Montgomery County v. May Department Stores Co.

RODOWSKY, Judge. This dispute is between claimants to surplus funds in a mortgage foreclosure. The petitioner, Montgomery County, Maryland (the County), rests its claim on Montgomery County Code (1994) (MCC), Chapter 25A, as amended. The claim of respondent, May Department Stores Co. d/b/a Woodward & Lothrop, Inc. (the Store), is based on a judgment lien.

The Court of Special Appeals held in favor of the Store. May Dep’t Stores v. Montgomery County, 118 Md.App. 441 , 702 ¹⁸⁸ A.2d 988 (1997). We granted the County’s petition for certiorari, and we shall affirm for the reasons explained below. 1 I MCC Chapter 25A governs the County’s Moderately Priced Dwelling Unit (MPDU) program. One feature of the County’s effort to meet the need for affordable housing authorizes an increase in the zoning density of a residential real estate development if the developer includes MPDUs. § 25A-5. 2 The ordinance requires there to be an agreement between the developer and the County, and that recorded covenants be imposed by the developer on the MPDU lots. § 25A-5(k).

These covenants “run with the land for the entire period of control,” § 25A-5(k)(l), and they “bind the applicant \ie., the developer], any assignee, mortgagee, or buyer, and all other parties that receive title to the property. These covenants must be senior to all instruments securing permanent financing.” § 25A-5(k)(2). The period of control for MPDUs built for sale, as contrasted with those built for rental, is ten years from the date of initial sale. § 25A-3(g). The ordinance also sets forth rules on maximum sale and resale prices and addresses foreclosure and judicial sales of MPDUs.

When such a unit is sold by a developer to the first grantee, there is a maximum selling price established by the County Executive. § 25A-7(a). The maximum price for resale of an MPDU within the control period is fixed in accordance with § 25A-9(a), which in relevant part reads: “(a) Resale pnce and terms. Except for foreclosure proceedings, any MPDU constructed or offered for sale ... under this Chapter must not be resold during the ¹⁸⁹ control period for a price greater than the original selling price plus: “(1) A percentage of the unit’s original selling price equal to the increase in the cost of living since the unit was first sold, as determined by the Consumer Price Index; “(2) The fair market value of improvements made to the unit between the date of original sale and the date of resale; “(3) An allowance for closing costs which were not paid by the initial seller, but which will be paid by the initial buyer for the benefit of the later buyer; and “(4) A reasonable sales commission if the unit is not sold during the priority marketing period to an eligible person from the [County’s] eligibility list.” Before any MPDU may be offered for resale during the control period, it “must first be offered exclusively for 60 days” to the Montgomery County Department of Housing and Community Affairs (the Department). §§ 25A-9(b)(l); 25A-3(j). If there is no resale of an MPDU during the control period, then, on the first sale of the unit after the control period ends, “the seller must pay to the Housing Initiative Fund one-half of the excess of the total resale price over” a maximum price computed under the ordinance. § 25A-9(c)(1).

The Housing Initiative Fund (the Fund) is one “established by the County Executive to achieve the purposes of Section 25B-9” of MCC. § 25A-3(n). 3 ¹⁹⁰ The matter now before us involves the foreclosure sale of an MPDU during the control period when the unit was held by the original grantee from the developer. The relevant section of the ordinance is § 25A-9(e), which in pertinent part reads: “Foreclosure or other court-ordered sales. 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) If the sale occurs during the first 10 years after the original sale or rental, any 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 [Maryland Code (1974, 1996 Repl.Vol., 1998 Cum.Supp.), §§ 14-201 through 14-206 of the Real Property Article], must be paid to the Housing Initiative Fund. If the remaining balance under the original first deed of trust or mortgage exceeds the resale price under subsection (a), then the difference between the foreclosure sales price and the balance of the original first deed of trust (plus reasonable foreclosure costs) must be paid to the 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.” ¹⁹¹ Montgomery County first enacted an MPDU ordinance in 1974.

See Montgomery County Code (1972, 1976 Cum.Supp.), ch. 25A. By Chapter 564 of the Acts of 1991, the Maryland General Assembly specifically authorized local governments to develop and administer affordable housing programs which include restrictions and regulations on the sale and purchase of those properties. See Md.Code (1957, 1995 Repl.Vol.), Art. 66B, “Zoning and Planning,” § 12.01. 4 II In May 1992 Rock Run Limited Partnership (RRLP), the developer of the Avenel Subdivision, recorded a declaration of covenants in compliance with the MPDU program. The declaration covers sixty lots in Avenel, which are therein called “The Property,” including Lot 140, 9742 Pleasant Gate Lane, Potomac, Maryland 20854, the lot involved in the case before us.

