Dillow v. Magraw

ALPERT, Judge. This appeal presents the novel issue of whether failure to name the proper parties in a proceeding to foreclose equity of redemption renders title to that property defective and constitutes a breach of special warranty or breach of the covenant against encumbrances when the property is subsequently conveyed. Appellant in this case, Robert M. Dillow (Dillow), is a builder of single-family homes in Cecil County, Maryland. In the summer of 1988, he entered into a contract of sale with appellees, James S. Magraw and Deborah L. Magraw (the Magraws), for the purchase of four adjoining, unimproved lots of property located in Cecil County.

The property was conveyed by two separate deeds, dated August 2, 1988 and November 7, 1988. Both deeds contained 1) a special warranty; 2) a covenant by the Magraws that “they have done not or suffered to be done any act, matter or thing whatsoever, to encumber the property hereby conveyed”; and 3) a covenant that “they will execute such further assurances of the same as may be requisite.” ³⁵³ Dillow alleges that after purchasing the property he invested approximately $150,000 to construct three single-family homes on the lots. In early 1989, Dillow attempted to secure a loan for an additional $100,000 in order to complete construction on the homes, but was denied financing because it was learned for the first time that the Magraws did not have good title to the entire property that was conveyed. Dillow learned that the Magraws had originally owned only a five-sixths interest in the property and had apparently purchased the entire property at tax sale in 1983, thus acquiring the remaining one-sixth interest.

This one-sixth interest, Dillow alleges, was owned by the heirs of Helen Rowland Squire, who died on January 12, 1947, without a will. On October 31,1983, the Magraws filed a Bill of Complaint to Foreclose Equity of Redemption (Foreclosure Complaint) with respect to “the subject property.” The Circuit Court for Cecil County, sitting in equity, issued a decree on August 28, 1984, granting the Magraws fee simple title to the property. Dillow alleges that the foreclosure proceeding initiated by the Magraws with respect to the one-sixth portion of the property was not performed in compliance with the Tax-Property Article because it failed to name as defendants the heirs of Helen Rowland Squire. Dillow contends a search of the Orphan’s Court records for Cecil County would have revealed that Ms. Squire left six heirs who, by virtue of Ms. Squire’s intestacy death, were the record title holders of the property at the time of the tax sale. 1 None of these heirs were named in the Foreclosure Complaint, nor were they notified of the foreclosure proceeding, according to Dillow.

Dillow claims that, as a result, he has less than absolute title in the property; that title in the property is not merchantable; and that the property is presently encumbered. He alleges that he has been unable to refinance or sell the property and has sustained damages including expenses incurred in improv ³⁵⁴ ing the property, lost profits, the amount of the purchase price, and other expenses. In December 1991, Dillow filed a complaint in the Circuit Court for Cecil County against the Magraws as well as against the companies that performed a title search of the subject property, Industrial Valley Title Insurance Company and Fidelity Title Company, Inc. Industrial Valley and Fidelity Title were subsequently dismissed by Dillow 2 and a First Amended Complaint was filed against the Magraws in five counts. The sole counts before this Court are: Count I, which alleges that the Magraws breached the special warranty contained in the deeds; Count IV alleging that the Magraws breached the covenant against encumbrances; Count V, which alleges breach of express and implied covenant of merchantable title; and Count VII, which alleges what essentially amounts to a claim for negligence on the part of the Magraws in the foreclosure proceedings. 3 On January 17, 1992, the Magraws filed a motion to dismiss the First Amended Complaint and, following a hearing, the circuit court dismissed Dillow’s complaint in its entirety.

This appeal followed. Dillow presents three issues for our review, which we have recast as follows: I. Did the Magraws’ failure to designate Squire’s heirs as defendants in their Complaint for Foreclosure of Equity of Redemption violate former section 103 of Article 81 of the Annotated Code of Maryland?

II

Does the failure to designate the proper defendants in a proceeding to foreclose equity of redemption render title ³⁵⁵ in the subject property defective and constitute a breach of the special warranty contained in the deed?

III

Does the failure to designate the proper defendants in a proceeding to foreclose equity of redemption constitute a breach of the covenant against encumbrances?

IV

Did the circuit court err in dismissing Dillow’s claims for negligent redemption and breach of the warranty of merchantable title? In answering these questions, we are mindful that the posture of this case as presented to us requires only that we review the propriety of the trial court’s dismissal. We are not called upon to decide any of the numerous factual issues that appear to have been generated in this case. We answer “yes” to questions one and three, and “no” to questions two and four.

