May Department Stores v. Montgomery County

CATHELL, Judge. May Department Stores, Inc. (May), and Avenel Community Association, Inc. (Avenel), judgment lien holders, appeal from the decision of the Circuit Court for Montgomery County that denied them the priority of their judgment liens in ⁴⁴³ respect to the disbursement of surplus funds following a judicial foreclosure sale. The court instead disbursed the entire surplus to an agency of Montgomery County (County) pursuant to the purported authority of a Montgomery County ordinance. Appellants present several issues on appeal: 1.

Whether the court below erred by failing to order that Appellants’ valid judicial liens be satisfied from the surplus proceeds of a foreclosure sale[.] 2. Whether the Montgomery County Moderately Priced Dwelling Unit Ordinance is violative of the Maryland and U.S. Constitutions when applied in a fashion that deprives judgment lienholders of surplus proceeds in a foreclosure sale[.] 3. Whether the Court below erred by failing to address the equity argument presented by Appellant, Avenel Community Association, Inc. In the resolution of this appeal, we shall resolve only the first issue. Resolution of this issue renders it unnecessary to address extensively the constitutional issues or the equity argument made by Avenel.

We shall be concerned primarily with arguments relative to the first issue. We shall hold that the County is preempted from asserting the provisions of a local ordinance that provide for a priority of liens that is in direct conflict with provisions of the Maryland Code, the Maryland Rules of Procedure, and Maryland cases. We will explain our decision after we briefly recount certain pertinent facts. The Facts Montgomery County adopted a local ordinance designed to encourage developers to provide for low and moderate-income housing. 1 Apparently, in order to ensure that the program excluded speculators who could purchase the properties at a low price and then quickly resell for a high profit, the County ordinance contained provisions limiting the resale of proper ⁴⁴⁴ ties for an extended period of time.

These restrictions set up methods for establishing resale prices and a method for computing the sums required to be remitted to the housing authority if the housing units were sold within the prohibited resale periods. In 1992, Deborah Farr purchased one of the units through the Montgomery County Department of Housing and Community Affairs from Rock Run Limited Partnership, the developer. Farr’s deed was from the limited partnership. Farr obtained financing from the Housing Opportunities Commission for Montgomery County in the amount of $94,100, secured by a deed of trust.

Farr defaulted on the loan, and the property subsequently was sold at a foreclosure sale on August 14, 1996, to William T. Wheeler for $147,000. 2 A surplus resulted. On October 26, 1994, after Farr had obtained title to the property but before the foreclosure suit was filed in 1996, May Department Stores, Inc., d/b/a/ Woodward and Lothrop, obtained a judgment against Farr. The judgment subsequently was filed as a “Notice of Lien” in the Circuit Court for Montgomery County. Farr also defaulted on her payments to her homeowner’s association, Avenel Community Association, Inc. Prior to the filing of the foreclosure action, Avenel also had obtained a judgment against Farr.

It was filed in the Circuit Court for Montgomery County in November of 1995. Both May and Avenel filed claims against the surplus resulting from the foreclosure sale. After the foreclosure proceeding was instituted but prior to the sale itself, the Department of Housing and Community Affairs of Montgomery County wrote a letter to a law firm informing them that [t]he MPDU Law provides that if an MPDU is sold through a foreclosure or other Court-ordered sale during the first ten years after the original sale, any amount of that sale price that exceeds the total of the approved resale price plus reasonable foreclosure costs must be paid into the ⁴⁴⁵ County’s Housing Initiative Fund. After payment is made, the covenants will be released by the County.

Apparently, lawyers in that firm were the trustees conducting the foreclosure sale. As far as we can determine, the County, prior to the auditor’s report, never filed a claim against the surplus proceeds of the sale in the proceeding. The auditor brought this to the attention of the court in the Auditor’s Answer to Exceptions to Auditor’s Report. The answer provided: |E]xamination of the Docket Entries does not disclose a claim being file[d] on behalf of County Department of Housing and Community Affairs.

That there is attached to the vouchers furnished to the Trustee letter 7/29/96 from Department of Housing and Community Affairs requesting surplus proceeds. The County’s letter, however, must have caused concern for the auditor because after the sale was ratified, he notified the trial court that he was unable to determine payment of the surplus proceeds and requested a hearing be held before the trial court to determine the apportionment of the surplus. Montgomery County then filed what it termed “Exceptions to Auditor’s Report, Motion to Pay Excess Proceeds to Montgomery County” 3 and requested a hearing. A hearing was held after which the trial court rendered its opinion.

