Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Co.

McDonald, J. A lien on real property is a right based on contract, statute, or common law to have a debt or charge satisfied out of the particular property. 1 Three common points of dispute about a lien are (1) whether one may be established; (2) if so, how; and (3) when it is established. The first two issues relate to the creation of a lien; the third to its priority. With some exceptions, the priority of a lien is determined by the date it is recorded in the land records. At issue in this case is the use of a lien as part of a deferred financing arrangement for the construction of the water and sewer infrastructure to serve a new home development.

There is no dispute that a lien can be created on the developed property to secure the payment of an assessment for the construction of that infrastructure. There is, however, a dispute as to when that lien takes effect—which must be resolved by answering how it is created. To carry out the deferred financing strategy, the developer in this case, Respondent Saddlebrook West, LLC (“Saddle-brook”) made use of an instrument entitled a Declaration, ³¹⁶ which provided for payments of an annual assessment by future homeowners to a related entity, Respondent Saddle-brook West Utility, LLC (“Utility”). The Declaration, which provided for the granting of a lien by future homeowners to Utility to secure the payment of the annual assessment, purported to give priority to that lien at a date before the development was constructed or any homeowner had granted a lien under the terms of the Declaration.

Petitioner Select Portfolio Servicing, Inc,, the holder of deed of trust that arose out of the financing of one of the homes in the development, brought this action to clarify the relative priority of its interest in that property in relation to the lien asserted by Utility for delinquent assessments. We hold that the Declaration recorded by Saddlebrook did not itself create a hen on the property. Rather, Utility must follow the procedures set forth in the Maryland Contract Lien Act, Maryland Code, Real Property Article (“RP”), § 14-201 et seq., to establish a hen under the Declaration with respect to delinquent assessments—as it did on at least two occasions with respect to the particular property that is the subject of this case. The priority of that hen is determined by the date of its recording in the land records.

I Background A. Water and Sewer Infrastructure in the Washington Suburban Sanitary District The Washington Suburban Sanitary District (“Sanitary District”) is comprised of portions of Prince George’s and Montgomery Counties. The Washington Suburban Sanitary Commission (“WSSC”) is a bi-county state agency established by State law to construct and operate water supply, sewerage, and storm water management systems in the Sanitary District. See generally Maryland Code, Public Utilities Article (“PU”), Division II; see also WSSC v. Phillips, 413 Md. 606, 630-32 , 994 A.2d 411 (2010); WSSC v. Utilities, Inc. 365 Md. ³¹⁷ 1, 8, 775 A.2d 1178 (2001); Katz v. WSSC, 284 Md. 508, 509 , 397 A.2d 1027 (1979). In 1998, the burden of constructing and paying for new water and sewer facilities in a private development to connect to the WSSC system was shifted from the WSSC to the developer by statute, although the WSSC remains responsible for overseeing that construction and operating the system.

Chapter 516, Laws of Maryland 1998, now codified at PU § 23-201. This case arises from an instance in which, in accordance with PU § 23-201, a developer entered into an agreement with the WSSC to assume responsibility for the construction of water and sewer facilities for a development in part of the Sanitary District located in Prince George’s County. The developer then recorded a document entitled a Declaration in the land records of Prince George’s County indicating that the expense of creating the infrastructure for the development was to be passed on to future homeowners in the form of an annual assessment. The homeowner’s liability was to be secured by a lien granted by the homeowner on the homeowner’s property.

This case concerns the procedure for establishing that lien and its priority. B. Facts The relevant facts were largely undisputed and were presented at trial through stipulation and documents. To the extent that expert testimony was contested, it had more to do with the relevance of the opinion testimony than its substance. Saddlebrook, Utility, and the Subdivision In the late 1990s, Saddlebrook planned to develop a residential subdivision known as Saddlebrook West (“the Subdivision”) in a portion of Prince George’s County that lies within the Sanitary District.

Saddlebrook planned ultimately to develop a total of 330 lots. The dispute in this case relates to the first phase of the Subdivision, which consisted of 187 lots on which single-family homes would be built. In December 1999, Saddlebrook entered into a memorandum of understanding (“MOU”) with the WSSC under which ³¹⁸ Saddlebrook would be responsible for construction of water and sewer extensions for the Subdivision, subject to the WSSC’s inspection and approval. As part of the plan, Utility would undertake the construction to connect the lots in the Subdivision to water and sewer service provided by the WSSC.

