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Opinions – Maryland Court of Appeals: 3/7/11

Administrative Law

Judicial review

BOTTOM LINE: Meaningful judicial review was possible where the Board of Appeals summarized substantial evidence in support of its conclusory findings that the variance applicants had failed to establish that their proposed development would not adversely affect water quality and that their variances were the minimum necessary to afford the applicants relief.

CASE: Critical Area Commission for the Chesapeake and Atlantic Coastal Bays v. Moreland, LLC, No. 55, Sept. Term 2010 (filed Jan. 28, 2011) (Judges Bell, Harrell, BATTAGLIA, Greene, Murphy, Adkins & Barbera). RecordFax No. 11-0128-21, 29 pages.

FACTS: In 1984, the General Assembly enacted the Chesapeake Bay Critical Area Protection Program, See NR §§8-1801 to 8-1817. The Program required all local jurisdictions, under the direction of a newly created Chesapeake Bay Critical Area Commission, to formulate and implement a plan to control development in the “critical” or protected area. NR §8-1801(b). See also NR §8-1807(a).

Anne Arundel County adopted a critical area protection program, embodied in Articles 17 and 18 of the Anne Arundel County Code. Specifically, §17-8-301(b) prohibits the construction of “new structures” within the 100-foot buffer, defined as a 100-foot strip of land near the shoreline. See §18-13-104(a). Furthermore, §17-8-601(b) permits the clearing of vegetation within a limited range inside the critical area to prevent erosion and other environmental impacts.

The County may grant variances when applicants for such meet various specific requirements detailed in §3-1-207 of the Code.

In 2003, Moreland, LLC purchased two parcels, Site # 1 and Site # 2, on the north shore of Warehouse Creek in Anne Arundel County, within the critical area. On Site # 1, Moreland proposed to construct a single-family home, attached garage, screened porch and deck totaling 3,343 square feet. To overcome the prohibition in §17-8-301(b) against construction of new structures within the 100-foot buffer, Moreland requested a variance of 34 feet. In addition, Moreland sought to clear more than 51 percent of the lot’s vegetation, exceeding the maximum 30 percent that the County’s Office of Planning and Zoning may approve pursuant to §17-8-601(b).

On Site # 2, Moreland sought to construct a home, attached garage, screened porch and uncovered deck totaling 2,615 square feet. Moreland requested another variance of 34 feet into the buffer. In addition, Moreland sought to clear nearly 34 percent of the total vegetation and therefore requested an additional variance.

An administrative hearing officer denied Moreland’s variance requests, and the Board of Appeals affirmed. The circuit court, applying Becker v. Anne Arundel County, 174 Md.App. 114 (2007), reversed, reasoning that the Board failed to make “clear findings” so as to “facilitate meaningful judicial review.” The Court of Special Appeals affirmed.

The Commission appealed to the Court of Appeals, which reversed.

LAW: In Becker, William and Jane Becker had purchased two adjoining lots fronting on the Magothy River and Park Creek in Pasadena on which they sought to build a two-story, ranch-style home, consisting of 2,499 square feet of living space and a 529-square-foot two-car garage, within the critical area buffer. To do so, the Beckers requested three variances, namely a variance of 56 feet from the 100-foot critical area buffer, a variance to disturb the steep slopes on both parcels to install the septic system, and a 10-foot variance from the 25-foot rear yard requirement. Id. at 122. An administrative hearing officer granted the variances. Id. at 119 n. 2.

On appeal to the Board, the Beckers presented testimony that without the variance allowing construction within the 100-foot buffer, the Beckers would not be able to build a house, that the requested variances were the minimum necessary to afford relief, and that the construction “should not have any adverse impact on water quality.” Id. at 123. Further testimony was adduced by the Beckers that the granting of the variances “would not be contrary to the spirit and intent of the critical area program.” Id. No evidence was presented in opposition to the variance requests.

The Board thereafter denied the Beckers’ application, reasoning that the Beckers had failed to demonstrate that the variances requested were the minimum necessary, because “[t]here was no explanation of why 2,500 square feet of living area was necessary. Id. at 125. The Board further found, without citing support in the record, that granting the variances would adversely affect water quality, would impair the use and development of the neighboring property, and would be detrimental to the public’s welfare, because the Beckers had failed to “convince the Board on these points.” Id. at 129.

