Case Title: Full Gospel v. Investors

Citation: 418 Md. 86

Docket Number: 115/08

State: maryland

Court: Maryland Supreme Court

Date: 2011-01-28T00:00:00Z

Document:
C. Phillip Johnson Full Gospel Ministries, Inc. v. Investors Financial Services, LLC, No.
115, September Term 2008.
REAL PROPERTY - MORTGAGES - DEED IN LIEU OF FORECLOSURE -
CLOGGING THE EQUITY OF REDEMPTION
A deed in lieu of foreclosure executed as a precondition to originating a loan, before any
default on the loan occurs, is not valid under Maryland law, because it clogs a borrower’s
equity of redemption.  
IN THE COURT OF APPEALS OF
MARYLAND
No. 115
September Term, 2008
C. PHILLIP JOHNSON FULL GOSPEL
MINISTRIES, INC.
v.
INVESTORS FINANCIAL SERVICES,
LLC
Bell, C.J.
Harrell
Battaglia
Greene
Murphy
Adkins
Barbera,
JJ.
Opinion by Battaglia, J.
Filed:   January 28, 2011
1
This is a reference to the popular children’s novel by German author Michael
Ende, later made into a film, in which Bastian Bux, with the help of Atreyu and Falkor,
embarks on an epic adventure to save the land of Fantastica (Fantasia in the film version).
See Michael Ende, The Never Ending Story (Doubleday 1983); The Never Ending Story
(Warner Brothers Pictures 1984).
This case may best be compared to “The Never Ending Story,”1 as it has been briefed
and argued before this Court on three separate occasions, beginning with our original grant
of certiorari on the issue of consideration and followed by our issuance of orders requesting
additional briefs on jurisdiction and thereafter, again, on the validity of deeds in lieu of
foreclosure when executed at the time of settlement of a loan.  We have now reached the end
of our journey.
The instant contretemps involves a lender, Investors Financial Services, LLC
(“Investors”), a Maryland company with its principal place of business in Silver Spring, and
a borrower, C. Phillip Johnson Full Gospel Ministries, Inc. (“Ministries”), which executed
a Deed in Lieu of Foreclosure regarding land in Martinsville, Virginia.  Ministries, in a four-
count Complaint seeking damages for breach of contract and for declaratory relief, had
challenged the validity of the Deed in Lieu in the Circuit Court for Montgomery County, on
the basis that the Deed in Lieu was not supported by consideration.  After the Circuit Court
ruled that no consideration was required because the Deed in Lieu was executed under seal,
Ministries noted an appeal to the Court of Special Appeals, raising the following question:
1. Is a contract under seal, which recites the consideration upon
which it is to be supported valid, even though the consideration
is not given?
Prior to any proceedings in the intermediate appellate court, we granted certiorari on our own
2
Amicus Curiae briefs were submitted by Jeffrey B. Fisher of the Fisher Law
Group and Debra Gardner and Jessica Weber of the Public Justice Center.  Mr. Fisher was
ceded time to argue by Ministries.
2
initiative.  Gospel Ministries, Inc. v. Investors Financial, 406 Md. 443, 959 A.2d 792 (2008).
After oral argument, we requested that the parties submit supplemental briefs
addressing two additional questions:
1. On what legal and factual bases may the Maryland courts
exercise jurisdiction and venue over the subject matter and relief
sought in this matter?
2. Can a declaratory judgment action be used to litigate defenses
to a foreclosure action?
After re-argument on these issues, “in light of recent statutory reforms in foreclosure law,”
we again ordered that briefing and re-argument be scheduled and invited the submission of
amicus curiae briefs,2 on the following additional and what will ultimately turn out to be the
dispositive issue:
Is a deed in lieu of foreclosure executed as a precondition to
originating a loan, before any default in the loan, valid under
Maryland law, to support conveyance of marketable title upon
default, but without foreclosure, in light of the borrower’s equity
of redemption, see, e.g., Restatement (Third) of Property:
Mortgages, Sec. 3.1(b), cmt. a; see also Md. Code (1974 Vol.),
Sec. 7-101(b) of the Real Property Article; Simard v. White, 383
Md. 257, 269-90, 859 A.2d 168, 175-97 (2004)?
We shall vacate the judgment of the Circuit Court for Montgomery County because, under
Maryland law, a deed in lieu of foreclosure may not be executed at the outset of a mortgage,
before any default occurs, as it clogs the equity of redemption.
3
The acceleration clause provided, in relevant part:
9. ACCELERATION.  That Grantor’s failure to perform any of
his obligations under this Deed of Trust or under said Note shall
constitute a default and all indebtedness secured hereby shall
immediately become due and payable at the option of the holder
of said Note.  Any time thereafter, at the request of the holder of
said Note, the Trustees, either one of whom may act, shall have
the power and it shall be their duty to sell said land and premises
or any part thereof at public auction in such manner, at such
time and place, upon such terms and conditions, and upon such
public notice as the Trustees may deem best for the interest of
all concerned, consisting of advertisement in a newspaper of
general circulation in the county or city in which the Properties
are located for such period as applicable law may require and,
in case of default of any purchaser, to re-sell with such
postponement of sale or re-sale and upon public notice thereof
as the Trustees may determine and upon judicial approval as
may be required by law, convey said land and premises in fee
simple to and at the cost of the purchaser, who shall not be liable
to see to the application of the purchase money; and from the
proceeds of the sale . . . .
