Howard County v. Heartwood 88, LLC

DEBORAH S. EYLER, Judge. This case is a dispute over whether Howard County (“the County”), the appellant, is obligated to pay interest on money it refunded to Heartwood 88, LLC (“Heartwood”), the appellee, a tax sale purchaser of property for which not only were ⁴⁹³ no taxes owed, none ever should have been assessed. We are called upon to decide whether, when an action to foreclose a right of redemption in a property is pending in circuit court, and the local government that held the tax sale then learns that the unpaid taxes for which the property was sold at tax sale never were assessable, the tax collector can declare the tax sale void, under the contractual terms of the tax sale, or whether only the court, pursuant to section 14-848 of the Tax-Property Article, can declare the tax sale void. We hold that the tax collector can declare the tax sale void.

On July 20, 1999, the property at issue (“Property”) was conveyed by recorded covenants from Elkhorn Associates, LLLP (“Elkhorn”), to the Allen & Shariff Condominium (“A & S”). The Property is part of the general common elements (actually, the parking lot) of the A & S condominium regime. Once conveyed as such, the Property no longer was an independently taxable parcel of land. The covenants conveying the Property properly were recorded in the Land Records of Howard County.

The Maryland State Department of Assessments and Taxation (“SDAT”) misinterpreted the covenants and a recorded plat of the condominium, however, and continued to assess taxes against the Property, in error. When the taxes were not paid for two years, the Property was included in the County’s annual tax sale, on June 6, 2001. All bidders at that tax sale signed written “Terms of the 2001 Tax Sale” issued by the County’s Department of Finance. One of the terms of the tax sale stated: D. VOIDED SALE.

Whenever a tax sale on a property is voided, for any reason, the Purchaser will be notified and advised not to pursue any further foreclosure action or to incur additional expenses. Reimbursement will be limited to the amount paid at the sale unless otherwise required by law. (Emphasis added.) Heartwood purchased the Property, and five others, at the ⁴⁹⁴ June 6, 2001 tax sale. 1 About two years later, on March 27, 2003, it filed suit in the Circuit Court for Howard County to foreclose the rights of redemption in all six properties. Elk-horn was named as a defendant, as was Howard County.

With respect to the Property, Heartwood alleged that “a search and examination of the Land Records of Howard County” had been made “for more than forty years last past” and had “revealed the fee simple title or other legal interest” in the Property in Elkhorn at the time of the tax sale, “as shown in the Affidavit of [Title] Search, filed herewith and made a part hereof.” The attached Affidavit of Title Search, signed by Heartwood’s lawyer, indeed stated that a title search of the land records had revealed, with respect to the Property, an address of “Deepage Drive” and fee simple title vested in Elkhorn “by deed from Elkhorn Associates Limited Partnership, dated July 24, 1998, and recorded on October 13, 1998, at Liber 4463 Folio 591.” In fact, a complete search of the Howard County Land Records would have revealed the July 20,1999 covenant by which the Property was conveyed to A & S. Heartwood never obtained service over Elkhorn in the action to foreclose right of redemption. For most of the pendency of the action, it did not have service over Howard County. It eventually served the title owners of the other five properties. Ultimately, they redeemed their rights in their properties and were dismissed from the suit.

Sometime in late May 2006, more than three years after Heartwood filed the action to foreclose right of redemption in the Property, the SDAT realized its error. Charles Watson of the SDAT contacted Linda Watts, the County’s Director of Finance, and told her he had learned from a representative of A & S that the Property was part of the general common ⁴⁹⁵ elements of the condominium and had been so since July 20, 1999. From that date forward, the SDAT should not have assessed any taxes against the Property. The SDAT planned to correct its error by consolidating the Property with the parent tax account for the condominium regime and reducing the taxes attributable to the Property to zero, retroactive to July 20, 1999.

In fact, that corrective measure was taken on June 1, 2006. On May 81, 2006, a few days after Mr. Watson contacted Ms. Watts, Heartwood’s lawyer received a letter from a third-party title company informing him that the State and County had “reduced the taxable assessment (and real estate taxes) [for the Property] to zero for the years 2000-2006” and that Ms. Watts had confirmed that the County was going to refund the tax sale payment to Heartwood, as the tax sale purchaser. Heartwood’s lawyer contacted Ms. Watts the next day complaining that, with the action to foreclose right of redemption in the Property pending in circuit court, the County had no power to invalidate the tax sale. Only the circuit court had the power to do so, pursuant to Md.Code (2001, 2007 Repl.

Vol.), section 14-848 of the Tax-Property Article (“TP”). Moreover, if the court were to declare the tax sale void under that statute, Heartwood would be entitled to repayment of the purchase price and interest at the rate provided in the certificate of tax sale, together with all taxes that [had] accrue[d] after the date of sale, which were paid by the holder of the certificate of sale or the predecessor of the holder of the certificate of sale, and all expenses incurred in accordance with this subtitle. TP § 14-848. The certificate of tax sale bore an interest rate of 18%.

