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

by Ballard Spahr LLP

[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, Timothy F. McCormack at 410.528.5680 or, or Michelle M. McGeogh at 410.528.5661 or

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.

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