Responsibility for maintenance of the infrastructure in the future would be shared by the WSSC and the individual lot owners. On February 4, 2000, Saddlebrook purchased the land on which the project was to be built. The deed was recorded in the land records for Prince George’s County on February 17, 2000. The Declaration On April 4, 2000, Saddlebrook, as “Declarant,” executed a “Declaration of Deferred Water and Sewer Charges” (“the Declaration”) in favor of Utility with respect to the Subdivision.

The Declaration recited that Saddlebrook and Utility would provide water and sewer infrastructure and connections for the lots. 2 To recoup the cost of building that infrastructure, the Declaration imposed an annual water and sewer charge in 23 equal installments of $700 with respect to each lot in the Subdivision. The charge was to be paid by the lot owner to Utility and would be due on January 1 of each year following conveyance of the lot to the lot owner. 3 Saddlebrook and the builders of the homes in the Subdivision were explicitly excluded from the obligation to pay the annual assessment during the period of time that they owned lots. One paragraph of the Declaration stated that each lot owner, by accepting deed to a lot, agrees to pay the annual ³¹⁹ water and sewer charge to Utility and grants Utility a lien to secure payment of that assessment. A later paragraph stated that the lien created with respect to each lot would have priority from the date of the recording of the Declaration in the land records over “any subsequently recorded or created lien, deed of trust, mortgage or other instrument encumbering” a lot.

The Declaration stated that, if a lot owner fails to pay an annual assessment, Utility may, among other things, foreclose on the lien against the lot “in the manner now or hereafter provided for the foreclosure of mortgages, deeds of trust or other liens on real property” and foreclose on the lien under the Maryland Contract Lien Act. The Declaration stated that a lot owner grants to Utility a power of sale that could be exercised in the event of foreclosure of a lien. The Declaration did not state the value of the lien it sought to create. Finally, the Declaration stated that “[a]ll provisions of this Declaration, including the benefits and burdens, shall touch, concern and run with the land ... and shall inure to the benefit of’ Saddlebrook, Utility, and their successors.

Depending on one’s point of view, this method of deferred financing of the water and sewer infrastructure in the Subdivision either disguised the true price of a home in the Subdivision or simply decreased the up-front cost of homeownership and thereby made such housing more affordable. On May 17, 2000, the Declaration was recorded in the land records of Prince George’s County. An exhibit to the Declaration identifies by lot, block, and plat number the 187 lots to which the Declaration pertains. A “Land Instrument Intake Sheet” for the Declaration shows that Saddlebrook paid a $75 recordation charge and a $2 surcharge.

No recordation or transfer taxes were charged or paid. Construction of Water and Sewer Facilities and Homes in the Subdivision Saddlebrook contracted with W.F. Wilson & Sons, Inc., to construct and install the water and sewer facilities for the 187 lots. On November 21, 2000, the WSSC certified that the conditions of the MOU had been satisfied and that service would be provided to those lots. ³²⁰ On October 3, 2001, Saddlebrook entered into a “Lot Purchase Agreement” with Maryland Homes CD, LLC (“Maryland Homes”), a builder, for 46 of the lots. A copy of the Declaration was attached to the Lot Purchase Agreement and “incorporated [tjherein by reference.” 4 Under the terms of the Lot Purchase Agreement, Maryland Homes agreed to disclose the annual deferred water and sewer benefit charge to each subsequent home purchaser as part of the sales transaction. 5 The 187 lots were conveyed to Maryland Homes by separate deeds that each covered one or more lots.

Maryland Homes built single-family homes on all 187 lots. The Property at Issue The property that became the setting for the legal issues presented in this case involves a changing cast of characters and a series of anomalies of the type familiar to anyone who has studied recent foreclosure cases: unsigned documents, missing attachments, incongruous dates, title searches that overlook key filings, deeds endorsed in blank, unpaid assessments, expired liens. The confluence of these elements provides a bloopers reel for a real property course. 6 Of course, had everything been done perfectly on all sides, there likely would be no case before us. The property at issue in this case is 8201 River Park Road (“the Property”).