Article II of the declaration provides: “For a period of ten years beginning on the date of recordation of the first deed from the Declarant or such other period as established by law, The Property and the improvements hereon and those that may subsequently be made to The Property must not be sold for an amount in excess of the maximum sales price established by written regulation of the County Executive from time to time and in accordance with Chapter 25A of the Montgomery County ¹⁹² Code, 1984, as amended, and any appropriate Executive Regulations.” Article X of the declaration, the only article that specifically addresses foreclosure sales, reads in relevant part: “If The Property is sold at a foreclosure sale, the restrictions contained in the Covenants will be terminated after the County has received the payment required to be made to the Housing Initiative Fund in accordance with the provisions of Section 25A-9(e) ... after which the provisions of these Covenants will terminate.” Furthermore, in the declaration RRLP irrevocably assigned to the County enforcement rights under the covenants, which require that the original and all subsequent deeds contain conspicuous language reciting that the property is subject to the recorded covenants. In November 1992 RRLP conveyed Lot 140 by deed to Deborah Farr (Farr) “in fee simple” for $99,078. The conveyance was expressly subject to the declaration of covenants. Farr financed the purchase by a loan from a lender designated by the Montgomery County Housing Opportunities Commission (HOC) in the amount of $94,100.

That loan was secured by a deed of trust. In September 1994 the Store obtained a judgment against Farr in the District Court of Maryland sitting in Montgomery County in the amount of $3,918.33. In October 1994 the notice of lien of this judgment, pursuant to Maryland Rule 3-621(c), was recorded in the Circuit Court for Montgomery County. Farr defaulted on her note secured by the deed of trust in 1995.

HOC acquired the note, substituted trustees, and, in July Í996, instituted foreclosure. While the foreclosure sale was pending the County notified the trustees that Lot 140 was subject to recorded covenants and that the current controlled resale price of the property was $105,121. At the foreclosure sale in August 1996 Lot 140 brought $147,000. This sale was ratified, and the matter was referred to an auditor to state an account.

The Store filed a claim, and the ¹⁹³ auditor considered that the County had filed a claim to the entire surplus. The auditor’s report reflected credits of $148,-858.50, representing the foreclosure sale price plus interest to the settlement date, and debits of $119,875.36, representing a statement of mortgage debt, with interest, of $108,761.12, costs of sale of $10,750.07, and a tax adjustment of $364.17. This resulted in a surplus of $28,983.14. The auditor was “unable from the Court file to determine the priority of payment and recommend[ed] that the Trustees, under appropriate Order, pay same into the Registry of the Court,” pending hearing before the circuit court.

The County excepted to the auditor’s report and moved for payment of the excess proceeds into the Fund. In an affidavit in support of the motion, the County recalculated the approved resale price from approximately $105,121 ($96,725 original purchase price plus 8.68% CPI adjustment) to $105,352.87 ($96,725 original purchase price plus 8.92% CPI adjustment) to reflect the higher CPI rate in August 1996. The circuit court disallowed the Store’s claim and ordered that the entire surplus be paid to the Fund. Because the Store’s judgment lien had been recorded after the declaration of covenants, which the court concluded ran with the land, the court held that the judgment lien was subject to the provisions of § 25A-9(e).

Agreeing with a further argument by the County, the circuit court held that “liens” in § 25A-9(e)(4) (“If the MPDU is sold subject to senior liens, the lien balances must be included in calculating the sale price.”) referred only to primary mortgages and first deeds of trust, and not to judgment liens. The Store also claimed that the ordinance violated equal protection because there was no rational basis for distinguishing in § 25A-9(e)(l) between its judgment lien and a lien filed under the Maryland Contract Lien Act. This argument was rejected by the circuit court on the ground that the public interest in affordable housing furnished a rational basis for the distinction. On appeal the Court of Special Appeals, correctly in our view, analyzed the issue as one of priority of liens against ¹⁹⁴ the realty.

May Dep’t Stores, 118 Md.App. 441 , 702 A.2d 988 . The court stated that the Store held a valid judgment lien against Farr’s property prior to foreclosure. Under Maryland Code (1974, 1996 Repl.Vol., 1998 Cum.Supp.), § 7-104 of the Real Property Article, only a purchase money mortgage or deed of trust or, in some instances, an instrument securing future advances, takes priority over a prior recorded and indexed judgment lien. May Dep’t Stores, 118 Md.App. at 451 , 702 A.2d at 993 .

Thus, if a property owner of an unmortgaged property incurs a new indebtedness secured by a mortgage on the property, ie., a first mortgage, that first (non-purchase money) mortgage is inferior to any prior recorded judgment lien; the first mortgage would be junior to the senior, recorded judgment lien. Id. at 451-52 , 702 A.2d at 994 . The court reviewed the statutory history of judgment lien priorities, id. at 452-58 , 702 A.2d at 994-97 , and concluded that “[a]s far as we can determine, the County never had a judgment lien against the property.” Id. at 458 , 702 A.2d at 997 . The County may have had a cause of action against Farr based on the covenant, but it would not have been entitled to the foreclosure proceeds even if there were no judgment creditors. “One generally cannot, during the post-ratification and audit stages of a foreclosure action, assert what is essentially a cause of action to obtain the surplus from the foreclosure sale.

