Relating to Real Estate
Relating to Real Estate - Recent Cases - Part 1 - July 8, 2013
- Circuit Court Affirms Tax Court Ruling That Lenders Are Not Liable To Pay Recordation Taxes on Indemnity Deeds of Trust
- Court of Appeals Holds That Assignee Does Not Assume Assignor's Obligations Under a Real Estate Contract
- Holder of a Note Need Not Prove Note's Legacy
- Contract Purchaser Awarded Liquidated Damages Despite Mutual Mistake
- Separating Land into Its Historic Parts Is Still a Subdivision
- Speaking of Real Estate
The Circuit Court for Howard County ruled on June 13, 2013 that when the recordation tax becomes due on an indemnity mortgage or an indemnity deed of trust (an “IDOT”), the party responsible to pay the tax is the guarantor who executed the IDOT. The case is Howard County Department of Finance v. Atapco Howard Square I Business Trust, et al., Circuit Court for Howard County Case No.: 13-C-12-092323.
IDOTs are security instruments that have been used in Maryland for decades. Most IDOT transactions involve a loan made by a lender to a borrower that is guaranteed by a different person, who owns real property. To secure the guaranty, the guarantor grants to the lender the IDOT on property it owns. An IDOT is an effective financial structure if, at the time the loan is made, the guarantor is not primarily liable to the lender. Instead, when the IDOT is recorded the guaranty is contingent on the occurrence of an event, such as a default under the loan to the borrower.
The Circuit Court noted that before July 1, 2012, IDOTs enjoyed a recordation tax advantage even though the Maryland Code did not make any specific provision for or reference to IDOTs. The Maryland Attorney General issued opinions in 1973 and 1989 which stated that IDOTs could be recorded without payment of recordation tax. When there is a default under the loan, the Attorney General opined that recordation tax becomes due, and it is the guarantor who must pay the tax. The Circuit Court found the Attorney General’s analysis persuasive and that the Legislature had acquiesced in those opinions.
The Atapco case involved seven underlying matters. In most of them, lenders foreclosed under IDOTs that had gone into default, and then the lenders or the purchasers at foreclosure tried to record deeds relating to the same properties. Recordation and transfer taxes due on the deeds themselves were tendered, but the Clerk of the Circuit Court for Howard County, at the direction of the Department of Finance, refused to record the deeds until the recordation taxes on the prior IDOTs were paid. The lenders or purchasers of the property paid the recordation taxes under protest and filed for refunds. The Maryland Tax Court, in Atapco Howard Square I Business Trust v. Howard County Dep’t of Finance, Nos. 11-RC-00-805 through 811, 2012 WL 3987381, 2012 Md. Tax LEXIS 4 (Aug. 28, 2012), agreed that the taxpayers were entitled to the return of the sums remitted with interest.
The Department of Finance appealed to the Circuit Court for Howard County, which affirmed the decision of the Tax Court on every point. In its Memorandum Opinion, the Circuit Court discussed and dismissed all of the arguments propounded by the Howard County Department of Finance. The Court found that Maryland appellate courts have recognized IDOTs for years and that recordation taxes are excise taxes and are, therefore, not liens on land.
Howard County has decided not to appeal the Atapco case to the Court of Special Appeals, so the decision of the Tax Court, as affirmed by the Circuit Court for Howard County, will stand.
Ed Levin at (410) 576-1900 and George Ritchie at (410) 576-4131 represented the taxpayers in Howard County Department of Finance v. Atapco Howard Square I Business Trust, et al. A variation of this article was published in The Daily Record, Baltimore, Maryland on June 25, 2013.
Pines Plaza Limited Partnership v. Berkley Trace, LLC, et al., No. 30, Sept. Term 2012 (Md. Court of Appeals, May 21, 2013), involved a dispute based on a real estate contract that, as the Court stated, ended in a draw. The Court of Appeals relied on three principles to reach its result:
(1) One who takes an assignment of an interest in a real estate contract of sale does not assume the assignor’s obligations under the contract if the contract does not so provide.