Accordingly, we affirm the judgment of the trial court as to Count I (breach of special warranty), Count V (breach of express and implied covenant of merchantable title), and Count VII (negligence). We reverse the judgment of the trial court as to Count IV (breach of covenant against encumbrances). I. We turn first to Dillow’s allegation that the Foreclosure Complaint filed by the Magraws failed to name as defendants the heirs of Helen Rowland Squire. Dillow claims that these unidentified heirs owned an one-sixth interest in the subject property at the time the complaint was filed.

He alleges that a title defect was created as a result of this error by the Magraws in the foreclosure. At the time the Magraws filed their complaint to foreclose in October, 1983, Article 81 of the Annotated Code governed the procedure to be followed in tax sales. 4 Section 103 of ³⁵⁶ Article 81 identifies the parties who must be named as defendants in the foreclosure proceeding: The defendants in any such proceeding shall be the following: (a) The owner of the property as disclosed by a search of the land records of the county, of the records of the register of wills of the county, and of the records of any court of law or equity of the county. # ❖ (d) It shall not be necessary to name as defendant any other person having or claiming to have any right, title, interest, claim, lien or equity of redemption in and to the property sold by the collector. Any or all such persons may be included as defendants by the designation “all persons having or claiming to have any interest in property..... (giving a description of the property in substantially the same form as the description which appears on the Collector’s tax bill).” Any or all such persons may be designated throughout the proceeding by the above designation and the cause may proceed against them by publication under order of court as hereinafter provided.

(emphasis added). The Magraws argue that they complied with section 108 by including in their Foreclosure Complaint the catch-all statutory language, “all persons having or claiming to have any interest in the property.” The caption of the Foreclosure Complaint was as follows: JAMES S. MAGRAW and DEBORAH L. MAGRAW Plaintiffs vs. ³⁵⁷ JAMES S. MAGRAW and ALL Persons having or claiming to have any interest in the property located in Cecil County, Maryland, described as 5.09 acres of land, more or less, with improvement thereon situated Rock-Battle Swamp Road, S/W of Woodlawn, District EQUITY NO. 7, adjoining the property of or formerly owned by John Carson (emphasis added). The Magraws contend that this was all that was required. They claim that they could not have named the heirs of Ms. Squire as defendant “owners” because Ms. Squire died intestate and her property was, therefore, never bequeathed or devised to any of her heirs.

They conclude that, as a result, the heirs never acquired actual ownership or record title in the property. 5 In support of this argument, the Magraws direct our attention to an “affidavit of search” attached to their Foreclosure Complaint, which certifies that a title search was performed on the subject property for the past forty years and no prior owners of the property were discovered. 6 Dillow argues in response that the affidavit of search is inaccurate and that a properly performed search ³⁵⁸ would clearly have shown that six persons took the subject property as intestate heirs of Ms. Squire. We note first that at the time of Ms. Squire’s death in 1947, the applicable testamentary law held that title to a decedent’s real property devolved directly to her heirs at law upon her death, without the necessity of administration by an administrator or personal representative. Heill v. Staniewski, 265 Md. 722, 723-24 , 291 A.2d 449 (1972); Campbell v. Welsh, 54 Md.App. 614, 625 , 460 A.2d 76 (1983). 7 Therefore, assuming as we must that Ms. Squire died leaving heirs, the Magraws’ argument that these heirs never acquired an actual-ownership interest or record title in the property is unavailing. The question remains, however, whether any such ownership interest would have been revealed by a properly performed title search.

This is a factual issue that we have neither the authority nor the inclination to decide. Because this case is presented to us in the context of a motion to dismiss, we must assume, as Billow’s First Amended Complaint alleges, that Ms. Squire’s heirs or any subsequent purchaser of the property would have been disclosed by a search of the land records in Cecil County. 8 Given this fact, we hold that as a matter of law, each such person would constitute an “owner” under section 103(a) of Article 81 rather than merely a party covered by the catch-all provision in subsection (d), “any other person having or claiming to have any right, title, interest, claim [or] ³⁵⁹ lien.” Section 103(a) mandates that the “owner[s] of the property” be named as defendants when a title search would reveal them as owners. Ms. Squire’s heirs should have been designated in the Magraws’ Complaint as defendants and should have been notified of the foreclosure proceeding. 9 II. We next address the effect of the Magraws’ failure to name the heirs of Ms. Squires as defendants and the implications, if any, on Dillow’s rights in the present action.