Normally, proceedings based upon the alleged cause of action are necessary to achieve judgment creditor status and, .through that status, priority.” Id. Further, held the court, the covenants were contractual obligations which, absent statutory provision, do not achieve automatic priority in a foreclosure proceeding. Id. The court ruled that the County cannot change by ordinance the order of priorities created by public general laws, the Maryland Rules of Procedure and Maryland cases respecting a judgment lien ¹⁹⁵ holder’s claim to the surplus proceeds of a foreclosure sale.

Id. at 460 , 702 A.2d at 998 . We granted the County’s petition for certiorari which raises a single question, namely: “Whether the provision of the Montgomery County Code that implements State-granted authority to create affordable housing conforms with State law defining the priority of liens.” In its argument in support of the petition the County argued that the covenant established a lien without further action, that the Store’s lien was junior and extinguished in the foreclosure, and that there was no preemption because the provisions of Chapter 25A are authorized by State law. In its brief in this Court the County for the first time additionally presents an alternative argument, namely, that the County acquired a property interest in Lot 140 that was not reached by the Store’s judgment lien. Before turning to our analysis, it should be noted that the dispute in this case is between the County, which claims all of the surplus, and the Store, which seeks to have its judgment lien paid out of the surplus.

Thus, we need not decide whether Farr has any interest in the surplus. Nor are we concerned with whether the covenants would run with the land and bind assignees of Farr or bind the purchaser at the mortgage foreclosure sale. Ill The covenants did not create a lien on Lot 140. 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.’ ” Chevy Chase Bank, FSB v. Chaires, 350 Md. 716, 731 , 715 A.2d 199, 206 (1998) (quoting 3 American Law of Property § 13.20, at 537 n. 4 (A.J. Casner ed.1952)).

See also Westinghouse Elec. Corp. v. State Tax Comm’n, 206 Md. 392, 402 , 111 A.2d 661, 666 (1955) (“A lien is merely a charge upon the thing as security for a debt.”). ¹⁹⁶ Article II of the declaration of covenants states that Lot 140 “must not be sold for an amount in excess of the maximum sales price established by written regulation of the County Executive ... and in accordance with Chapter 25A....” There is no language by which grantees of MPDUs in Avenel agree to the imposition of a lien on their particular lot. Further, it is far from clear that Article II even applies to the instant matter, inasmuch as Article II may be read as limited to voluntary sales. Foreclosure sales are addressed in Article X of the covenant.

It states simply that in the event of a foreclosure sale “the Covenants will be' terminated after the County has received the payment required to bé made” to the Fund under § 25A-9(e). In Article X the use of the passive voice muddles where any obligation lies, but presumably it would be on the covenantor, in this case Farr. In any event Article X contains no language contractually imposing a lien on the property for any amount payable under § 25A-9(e). Nor does § 25A-9(e) create a statutory lien.

There is no language expressly imposing a lien in that section. Once again, the section speaks in the passive voice: the computed sum “must be paid to the Housing Initiative Fund.” § 25A-9(e)(1). In this subsection, as under the covenants, the obligation presumably is on the covenantor. Inclusion in a contract of language expressly creating a lien is not an absolute prerequisite to the recognition of a lien in equity.

In Keyworth v. Israelson, 240 Md. 289 , 214 A.2d 168 (1965), we said: “An equitable hen is based on specific enforcement of a contract to assign property as security. The contract need not stipulate for the hen in express terms; it is enough if .that is the fair and reasonable implication of the terms employed. A mere promise to pay a debt or obhgation does not of itself, however, create a hen unless the intention to create it is apparent from the instrument and circumstances leading to it. Johnson v. Johnson, 40 Md. 189, 196 (1874).

See 33 Am.Jur. Liens § 18 and 4 Pomeroy’s Equity Juris ¹⁹⁷ prudence §§ 1235-1237 (5th ed.1941); but also see 41 Harv. L.Rev. 404 (1928).” Id. at 305, 214 A.2d at 177 . A negative covenant was involved in Equitable Trust Co. v. Imbesi, 287 Md. 249 , 412 A.2d 96 (1980).

There, in connection with a loan from a bank, the borrower promised the bank in a notarized and recorded instrument that the borrower would not encumber or convey certain real estate owned by him so long as he was indebted to the bank. The bank sought to foreclose on the land, asserting that the covenant created an equitable mortgage, but we rejected that argument. Quoting favorably from 2 G. Gilmore, Security Interests in Personal Property §