Maryland Tax Court Sides with Foreclosure Sale Purchasers on Payment of IDOT Taxes

by Ballard Spahr LLP
Contact

[authors: Jon M. Laria, Timothy F. McCormack, Michelle M. McGeogh]

The Maryland Tax Court on August 28, 2012, handed down a decision that addressed a concern of many foreclosing lenders: must a foreclosure sale purchaser pay recordation taxes on a defaulted Indemnity Deed of Trust (IDOT) as well as those due on a substitute trustees’ deed?

This decision has the potential for affecting the thousands of IDOTs recorded in Maryland before July 1, 2012, when counties did not collect recordation taxes on IDOTs.

In an IDOT loan transaction, the borrower issues a promissory note to the lender but is not the owner of the real property securing the loan. A guarantor gives the lender a guaranty of the borrower’s obligations and secures the guaranty (not the note itself) by an IDOT. The IDOT secures only the guarantor’s liability, which is only secondary and is conditioned on, typically, the borrower’s default under the note or another loan document. Until July 1, 2012, the rule was that when the IDOT is recorded, the debt that it secures has not been “incurred” by the guarantor, and, therefore, no recordation tax was due until default by the borrower.

When defaults on loans secured by IDOTs became more common during the recession, some local jurisdictions in Maryland asserted that the unpaid recordation tax due on the IDOT created a lien on the property and that a purchaser at a foreclosure sale was required to pay both the unpaid recordation tax on the IDOT and recordation and transfer taxes on the substitute trustees’ deed following a foreclosure sale.

The Tax Court has now held that in IDOT transactions, although recordation taxes are typically due when the borrower defaults, only the guarantor is liable for such taxes. The Tax Court held that the unpaid recordation taxes due on the IDOT do not create a lien on the underlying property. There is no statutory or legal authority that provides that any other party, including the purchaser at a foreclosure sale, must pay the recordation taxes due on the IDOT. Thus, the Tax Court held that after foreclosure, the purchaser need only pay recordation taxes on the consideration paid pursuant to the substitute trustees’ deed.

In this case, because the Howard County Department of Finance collected recordation taxes on both the original amount secured by the IDOT and the consideration set forth in the substitute trustees’ deed, the Tax Court required the County to refund the recordation tax paid on the foreclosed IDOT to the lender.

As we reported in a legal alert last March, effective July 1, 2012, recordation taxes must be paid on IDOTs securing loans of $1 million or more.

Although the Tax Court opinion is a victory for foreclosing lenders, the decision is subject to review. The opinion can be appealed to the Circuit Court.

Attorneys in Ballard Spahr's Commercial Real Estate Recovery Group advise on loan workout and enforcement actions, including mortgage foreclosures, receiverships, and guarantor suits. For more information, please contact Jon M. Laria at 410.528.5506 or laria@ballardspahr.com, Timothy F. McCormack at 410.528.5680 or mccormackt@ballardspahr.com, or Michelle M. McGeogh at 410.528.5661 or mcgeogh@ballardspahr.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP
Contact
more
less

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.