3
The present case began with a purchase of improved land (“Property”) located in
Martinsville, Virginia, by Ministries from the Catholic Diocese of Richmond, to be used as
a church.  Ministries turned to Investors, a Maryland limited liability company with its
principal place of business in Silver Spring, Montgomery County, 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,3 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
4
foreclosure of the . . . Deed of Trust,” immediately upon default for any reason.  The Deed
in Lieu provided, in relevant part:
THIS DEED IN LIEU OF FORECLOSURE, made this, by and
between C. Phillip Johnson Full Gospel Ministries, Inc., a
Washington, D.C. corporation, party (ies) of the first part, and
Investors Financial Services, LLC party (ies) of the second
part:
WHEREAS, the party (ies) of the first part is the obligor
named in a separate Note dated April 5, 2005 in the original
principal sum of Ninety-three Thousand and zero cents
($93,000.00) which Note is secured by a Deed of Trust dated
April 5, 2005 and to be recorded among the Land Records of the
Commonwealth of Virginia, City of Martinsville; and
WHEREAS, the party (ies)
of the second part are
the holders of the aforesaid Note and the secured party (ies)
under the aforesaid Deed of Trust; and
WHEREAS, for diverse reasons, the party of the first part
has been unable to pay the indebtedness evidenced by the
aforesaid Note as the installments have become due and payable
and has been unable to perform the several covenants set forth
in the aforesaid Deed of Trust; and
WHEREAS, in order to avoid foreclosure of the aforesaid
Deed of Trust, the party (ies) of the first part desires to convey
the subject property to the parties of the second part in exchange
for the cancellation of the existing indebtedness owed to the
parties of the second part in the amount of the debt owed;
NOW, 
THEREFORE, 
in 
consideration 
of 
the
relinquishment of indebtedness, and other good and valuable
consideration, receipt of which is hereby acknowledged, the
party of the first part does hereby grant unto parties of the
second part in fee simple, all that piece or parcel of land,
together with the improvements, rights, privileges and
appurtunances to the same belonging, situate in the
Commonwealth of Virginia, described as follows to wit:
5
SEE ATTACHED LEGAL DESCRIPTION
Also known as:  704 East Church Street, Martinsville, Virginia
24112
Subject to covenants, easements, and deeds of trust and
restrictions of record.
AND the said party (ies) of the first part covenants that
he/she/it/they will warrant specially the property hereby
conveyed; and that it will execute such further assurances of
said land as may be requisite.
Although granted at the time of loan origination, the Deed in Lieu was phrased in the
present perfect tense: “WHEREAS, . . . [Ministries] has been unable to pay the indebtedness
evidenced by the aforesaid Note as the installments have become due and payable and has
been unable to perform the several covenants set forth in the aforesaid Deed of Trust[,]”
(emphasis added), was executed under seal and was held in escrow by Investors.  The
Disclosure Statement for the Deed in Lieu provided:
The undersigned Borrower hereby acknowledge [sic] and
agree [sic] as follows:
1.  As a part of the financing for the property known as 704 East
Church Street, Martinsville, Virginia 24112 by Investors
Financial Services, LLC in the amount of $93,000.00 on April
5, 2005 the Borrower have [sic] executed a Deed in Lieu of
Foreclosure;
2.  The Deed in Lieu of Foreclosure conveys title to the property
to Investors Financial Services, LLC;
3.  Investors Financial Services, LLC will hold the Deed in Lieu
of Foreclosure and not record it in the land records so long as
Borrower is not in default in the repayment of the financing;
4.  Investors Financial Services, LLC will record the Deed in
Lieu of Foreclosure and take over title to the property if the
Borrower are [sic] two (2) payments past due and have [sic] not
4
Under the general allegations of the Complaint, Ministries alleged:
6.  Among other terms and provisions of the Deed of Trust was
one that should Ministries default then the real property would
be sold, by the trustee appointed in the Deed of Trust, at a public
sale.
6
made satisfactory payment arrangements;
5.  If the Borrower are [sic] past due, it is the Borrower’s
responsibility to contact [Lender’s Counsel] to make satisfactory
payment arrangements;
6.  If the Borrower do [sic] not contact [Lender’s Counsel], no
further notice will be given to the Borrowers [sic] before the
Deed in Lieu of Foreclosure is recorded;
7.  Once the Deed in Lieu of Foreclosure is recorded, the
Borrowers [sic] will no longer own the Property and the debt
will be cancelled.
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 four-count Complaint in the Circuit Court for Montgomery County, Maryland.  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, stating, in relevant part:
12.  Investors materially breached its Contract with the
Ministries by filing [sic] to have the real property sold at a
public sale as required by the terms of the contract of the
parties.[4]
Ministries sought damages in the amount of $200,000 plus interest on its breach of contract
count.  Another count seeking a declaratory judgment under Section 3-409 of the Courts and
5
Section 3-409 of the Courts and Judicial Proceedings Article provides, in
relevant part:
§ 3-409. Discretionary relief.
