Maryland Appellate Court: Fair dealing, voluntary waste, restrictive covenants

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Contract; good faith and fair dealing

BOTTOM LINE: Where the plaintiff did not identify an explicit contractual provision that was breached, his claim for breach of the implied duties of good faith and fair dealing did not state a cause of action in Maryland.

CASE: Daljaco Incorporated v. Baugh, No. 1041, Sept. Term, 2024 (filed Dec. 19, 2025) (Judges  Shaw, ALBRIGHT, Kehoe).

FACTS: Daljaco Inc. is an S corporation that, until Dec. 31, 2020, was equally owned by appellant Martin Burns and appellee D’Alan Baugh. In this appeal, Mr. Burns and Daljaco challenge the money judgment and disbursal of escrowed funds, entered via summary judgment in Mr. Baugh’s favor, following his claim that Mr. Burns and Daljaco improperly claimed Employee Retention Tax Credits, or ERTCs, for the 2020 tax year, with the result that Mr. Baugh’s estimated tax liability was increased.

LAW: Mr. Burns and Daljaco argue that summary judgment in favor of Mr. Baugh was inappropriate because Count Four, which alleged a breach of the Stock Purchase

Agreement’s implied duties of good faith and fair dealing, did not state a cause of action in Maryland. The court agrees. Because Mr. Baugh identified no explicit contractual provision that had been breached, Mr. Baugh’s breach of contract claim fails.

Mr. Baugh now posits a new theory for contractual breach, based on § 2.5.1 of the Stock Purchase Agreement. But Mr. Baugh did not move for summary judgment on Count Four, let alone on the basis of his new § 2.5.1. theory. Therefore, there was no “written motion” on which the circuit court could have granted summary judgment to Mr. Baugh on Count Four. More significantly, because this new theory was absent from the first amended complaint, it would not be one that the circuit court could have considered on summary judgment.

In Count Two, Mr. Baugh sought three declarations: (1) that Mr. Burns “lacks standing to amend any of Daljaco’s pre-2021 tax returns” without Mr. Baugh’s consent; (2) that Mr. Baugh was “entitled to 50% of any tax credits received as a result of an amendment to any of [Daljaco’s] pre-2021 tax returns, including any ERTC received by [Daljaco] due to an amendment to [Daljaco’s] 2020 tax returns” or (3) that Mr. Baugh was entitled to “the dollar value of such tax credits.”

Mr. Burns and Daljaco argue that Mr. Baugh was not entitled to declaratory judgment on the first two declarations because the federal anti-injunction act, or AIA, and the federal declaratory judgment act bar courts from providing declaratory relief with respect to the assessment and collection of federal tax. The court agrees.

By asking that the circuit court declare that Mr. Burns “lacked standing” to take the steps that led to Mr. Baugh’s unpaid tax liability, or that Daljaco was not entitled to claim half of the ERTCs that led to Mr. Baugh’s unpaid liability, all the while having not paid the tax liability, the target of Mr. Baugh’s suit was the tax liability. Such declarations could make it more difficult for the IRS to assess, and then collect, tax from Mr. Baugh.

But even if Mr. Baugh’s first two declarations could not have interfered with the IRS’s assessment and collection of tax from him, this court is not convinced that the Maryland Declaratory Judgment Act allows such declarations. In essence, and as above, Mr. Baugh’s first two declarations are an attempt to dispute the $180,000 increased tax liability that he estimates. Such claims must be filed as § 7422(a) refund claims (or claims for credit and refund) after the tax has been paid.

Mr. Baugh argues that because his case is about a refund, it does not run afoul of the AIA. Specifically, he argues that Daljaco has already received a refund from having claimed the ERTCs. As a result, Mr. Baugh contends the federal government has already assessed and collected taxes, and has no further interest in whether Mr. Baugh or Mr. Burns gets the refund. In support of this contention, Mr. Baugh cites two federal opinions. These cases do not involve pass-through entities or their shareholders. Moreover, in both, the tax had been assessed and collected, and the amount of the taxpayers’ refunds had been determined.

Mr. Burns and Daljaco next argue that the circuit court erred by entering money judgment in favor of Mr. Baugh, via summary judgment. The court agrees. Mr. Baugh was not entitled to the ancillary relief of a money judgment because the circuit court never declared in a written declaratory judgment that Mr. Baugh was entitled to such relief.

Judgments of the Circuit Court for Baltimore County reversed, vacated and remanded.

Real Property; voluntary waste

BOTTOM LINE: Where a company that purchased an apartment building in a foreclosure sale submitted evidence that the former owner deliberately destroyed property between the date of the sale and the date the sale was ratified by the circuit court, the circuit court wrongly denied its petition for surplus funds.