A. Status of Title as a Result of Failure to Designate Proper Defendants in Complaint to Foreclose Equity of Redemption Section 112 of Article 81 10 provides that when a final decree is issued by the circuit court, the tax sale purchaser obtains “absolute and indefeasible title in fee simple in the property, free and clear of all alienations and descents of the property occurring prior to the decree of court as herein ³⁶⁰ provided and encumbrances thereon.... ” This section further provides that the decree “shall be final and conclusive upon the defendants, their heirs, devisees and personal representatives and they or any of their ... successors in right, title or interest ... shall be bound by the said decree as if they had been named in the proceedings and personally served with process.” (emphasis added). For cases discussing the finality of a decree, see, Monumental Enters., Inc. v. Mayor & City Council of Baltimore City, 26 Md.App. 24 , 337 A.2d 176 (1975); James v. Zantzinger, 202 Md. 109, 113 , 96 A.2d 10 (1952); Oppenheimer v. Micbar Co., Inc., 192 Md. 192, 195 , 63 A.2d 765 (1949). The conclusiveness of the tax sale purchaser’s title is, however, subject to two exceptions set forth in section 113 of Article 81. A final decree issued by a circuit court may be vacated or reopened on the grounds of either 1) lack of jurisdiction or 2) fraud in the conduct of the proceedings to foreclose.

Art. 81, § 113. A lack of jurisdiction may exist where the property being foreclosed is not sufficiently described in the proceedings such that the property owners are not notified of their rights to foreclose, Thomas v. Hardisty, 217 Md. 523, 534-35 , 143 A.2d 618 (1958), or where the property owners or their heirs are simply not notified of the foreclosure proceedings at all. Brashears v. Collison, 207 Md. 339, 347-48 , 115 A.2d 289 (1955) (holding decree null and void due to failure to name owners of a remainder interest in property as defendants in foreclosure proceeding); Holland v. Billingsley, 208 Md. 635, 639-40 , 119 A.2d 380 (1956) (holding that trial court properly rescinded decree where tax sale purchaser overlooked property owner’s will in office of register of wills and, as a result, failed to name property owner’s surviving wife and son as defendants). In order to establish fraud as the basis for setting aside a final decree, the Court of Appeals has held that proof of “constructive” fraud is sufficient.

Jannenga v. Johnson, 243 Md. 1, 5 , 220 A.2d 89 (1966); Scheve v. McPherson, 44 Md.App. 398, 405 , 408 A.2d 1071 (1979). Constructive fraud, ³⁶¹ sometimes called “legal fraud,” includes failure on the part of the foreclosing party to adequately search land records, court records, and register of wills’ records, Arnold v. Carafides, 282 Md. 375, 383-84 , 384 A.2d 729 (1978), as well as the failure to make at least a good faith effort to provide actual notice to owners of the property. Jannenga, 243 Md. at 5 , 220 A.2d 89 . In the case sub judice, the decree issued by the circuit court in August, 1984, is vulnerable on grounds of lack of jurisdiction but not fraud in the conduct of the foreclosure proceedings.

According to the allegations in Dillow’s First Amended Complaint, a proper search of the land records would have disclosed some or all of Ms. Squire’s six heirs and their ownership interest in the subject property. Assuming this is true, these persons were necessary defendants in the Foreclosure Complaint filed by the Magraws in October, 1983. Because the Magraws failed to name Ms. Squire’s heirs in the proceeding, the circuit court lacked jurisdiction to render a decree foreclosing their right to redeem the property. We hold that the allegations in Dillow’s First Amended Complaint are sufficient for present purposes to at least raise the issue of lack of jurisdiction and defeat the presumption that a final decree is, indeed, final and conclusive.

As to the second ground for challenging the finality of the decree—constructive fraud on the part of the Magraws—we need not address this issue since any such claim would be barred under the one-year statute of limitations set forth in then applicable section 113 of Article 81. 11 In so holding, we recognize that a decree foreclosing the right of redemption cannot be set aside except by a petition filed by the original owners whose rights were foreclosed and that there is no evidence in the record that the ³⁶² heirs of Ms. Squire are, in fact, contesting the foreclosure proceedings initiated by the Magraws. This does not, however, necessarily preclude a third-party such as Dillow from asserting that the foreclosure proceedings were faulty, and that, as a result, he has suffered damages. The Court of Appeals has held that the validity of a final decree may be subject to “collateral” attack, i.e., in a suit other than one directly seeking to vacate the decree. Thomas v. Hardisty, 217 Md. 523, 535-37 , 143 A.2d 618 (1958). 12 The Court in Thomas stated: [I]t would seem to be an unnecessary refinement to make a distinction between an application to reopen a decree because of lack of jurisdiction to enter it and a collateral attack intended to show that the decree is a nullity for precisely that same reason.