It was sold by Saddlebrook to Maryland ³²¹ Homes on November 7, 2001; a deed conveying the lot to Maryland Homes was recorded in the land records on November 13, 2001. The deed states that it is subject to “all easements, covenants and restrictions of record.” On April 1, 2002, Charles Bradley, Jr., purchased the Property from Maryland Homes for $347,388. He financed the transaction with a $351,922 purchase money mortgage. The deed conveying the Property from Maryland Homes to Mr. Bradley, which was recorded in the land records on April 23, 2002, states that it is made “subject to all easements, covenants, and restrictions of record.” Statements of Lien Pursuant to the Declaration, the first annual water and sewer charge on the Property came due on January 1, 2003.

Mr. Bradley apparently failed to pay that charge—or the charge that came due the following year on January 1, 2004. As a result, a management company acting on behalf of Utility recorded two “Statements of Lien” in favor of Utility in the land records with respect to the unpaid charges. In particular, on March 1, 2004, a Statement of Lien in the amount of $1,072.50 (plus recording costs of $137.50) was recorded against the Property. On November 17, 2004, a second Statement of Lien in the amount of $1,365.00 (plus recording costs of $213.80) was recorded. 7 Both Statements of Lien recite that the Property is covered by the Declaration and that it is subject to a lien for the amount stated pursuant to the Maryland Contract Lien Act.

Sale of Property by Mr. Bradley to Ms. Mitchell Shortly after the second Statement of Lien was recorded, Mr. Bradley sold the Property to Sherrylyn Mitchell for $565,000. 8 A deed dated January 6, 2005, conveying the Prop ³²² erty from Mr. Bradley to Ms. Mitchell was recorded in the land records on March 8, 2005. According to a Land Instrument Intake Sheet that appears in the land records with the deed, Ms. Mitchell financed the purchase of the Property with a $480,250 loan secured by a deed of trust. 9 In the deed conveying the Property, Mr. Bradley represented that he “has not done or suffered to be done any act, matter or thing whatsoever, to encumber the property hereby conveyed[.]” However, the deed made no reference to the Declaration or Statements of Lien and, unlike the deed that had conveyed the Property to Mr. Bradley, did not explicitly state that it was “subject to all easements, covenants and restrictions of record.” It does appear that, at some point, perhaps unrelated to this particular conveyance, Ms. Mitchell executed a form document entitled “Notice to Purchaser of Deferred Water and Sewer Charges,” acknowledging the existence of the annual charge for lots in the Subdivision. While that document refers to “the Lot,” it does not identify the lot by address or otherwise. Next to Ms. Mitchell’s signature appears the handwritten date “9-1-01.” The document also bears a signature of a representative of Maryland Homes (designated in the document as the “Seller”) with a date of “9/4/01.” These dates are long before the conveyance of the Property by Mr. Bradley to Ms. Mitchell, pre-date the conveyance by Maryland Homes to Mr. Bradley, and indeed, pre-date the Lot Purchase Agreement between Saddlebrook and Maryland Homes.

There is no evident solution in the record to this puzzle. 10 ³²³ In any event, whatever knowledge either party to the transaction may have had of the annual assessment, the delinquency with respect to the Property, and the action that Utility had already taken under the Maryland Contract Lien Act to establish liens with respect to that delinquency, the Statements of Lien were not paid, cleared, and released upon closing of the sale of the Property by Mr. Bradley to Ms. Mitchell. Refinancing the Property with a Predecessor of Select Portfolio Ms. Mitchell subsequently sought to refinance the loan on the Property. She applied to Long Beach Mortgage Company (“Long Beach”) for a $552,000 loan. In connection with the new loan, Long Beach ordered a two-party title search of the Property—ie., a search that included Ms. Mitchell and Mr. Bradley, but not prior owners.

The title search did not reveal the Declaration. Neither did the title searcher find the two recorded Statements of Lien, On May 25, 2006, Ms. Mitchell settled on the loan with Long Beach. The loan was secured by a deed of trust in favor of Long Beach (“Deed of Trust”), which was recorded in the land records on August 18, 2006. 11 Presumably because Long Beach was unaware of the Statements of Lien, they were not paid, cleared, and released at closing. Long Beach apparently sold Ms. Mitchell’s loan to JP Morgan Chase Bank, N.A (“Chase”). 12 Chase in turn eventually sold the loan to Select Portfolio during the conduct of this litigation.