CASE: Wonder City LLC v. DiPietro, No. 0311, Sept. Term, 2024 (filed Dec. 22, 2025) (Judges Berger, Leahy, GETTY).

FACTS: Wonder City LLC purchased a six-unit apartment building in Baltimore in a foreclosure sale on June 16, 2022, for $580,000.

The circuit court ratified the sale on Oct. 13, 2022. Walter Dixon, acting as an authorized agent of Wonder City, conducted 10 site visits to the property between June 17 and October 11. Mr. Dixon observed several instances of what he believed to be deliberate destruction of the property, to which he attested in an affidavit submitted to the court.

On Aug. 9, 2023, Wonder City filed a petition for surplus funds based on the damage to the property. Wonder City claimed that the damage was the result of wrongful conduct by the former owner in the interim between the date of sale and ratification by the court. The circuit court denied the petition, reasoning that Wonder City bore the risk of all loss or damage to the subject property from the date of the foreclosure sale, June 16, 2022, onward.

LAW: The judge relied upon the language of the sale advertisement for the property which stated that, “[p]urchaser assumes the risk of loss or damage to the property from the date of sale forward.” Such strict reliance was in error because it is possible that equitable considerations—particularly Wonder City’s allegation that Zewdi deliberately damaged the property while it was still in its possession—justify excising the risk-of-loss provision of the sale contract. In so holding, this court does not presuppose the outcome on the merits of Wonder City’s claim, but it was imperative for the trial court to exercise its discretion to assess Wonder City’s allegations and determine whether equity demanded a different result.

The contractual provision at issue here, if strictly applied, would require the purchaser to bear the entire risk of loss or damage to a property which the purchaser is not yet entitled to possess, even when the damage at issue was the result of deliberate acts by the former owner who still has lawful possession. Such a principle is at odds with more than a century of Maryland law, which establishes that a foreclosure sale is not complete and full equitable title is not conveyed until the sale is ratified by the court.

This court agrees with Wonder City that, during this precise period when a foreclosure purchaser has only an inchoate equitable interest in the foreclosed property and is not yet entitled to seek possession, it would be inequitable to impose upon the purchaser complete liability for any and every possible kind of damage to the property, including damage brought about by the deliberate acts of the former owner. This is particularly so given the generally acrimonious nature of foreclosure proceedings.

Voluntary waste committed by a former owner during the liminal period where the foreclosure sale has occurred but the former owner is still in lawful possession of the property prejudices the purchaser’s inchoate equitable interest in the property. The purchaser may suffer damages without the ability to intervene and protect his or her interest because the purchaser is not yet entitled to seek possession.

As a matter of equity and public policy, such circumstances may justify setting aside the risk-of-loss shifting provision from the foreclosure sale contract. To hold otherwise would leave a foreclosure purchaser without a remedy in the event that the former owner vindictively damages the property while moving out.

To the extent the circuit court relied on the contract’s “as is” provision in denying an equitable remedy, we hold that this was in error. In the same way that an “as is” provision disclaims the potential existence of latent defects only insofar as the seller does not actively conceal such defects, here, the “as is” provision does not excuse the alleged deliberate bad-faith actions on the part of the former owner before the property had come into Wonder City’s possession.

Judgment of the Circuit Court for Baltimore City vacated and remanded.

Real Property; restrictive covenants

BOTTOM LINE: Where an entity that enforces certain restrictive covenants in a planned city lacked authority to reject a development proposal, and the developer suffered resulting damages, the nearly $17 million jury verdict was affirmed.

CASE: The Howard Research & Development Corporation v. IMH Columbia LLC, No. 0752, Sept. Term, 2024 (filed Dec. 19, 2025) (Judges Wells, Berger, Eyler, James R).

FACTS: More than 50 years ago, James Rouse established Columbia, Maryland as one of the first planned cities in the United States. The Howard Research and Development Corporation, or HRD was created as one of the entities that would record among the land records and enforce certain restrictive covenants encumbering various parcels of land that subsequently were conveyed to other parties, including an area known as Lakefront North.

In December 2017, IMH Columbia LLC purchased a lot in Lakefront North with the intention of renovating and modernizing an existing hotel, demolishing short-term rental lodges, replacing them with a mixed-use development and constructing underground, on-site parking. Both the residential use and the on-site parking required prior approval under the relevant covenants. Two years later, in December 2019, after IMH had begun the first phase of its development plan, HRD notified IMH that it had rejected the residential use change and on-site parking for the second phase in its sole and absolute discretion.

IMH filed suit against HRD, seeking declaratory relief and asserting claims for detrimental reliance and breach of the covenants. The jury returned a special verdict in favor of IMH on all issues presented to it and awarded nearly $17 million in damages.

