|January 16, 2013|
Previously published on January 2013
When the recordation tax becomes due on an indemnity mortgage or an indemnity deed of trust (an “IDOT”), the only person with the obligation to pay the tax is the landowner which guaranteed the loan, according to the Maryland Tax Court in Atapco Howard Square I Business Trust v. Howard County Department of Finance, decided on August 28, 2012.
IDOTs are financing devices that have been used in Maryland for decades. In general, an IDOT transaction involves a loan made by a lender to a person or an entity (the “borrower”) and the guaranty of that loan by a different person or entity (the “guarantor”). In order to secure the guaranty, the guarantor grants to the lender a mortgage or deed of trust (the IDOT) on property that it owns. Significantly for the IDOT structure, the guarantor is not primarily liable on the loan from the lender to the borrower when the IDOT is recorded. Instead, when the IDOT is recorded the guaranty is contingent on the occurrence of an event, such as a default under the loan to the borrower.
IDOTs securing any amounts recorded before July 1, 2012 enjoyed a recordation tax advantage. Pursuant to §12-105(f)(1) of the Tax-Property Article of the Maryland Code (“TP”), “if the total amount of secured debt has not been incurred at the time of recording or filing the instrument of writing, the recordation tax applies only to the principal amount of the debt incurred at that time.” The Maryland Attorney General and Maryland courts have interpreted this language to mean that prior to July 1, 2012 no recordation tax was due upon the recordation of an IDOT because as to the guarantor, which is the owner of the property encumbered by the IDOT, the “secured debt has not [then] been incurred.” However, the recordation tax becomes due when the borrower defaults and the guarantor becomes primarily liable.
The Atapco case involved seven separate matters in which defaults occurred under IDOTs and recordation taxes came due on them. Howard County did not collect the recordation taxes that were due from the guarantors, most likely because the only assets the guarantors owned were the properties subject to the IDOTs and those properties were worth less than the debt on them at the time of default under the loans.
In most of the matters that the Tax Court considered, the lenders foreclosed the IDOTs, and the purchasers at the foreclosure sales then tried to record their deeds among the land records of Howard County. The parties recording the deeds tendered the applicable amounts of the taxes due on the deeds, but Howard County refused to permit the recordings until the outstanding recordation taxes on the IDOTs were first paid. In some of these matters the foreclosing lenders paid the recordation taxes on the IDOTs; in others, the taxes were paid by the purchasers. In another of the matters, the owner of the property that was subject to an IDOT filed for bankruptcy, and an agreement was reached to enable the property to be transferred to a third party. That third party paid the recordation tax on the IDOT in order to enable its deed to be recorded. In the last matter, a bank reached an agreement with its borrowers and the guarantors of a group of loans after the loans went into default. Howard County threatened to charge the bank with a misdemeanor under TP §14-1011 if the bank did not pay the recordation tax that was due, so the bank paid the tax.
The Tax Court rejected all of the contentions raised by Howard County. Howard County claimed that §3-104(b) of the Real Property Article of the Maryland Code (“RP”) enables the County to prohibit the recordation of a deed conveying property that had been subject to an IDOT on which recordation taxes had not been paid. Instead, the Tax Court found that RP §3-104(b) applies only if there are taxes, assessments, or charges currently owed on the property. Because the recordation tax is an excise tax, which is imposed on the privilege of recording documents in the land records, it is not a tax on any real property. Therefore, RP §3-104(b) was not applicable to the subject case.
The Tax Court also held that “there is no provision in the Maryland Code in which an unpaid recordation tax constitutes a lien upon any real property merely as a result of the non payment of that tax."
The Tax Court found that TP §12-105(f)(6) was not applicable to the subject case. That provision, on its face, is applicable only to construction loans for over $100,000 for which the total amount of secured debt has not been incurred at the time of recording the instrument of writing.
Therefore, the Tax Court reversed the decision of the Howard County Department of Finance which had denied the petitioners' claims for refunds. Accordingly, the Tax Court ordered the refund of the amounts of recordation taxes that the petitioners paid (approximately $500,000), together with interest at the rate of 6 percent per annum from when paid.
As suggested above, the law regarding the taxation of IDOTs changed as of July 1, 2012. Senate Bill 1302, Chapter 2 of the First Special Session of the General Assembly of 2012, added TP §12-105(f)(7), which now requires that recordation taxes be paid on the recordation of IDOTs that secure loans in the amount of $1,000,000 or more. Because SB 1302 did not affect IDOTs that were of record on July 1, 2012, and because under SB 1302 IDOTs involved in loans for less than $1,000,000 may be recorded without payment of the recordation tax, the holding in Atapco will be applicable in these situations. However, the holding in Atapco will not be applicable to any IDOT on which the recordation tax has been paid when the IDOT was recorded.