(a) In general. – Except as provided in subsection (d) of this
section, a court may grant a declaratory judgment or decree in
a civil case, if it will serve to terminate the uncertainty or
controversy giving rise to the proceeding, and if:
(1) An actual controversy exists between contending parties;
(2) Antagonistic claims are present between the parties involved
which indicate imminent and inevitable litigation; or
(3) A party asserts a legal relation, status, right, or privilege and
this is challenged or denied by an adversary party, who also has
or asserts a concrete interest in it.
* * * 
(c) Concurrent remedies not bar for declaratory relief. – A party
may obtain a declaratory judgment or decree notwithstanding a
concurrent common-law, equitable, or extraordinary legal
remedy, whether or not recognized or regulated by statute.
6
In Count II of its Complaint, Ministries stated, in relevant part:
15. Ministries contends that the Deed in Lieu of Foreclosure is
invalid in that it was entered into without consideration as
required by law.
16. That Investors has recorded said Deed transferring
ownership of the real property from Ministries to itself.
* * *
(continued...)
7
Judicial Proceedings Article, Maryland Code (1974, 2006 Repl. Vol.),5 asked the Circuit
Court to determine whether the Deed in Lieu was invalid for lack of consideration.6  The
6(...continued)
19. A declaratory judgment by this Court will end the
controversy.
WHEREFORE, [Ministries] demands:
a. That this Court determine the validity of the Deed in
Lieu of Foreclosure recorded by Investors on or about
November 6, 2006; . . . .
8
other two original counts, alleging breach of contract regarding late fees and unjust
enrichment, were dismissed with prejudice by the Circuit Court Judge and are not part of this
case.
The parties filed cross motions for summary judgment.  Investors contended that the
circuit court lacked “subject matter jurisdiction to invalidate the deed in lieu of foreclosure
because it was recorded in Martinsville, Virginia.”  Ministries countered that jurisdiction was
proper under Section 3-409 of the Courts and Judicial Proceedings Article, Maryland Code
(1974, 2006 Repl. Vol.).  The Circuit Court denied the motions for summary judgment.
During the ensuing bench trial, Ministries argued that the Deed in Lieu was invalid
because the consideration recited in the Deed had not occurred at the time the Deed was
granted.  Investors countered that consideration supporting the contract, which included the
Deed in Lieu as part of its terms, was provided by the loan, and that, moreover, all the
instruments at issue had been executed under seal, which itself was sufficient consideration.
The circuit court bypassed the jurisdictional question and ruled that, because the contract
between the parties had been executed under seal, there was adequate consideration.
7
A “transitory action” 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 (9th ed.
2009).
9
Judgment was entered in favor of Investors.
The first question presented before us deals with consideration.  Because we hold that
a Deed in Lieu of Foreclosure, executed at the time of the origination of a loan, is a
mortgage, and that under the circumstances of this case, foreclosure proceedings must have
been initiated before Ministries’s interest in the property was extinguished, we need not
address this question.
The second set of questions regarding jurisdiction is more complex.  With respect to
the declaratory judgment count, as both parties herein conceded in their supplemental briefs
and at argument, such an 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, 675, 101 A. 538, 542 (1917); Seldner v. Katz, 96 Md. 212, 219-20, 53 A. 931,
933 (1903); White v. White, 7 G. & J. 208, 210 (1835).  See also Epstein v. Epstein, 193 Md.
164, 175, 66 A.2d 381, 385 (1949) (“No judgment or decree, except a judgment or decree
of a Maryland court, state or federal, can directly operate upon title to, or possession of,
Maryland land.”).
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”7 regarding Ministries’s allegation that Investors
10
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, 219 A.2d 80,
82 (1966) (“[A] transitory cause of action could, and generally would, be decided outside the
jurisdiction of its origin by any court in any other forum which had jurisdiction of the subject
matter and the parties.”).
The dispositive issue, nevertheless, is whether a deed in lieu of foreclosure, executed
at the origination of a loan, is valid as an absolute conveyance, rather than a mortgage, under
Maryland law.  We will also address whether a deed in lieu of foreclosure is valid, in this
scenario, also under Virginia law, because of the provision in the Deed of Trust regarding
the law that governs disputes between the parties:
19.  GOVERNING LAW; SEVERABILITY.  This Deed of
Trust shall be governed by the laws of the jurisdiction in which
the Property is located.  If any provision or clause of this Deed
of Trust or the Note conflicts with applicable law such conflict
shall not affect other provisions of this Deed of Trust or the
Note which can be given effect without the conflicting
provision.  To this and [sic] the provisions of the Deed of Trust
and the Note are declared to be severable.
Of course, in applying Virginia law, we do so without hubris, recognizing that nothing we
opine about herein could, in any way, be binding on any Virginia tribunal.
With respect to the Deed in Lieu, Ministries argues that, “[i]n order for a Deed in Lieu
of Foreclosure entered into as a precondition to a mortgage loan and prior to any default in
the mortgage loan to convey marketable title,” it would have to impermissibly “terminate the
mortgagor’s equity of redemption in the property.”  Accordingly, Ministries argues, the Deed
8
Amicus Fisher contends that the judgment in the present case should be vacated
and the case remanded for further proceedings, asserting:
Courts have universally held that when a mortgagor executes a
deed in lieu of foreclosure as part of the initial mortgage
transaction with instructions that the mortgagee can record the
instrument in the event of future default, such a deed . . . is void.