Id. at 537 , 143 A.2d 618 . See also, Bugg v. State Roads Comm’n, 250 Md. 459, 461 , 243 A.2d 511 (1968); Board of Medical Examiners v. Steward, 207 Md. 108, 112 , 113 A.2d 426 (1955) (“A judgment that is a nullity, because the court lacked jurisdiction to render it, may be disregarded, even in a collateral proceeding....”); Mullen v. Brydon, 117 Md. 554 , 83 A. 1025 (1912). ³⁶³ We turn now to the effect, if any, that the lack of jurisdiction had on the title to the property as presently held by Dillow. It is generally accepted that a defect in the conduct of a tax sale proceeding may render title to the subject property defective and unmarketable. See e.g., Smith v. Huber, 224 Iowa 817 , 277 N.W. 557 (1938) (holding that title was not good and merchantable where there was failure to provide notice of right to redeem to title owners in tax sale proceeding).

The Maryland courts have similarly held. In In re Swann’s Estate, 125 Md. 519 , 94 A. 93 (1915), a purchaser of thirty acres of land refused to consummate a contract of sale on the ground that title to the property was not good and marketable. The purchaser claimed that sufficient notice of tax sale was not given to several co-owners of the property since the required notice was merely addressed to the “heirs” of the property’s former owner. The Court of Appeals held that there was “manifest failure” to observe the notice requirements and that, as a result, title was not good and marketable.

The Court further stated that the fact that the original owners had not yet challenged the tax sale did not prevent the purchaser from asserting that the lack of notice affected the marketability of his title: While a considerable period has elapsed since the tax sale was made and ratified, and while those adversely affected have taken no formal action to have the sale annulled, the present purchaser could have no assurance that they will not contest the title____ It would not be just to compel the objecting purchaser to accept a title thus exposed to probable litigation. As it stands at present it is not the good and marketable title which he has a right to demand. Id. (citations omitted).

In the present case, assuming the truth of all facts alleged by Dillow, we hold that title to the subject property was rendered defective and unmarketable as a direct result of the Magraws’ failure to name the proper parties as defendants in their Foreclosure Complaint. If the Magraws had complied with Article 81 and named Squire’s heirs as defendants, we must assume that the heirs would have exercised their right to ³⁶⁴ redeem or, alternatively, would have voluntarily foregone this right. In either event, there would not presently be a cloud on the title. The question remains, however, whether the failure to designate Squire’s heirs as defendants and the resulting defect in title constitutes a breach of special warranty. 13 B. Breach of Special Warranty The effect of the Magraws’ failure to name Ms. Squire’s heirs as defendants is, of course, that the heirs were not granted the opportunity to pay the back taxes and redeem the property.

We cannot speculate whether or not the heirs were financially able, or otherwise inclined, to redeem the property, but it is clear that were they granted the opportunity they would presently have an action against Dillow in which they could claim superior or paramount title to the property. We hold that the special warranty in the deeds would not protect Dillow from such a claim. The legislature has codified the scope and effect of a special warranty in section 2-106 of the Real Property Article: A covenant by a grantor in a deed, ‘that he will warrant specially the property hereby granted,’ has the same effect as if the grantor had covenanted that he will warrant forever and defend the property to the grantee against any lawful claim and demand of the grantor and every person claiming or to claim by, through, or under him. Md.Code Ann., Real Prop., § 2-106.

The Magraws argue that a grantor does not warrant in a special warranty that he is the true owner of the property, or that he will protect the grantee against all claims of superior or paramount title. They contend, therefore, that any poten ³⁶⁵ tial claims of superior or paramount title by Ms. Squire’s heirs against Dillow would not be covered under the special warranty contained in the two deeds. The Magraws also rely on the language in section 2-106 which provides that under a special warranty a grantor warrants that he will defend the grantee only against any claims “by, through or under him.” According to the Magraws, the allegations in Dillow’s complaint indicate that there is no one, in fact, claiming title “by, through or under [the Magraws].” We agree with the Magraws for several reasons. First, a special warranty does not protect the grantee from claims of superior or paramount title.

A covenant of special warranty, in contrast to a covenant of general warranty, is limited as to the persons or claims to which it operates. It protects the covenantee against claims by, through or under the grantor, but does not warrant title “against a claim under a title against, or superior to, his grantor.” 20 Am.Jur.2d, Covenants, Conditions, and Restrictions, § 53 at pp. 624-25 (1965). See also, Central Life Assur. Soc. v. Impelmans, 13 Wash.2d 632 , 126 P.2d 757, 763 (1942).