The Court of Special Appeals reversed. Faced with the issue of whether the Board must have made findings based upon articulated evidence, the intermediate appellate court noted that, “a reviewing court may not uphold an agency’s decision if a record of the facts on which the agency acted or a statement of reasons for its actions is lacking. Findings of fact must be meaningful and cannot simply repeat statutory criteria, broad conclusory statements, or boilerplate resolutions.” Id. at 138-39. The Court reasoned that there was no evidence of water quality or developmental impairment on the record before the Board. Id. at 143.

The Court’s role in reviewing the final decision of an administrative agency, such as the Board of Appeals, is “limited to determining if there is substantial evidence in the record as a whole to support the agency’s findings and conclusions, and to determine if the administrative decision is premised upon an erroneous conclusion of law.” Maryland Aviation Admin. v. Noland, 386 Md. 556, 571 1154 (2005). In doing so, a reviewing court decides whether the Board’s determination was supported by “such evidence as a reasonable mind might accept as adequate to support a conclusion.” People’s Counsel for Baltimore County v. Surina, 400 Md. 662, 681 (2007).

In denying the variance requests, the Board found that Moreland met various burdens of proof, specifically with regard to §§3-1-207(b)(1), (b)(2)(i), (b)(3), (b)(4)(ii), (c)(2)(iii) and (c)(2)(iv).

The Board further found, however, that granting the variances would adversely affect water quality or adversely impact fish, wildlife, or plant habitat within the critical area, in contravention of §3-1-207(b)(5)(i), that the variances requested were not the minimum necessary to afford relief pursuant to §3-1-207(c)(1), and that granting the variances would alter the essential character of the neighborhood pursuant to §3-1-207(c)(2)(i), substantially impair the appropriate use or development of adjacent property pursuant to §3-1-207(c)(2)(ii), and be detrimental to the public welfare pursuant to §3-1-207(c)(2)(v).

In reaching its findings and conclusions, the Board explicitly referred to the testimony presented by John Flood, a neighbor and longtime South River resident, who was accepted by the Board as an environmental expert, albeit the summary of his testimony was in a section separate from the conclusory findings of the Board.

The Board also explicitly included a summary of the testimony presented by Andrew Koslow, the South Riverkeeper, regarding the adverse impact of construction near Warehouse Creek, again separate from its conclusory findings expressed in its decision.

The Board also found persuasive testimony presented by several neighbors of the tracts regarding the removal of large amounts of vegetation from the parcels causing erosion and contributing to the decline in water quality of the creek, although, again, the summaries were separate from the Board’s conclusory findings in its decision.

The Board of Appeals’ opinion contained clear adverse findings, as well as summaries of substantial evidence supporting those findings, in contrast with the Board’s opinion in Becker, in which the Board failed to articulate any evidence supporting its adverse findings.

When the Board of Appeals merely states conclusions without pointing to the evidentiary bases for those conclusions, such findings are not amenable to meaningful judicial review and a remand is warranted. See, e.g., Bucktail, LLC v. County Council of Talbot County, 352 Md. 530 (1999); Annapolis Market Place LLC v. Parker, 369 Md. 689 (2002).

In contrast, when the Board of Appeals refers to evidence in the record in support of its findings, meaningful judicial review is possible. See Mastandrea v. North, 361 Md. 107 (2000); Alviani v. Dixon, 365 Md. 95 (2001).

Here, in its determination that the Moreland variances should be denied, the Board explicitly summarized evidence presented by several witnesses supporting its conclusions. There is no statutory or jurisprudential basis for the conclusion that summarizing the evidence in a separate section deprived the Board’s conclusory findings of adequate evidentiary support.

The Board clearly articulated the evidence in support of its findings, referring to the testimony presented by John Flood, as well as others, regarding detriment to the water quality of Warehouse Creek posed by the construction. That evidence was substantial. Accordingly, meaningful judicial review was possible.

COMMENTARY: According to Moreland, the Board’s finding regarding the clearing of vegetation from the lots adversely impacting water quality was difficult to reconcile with the Board’s favorable conclusion regarding plans for replanting on the sites.

The Board determined that Moreland had offered an adequate replanting proposal, satisfying §3-1-207(c)(2)(iii) and (c)(iv) of the Code. Moreland’s proposal to mitigate the removal of great percentages of vegetation from the parcels with replantings, as mandated by the Code, however, had no bearing on the Board’s finding regarding the removal of vegetation in the first place and its impact on Warehouse Creek

PRACTICE TIPS: A variance refers to “administrative relief which may be granted from the strict application of a particular development limitation in the zoning ordinance.” Mayor & Council of Rockville v. Rylyns Enterprises, Inc., 372 Md. 514, 537 (2002), quoting Abrams, Guide to Maryland Zoning Decisions, §11.1 (3d. ed. Michie 1992).