11
in Lieu in the present matter was invalid, as it was executed at the outset of the mortgage
prior to Ministries’ default.8  Conversely, Investors contends that Ministries never lost its
equity of redemption, arguing that it “had the right to redeem the Property outside the Deed
in Lieu (pursuant to the Disclosure Statement) by either paying the two or more months in
arrears or making other satisfactory payment arrangements with [Investors].”
For centuries, courts of equity have 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,
uniformly recognized in the Anglosphere since late medieval times, is called the equity of
redemption.  See Simard v. White, 383 Md. 257, 269-90, 859 A.2d 168, 175-87 (2004), in
which Judge Dale R. Cathell, writing for this Court, gives a historical overview of mortgages
and deeds of trust.  See also Restatement (Third) of Property: Mortgages § 3.1 cmt. a (1997)
(outlining the origins of the doctrine in English Chancery).
Courts have consistently refused to recognize creditors’ attempts to cut off that right
as a precondition for originating a mortgage.  Kenneth C. Kettering, True Sale of
9
The term “clogging” is widely used to describe various schemes to strip a
mortgagor’s right to redeem her equity in the event of a foreclosure.  The doctrine against
“clogging” the so-called equity of redemption arose in the English Courts of Chancery, as
an attempt to ameliorate the harsh result that obtained in the law courts in medieval England,
before the concept of a mortgage had evolved.  Before the adoption of the “anti-clogging”
doctrine, a landowner wishing to borrow while pledging his land as security would deed the
land outright to his creditor, in exchange for a stated sum of money, subject to the condition
that if the landowner (borrower) repaid the creditor on a future specified day (called “law
day”), title would revert to the borrower.  If for any reason (even if he could not find the
creditor) the borrower failed to pay on “law day,” he forfeited his title, regardless of whether
the debt owed bore any reasonable relation to the value of the land.
By the sixteenth century, courts of equity invoked the “anti-clogging” rule to avoid
this harsh result and began to permit late payment.  Later, the rule developed that both parties
were entitled to the protection of a foreclosure sale, with any excess payable to the defaulting
borrower, and conversely, permitting entry of a deficiency judgment in favor of the creditor
in case the sale proceeds were insufficient to satisfy the loan obligation.  From this
beginning, the modern idea of a mortgage secured by a deed of trust evolved.  See  Simard
v. White, 383 Md. 257, 269-90, 859 A.2d 168, 175-87 (2004) (Judge Dale R. Cathell, writing
for the Court, gives a historical overview of mortgages and deeds of trust.); Kenneth C.
Kettering, True Sale of Receivables: A Purposive Analysis, 16 Am. Bankr. Inst. L. Rev. 511,
527 (2008); Restatement (Third) of Property: Mortgages § 3.1 cmt. a (1997).
The Restatement further elaborates:
(continued...)
12
Receivables: A Purposive Analysis, 16 Am. Bankr. Inst. L. Rev. 511, 527 (2008) (explaining
the origin of the right to equity of redemption in “the deeply engrained unwillingness of the
equity courts to abide a forfeiture”); John C. Murray, Mortgage Workouts: Deeds in Escrow,
41 Real Prop. Prob. & Tr. J. 185, 187-88 (2006) (outlining the common law rule invalidating
deeds in escrow created as part of the original mortgage).
The Restatement (Third) of Property: Mortgages summarizes the common law rule,
known as the prohibition against “clogging”9 the equity of redemption, as follows:
(...continued)
Courts sometimes use alternative characterizations of the
clogging rule.  “Once a mortgage, always a mortgage” is the
most common alternative.  It is also sometimes stated that “a
mortgage cannot be made irredeemable.”  Whatever the
language of the clogging concept, courts traditionally have been
hostile to clauses and devices that purport to recognize the
equity of redemption, but whose practical effect is to nullify or
restrict its operation.  This hostility is rooted in a judicial desire
to protect “impecunious landowners.”  Equally important is a
judicial inclination to protect the mortgagor against misplaced
optimism and overconfidence concerning future ability to satisfy
commitments.
Restatement (Third) of Property: Mortgages § 3.1 cmt. a.
13
§ 3.1 The Mortgagor’s Equity of Redemption and
Agreements Limiting It.
(a) From the time the full obligation secured by a mortgage
becomes due and payable until the mortgage is foreclosed, a
mortgagor has the right to redeem the real estate from the
mortgage under the principles of § 6.4.
(b) Any agreement in or created contemporaneously with a
mortgage that impairs the mortgagor’s right described in
Subsection (a) of this section is ineffective.
(c) An agreement in or created contemporaneously with a
mortgage that confers on the mortgagee an interest in
mortgagor’s real estate does not violate this section unless its
effectiveness is expressly dependent on mortgagor default.
Emphasis added.
The cases supporting this principle are legion.  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
14
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.” (emphasis added).  See also Murray, supra, at 188 n.9 (collecting
cases).