For simplicity, we shall refer to Long Beach, Chase, and Select Portfolio collectively as “the Lender.” 13 ³²⁴ Utility Attempts to Foreclose on the Property The record is not clear on whether Mr. Bradley paid the annual assessment due on January 1, 2005, or whether Ms. Mitchell paid the assessments for the years after the Property was conveyed to her. There appears to be no dispute that she did not pay off the liens imposed for the period during which Mr. Bradley owned the Property. In any event, Utility apparently took no action to enforce Statements of Lien before they expired in 2007. See RP § 14-204(c) (2007) (requiring an action to foreclose under a statement of lien to be commenced within three years of the date of recordation). 14 Some years later, on October 7, 2010, Utility commenced a foreclosure proceeding in the Circuit Court for Prince George’s County against the Property relating to the unpaid water and sewer charges based on the Declaration itself.

On March 5, 2012, the Lender filed a motion to stay and dismiss the foreclosure proceeding. That same day, the Lender filed the declaratory judgment action that gives rise to this appeal. Utility later voluntarily dismissed the foreclosure action. Declaratory Judgment Action by the Lender The Lender’s amended complaint named as defendants Sad-dlebrook, Utility, Ms. Mitchell, the Saddlebrook West Homeowners Association, Inc. (“the HOA”), and the trustees who filed the foreclosure action on Utility’s behalf (“Trustees”).

The Lender also named as defendants the Clerk of the Circuit Court for Prince George’s County, the Director of the Prince George’s County Office of Finance, and the Director of the State Department of Assessments and Taxation (collectively, the “public defendants”). ³²⁵ The amended complaint alleged, among other things, that the Declaration did not itself create a lien that gave Utility a priority over the Deed of Trust. It stated that, if the Declaration did create a lien, Utility would have had to pay approximately $60,000 in recordation and transfer taxes at the time it was filed and would not have had to record the Statements of Lien under the Maryland Contract Lien Act. Count I of the amended complaint asked the Circuit Court to declare that the Declaration was not itself a lien against the Property, that Utility had no security interest in the Property, and that the Lender’s Deed of Trust was the first priority lien against the Property. On the alternative assumption that the Declaration was intended to create a lien, Count II of the amended complaint sought mandamus relief against the public defendants, requiring them either to collect recordation and transfer taxes from Utility with respect to the Declaration or to remove that document from the land records.

Count III of the amended complaint alleged that Saddlebrook and Utility had committed a fraud by drafting the Declaration in a way that concealed from the public and government authorities that it was intended to create a lien directly and asked the court to award compensatory and punitive damages, as well as attorneys’ fees. The Circuit Court awarded summary judgment in favor of the public defendants with respect to the request for mandamus relief in Count II on the ground that there was no justiciable controversy between them and the Lender; 15 the Lender voluntarily dismissed its cause of action for damages in Count III. Following discovery, the case proceeded to trial on Count I with Saddlebrook, Utility, and Ms. Mitchell (who was self-represented) participating as defendants. 16 ³²⁶ The Trial The Circuit Court conducted a bench trial on September 17 and 18, 2013. As noted earlier, the basic facts of the transactions and governing documents were undisputed and presented in the form of a stipulation of facts together with joint exhibits.

Testimony concerning the underlying facts was very limited. 17 One of the principals of Saddlebrook was called by the Lender to testify concerning some of the background of the development that resulted in the recording of the Declaration. There was very brief testimony by Ms. Mitchell concerning her purchase and refinance of the Property. A custodian of documents for the Lender identified a deed. Most of the testimony at the trial was provided by expert witnesses.

However, instead of offering competing opinions of similar experts, the parties presented opinions from different types of experts. The Lender presented expert testimony from three individuals with extensive experience with title searches and title insurance. They testified that the Declaration would be regarded as a notice instrument, as opposed to a lien, by the title insurance industry. A title abstractor testified that a lender in a refinance transaction would typically order a “two-party” title examination which, in this case, would not have revealed the Declaration directly, but which should have revealed the Statements of Lien, which reference the Declaration.