LAW: Parking Covenant (a) granted HRD the right to consent to (or reject) IMH’s plans to use part of the property for parking spaces, i.e., on-site parking. The jury found, under question five on the verdict sheet, that HRD, through its preliminary communications with IMH, consented to on-site parking. HRD does not challenge this verdict on appeal.

The sole issue before this court is whether the use change that necessitated the increase in parking spaces on the property was subject to HRD’s veto under Parking Covenant (c). The court finds that HRD’s right to consent under Parking Covenant (c) only is triggered by a use change that causes the need for “additional parking areas,” which refers to common parking areas on HRD’s property. It was not triggered in this case because, as the jury found, IMH’s Phase 2 proposal situated all the additional parking on the property and did not increase the need for additional common parking on HRD’s property. Thus HRD breached the covenants by rejecting IMH’s Phase 2 proposal because it lacked any authority to do so.

HRD contends that the damages awarded by the jury are duplicative because IMH recovered “past damages for the bargain [Mr.] Costello believed he struck and prospective damages for future performance.” HRD contends that the $7,560,000 in lost return on investment, or ROI, damages were “lost profits” and that IMH was not entitled to receive that return and go forward with Phase 2, thus allowing it to earn that same 12 percent rate of return once the project is complete. The court disagrees.

The ROI damages are not lost profits, but delay damages for the four-year, two-month period when no action could be taken on Phase 2 because of HRD’s December 2019 rejection letter, which itself was in breach of the covenants. As a direct result of HRD’s breach, IMH was forced to run an unprofitable hotel for over four years instead of completing Phase 2, which was the profitable phase of the project.

Independently, it also will cost IMH much more to finance the construction of Phase 2 occasioned by the increase in interest rates. These two sets of damages were not duplicative and neither will result in IMH realizing a double recovery when it is able to complete Phase 2. And while HRD argues that Mr. Costello’s expert testimony was “untethered to any evidence” and did not support the damages award, the court is satisfied that Mr. Costello’s testimony supported the award of damages.

Judgment of the Circuit Court for Howard County affirmed.

Real Property; custodia legis

BOTTOM LINE: Where a company that purchased real property at a tax sale moved to vacate a deed of trust foreclosure action involving the same property, the circuit erred when it voided the tax sale certificate.

CASE: Midaro Investments 2021 LLC v. Gerzowski, Nos. 1991 and 1992, Sept. Term, 2023 (filed Dec. 23, 2025) (Judges SHAW, Nazarian, Kehoe).

FACTS: These consolidated appeals arise from overlapping proceedings in the circuit court to foreclose rights of redemption in the same property. In December of 2019, the subject property was sold pursuant to a power of sale provision in a deed of trust to Dominion Properties LLC. In May of 2021, prior to judicial ratification of the trustee’s sale, the property was sold at a tax sale to Midaro Investments 2021 LLC.

On June 7, 2023, at which time the trustee’s sale to Dominion still had not been ratified, Midaro obtained a judgment foreclosing the taxpayer’s rights of redemption. On July 20, 2023, Midaro was issued a fee simple deed to the property.

Midaro subsequently filed exceptions to the notice of the unratified trustee’s sale and moved to vacate the deed of trust foreclosure action. In support of the request for relief, Midaro provided the court with the certificate of tax sale, the judgment foreclosing the taxpayer’s right of redemption and the deed to the property. The court overruled the exceptions, denied the motion to vacate and issued a final order ratifying the trustee’s sale. In the tax sale foreclosure case, the court vacated the judgment of foreclosure in favor of Midaro.

LAW: In denying Midaro’s motion to vacate the foreclosure action, the court concluded “the tax collector had no right or authority to sell the [property] at a tax sale, as the property was under the control and jurisdiction” of the court in the deed of trust foreclosure action. The court reasoned that the property was “placed in custodia legis by virtue of the appointment of the substitute trustee” in the deed of trust foreclosure action. The court employed the same rationale in vacating the judgment of foreclosure in the tax sale proceedings and voiding the tax sale certificate held by Midaro.

Midaro asserts the property was not in custodia legis at the time of the tax sale because the substitute trustee in the deed of trust foreclosure was not appointed by the court, but by the beneficiary of the deed of trust. Midaro further claims the court erred in ratifying the trustee’s sale because, at the time the order of ratification was entered, Midaro had been granted a judgment foreclosing rights of redemption in the tax sale case and was in possession of a deed to the property.

This court agrees with Midaro that Maryland law on the subject of custodia legis does not support application of the doctrine in an action to foreclose a lien instrument where the trustee is not appointed by the court. The court thus erred in concluding the property was in custodia legis in the deed of trust foreclosure case. Consequently, the court abused its discretion in denying Midaro’s motion to vacate the deed of trust foreclosure action and in vacating Midaro’s judgment of foreclosure in the tax sale case on that basis.

So ordered.