Real Property

Deed in lieu of foreclosure

BOTTOM LINE: A deed in lieu of foreclosure executed as security at the time of loan origination is a mortgage, not an absolute conveyance, regardless of whether the deed purports on its face to be absolute and, therefore, foreclosure proceedings must be initiated before the mortgagor’s interest in the property can be extinguished.

CASE: C. Phillip Johnson Full Gospel Ministries, Inc. v. Investors Financial Services, Inc., No. 115 Sept. Term, 2008 (filed Jan. 28, 2011) (Judges Bell, Harrell, BATTAGLIA, Greene, Murphy, Adkins & Barbera). RecordFax No. 11-0128-20, 30 pages.

FACTS: C. Phillip Johnson Full Gospel Ministries, Inc. (Ministries) purchased improved land (Property) located in Martinsville, Virginia, from the Catholic Diocese of Richmond, to be used as a church. Ministries turned to Investors Financial Services, LLC (Investors), based in Maryland, to obtain financing.

As part of the financing, Ministries issued a Promissory Note to Investors for $93,000, which was used to finance the Property. The Note was secured by two deeds: a Deed of Trust, which included an acceleration clause containing a Power of Sale, as well as a Deed in Lieu of Foreclosure, which Ministries also was required to execute at closing.

The Deed in Lieu purported to grant to Investors title to the Property “in order to avoid foreclosure of the … Deed of Trust,” immediately upon default for any reason. Although granted at the time of loan origination, the Deed in Lieu was phrased in the present perfect tense, was executed under seal and was held in escrow by Investors.

Several months later, Ministries defaulted on the Note, and Investors recorded the Deed in Lieu in the land records of Virginia, without any foreclosure proceedings. Ministries filed a complaint in the circuit court. One count alleged breach of contract, which was premised on the theory that Investors was required by the terms of the contract to conduct a public sale of the Property, rather than simply record the Deed in Lieu. Ministries sought damages in the amount of $200,000 plus interest on its breach of contract count.

Ministries also sought a declaratory judgment under CJ §3-409 asking the circuit court to determine whether the Deed in Lieu was invalid for lack of consideration. The parties filed cross motions for summary judgment, which were denied.

The circuit court ruled that, because the contract between the parties had been executed under seal, there was adequate consideration. Judgment was entered in favor of Investors.

The Court of Appeals granted certiorari prior to any proceedings in the Court of Special Appeals and vacated the circuit court judgment.

LAW: Courts of equity have always recognized a mortgagor’s right, in an event of default, to tender payment in full at any time prior to foreclosure, thereby retaining title to her property, and barring that, to recover the proceeds (if any) from the ensuing foreclosure sale, after satisfying the obligations to the mortgagee and other lienholders. This right is called the equity of redemption. See Simard v. White, 383 Md. 257, 269-90 (2004); Restatement (Third) of Property: Mortgages §3.1 cmt. a (1997).

Courts have consistently refused to recognize creditors’ attempts to cut off that right as a precondition for originating a mortgage. Kettering, True Sale of Receivables: A Purposive Analysis, 16 Am. Bankr.Inst. L.Rev. 511, 527 (2008); Murray, Mortgage Workouts: Deeds in Escrow, 41 Real Prop. Prob. & Tr. J. 185, 187-88 (2006).

The Supreme Court long ago set forth the basic idea in Peugh v. Davis, 96 U.S. (6 Otto) 332, 337, 24 L.Ed. 775, 776 (1878), where the Court explained that it is “an established doctrine” that a mortgagor’s equity of redemption is “inseparably connected with a mortgage,” and that, furthermore, “[t]his right cannot be waived or abandoned by any stipulation of the parties made at the time, even if embodied in the mortgage.” Indeed, this doctrine is inviolate. Id. at 337; accord Restatement (Third) of Property: Mortgages §3.1 cmt. b.

Investors required Ministries to execute an escrow deed at the time of loan origination as a precondition for granting the loan. In so doing, Investors cut off Ministries’ right to its equity of redemption from the outset. Courts of equity have abhorred such overreaching for hundreds of years.

Under Maryland law, the Deed in Lieu would have to be regarded as a mere mortgage and could not effectively convey the land to Investors absent a foreclosure action, in spite of what the Deed in Lieu purported to state on its face.

Furthermore, RP §7-101(a) codifies the buyer’s long-settled right to the equity of redemption, stating: “Every deed which by any other writing appears to have been intended only as security for payment of an indebtedness or performance of an obligation, though expressed as an absolute grant is considered a mortgage.”

