• Maryland Circuit Court For Howard County Rules That Lenders Are Not Liable For Recordation Taxes On IDOTs
  • July 12, 2013 | Authors: Margaret "Ann" Brown; R. Craig Fitzenreiter; Richard E. Hagerty; M. Kevin McCusty
  • Law Firms: Troutman Sanders LLP - Tysons Corner Office ; Troutman Sanders LLP - Richmond Office
  • On June 13, 2013, the Circuit Court for Howard County, Maryland affirmed a decision by the Maryland Tax Court, which held that a lender is not responsible for paying the recordation tax that becomes due on an indemnity mortgage or indemnity deed of trust (“IDOT”) because the party that is responsible for paying this is the guarantor who executed the IDOT. The case is good news for lenders that have been forced by some Maryland jurisdictions to pay recordation taxes on the recording of trustees’ deeds following the foreclosure of IDOTs. The case is Howard County Dept. of Finance v. Atapco Howard Square I Business Trust, No. 13-C-12-092323, which was an appeal from a Maryland Tax Court decision, Atapco Howard Square I Business Trust v. Howard County Dept. of Finance, No. 11-43-00-0805, 2012 Md. Tax LEXIS 4 (Aug. 28, 2012).

    Until July 1, 2012, IDOTs were commonly used in Maryland to avoid payment of the recordation tax that is generally due upon the filing of mortgages or deeds of trust. They are so named because rather than securing the primary payment obligation of the borrower of a loan, they secure the contingent obligation of the owner of the covered property under that owner’s guaranty of the loan. Under Maryland law in effect prior to July 1, 2012, until a guarantor’s contingent liability became non-contingent, the guaranteed debt was not incurred by the guarantor for purposes of calculating recordation tax on an IDOT given by the guarantor to secure such guaranty. Md. Tax Prop. Code Ann. § 12-105(f)(1) permits payment of recordation tax on only the amount of secured debt incurred at the time a security instrument is recorded, so, until a default or some other triggering event, an IDOT securing such a contingent (i.e., unincurred) guaranty liability was not subject to tax (note that because of changes in §12-105(f) made in 2012 and earlier this year, IDOTs recorded on or after July 1, 2012 are subject to recordation tax upon their recording, except where the secured loan (or series of a loan) is less than $3,000,000).

    The inapplicability of recordation tax upon the filing of an IDOT was not an exemption from the tax; rather, it was an indefinite deferral of the tax until the default or other triggering event rendered the contingent liability secured by the IDOT non-contingent. Md. Tax Prop. Code § 12-105(f)(2) requires the payment of the recordation tax “by the debtor” within 7 days of the date on which the “additional debt” is incurred, which in the case of an IDOT is the date on which the guarantor/grantor of the IDOT has become liable for the underlying indebtedness.

    In recent years several Maryland jurisdictions, including Howard County, have demanded payment of the recordation tax which has become due on an IDOT at the time a lender that has foreclosed on that IDOT seeks to record a trustee’s deed conveying the property subject to the IDOT following foreclosure. This has resulted in larger than anticipated post-foreclosure costs for lenders who have been required to pay not only the transfer and recordation taxes assessed on the consideration recited in the trustee’s deed, but the recordation tax calculated on the principal amount of the indebtedness recited in the IDOT that was the subject of the foreclosure sale.

    In the Atapco case, several lenders who had foreclosed on IDOTS and were forced to pay these recordation taxes as a condition of recording various trustees’ deeds challenged Howard County’s collection of the taxes in the Maryland Tax Court. The Tax Court held in August 2012 that because the statute provides that the debtor is liable for payment of the recordation tax when a contingency occurs that makes the debtor primarily liable for the underlying indebtedness, there was no legal basis on which Howard County could compel the payment of that tax by another party, including a foreclosing lender. The Tax Court further rejected Howard County’s claim that it could require payment of the recordation taxes under Md. Real Prop. Code Ann. § 3-104(b), which requires the payment of “all public taxes, assessments, any charges due a municipal corporation, and charges due on the property” as a prerequisite for the transfer of real property. Based on the Maryland Court of Appeals’ decision in Dean v. Pinder, 312 Md. 154, 159, 538 A.2d 1184 (1988), the Tax Court concluded that recordation taxes are excise taxes on documents and not taxes on real property, and that the county could not require the payment of the “deferred” tax on the IDOTs as a condition of transferring the foreclosed property.

    On appeal by Howard County, the Howard County Circuit Court affirmed the Tax Court, expressly concluding that “[t]he guarantor, who executes an IDOT, is the party responsible to pay the recordation tax at the time of default.” The Court further rejected the County’s arguments that the foreclosing lenders, as the beneficiaries of the IDOTs, should be the parties responsible for paying the recordation tax, and it similarly affirmed the Tax Court’s conclusion that Real Prop. Code § 3-104(b) did not permit the County to collect the unpaid recordation tax as a condition of recording the post-foreclosure trustees’ deeds.

    Although IDOTs filed on or after July 1, 2012 securing guarantees of debts above $3,000,000 are subject to the recordation tax, the Atapco decision is still important for all IDOTs recorded before July 1, 2012, and for any IDOT recorded since July 1, 2012 securing a guaranty of a loan (or series of a loan) of less than $3,000,000. At this point it is not known whether Howard County will appeal the Atapco decision to the Maryland Court of Special Appeals (it has until July 15, 2013 to do so), or whether tax collectors in other Maryland jurisdictions will agree to follow the Atapco decision. Any lender foreclosing on an IDOT in Maryland who is compelled to pay recordation tax when it records a trustee’s deed should consider doing so under protest, exhaust its administrative remedies, and promptly file an appeal to the Maryland Tax Court.