(2) The buyer’s failure to settle a real estate contract within the time stated in it is not a breach that causes the forfeiture of the deposit if the closing occurs within a reasonable time thereafter, unless the contract specifically provides to the contrary.
(3) An assignee who asserts a claim based on an assignment of a right under a contract is subject to any right of offset that the seller may have against the assignor under that contract.
In February 2003, Pines Plaza Limited Partnership (“Pines Plaza”) entered into a contract with Q-C Pines Plaza, LLC (“Q-C”) for the sale of a shopping center in Ocean Pines, Worcester County. That contract was terminated, but it was revived and amended three times. Also, Q-C assigned a 25% tenant-in-common interest to each of three investors (collectively called the “Berkley Investors”) who provided the deposit. The sale ultimately closed on March 1, 2004, after Pines Plaza declared a forfeiture of the $200,000 deposit that the Berkley Investors had made.
The broker was not paid its commission at the closing, and it successfully sued Pines Plaza for $196,666.66. Pines Plaza paid the judgment, and then it sued Q-C and the Berkley Investors under a section in the contract that provided that the buyer would indemnify the seller for any claim by the broker for a commission. Q-C did not defend the lawsuit, and a default judgment was entered against it.
The Berkley Investors did defend the action, and they filed a counterclaim against Pines Plaza for recovery of a $200,000 deposit they had made that had not been credited against the purchase price.
The Circuit Court ruled for the Berkley Investors on both Pine Plaza’s claim – the court stated that the Berkley Investors had not assumed the indemnification obligation in the purchase and sale agreement – and on the counterclaim – the court held that Pines Plaza was not entitled to retain the $200,000 deposit as liquidated damages.
In an unreported opinion, the Court of Special Appeals affirmed the decision of the Circuit Court. The Court of Appeals then issued a writ of certiorari. It affirmed in part but reversed in part.
The Court of Appeals noted that the assignments by Q-C of the contract to the Berkley Investors were silent as to whether the Berkley Investors assumed, or were delegated, the obligations under the contract. According to the Court, for real estate contracts, Maryland follows the “non-delegation presumption.” Therefore, the Court of Appeals affirmed the portion of the decision of the Court of Special Appeals that held that the Berkley Investors did not assume the obligation to pay the broker’s commission.
As to the forfeiture of the deposit, the Court of Appeals stated that under real estate contracts in Maryland, buyers are typically permitted to have additional time, beyond that stated in the contract of sale, to close the transaction. Additionally, the Court found that Pine Plaza’s decision to proceed to closing was an election of its remedies, and the Berkley Investors had, therefore, not forfeited their $200,000 deposit.
Finally, the Court of Appeals held that Pine Plaza was entitled to offset its liability to the Berkley Investors for the return of the $200,000 deposit against Pine Plaza’s judgment versus Q-C for payment of the $196,666.66 broker’s commission. This was because the Berkley Investors’ claim for the refund of the deposit was based on Q-C’s rights under the contract, and by asserting its entitlement to the rights of Q-C (the Berkley Investors’ assignor), the Berkley Investors became subject to any defenses (including the right to recoupment) that Pine Plaza had under the contract.
For questions about this, please contact Ed Levin at (410) 576-1900.
Holder of a Note Need Not Prove Note's Legacy
In Deutsche Bank National Trust Company as Trustee v. Angela Brock, 63 A.3d 40, 430 Md. 714 (2013), the Court of Appeals held that a person in possession of a promissory note that had been endorsed in blank was entitled to enforce it, and that person was not required to prove how it came in possession of the note.
The promissory note in question was secured by a deed of trust on residential property in Silver Spring, Maryland owned by Brock. Brock had made the note to Amerifund Mortgage Services, LLC on September 28, 2006 to evidence repayment of a $544,000 loan. The note was then pooled with others in a securitization, and it was assigned three times. Ultimately, the note was held by BAC Home Loans Servicing LP, as subservicer for Deutsche Bank National Trust Company, which was the owner of the note. Deutsche Bank and BAC together were the plaintiffs in the litigation. They moved to foreclose after default. Brock challenged the foreclosure by contending that the plaintiffs had not proved how they acquired ownership of the note.