In Gittings v. Worthington, 67 Md. 139, 150 , 9 A. 228 (1887), the Court of Appeals stated: “[S]pecial warranties [are] distinct covenants that [the grantor is] not to be answerable for any losses which might occur from the assertion of a title superior to his own; that if he is required to protect [the grantee] from [claims of superior title], he is in effect made to give [the grantee] all the benefit which could be derived from a general warranty....” Here, Dillow seeks protection against the potential claims of Ms. Squire’s heirs, who he alleges have an outstanding and superior ownership interest in the subject property by virtue of the Magraws’ failure to properly foreclose their rights of redemption. We hold that while a covenant of general warranty might extend to such claims, the special warranty contained in the two deeds does not. The mere ³⁶⁶ existence of paramount title does not constitute a breach of special warranty. The defect in the foreclosure proceedings would also not be covered under the special warranty for the simple reason that the Magraws did nothing during their period of “ownership” to impair title; stated differently, title to the property was not vested in them at the time the alleged “defect” arose.

The Court of Appeals in Kendall v. Rogers, 181 Md. 606, 611 , 31 A.2d 312 (1943), explained that the coverage of a special warranty deed includes “any act impairing the title during the holding of the property by the grant- or.” A special warranty deed makes no covenant as to the status of title prior to title actually vesting in the grantor. See Campbell v. Heller, 36 N.J.Super. 361 , 115 A.2d 644, 648 (1955); Wempe v. Schoentag, 163 Md. 647, 649 , 163 A. 868 (1933); Kendall, 181 Md. at 611 , 31 A.2d 312 . In the case of property purchased at tax sale, title does not vest in the tax sale purchaser until a final decree is issued. See, Part U.A., supra.

The tax sale purchaser has neither legal nor equitable title but is said to have merely a lien against the property, which ripens into title through the process of foreclosure. Voge v. Olin, 69 Md.App. 508, 522 , 518 A.2d 474 (1986) (citing Prince George’s Homes, Inc. v. Cahn, 283 Md. 76, 85 , 389 A.2d 853 (1978)); Stewart v. Wheatley, 182 Md. 455, 458 , 35 A.2d 104 (1943); 4 Tiffany, The Law of Real Property, § 1248 at p. 1152-53 (3d ed. 1975). 14 See also, Keefauver v. Richardson, 233 Md. 545 , 197 A.2d 438 (1964); Winter v. O’Neill, 155 Md. 624 , 142 A. 263 (1928). The final decree in this case was issued on August 28, 1984. Until that date, the Magraws’ interest in the property was in the nature of an inchoate lien.

Anything they did' to impair title would not be covered by a special warranty. Lastly, Dillow’s claim is not covered under the special warranty because a claim attacking the validity of ³⁶⁷ foreclosure proceedings is not one brought “by, through or under” the grantor as § 2-106 of the Real Property Article commands, but is rather one “through” or “under” the heirs of Ms. Squire. Dillow is contesting the invalidity of the foreclosure proceeding on the heirs’ behalf. He is not alleging that the Magraws, or anyone claiming by, through, or under them, such as their heirs or assigns, are challenging Dillow’s title to the subject property.

While such collateral attacks of a final decree as Dillow’s are generally permissible (see discussion in Part H.A.), claims which are not “by, through or under” the grantor do not fall within the scope of a special warranty. See, Monumental Enters., Inc. v. Mayor & City Council of Baltimore City, 26 Md.App. 24, 38 , 337 A.2d 176 (1975) (characterizing claim by mortgagee of original owner of property as one “claiming under” the original owner); Oppenheimer v. Micbar Co., Inc., 192 Md. 192, 195 , 63 A.2d 765 (1949) (characterizing claim by subsequent purchaser attacking validity of tax sale as one “under the original owners”). 15 We hold, therefore, that as a matter of law the failure by a purchaser of property at tax sale to name the proper defendants in a complaint to foreclose equity of redemption does not constitute a breach of special warranty when the tax sale purchaser subsequently conveys that property by deed. ³⁶⁸ For the reasons cited above, the lower court properly dismissed Count I of Dillow’s First Amended Complaint.

III

We next address whether the defect in title that exists as a result of the Magraws’ failure to name the heirs as defendants (see Part II.A.) would constitute a breach of the covenant against encumbrances. The lower court summarily dismissed this count of Dillow’s complaint on the basis that there could not be a breach of the covenant against encumbrances because there was no breach of special warranty. 16 We disagree. The legislature has codified the scope and effect of a •covenant against encumbrances. Section 2-110 of the Real Property Article provides: A covenant by the grantor in a deed, “that he has done no act to