Daily Development for Wednesday, May 19, 1999

 

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

 

SERVITUDES; MONEY OBLIGATIONS; PRIORITY: Servitude requiring the owner of property dedicated to low or moderate income housing to pay a fixed sum to county housing fund if the property is foreclosed upon does not establish an equitable lien against the property, and therefore county's claim to any surplus resulting from the foreclosure sale of the property is a general creditor's claim and junior to a recorded  judgment lien. 

 

Montgomery County v. May Department Stores Company, 352 Md. 183, 721 A.2d 249 (Md. 1998). 

 

A county and a judgment creditor both asserted claims to surplus funds in a mortgage foreclosure.  The county's claim was under its Moderately Priced Dwelling Unit program.  The ordinance establishing that program requires an agreement between the developer and the county concerning the commitment of the property to moderately priced housing and further requires that recorded covenants be imposed by the developer on the affected lots.  The covenants must be superior to all instruments securing permanent financing. 

 

One of the covenants sets forth rules on maximum sale and resale prices. The ordinance also provides that if an affected unit is to be sold through a foreclosure sale, a payment, in a particular amount, must be made to a county fund. 

 

One of the units was foreclosed upon.  It was encumbered by a mortgage, and also by a judgment lien in favor of a department store.  After the foreclosure sale, the county made a claim that exceeded the amount of the entire surplus.  The department store was denied any payment.  The Maryland Court of Appeals (its highest court) ruled that the covenants did not create a lien because a lien is "a right given by contract, statute, or rule of law to have a debt or charge satisfied out of a particular property."  Even though the declaration of covenants established a maximum sales price and provided for a payment to be made to the county following a foreclosure sale, the relevant provision contained no language contractually imposing a lien on the property for any amount.

 

All that the ordinance and regulation stated was that a computed sum "must be paid to the Housing Initiative Fund."  The Court granted that it is not an absolute prerequisite to the recognition of the lien in equity that the lien be expressly granted in a written agreement. The Court, however, could not find an equitable lien.  In its view, the liability of a homeowner to the county was based on the personal covenant and the applicable law and regulations did not impose a lien on the realty or charge, per se, on the sale proceeds from the realty. 

 

Inasmuch as the county was found to have neither a contractual nor a statutory lien, the county became a general creditor as to the distribution of the mortgage sales proceeds and, as such, was found to be subject to the priority of the department store's judgment lien. 

 

 

To the Court, even though the county could place restrictions on the resale of affordable housing, it did not have the authority to reorder the priority for the payment of surplus proceeds on a foreclosure sale contrary to state statutory law.  The county argued in the alternative that when the homebuyer acquired its property, subject to the covenants, a recognized property interest in the county was created.  Under that theory, the lien of the store's judgment against the homeowner did not reach the county's purportedly separate property interest.  The Court rejected this theory because the homeowner did not covenant that it would grant (or devise) its property, subject to the mortgage, to the county.  Therefore, there was nothing for equity to enforce by equitable assignment.

 

Comment 1: It's not clear why the county didn't specifically establish an equitable lien in the first place.  The problem can be resolved in that way, and thus the case is not really about low and moderate income housing.

 

Comment 2: The case does have relevance in a number of other situations in which the parties have committed to make certain payments through a servitude or covenant that runs with the land.  It is likely that the benefited party expects that the claim is enforceable through a lien, but the case makes clear that "you don't always get what you want," in the words of ole' what's his name (the one with the lips.)

 

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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