The Circuit Court for Montgomery County granted the plaintiffs’ Motion for Summary Judgment. The Court of Special Appeals reversed, but the Court of Appeals reversed the decision of the Court of Special Appeals.
The Court of Appeals found that BAC was the holder of the note and that no other issues raised in the case were relevant. Brock had referred to the recent case of Anderson v. Burson, 35 A.3d 452, 424 Md. 232 (2011), but Anderson involved a missing interim endorsement, so the party prosecuting the foreclosure action in that case was not a holder under the Uniform Commercial Code.
In contrast, in the present case there was no dispute that BAC was in possession of the note and was the holder of the note, which had been endorsed in blank, and there was no missing endorsement. Therefore, BAC was not required to prove how it came into possession of the note, and it was therefore entitled to enforce the note.
For questions about this, please contact Ed Levin at (410) 576-1900.
Contract Purchaser Awarded Liquidated Damages Despite Mutual Mistake
In Cuesport Properties, LLC v. Critical Developments, LLC, 61 A.3d 91, 209 Md. App. 607 (2013), the Maryland Court of Special Appeals held that a liquidated damages clause in a contract for the purchase and sale of real property was enforceable, and the resulting damage award was not invalid despite a mutual mistake by the parties.
Cuesport Properties, LLC sold a condominium unit to Critical Developments, LLC, and in the purchase and sale agreement agreed to construct a new demising wall. The wall was to be built of the same type, materials, and specifications as another wall in the building. Cuesport did that, but it did not get a building permit. Critical Developments accepted that wall as built. Later, when Critical Developments was in the process of doing some other work, it found out that neither the new wall nor the sample wall complied with the county code. As a result of the need to rebuild the wall and to perform certain electrical work, Critical Developments was unable to use the premises for a period of time.
Critical Developments sued for damages under the liquidated damages clause in the purchase and sale agreement that set a per diem amount for delays, and it was successful before the Circuit Court for Anne Arundel County. On appeal, the Court of Special Appeals affirmed.
The Court of Special Appeals stated:
Maryland courts will uphold a liquidated damages clause as valid, and not a penalty, if it satisfies two primary requirements: (1) the clause must provide a fair estimate of potential damages at the time the parties enter into a contract; and (2) the damages must have been incapable of estimation, or very difficult to estimate, at the time of contracting.
The Court further noted that the decisive element is the intention of the parties – whether they intended to compensate a party for its loss or to punish the other party for its failure to perform.
The Court of Special Appeals then considered the question of mutual mistake because Cuesport and Critical Developments both thought that it would be acceptable to build the new wall like the existing one. This was a mistake of law since both parties knew the applicable facts but they were unaware of the legal consequences of them. A mistake of law is not a basis to rescind a contract or a portion of one.
The Court went on to point out that even if the error were categorized as a mistake of fact, it would not provide relief to Cuesport. That is because under Restatement (Second) of Contracts §154 (1981) Cuesport was the party that was required to bear the risk of a mistake.
For questions about this, please contact Ed Levin at (410) 576-1900.
Separating Land into Its Historic Parts Is Still a Subdivision
The Court of Special Appeals held in Covered Bridge Farms II, LLC, et al. v. State of Maryland, et al., No. 1920, Sept. Term 2011 (Md. Court of Special Appeals, March 22, 2013), that the owner of real property was prohibited from re-dividing parcels of property that had been collectively entered into a Maryland land preservation program. Even though the land had consisted of three distinct parcels before they were made into a single agricultural district, the Court held that it would be a subdivision to separately convey one or more of the parcels. Key to the Court's holding is the definition of subdivision as "the division of land into two or more parts or parcels." The fact that the land had historically consisted of multiple parcels was not, in the Court's opinion, relevant to the analysis. For questions about this, please contact Ed Levin at 410-576-1900.