Obviously, the only purpose of the Deed in Lieu was to grant additional security to the lender at the time of loan origination. Thus, RP §7-101 would mandate that the Deed in Lieu be “considered a mortgage,” and Investors would have to file a foreclosure action or negotiate with Ministries to execute an effective (new) Deed in Lieu, supported by adequate consideration, based on the parties’ circumstances and bargaining power at the time of default.

A statute similar to RP §7-101(a) has been codified in Maryland since 1825. The long-standing existence of a Maryland statute construing a conveyance as a mortgage, when it appears to have been created solely as security for a loan, is powerful evidence that the escrow deed finance arrangement used by Investors is deeply repugnant to the public policy of this State.

Unlike Maryland, Virginia has not codified the prohibition against “clogging” the equity of redemption, but it appears to be a part of its common law. Nearly contemporaneously with Peugh, in which the Supreme Court recognized the “anti-clogging” doctrine, the Supreme Court of Virginia adopted the same view. See Snavely v. Pickle, 70 Va. 27 (1877).

In Dawson v. Perry, 30 Va. Cir. 372 (Va.Cir.1993), the debtor, Sally Dawson, had lived at her home from 1969 until 1986, when the property was foreclosed upon. The purchaser at the foreclosure sale assigned its rights to Perry.

Dawson had received approximately $9,000 from the foreclosure sale and wished to use that money as a down payment to buy back her house. She and Perry entered into a purchase agreement in 1986, which provided that Dawson would rent the property until settlement. Settlement took place in 1990. Id.

On March 19, 1990, Perry conveyed the property to Dawson, who executed two deeds in favor of Perry. One was a deed of trust; the second deed conveyed the property back to Perry. A separate letter agreement, executed the same day, provided that Perry would hold the latter deed in escrow and record it if Dawson became two months delinquent in her payments. Perry “characterize[d] this arrangement as a ‘deed in lieu of foreclosure.’” Id. at 373.

Dawson subsequently missed two consecutive payments, and Perry recorded the deed on May 22, 1990. He then sold the property to a bona fide purchaser in April of 1991. Consequently, Dawson “lost all of her equity by entering into this arrangement instigated by Perry.” Id.

Dawson filed suit. The court relied on Snavely v. Pickle, “[t]he only Virginia authority on the subject,” 30 Va. Cir. at 373, and also consulted several out-of-state authorities. The court ruled that the deed in lieu of foreclosure was ineffective to convey Dawson’s equity of redemption and awarded her damages of $26,138, “the value of her equity of redemption which was denied her by Perry.” Id. at 376. See also Basile v. Erhal Holding Corp., 148 A.D.2d 484 (N.Y.App.Div.1989); Leona Bank v. Kouri, 3 A.D.3d 213 (N.Y.App.Div.2004).

Thus, under Maryland statutory law and Virginia common law, a deed in lieu of foreclosure executed as security at the time of loan origination is a mortgage, not an absolute conveyance, regardless of whether the deed purports on its face to be absolute. Foreclosure proceedings, therefore, must have been initiated before Ministries’ interest in the Property could have been extinguished.

COMMENTARY: With respect to the jurisdictional issues, a declaratory judgment action seeking to invalidate a deed recorded in the land records of Virginia cannot lie in Maryland. See Wilmer v. Philadelphia & Reading Coal & Iron Co., 130 Md. 666 (1917); Seldner v. Katz, 96 Md. 212 (1903).

With respect to the breach of contract action, however, the contract between Ministries and Investors involved a company with its principal place of business in Maryland. As a result, a “transitory action,” which is “[a]n action that can be brought in any venue where the defendant can be personally served with process,” Black’s Law Dictionary 36, regarding Ministries’ allegation that Investors failed to utilize its obligation under the contract to utilize the remedy of judicial foreclosure, could lie in Maryland. See Texaco, Inc. v. Vanden Bosche, 242 Md. 334, 338 (1966).

PRACTICE TIPS: In a loan workout, where a mortgagor and mortgagee negotiate after an event of default already has occurred, a defaulting mortgagor may legitimately contract with the noteholder to execute a conveyance, in exchange for adequate consideration, and, therefore, “[t]he right to redeem, even in a mortgage context, can be itself divested by a valid mortgage foreclosure sale, or by a waiver made subsequent to, and outside the mortgage instrument itself.” Simard v. White, 383 Md. 257, 272 n. 12 (2004).