It found: According to the County, said excess triggers distribution pursuant to Section 25A-9(e), which in essence means the County receives the entire surplus notwithstanding any prior “junior” liens on the property. ... According to the ... County, “senior liens” mean either a first mortgage or first deed of trust. No other lienholder, including judgment lienholders, fall within the definition of senior lien.

Hence, the only liens to be paid ⁴⁴⁶ prior to the county obtaining proceeds pursuant to Section 25A-9 are first deeds of trust and liens filed under the Maryland Contract Liens Act. The [CJounty further asserts that the Declaration of Covenants for Avenel, incorporated into the Deed, act to protect the count[y’]s interest and to put any creditors on notice---- Upon review ... this Court finds that pursuant to Section 25A-9(e) of the Montgomery County code, surplus proceeds from the foreclosure sale ..., shall be paid to the Montgomery County Housing Initiative Fund. In support of its ruling the court further finds that the restrictions set forth in this section as provided in the Declaration of Covenants for Avenel Subdivision are covenants that run with the land---Clearly, the covenants run with the land and judgment liens arising after the covenants had been recorded are bound [and] áre subject to Section 25A-9(e) of the [Montgomery County] Code. The next issue ... is whether judgment liens constitute “senior liens” for the purposes of Section 25A-9(e)(4) of the County Code.

The Court need not address the status of judgment lienholders in the ordinary course of property transactions. [4] The narrow issue ... is to define senior lienholder within a specific context. Traditionally, first or prior mortgages and deeds of trust have been labeled “senior” to those of secondary mortgages and deeds of trust. The Court accepts this distinction for purposes of Section 25A-9(e)(4).... The trial court went on to find that the County had a paramount claim to the surplus proceeds because, even though appellants’ judgment liens were recorded prior to any asser ⁴⁴⁷ tion of a lien or claim by the County, these liens were not “senior” liens as described in the Montgomery County Code because they were not first mortgages or deeds of trust.

In other words, the County ordinance was found to control the priorities of the various liens following a judicial sale of a property that had been purchased through this particular County agency. The County argues in its brief that under its home rule power and under the authority of the Maryland Code, section 12.01 of Article 66B, it has the power to enact an affordable housing law and to impose restrictions on the resale of such housing. We agree. Section 12.01(a)(2) of Article 66B expressly permits the legislative bodies of counties, in conjunction with affordable housing programs, to impose “restrictions on ... resale of housing ... to ensure that the purposes” of the act are carried out.

This statute is made applicable to the County by section 7.03 of Article 66B. Clearly, the County had the power to create an affordable housing program that imposed resale prohibitions. Accordingly, we must examine the County ordinance. We agree with the County that the State statute permits the County to impose restrictions on the resale of affordable housing units.

We shall presume, but not decide, that the County has the power to impose restrictions on foreclosure sales and did, in fact, exercise the power to impose such restrictions. We then must address whether the authority granted to the County was sufficiently broad, and sufficiently clear, to enable the County to change the priority of liens, i.e., to confer unilaterally upon itself (a general creditor) a priority ahead of judgment liens afforded a higher priority by State statute. We initially note that the State statute, while specifically granting to the County the ability to enact resale prohibitions, does not grant to the County any specific power to alter the priority status of judgment lien holders. The County created its affordable housing program by enacting Chapter 25A of the Montgomery County Code.

The ⁴⁴⁸ County ordinance, among other things, requires a developer/applicant to execute and record covenants assuring that the ordinance’s “restrictions ... run with the land for the entire period of control,” Montgomery County Code § 25A-5k(l), and that the covenants executed must “bind the applicant, any assignee, mortgagee, or buyer, and all other parties that receive title to the property.” Montgomery County Code § 25A-5k(2). The ordinance then requires that the covenants contain a provision “assuring that ... [t]hese covenants must be senior to all instruments securing permanent financing.” Montgomery County Code $ 25A-5k(2). Of course, the recordation of any covenant prior to the execution of mortgages or deeds of trust normally will encumber the property. Section 25A-9 of the Montgomery County Code, “Control of rents and resale prices; foreclosure,” provides as follows: (a) Resale price and terms.

