Relating to Real Estate

Bank of New York Mellon, as trustee of a residential mortgage-backed securitization trust that held a deed of trust on a Baltimore City house, docketed a foreclosure action on November 21, 2001. The house was sold to the trustee in an auction sale on December 27, 2001, and the Circuit Court for Baltimore City ratified the sale on February 5, 2002. Although the deed of trust provided that the trustee had the right to possession of the property upon default, the trustee did not possess the house until after it obtained an order for possession on August 15, 2002. Tenants occupied the house when the foreclosure action commenced, but they vacated the property in spring 2002 before the trustee took actual possession. In June 2016, the tenants sued the trustee in the trustee’s individual capacity for damages alleging negligence causing lead paint poisoning. The suit was dismissed by the circuit court, which ruled that the trustee could not be sued in its individual capacity for the alleged tortious act.

On appeal, the Maryland Court of Special Appeals (CSA) affirmed. Hector v. Bank of New York Mellon, 244 Md. App. 322 (2020). Although the CSA disagreed with the circuit court and held that the trustee could be sued in its individual capacity for a tort committed in the administration of the trust, it further ruled that the trustee could not be personally liable as an “owner” of the property, as defined by the Baltimore City Housing Code, because the trustee’s involvement with the property was a passive one. We discussed this decision in the October 2020 issue of Relating to Real Estate.

On further appeal, the Maryland Court of Appeals reversed and remanded the case to the circuit court for trial. Hector v. Bank of New York Mellon, 473 Md. 535 (2021), reconsideration denied (July 9, 2021). In reversing the CSA, the Court of Appeals stated that “in order for a trustee to be individually liable for a tort committed in the course of trust administration, the trustee must be personally at fault.” But then the Court of Appeals held:

• The trustee had personal liability regardless of whether its role was active or passive, so long as it was an “owner” of the property within the meaning of the Baltimore City Housing Code, and
• The trustee became the “owner” of the property as of the date of the foreclosure sale when the tenants were still in possession because a provision in the trustee’s deed of trust gave the trustee the right to possess the property upon default.

The Court of Appeals stated that the trustee would have become the “owner” upon the date of ratification of the sale had the deed of trust not had such a provision.

Central to the decision by the Court of Appeals was its broad reading of the Baltimore City Housing Code’s definition of the term “owner” that was in effect at the time the alleged negligence occurred. Owner was defined as “(1) … any … trustee … who … owns, holds or controls the whole or any part of the freehold or leasehold title to any dwelling …, with or without accompanying actual possession; and (2) shall include in addition to the holder of legal title, any vendee in possession thereof, but shall not include a mortgagee or an owner of a reversionary interest under a ground rent lease.”

As the owner of the property, the trustee could be guilty of negligence under the “Statute or Ordinance Rule,” which provides that where a statute protects a class that includes the plaintiff, violation of the statute is evidence of negligence.

The case is Hector v. Bank of New York Mellon, 473 Md. 535 (2021).

Observations

The Court of Appeals’ broad interpretation of the term “owner” should make mortgage lenders holding liens on older residential properties in Baltimore City proceed very carefully before they buy those properties at foreclosure sales. Before proceeding to a sale, a lender should inspect the properties to make sure they are lead-free. The decision also will undoubtedly make it more difficult for owners of older residential properties to obtain financing even though funds may be needed in order for lead paint conditions to be remediated.

Lawrence Coppel wrote this article. Larry, former Senior Counsel at Gordon Feinblatt, can be reached at lawrencecoppel@gmail.com. Edward J. Levin edited this article.