Indeed, the Peugh Court stated that this doctrine was inviolate.  96 U.S. (6 Otto) at
337, 24 L. Ed. at 776 (“This is a doctrine from which a court of equity never deviates.”)
(emphasis added).  See Washington Fire Ins. Co. v. Kelly, 32 Md. 421, 440 (1870) (“Courts
of Equity, though a mortgage be forfeited, and the estate absolutely vested in the mortgagee,
at common law, yet they will allow the mortgagor, at any reasonable time, to redeem his
estate. . . . Nor will they permit a conveyance made to secure a debt, to operate for any other
purpose than to secure the debt; the conveyance will be considered as merely holding the
property as pledged, and no agreement in a mortgage will be suffered to make the property
irredeemable.”) (emphasis added); accord Restatement (Third) of Property: Mortgages § 3.1
cmt. b (“If ‘clogging’ were routinely permitted by agreement of the parties, there is a strong
likelihood that foreclosure sales would disappear and debtors would lose the long-recognized
right to have their real estate taken only after its value is tested by a public sale.”) (emphasis
added).
The instant case is wholly different from a loan workout, where a mortgagor and
mortgagee negotiate after an event of default already has occurred.  After a mortgagor
defaults on a note, she may legitimately contract with the noteholder to execute a
conveyance, in exchange for adequate consideration, so long as there is no overreaching.
15
See, e.g., Peugh, 96 U.S. (6 Otto) at 337, 24 L. Ed. at 776 (“A subsequent release of the
equity of redemption may undoubtedly be made to the mortgagee. . . . The transaction will,
however, be closely scrutinized, so as to prevent any oppression of the debtor.”) (emphasis
added); Simard, 383 Md. at 272 n.12, 859 A.2d at 177 n.12 (“The 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.”) (emphasis added).
After a mortgagor defaults, she may negotiate a “short sale” to avoid a deficiency
judgment, i.e., further indebtedness persisting even after the proceeds from a foreclosure sale
have been distributed.  To require the borrower, however, as a condition of obtaining
financing, to surrender the equity of redemption in advance places the lender in a “heads I
win, tails you lose” position.  In situations where the borrower had made substantial
payments on the loan, or where the property greatly appreciated in value, the lender would
record the deed in lieu rather than file for foreclosure.  If the borrower’s equity in the
property were insufficient, the lender would still have its traditional remedies under the deed
of trust with power of sale.
In the present case, 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 purports to state on its face.
10
The full text of the statute stated as follows:
§ 7-101. When deed absolute in terms to be considered a
mortgage; assignment of mortgages as security; certain
security interests perfected. 
(a) When deed absolute in terms to be considered a mortgage.–
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.  The person for whose benefit
the deed is made may not have any benefit or advantage from
the recording of the deed, unless every other writing operating
as a defeasance of it, or explanatory of its being intended to have
the effect only of a mortgage, also is recorded in the same
records at the same time.
(b) Assignment of mortgages as security. – Subsection (a) of this
section is not applicable to the grant of a security interest in a
mortgage by a mortgagee, or one of several mortgagees, or any
assignee of his interest in a mortgage as security for payment of
an indebtedness or performance of an obligation.  Such a
transaction is governed by Title 9 of the Maryland Uniform
Commercial Code.
(c) Certain security interests perfected. – Notwithstanding any
provision of Title 9 of the Maryland Uniform Commercial Code
to the contrary, if a security interest in a mortgage was attached
and perfected before July 1, 2001, in accordance with subsection
(b) of this section as in effect before July 1, 2001, then the
security interest shall continue to be perfected after July 1, 2001,
without the need for any additional filing in the land records in
the county where the mortgage is recorded, and without the need
(continued...)
16
The Real Property Article codifies the buyer’s long-settled right to the equity of redemption.
The relevant statute is Section 7-101 of the Real Property Article, Maryland Code (1974,
2003 Repl. Vol.),10 which, at the time the Deed in Lieu was executed, stated, in relevant part:
(...continued)
for any additional filing otherwise required under Title 9 of the
Maryland Uniform Commercial Code.
The current iteration of Section 7-101 of the Real Property Article, Maryland Code (1974,
2010 Repl. Vol.), contains identical language. 
17
§ 7-101. When deed absolute in terms to be considered a
mortgage; assignment of mortgages as security; certain
security interests perfected.
(a) When deed absolute in terms to be considered a mortgage.–
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.  The person for whose benefit
the deed is made may not have any benefit or advantage from
the recording of the deed, unless every other writing operating
as a defeasance of it, or explanatory of its being intended to have
the effect only of a mortgage, also is recorded in the same
records at the same time.
Emphasis added.  
Obviously, as Investors itself admitted, the only purpose of the Deed in Lieu was to
grant additional security to the lender at the time of loan origination.  Thus, Section 7-101
of the Real Property Article 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.
Although not strictly necessary to the analysis, we think it highly significant that a
statute similar to Section 7-101(a) of the Real Property Article has been codified in Maryland
11
The 1888 version of the statute stated as follows:
Every deed conveying real estate or chattels, which by
any other instrument or writing shall appear to have been
intended only as a security in the nature of a mortgage, though
it be an absolute conveyance in terms, shall be considered as a
mortgage, and the person for whose benefit such deed shall be
made shall not have any benefit or advantage from the recording
thereof, unless every instrument and writing operating as a
defeasance of the same, or explanatory of its being designed to
have the effect only of a mortgage or conditional deed, be also
therewith recorded.