Except for foreclosure proceedings, any MPDU ... offered for sale ... must not be resold during the control period for a price greater than the original selling price plus: (e) ... If an MPDU is sold through a foreclosure or other court-ordered sale, a payment must be made to the Housing Initiative Fund as follows: (1) ... [A]ny amount of the foreclosure sale price which exceeds the total of the approved resale price under subsection (a), reasonable foreclosure costs, and liens filed under the Maryland Contract Lien Act, must be paid to the Housing Initiative Fund____ (4) If the MPDU is sold subject to senior liens, the lien balances must be included in calculating the sale price. All MPDU covenants must be released after the required payment is made into the Housing Initiative Fund. The effect of the County ordinance on the priority of liens in judicial sales We next examine the effect of the Montgomery County Code on the priority of liens. ⁴⁴⁹ In County Council v. Investors Funding Corp., 270 Md. 403, 413 , 312 A.2d 225 (1973), the Court of Appeals noted what it had said about a county’s home rule power in Montgomery Citizens League v. Greenhalgh, 253 Md. 151, 160-61 , 252 A.2d 242 (1969): “The Council ... is also given statutory power to pass ‘all’ ordinances it deems expedient ... and the only limit on its powers is ... that such an ordinance cannot be inconsistent with ... the laws of the State ....

Gratification would not be afforded the purposes of home rule ... if the language of § 5(S) of Art. 25A were not to be construed as a broad grant of power to legislate on matters not specifically enumerated in Art. 25A____” Investors Funding, 270 Md. at 413 , 312 A.2d 225 (emphasis added). The Investors Funding Court went on to hold that, under home rule, the County was invested with the power to pass ordinances in abrogation of the common law. It reasoned: Apparent from our previous discussion of Article XI-A of the [Maryland] Constitution is our conclusion that its underlying purpose is to share with the counties, within well delineated limits, the legislative powers formerly reserved to the General Assembly.... As indicated, the purpose of home rule was to share the legislative power ... to ... revise ... the ... common law....

Id. at 418 , 312 A.2d 225 (footnote omitted). The Court in Investors Funding , however, went on to discuss a section of the local ordinance passed under the county’s home rule power that appeared to conflict with a public general law. It first discussed a previous case, Heubeck v. Mayor of Baltimore, 205 Md. 203 , 107 A.2d 99 (1954), quoting from that case as follows: “The Public General Law, applicable to the entire State, provides for the eviction of tenants holding over ... if proper notice has been given____ The Rent Control Ordinance, therefore, prohibits an action which the Public Gen ⁴⁵⁰ eral Law permits.... [T]here is a conflict between the ordinance and Public General Law, and as between the two, the Public General Law prevails----” Investors Funding, 270 Md. at 422-23 , 312 A.2d 225 . The Investors Funding Court then examined whether the county’s ordinance relating to retaliatory evictions conflicted with a State law providing for summary evictions.

The Court, referring to the holding in Heubeck , held: We are not persuaded to alter that conclusion by the fact that the prohibition of Chapter 93A [the county ordinance] operates indirectly and circuitously. By making unlawful the action which the Public General Law permits, this ordinance clearly creates a conflict.... ... Since the public general laws ... grant a landlord a legal right to evict ... the County may not require him to agree not to do so. Therefore, § 93A-26(o) is also invalid.

Id. at 423-24, 312 A.2d 225 (footnote omitted). The Court also invalidated the county ordinance’s prohibition of oral leases, holding: This provision is in conflict with the provisions of Art. 21, §§ 2-101 and 2-102 of the recently adopted Statute of Frauds____ It is clear to us that oral leases, valid at common law, are recognized and permitted by the public general law and hence may not be prohibited by the Council.... Id. at 425, 312 A.2d 225 . We turn now to the case at hand.

Section 1H02 of Md.Code, the Courts and Judicial Proceedings Article (1995 Repl-Vol., 1997 Supp.) provides: (a) Definition. — In this section, “land” means real property or any interest in or appurtenant to real property. (b) Judgment of court of original entry. — If indexed and recorded as prescribed by the Maryland Rules, a money judgment of a court constitutes a lien to the amount and from the date of the judgment on the judgment debtor’s interest in land located in the county in which the judgment ⁴⁵¹ was rendered except a lease from year to year or for a term of not more than five years and not renewable. (c) Judgment of another court. — If indexed and recorded as prescribed by the Maryland Rules, a money judgment constitutes a lien on the judgment debtor’s interest in land located in a county other than the county in which the judgment was originally entered____ [Emphasis added.] Maryland Rules of Procedure (Md.Rule) 2-621 contains similar provisions. There is no dispute as to whether the judgment liens of appellants were recorded and indexed properly.