Lawyers for the County countered that, notwithstanding the pendency of the foreclosure of right of redemption action, the “Terms of the 2001 Tax Sale” gave the County the right as a matter of contract to declare the tax sale void, so long as doing so was not contrary to law, which it was not. The County merely was exercising that contractual right. Under the ⁴⁹⁶ “Terms of the 2001 Tax Sale,” Heartwood was entitled to a refund of the purchase price paid for the Property, without interest or expenses. On June 5, 2006, in the foreclosure action, Heartwood filed a “Line,” requesting the re-issuance of a summons for Elkhorn, Howard County, and certain other defendants that had not been served.

Soon thereafter, the County was served. A week later, Heartwood filed a motion, under TP section 14-848, to declare the tax sale void. The County filed an opposition to Heartwood’s motion and a motion to dismiss. Heartwood filed a reply memorandum.

The court heard argument of counsel on the matter. On January 24, 2007, it issued a Memorandum Opinión granting Heartwood’s motion, setting aside the tax sale as void, and ordering the County to pay Heartwood in accordance with TP section 14-848. The County noted this timely appeal. 2 It poses three questions, which can be reduced to one: Did the circuit court err as a matter of law in ruling that the tax sale was invalid and that Heartwood is entitled to reimbursement as provided in TP section 14-848? For the following reasons, we shall reverse the judgment of the circuit court and remand the case with instructions to enter an order dismissing the action to foreclose right of redemption.

DISCUSSION The material first-level facts are not in dispute. The issue decided by the circuit court, and pursued by the County on appeal, is purely legal. Accordingly, we decide it de novo. Hall v. Univ. of Md. Med.

Sys. Corp., 398 Md. 67, 82 , 919 A.2d 1177 (2007). A tax sale under Title 14, Subtitle 8, Part III of the Tax-Property Code (“the Tax Sale Statute”) is a tax collection mechanism for local governments. Sckeve v. Shudder, Inc., ⁴⁹⁷ 328 Md. 363, 369 , 614 A.2d 582 (1992).

With certain exceptions, when taxes on a property -within a local subdivision are not paid for a period of two years, the tax collector “shall proceed to sell and shall sell under this subtitle ... all property in the county in which the collector is elected or appointed on which the tax is in arrears.” TP § 14-808(a). The purchaser at tax sale receives a tax sale certificate. TP § 14-820(a). Within the time specified in TP section 14-833, the purchaser (or certificate holder, if the certificate has been assigned) can bring suit to foreclose the right of redemption of the title owner (and of any other person having an estate or interest in the property).

To redeem the property, the title owner must pay the total price paid at the tax sale, plus interest; any taxes, interest, and penalties paid by the tax certificate holder; any taxes, interest, and penalties accruing after the date of the tax sale; and all actual expenses incurred by the certificate holder. TP § 14-828. The redemption rate of interest is set in TP section 14-820(b). If the right of redemption is finally foreclosed under the Tax Sale Statute, the tax sale purchaser receives fee simple title to the property by deed from the local government.

TP § 14-844. The outcome of the case at bar turns on the application vel non of TP section 14-848, entitled “Judgment declaring sale void.” The relevant language in that section provides: If the judgment of the court [in a foreclosure of right of redemption action] declares the sale void and sets it aside, the collector shall repay the holder of the certificate of sale the amount paid to the collector on account of the purchase price of the property sold, with interest at the rate provided in the certificate of tax sale, together with all taxes that accrue after the date of sale, ... which were paid by the holder of the certificate of sale or the predecessor ..., and all expenses properly incurred in accordance with this subtitle____ The collector shall proceed to a new sale of the property under this subtitle and shall include in the new sale all taxes that were included in the void sale, and all unpaid taxes that accrued after the date of the sale declared void. ⁴⁹⁸ On appeal, the County argues as it did below that the facts in this case did not trigger application of TP section 14-848. Rather, they triggered the County’s contractual right, separate from and not inconsistent with the Tax Sale Statute, and established by the “Terms of the 2001 Tax Sale,” to void the sale and refund the sum paid by the tax sale purchaser. If the County is correct, it has no obligation to pay 18% interest or expenses on the purchase money refunded to Heartwood.

The court in its memorandum opinion and the County in its brief rely upon this Court’s decision in Heartwood 88, Inc. v. Montgomery County, 156 Md.App. 338 , 846 A.2d 1096 (2004) {“Montgomery”). In that case, the Montgomery County tax collector sold 331 properties to a single tax sale purchaser. Before any action to foreclose right of redemption was filed, the tax sale purchaser discovered that the properties had been sold in error, as Montgomery County already had collected the taxes in full before the date of sale. The tax collector refunded the purchase monies for all the tax sales, plus 8% interest, as provided in the tax sale certificates.

The tax sale purchaser protested, demanding payment of the “redemption rate” of interest, i.e., the rate that would have applied had the sale been valid and had the title owners then redeemed their properties. Under TP section 14-820(b), the “redemption rate” is either 6% or a percentage adopted by the county in which the property is located. At that time, Montgomery County’s “redemption rate” was 20%, comprised of 8% interest and a 12% penalty. The tax sale purchaser also demanded payment of expenses and counsel fees under TP section 14-843.

When Montgomery County refused to pay either, the tax sale purchaser brought a declaratory judgment action seeking to have the sale declared void, pursuant to TP section 14-848. The circuit court ruled that the tax sale of the 331 properties was void at its inception, and so there was no tax sale to declare invalid, and TP section 14-848 had no