Md. Code (1888), Art. 66, § 1.
12
The earliest statute was virtually identical to the 1888 version:
And be it enacted, That every deed conveying real estate
or chattels, which by any other instrument or writing, shall
appear to have been intended only as a security in the nature of
a mortgage, though it be an absolute conveyance in terms, shall
be considered as a mortgage, and the person or persons for
whose benefit such deed shall be made, shall not have any
(continued...)
18
since 1825.  Prior to the 1974 codification of the Real Property Article, its predecessor had
been enacted and codified as Section 7-101 of Article 21, Maryland Code (1957, 1973 Repl.
Vol.).  1972 Maryland Laws, Chapter 349, Section 1.  Prior to the 1972 act, the same statute
appeared in Section 1 of Article 66, Maryland Code (1957, 1968 Repl. Vol.).  The same
statute, with the same designation, had appeared in prior codifications going back to 1888.11
In Kelly, an 1870 decision, this Court cited Section 20 of Article 64, Maryland Code (1860),
as authority for the same proposition.  32 Md. at 440.  The earliest version of the statute was
enacted in 1825.  1825 Maryland Laws, Chapter 203, Section 2.12
(...continued)
benefit or advantage from the recording thereof, unless every
instrument and writing, operating as a defeasance of the same,
or explanatory of its being designed to have the effect only of a
mortgage, or conditional deed be also therewith recorded.
1825 Md. Laws, Chap. 203, § 2.
19
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.  Snavely v. Pickle, 70 Va.
27 (1877).  In Snavely, the court observed that the equity of redemption “[was] an inseparable
equitable incident of every mortgage. . . . and cannot be defeated, restrained, evaded, or in
any way impaired by agreement of parties as long as the mortgage continues a security.”  Id.
at 35 (emphasis added).  See also In re: Greene, No. 06-33811-KRH, Chapter 13, Adv. Pro.
No. 07-03004-KRH, Adv. Pro. No. 07-03018-KRH, 2007 Bankr. LEXIS 2021, at *15, *15
n.9 (Bankr. E.D. Va. 2007) (collecting cases).
Research reveals only one other Virginia reported opinion besides Snavely that
addresses the issue.  That case, Dawson v. Perry, 30 Va. Cir. 372 (Va. Cir. 1993), is
20
instructive.  In Dawson, a debtor successfully challenged the validity of a deed in lieu of
foreclosure that had been executed at the time of loan origination.  Id.  The debtor, Sally
Dawson, had lived at her home from 1969 until 1986, when the property was foreclosed
upon.  Id.  The purchaser at the foreclosure sale assigned its rights to Perry.  Id.
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, contesting the validity of the deed in lieu of foreclosure, “arguing
that it impermissibly cut off her equity of redemption.”  Id.  Perry countered that Dawson had
“validly contracted away her equity of redemption in consideration of his providing financing
for the transaction.”  Id.  Thus, Perry had used the exact same financing arrangement used
13
In First Illinois National Bank v. Hans, 493 N.E.2d 1171 (Ill. App. Ct. 1986),
the Appellate Court of Illinois construed an assignment of an interest in land, granted by
mortgagors to a bank, created as security for a loan, and which provided that in event of
default, the mortgagors would execute a quitclaim deed in favor of the bank, as creating
instead an equitable mortgage.  Consequently, the court determined that the contractual
provision requiring the mortgagors to execute the quitclaim deed “must be declared null and
void.”  Id. at 1174.  The court rejected the bank’s argument that a mortgagee can take a deed
in lieu of foreclosure, because the authority relied upon by the bank applied only to a
subsequent conveyance.  Id. at 1175 (“That is a far different situation from the one presented
here where the mortgage itself required the mortgagor to execute a deed upon the occurrence
of a default.”).
The Dawson court contrasted Hans with Ringling Joint Venture II v. Huntington
National Bank, 595 So. 2d 180, 182-83 (Fla. Dist. Ct. App. 1992) (per curiam), which upheld
a deed in lieu of foreclosure because it was part of “an agreement subsequent to the
promissory notes and mortgages involved in the earlier foreclosure proceeding . . . [and] was
given to avoid foreclosure . . . .  Ringling received valuable new consideration to relinquish
its right of redemption.”  (emphasis added).  Even so, the Florida court “emphasize[d] that
the agreements used in this case could easily result in abuse or inequity in another case under
other facts.”  Id. at 183.  Thus, the court disavowed giving “general approval for the use of
such documents in resolving other foreclosure proceedings[, explaining instead that] [s]uch
arrangements should be carefully scrutinized to assure that they do not violate the favored
right of redemption.”  Id.  (emphasis added).
21
here by Investors.
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,13 which “buttressed the
court’s initial belief . . . that a deed in lieu of foreclosure is normally executed after default,
when foreclosure is threatened.”  Id. at 374. (emphasis added).  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.