They were, at the time of the foreclosure sale, valid judgment liens. Moreover, appellants’ judgment liens were liens on the Farr property, which was the subject of the foreclosure sale. We initially note that under Maryland statutory law only a purchase money mortgage, or perhaps in some cases an instrument securing future advances, takes priority over a prior recorded and indexed judgment lien. The senior status afforded purchase money mortgages was created by statute.

Section 7-104 of Md.Code, Real Property Article (1996 Repl. Vol., 1997 Supp.), provides: § 7-104. Priority of purchase-money mortgage or deed of trust. If property is sold and granted, and at the same time the purchaser gives a mortgage or deed of trust to secure total or partial payment of the purchase money, the mortgage or deed of trust shall be preferred to any previous judgment or decree for the payment of money which is obtained against the purchaser if it recites that the sum received is all or part of the purchase money of the property.

This section is applicable regardless of whether the mortgage or deed of trust is given to the vendor of the property or to a third party who advances all or part of the purchase money. If an owner of unmortgaged property who, after the purchase of the property, acquires a new indebtedness secured by a mortgage on that property (this mortgage would then be a first mortgage or deed of trust), that first mortgage is, nevertheless, inferior to any prior recorded and indexed judg ⁴⁵² ment lien. The mortgage would remain a first mortgage, but would not be the senior lien. It would be inferior and junior to the prior judgment lien.

Maryland Rule 3-621 states that any money judgment “constitutes a lien ... on the judgment debtor’s interest in land located in a county.” The lien is effective from the date it is recorded and indexed in the county in which the land is located. The rule provides that the lien is established formally by filing, with the Clerk of the Court of any county, a “Notice of Lien of Judgment.” Appellants filed such notices in the case at bar. Maryland Rule 14 — 201(b)(5) defines “Lien Instrument” to include “any other instrument creating or authorizing the creation of a lien upon the property.” The liens were, therefore, perfected as property liens prior to any claim being asserted by the County. In order to understand better the statutory and case law treatment of the matter of judgment lien priorities, we shall depart from our normal practice of commencing our discussion of the law with the most recent cases and instead begin by noting the long history in Maryland of the establishment of such priorities.

An early Maryland case emphasized that judgment liens have, since the early days of the State, enjoyed a statutory basis. Messinger v. Eckenrode, 162 Md. 63 , 158 A. 357 (1932), involved the priority between two judgment liens, one of which resulted from the advancement of purchase money for the property in question. The judgment holder in respect to the purchase money obligation, Messinger, had not protected her claim in the manner provided by the Maryland statute in effect at that time for the protection of advancements of purchase money. The Court of Appeals discussed the nature of the priorities of liens and noted that such priorities had statutory origins.

Additionally, the Court discussed the effect of the purchase money creditor’s failure to perfect her claim in the manner provided for by the then existing statute. The Court stated: ⁴⁵³ The contention of the appellees [the Eckenrodes] is that their judgment, having been entered first and being effective from its date, is entitled to priority, while the appellant [Messinger] contends that the only real property the Heagys had was that which she conveyed to them, and that her judgment gave her an equitable lien for the purchase money, and that she is therefore entitled to the entire proceeds of sale, and, if that does not appeal to the court, then, the property coming under the judgments at the same time, the proceeds should be distributed pro rata to the judgments of the appellant and the appellees. The answer to the appellants’ first contention is that a judgment, being a general and not a specific lien, is enforceable, not only against the property sold by the creditor to the debtor, but against any other property within the jurisdiction of the court wherein the judgment is entered. The fact that the appellant chose to take a judgment in payment of the purchase money does not give her security an effect different from that of a judgment to any other person.

The statutes and decisions in this state show the vendor the ways and means whereby unpaid purchase money may be secured, and to act otherwise is to take the risk which negligence of one’s rights involves. By Code, art. 66, sec. 4, it is provided that a purchase-money mortgage shall be superior to any previous judgment or decree or the payment of money. The same protection may also be afforded a third party who advances the purchase money in whole or in part. A vendor’s lien for