AWARDS / RECOGNITION
Gordon Feinblatt LLC's Real Estate practice is among the top-ranked in the 2013 edition of Chambers USA: America's Leading Lawyers for Business. Chambers also ranked three Gordon Feinblatt real estate attorneys: Timothy D.A. Chriss, David H. Fishman, and Edward J. Levin.
David Fishman and Ed Levin were listed in the 2013 edition of TheInternational Who's Who of Real Estate Lawyers.
PRESENTATIONS AND PUBLICATIONS
David Fishman addressed the Maryland State Bar Association's (MSBA) Commercial Real Estate Attorneys Discussion Group on April 16, 2013 at the MSBA Headquarters and the Baltimore County Bar Association's Real Property Committee on May 8, 2013 at the Country Club of Maryland on "The 2012 Real Estate Case Hit Parade."
Searle Mitnick is the co-author of "The Mortgage Crisis: Application Overreaction," which was published in the July/August 2013 issue of The Maryland Bar Journal.
On the topic of indemnity deeds of trust and indemnity mortgages (IDOTs), Ed Levin testified before the Maryland Senate Budget and Taxation Committee and the House Ways and Means Committee on Senate Bill 436 and House Bill 1209 entitled "Recordation Taxes – Exemptions" on March 5 and 7, 2013. The bills passed unanimously and became Chapters 267 and 268 of the Laws of Maryland of 2013. Ed wrote "Supplemental Instrument Exemption Applies to Indemnity Deeds of Trust," published in The Daily Record, Baltimore, Maryland (February 14, 2013) and http://thedailyrecord.com/2013/02/13/edward-j-levin-supplemental-instrument-exemption-applies-to-indemnity-deeds-of-trust/; "New Law Relates to IDOTs, Refinancings," published in The Daily Record, Baltimore, Maryland (May 20, 2013) and http://thedailyrecord.com/2013/05/17/edward-j-levin-new-law-relates-to-idots-refinancings/; "Maryland Changes Law Relating to IDOTs and Refinancings," published in ABA/RPTE eReport (June, 2013) at http://www.americanbar.org/content/newsletter/publications/rpte_e_report_home/june_2013.html; and "Lenders Not Liable for Recordation Taxes on IDOTS," published in The Daily Record, Baltimore, Maryland (June 25, 2013); http://thedailyrecord.com/2013/06/24/edward-j-levin-lenders-not-liable-for-recordation-taxes-on-idots/. Ed was a panelist on Senate Bill 436 and House Bill 1209 entitled "Recordation Taxes – Exemptions" for the Commercial Real Estate Discussion Group of the MSBA's Section of Real Property, Planning and Zoning on March 12, 2013 at the Hotel Monaco, Baltimore; at the MylesTitle Advisory Council Breakfast Seminar on "The Everchanging IDOT Issue," Hunt Valley, Maryland, May 16, 2013, posted at Advisory Council Seminar Archive at http://www.marylandcommercialtitle.com/advisorycouncil.php; and on "New Law Affects IDOTs" at the Woodholme Country Club sponsored by Residential Title & Escrow Company on June 25, 2013.
On the topic of the Real Estate Finance Opinion Report of 2012, which was a project of the American Bar Association (ABA) Section of Real Property, Trust and Estate Law (RPTE) Committee on Legal Opinions in Real Estate Transactions, the American College of Real Estate Lawyers (ACREL) Attorneys' Opinions Committee, and the Opinions Committee of the American College of Mortgage Attorneys (ACMA), Ed Levin served as a member of the drafting committee. Ed was a panelist on "What's in Your Opinion? The Real Estate Finance Opinion Report of 2012" and co-leader of workshops on the same topic at the ACREL Mid-Year Meeting on March 15-16, 2013 in Naples, Florida; the moderator and a panelist on "You Want WHAT Opinions from Us? A Look at the Real Estate Finance Opinion Report of 2012" at the ABA Section of Real Property, Trust and Estate Law Spring Symposia in Washington, D.C., May 2, 2013; and the moderator and a panelist on a webinar also entitled "You Want WHAT Opinions from Us? A Look at the Real Estate Finance Opinion Report of 2012" of the ABA RPTE eCLE on June 19, 2013.