22
Although one can only speculate as to the reason Investors required the Deed in Lieu
to be executed under seal, it may well be that they hoped to evade the ruling in Dawson,
which at least colorably could be read as based in part on the fact that in that case, “[t]here
was simply no new consideration[.]”  Id.  In any event, under “jealous scrutiny,” Snavely, 70
Va. at 35, we refuse to elevate form over substance.
Our analysis is supported overwhelmingly by authority from other jurisdictions.  In
Part II of his law review article entitled “Deed in Escrow in Connection with Original
Mortgage,” supra, Murray surveys cases from all over the United States, all of which hold
that, “when a mortgagor places a deed in escrow in connection with the initial mortgage
transaction, with instructions to release the deed to the mortgagee immediately in the event
of a future default, the deed is void and unenforceable.”  Murray, supra, at 187.  This result
is grounded on general equitable and public policy grounds.  Id.
In Basile v. Erhal Holding Corp., 538 N.Y.S.2d 831 (N.Y. App. Div. 1989), the
mortgagee required the mortgagor to execute a deed in escrow as part of a consumer
mortgage and, when the borrower defaulted, the mortgagee recorded the deed.  The trial court
ruled that the borrower had waived her right of redemption and denied her motion for an
order requiring the mortgagee to deliver the deed and declare the mortgage void.  Id. at 833.
The Appellate Division modified the decree, construing the deed in lieu of foreclosure as a
mortgage, holding that the trial court had “erred in declaring that the plaintiff waived her
right of redemption in the demised premises[,]” because “[a] deed conveying real property,
although absolute on its face, will be considered to be a mortgage when the instrument is
14
The New York statute states as follows:
§ 320.  Certain deeds deemed mortgages
A deed conveying real property, which, by any other written
instrument, appears to be intended only as a security in the
nature of a mortgage, although an absolute conveyance in terms,
must be considered a mortgage; and the person for whose
benefit such deed is made, derives no advantage from the
recording thereof, unless every writing, operating as a
defeasance of the same, or explanatory of its being desired to
have the effect only of a mortgage, or conditional deed, is also
recorded therewith, and at the same time.
23
executed as security for a debt.  Id.  The appellate court cited, in addition to a string of Court
of Appeals (of New York) decisions, a statute, N.Y. Real Property Law § 320,14 which is
substantially similar to Section 7-101 (a) of the Real Property Article.  See id.  The appellate
court explained the rationale behind this rule by quoting the passage from Peugh, discussed
supra. 
This holding was confirmed in Leona Bank v. Kouri, 772 N.Y.S.2d 251 (N.Y. App.
Div. 2004), in the context of a divorce and separation agreement, where the court noted that
“the giving of a deed to secure a debt, in whatever form and however structured, creates
nothing more than a mortgage.”  Id. at 254.  Consequently, the court held that “[t]he holder
of a deed given as security must proceed in the same manner as any other mortgagee--by
foreclosure and sale--to extinguish the mortgagor’s interest . . . .”  Id.
It also is noteworthy that, in the opinion of the appellate court, the New York statutory
analog of 7-101(a) of the Real Property Article, Maryland Code (1974, 2003 Repl. Vol.),
“codifies the common law as enunciated in cases for over a century.”  772 N.Y.S.2d at 254.
24
This further confirms that the Deed in Lieu in the present case would be construed as a
mortgage under Virginia law.
First Illinois National Bank v. Hans, 493 N.E.2d 1171 (Ill. App. Ct. 1986), held
similarly.  In that case, the Appellate Court of Illinois construed an assignment, which had
been created as a security interest, as an equitable mortgage.  Id. at 1172.  In particular, the
court held that a contractual provision requiring the mortgagors to execute a quitclaim deed
in favor of the bank, in case of default, “must be declared null and void[,]” because that
provision cut off the mortgagors’ equity of redemption.  Id. at 1174.
Larson v. Hinds, 394 P.2d 129 (Colo. 1964), is to similar effect.  In that case, Hinds
filed an action in unlawful detainer, alleging that the defendants were tenants who had failed
to pay rent, and praying for a writ of possession and past rent due.  Id. at 130-31.  The
defendants’ answer included the affirmative defense that they were owners and mortgagors,
not tenants.  Id. at 131.
The pertinent facts were: in 1955, defendants Jennie Bloomquist, George Larson,
Beatrice Larson, Walter Larson and Vernon Larson executed a warranty deed whereby they
conveyed real property to the plaintiff, Hinds, subject only to a first deed of trust to the
Midland Savings and Loan Association; at the same time, the defendants made a promissory
note payable to Hinds in the principal amount of $ 800.00; and, also at the same time, the
parties executed an escrow agreement whereby the Larsons and Jennie Bloomquist agreed
to pay to Hinds the principal amount of the note, together with interest at the rate of 1% per
month, within sixty days.  Id. at 131.  The agreement included “Schedule A,” which provided
15
At the time, the Supreme Court of Colorado sat in panels of three justices for
some cases.