According to the title abstractor, the Declaration, if discovered, would be reported as an “exception” to the title, but not as a lien or encumbrance on the Property—ie., it ³²⁷ would affect the scope of the title insurance policy, but not the decision to issue the policy. An attorney for a title insurance company likewise opined that the Declaration would be treated as an exception in a title report—similar to an exception for an easement. The Declaration itself would not be regarded by the title insurer as an existing lien or encumbrance, but rather as notice of the potential creation of a lien for unpaid charges. Discovery of a recording like the Declaration might prompt further inquiry into whether payment of the.assessment was current.

In the same vein, an underwriter for a title insurance company opined that the Declaration was a notice instrument which would not affect the willingness of a title insurance company to issue a policy, as opposed to a lien, which would affect the issuance of a policy. Saddlebrook and Utility largely did not contest the opinions of the Lender’s experts, but argued that they were irrelevant 18 and presented the testimony of a real estate attorney who had drafted similar declarations to the one in this case and who opined that the Declaration in this case was a covenant running with the land that created a lien against the Property. 19 At the conclusion of the trial, the Circuit Court asked the parties to submit proposed findings of fact and conclusions of law concerning the issues in the case. The parties did so. Circuit Court Ruling On November 20, 2013, the Circuit Court issued a three-page opinion and order that concluded that the Declaration “is ³²⁸ a valid, enforceable first-priority lien encumbering the [P]rop-erty . 20 The court did not explicitly adopt any of the proposed findings of fact or conclusions of law submitted by the parties.

The court held that the Declaration was a covenant running with the land. The court further reasoned that the Declaration was a “super lien” in favor of Utility that “takes effect” when a lot is sold to the first homeowner—in this case, Mr. Bradley. Since that event preceded the recording of the Lender’s Deed of Trust in the land records, Utility’s lien had priority over the Deed of Trust. The court rejected the Lender’s argument that the Declaration, under such an interpretation, would be invalid under the rule against perpetuities.

The court faulted the Lender for not discovering the Declaration by conducting a more comprehensive title search and ruled that the failure of the public defendants to collect recordation and transfer taxes upon the filing of the Declaration did not affect its validity. While the court did not expressly address the Lender’s argument that the Maryland Contract Lien Act is the sole vehicle for enforcement of any lien created under the Declaration, it was implicit in the court’s ruling that the Declaration created a first-priority lien that it rejected that argument. Appellate Proceedings The Lender noted a timely appeal. 21 The Court of Special Appeals affirmed the judgment of the Circuit Court in a thorough opinion. 229 Md.App. 241 , 145 A.3d 19 (2016). The intermediate appellate court first reviewed Maryland case law concerning the rule against perpetuities and concluded that the Declaration was not unenforceable on that ground.

It next agreed with the Circuit Court that the Declaration was a “covenant running with the land” and that the Lender lacked ³²⁹ standing to challenge the non-payment of recordation and transfer taxes in connection with the recording of the Declaration. Finally, it turned to the “complex legal question” whether the Declaration itself created a lien with priority over the Lender’s Deed of Trust. It concluded that the recordation of the Declaration created a lien that secured the payment of the annual assessment, whether considered in reference to the Maryland Contract Lien Act or otherwise, and that the lien had priority over the Lender’s later recorded Deed of Trust on the Property. The Lender then filed a petition of a writ of certiorari which we granted.

II Discussion The Lender has raised three issues, which we describe as follows: 1. Could a lien be created on the Property by the Declaration without following the procedures of the Maryland Contract Lien Act? 2. To the extent that the Declaration purported to establish a lien on the Property, did it violate the rule against perpetuities? 3. Did the Lender have standing to challenge the acceptance of the Declaration by the clerk of court for recording in the land records on the ground of nonpayment of recordation and transfer taxes?

For the reasons set forth below, we answer the first question “no.” Accordingly, we need not, and do not, discuss the second and third issues. A. Standard of Review Pursuant to Maryland Rule 8-131(c), when an action is tried without a jury, an appellate court reviews the case on both the law and the evidence. We accept the trial court’s findings of fact unless they are clearly erroneous. However, ³³⁰ we review the trial court’s conclusions of law and application of the law to the facts without deference to the trial court.

Tribbitt v. State, 403 Md. 638, 644 , 943 A.2d 1260 (2008). B. Creation and Enforcement of Liens under the Maryland Contract Lien Act We begin with a short review of the provisions and history of the statute that plays a central role in this case—the Maryland Contract Lien Act. 1. The Statute The Maryland Contract Lien Act addresses the