, "Appellants") who retained Genuine Title, LLC ("Genuine Title") for settlement and title services for the purchase and/or refinancing of their residences.  Appellants alleged that Genuine Title engaged in a home mortgage kickback scheme in which Genuine Title, by itself and through sham companies it created, provided cash payments to referring mortgage brokers (Genuine Title together with the mortgage brokers, "Appellees").  Without these kickback payments, Appellants said, their settlement fees would have been much lower.

Appellants filed suit in the Circuit Court for Baltimore County, alleging that Appellees violated, inter alia, RP §14-127.  RP §14-127(c)(1) provides: "A person who has a connection with the settlement of real estate transactions involving land in the State may not pay to or receive from another any consideration to solicit, obtain, retain, or arrange real estate settlement business."  RP §14-127(e) states that anyone violating this section is guilty of a misdemeanor and is subject to imprisonment, a fine, or both.

Appellees removed the case to the District Court for the District of Maryland.  The federal court stayed Appellees' motions to dismiss the RP §14-127 claims and issued a certification order so that the Court of Appeals could determine whether RP §14-127 permits a private right of action for anyone who is allegedly harmed by a violation of RP §14-127(c)(1).

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Accord and Satisfaction Requires a Dispute

Joseph Johnson, Jr. owed $35,556.58 which was assigned to Affiliated Computer Services ("ACS").  Johnson took a paralegal studies program at UMUC and thought that he had a way to reduce his debt.  He wrote a check for $12,390 and wrote in the margin, "Payment in Full, Accord and Satisfaction of Account # [account number was included]."  In the letter transmitting the check he wrote that the payment was in "accord and satisfaction" of his debt.

ACS cashed the check and then sued Johnson.  Unfortunately for Johnson, neither the Circuit Court for Prince George's County nor the Court of Special Appeals bought his gimmick.  See Johnson v. Xerox Educational Solutions LLC, No. 0579, Sept. Term 2015 (Md. Ct. Spec. App. September 13, 2016) (unreported).

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Speaking of Real Estate

Honors and Awards

Gordon Feinblatt's Real Estate Practice Group was ranked by Chambers USA 2016.  Ed Levin was ranked in Band 1, Tim Chriss was ranked in Band 2, and David Fishman was listed as a Senior Statesman.

David Fishman and Ed Levin are among the seven Maryland lawyers included in Who's Who Legal: Real Estate 2016 as being among the world's leading Real Estate lawyers.
 
Presentations

Ed Levin spoke on "LOCO for Local Counsel Opinion Letters; A Discussion of the Supplement to the Real Estate Finance Opinion Report of 2012" at the Maryland State Bar Association's (MSBA) Advanced Real Property Institute, September 27, 2016, in Columbia, Maryland.

Danielle Zoller of our Real Estate Practice Group will be on a panel with Doug Coats of the Firm's Tax Practice Group and Christia Pritts of the Firm's Trusts and Estates Practice Group discussing "Transferring Real Property to a Non-Profit" at the MSBA's Commercial Real Estate Discussion Group on October 11, 2016.

Publication

Ed Levin wrote "Lenders Beware:  Assessments Have Priority Over Mortgages," which was published in The Daily Record, Baltimore, Maryland at http://thedailyrecord.com/2016/09/19/edward-j-levin-lenders-beware-assessments-have-priority-over-mortgages/ and in the print edition on September 20, 2016.

Recent Transaction

Tim Chriss of our Real Estate Practice Group and Michael Powell of the Firm's Environmental Practice Group assisted a client on its recent acquisition of a large tract of industrial property that presented a number of environmental concerns.  Michael worked with the client's environmental consultant to identify and quantify the risks presented by the contamination and devise a proposed remediation of the property.  Thereafter, the client and the environmental firm agreed to a guaranteed maximum price for the remediation of the property.  Based on that, the client was able to successfully negotiate a favorable price for the purchase of the property with assurance that the environmental risk and expense would be limited.  With the environmental concerns quantified and limited, the value of the property has been significantly enhanced.

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