16
The statutory authority interpreted by the Colorado court, Colo. Rev. Stat. §
118-6-17 (1953), provided as follows:
MORTGAGES, NOT A CONVEYANCE BUT A LIEN. –
Mortgages, trust deeds or other instruments intended to secure
the payment of an obligation affecting title to or an interest in
real property, shall not be deemed a conveyance, regardless of
its terms, so as to enable the owner of the obligation secured to
recover possession of real property without foreclosure and sale,
but the same shall be deemed a lien.
Larson v. Hinds, 394 P.2d 129, 133 (Colo. 1964).
25
that, if the borrowers “fail to perform in accordance with the terms and conditions of this
agreement and the note of even date herewith and hereto attached,” the escrow holder shall
“immediately” deliver the warranty deed to Hinds, “without notice to the parties of the first
part,” i.e., the Larsons and Ms. Bloomquist, and that the transaction shall be regarded as an
absolute conveyance to Hinds.  Id.
After finding that the Larsons and Bloomquist had defaulted on the note, the trial court
construed the terms of this agreement as a contract of sale and entered judgment in favor of
Hinds for possession but denied him damages for rent.  Id.  The Supreme Court of Colorado,
sitting in Department,15 construed this arrangement as creating a mortgage and reversed and
remanded the case with directions that the trial court enter a decree declaring the warranty
deed in favor of Hinds to be a mortgage.  Id. at 134.
Similar to Maryland and New York, there is statutory authority in Colorado.16  The
26
court noted that “[t]he only purpose of the escrow was to avoid the necessity of foreclosure
and sale in the event of default,” and that such a result violated the public policy of Colorado
as expressed in the statute.  Id. at 133 (“The arrangement here deprived the defendants of any
redemption rights which the public policy of this state guarantees and amounted to a
[forfeiture] which the policy of this state abhors.”) (emphasis added).  See also Guam
Hakubotan, Inc. v. Furusawa Inv. Corp., 947 F.2d 398, 401 (9th Cir. 1991) (noting that
Guam Civil Code provision “states the familiar principle of equity and public policy that a
mortgagor is not permitted to alienate his right of redemption at the time he enters into a
mortgage agreement.”); Marple v. Wyoming Prod. Credit Ass’n, 750 P.2d 1315, 1320 (Wyo.
1988) (holding that a deed held in escrow that was to be conveyed upon default was, in fact,
a mortgage and could not terminate mortgagor’s right of redemption); Kartheiser v. Hawkins,
645 P.2d 967, 968 (Nev. 1982) (holding that quitclaim deeds given by mortgagor to
mortgagee at time of delivery of deeds of trust were merely further security for mortgage
loan and did not surrender grantor’s equity of redemption); Lincoln Mortg. Investors v. Cook,
659 P.2d 925, 927 (Okla. 1982) (“Simply stated, the [clogging] doctrine voids any provision
in an original mortgage agreement limiting or modifying the right of redemption by payment
of the full mortgage debt after default for any reason.”); MacArthur v. North Palm Beach
Utilities, Inc., 202 So. 2d 181, 188 (Fla. 1967) (“A mortgagor cannot, by any agreement
made contemporaneously with or as a part of the mortgage transaction, bind himself not to
assert his right or equity of redemption . . . .”) (citation omitted); Hamud v. Hawthorne, 338
P.2d 387, 390 (Cal. 1959) (“‘Transfers of mortgaged properties by mortgagors to mortgagees
27
for the purpose of avoiding foreclosure proceedings . . . have not been uncommon
occurrences . . . [and] have been held valid by the courts where the transactions were fair and
honest . . . ’ [but only where] an original loan contract was first entered into providing for a
note secured by a deed of trust or mortgage and, after default in payment, the parties entered
into a separate, distinct and subsequent contract which provided for the conveyance of the
subject property to the mortgagee or beneficiary . . . .” (quoting Bastajian v. Brown, 135 P.2d
374, 377 (Cal. Ct. App. 1943))); Pollak v. Millsap, 122 So. 16, 20-22 (Ala. 1928) (holding
that transaction involving loan of money secured by deed is enforceable as mortgage, not a
conditional sale); Humble Oil & Ref. Co. v. Doerr, 303 A.2d 898, 905 (N.J. Super. Ct. Ch.
Div. 1973) (“For centuries it has been the rule that a mortgagor’s equity of redemption
cannot be clogged and that he cannot, as a part of the original mortgage transaction, cut off
or surrender his right to redeem.  Any agreement which does so is void and [unenforceable]
as against public policy.”); 4 Pomeroy, Equity Jurisprudence § 1193 (5th ed. 1941) (“Once
a mortgage, [a]lways a [m]ortgage.”).  In the end, clogging the equity of redemption is
prohibited.
Most importantly, for this case, 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 in the present case, therefore, must have been
initiated before Ministries’ interest in the Property could have been extinguished.
Accordingly, because Ministries has properly stated a cause of action for damages
28
from breach of contract, we shall vacate the judgment of the Circuit Court for Montgomery
County and remand for further proceedings on that action.
JUDGMENT OF THE CIRCUIT
COURT 
FOR 
MONTGOMERY
COUNTY 
VACATED; 
CASE
REMANDED TO THAT COURT FOR
FURTHER PROCEEDINGS NOT
INCONSISTENT 
WITH 
THIS
OPINION.  COSTS TO BE PAID BY
APPELLEE.