Opinion ID: 1975433
Heading Depth: 2
Heading Rank: 4

Heading: Analysis of the City Loan Under the SMLL

Text: In order for the Bank Loan to qualify under the SMLL, there must have been a lien constituting a qualifying prior encumbrance on the title to petitioner's property. Petitioner contends that the City Loan created an equitable lien that was a lien of a prior encumbrance. Respondents contend that the City Loan was just a loan and did not create a lien on the title to petitioner's property. The City Loan states, in part: WHEREAS, the Owner is willing to subject the Property to a rehabilitation easement and to the claims of the City for the repayment of the Loan pursuant to the terms and conditions set forth in this Agreement; and WHEREAS, it is agreed that the repayment of the indebtedness evidenced hereby, as well as the performance of the other covenants, terms and conditions herein, should be secured by the execution of this Agreement. .... II. The Owner agrees as follows: 1) To repay the Loan and simple interest thereon at the rate of 3% per annum in the event the Property is transferred, sold, assigned or abandoned or if the Owner ceases to own the Property, whether by death, condemnation, operation of Law or otherwise. It is expressly understood and agreed by the owner that upon his or her death, his or her heirs may assume the loan and be subject to the terms and conditions of the Deferred Loan Program.... .... 7) Upon the occurrence of any such default, NPA/DHCD [17] may take any or all of the following remedial steps: a) NPA/DHCD may, upon notice in writing that a default has occurred under this Agreement and is continuing, stop making payments hereunder and apply the balance of the undisbursed Loan proceeds to the payment of the Loan and to pay any funds due to the contractor for completed work; and/or b) may declare the indebtedness evidenced and secured by this Agreement immediately due and payable; and/or c) may take whatever action at Law or in equity as may appear necessary or desirable to enforce any obligation, covenant or agreement of the Owner under this Agreement. [Emphasis added.] Only the signature of the City's representative was attested to on the City Loan agreement. Petitioner points to several factors that she thinks establishes that the City Loan created a lien on her property. Petitioner contends that the language in the loan agreement that the Owner is willing to subject the Property to a rehabilitation easement and to the claim of the City for the repayment of the Loan and petitioner's understanding that she was giving the City a lien on her property show the intent of the parties to create a lien. Petitioner also points to the City Loan agreement being recorded in Baltimore City as a mortgage as proof of the parties' intent to create a lien on petitioner's property. Petitioner contends that the totality of the facts, that the City Loan agreement was recorded, the language of the City Loan agreement, the creation of a rehabilitation easement on petitioner's property, and petitioner's understanding that she was giving the City a lien on her property, all prove that the intent of the parties was to create a lien. We disagree with petitioner. We hold that the City Loan did not create an equitable lien in the property but provided the City with a chose in action. [18] This Court has stated that [t]he modern conception of a lien is that it is a right given by contract, statute or rule of law to have a debt or charge satisfied out of a particular property. Chevy Chase Bank v. Chaires, 350 Md. 716, 731, 715 A.2d 199, 206 (1998). In Equitable Trust Co. v. Imbesi, 287 Md. 249, 412 A.2d 96 (1980), this Court, while examining equitable liens, quoting from Keyworth v. Israelson, 240 Md. 289, 214 A.2d 168 (1965), stated that: An equitable lien is based on specific enforcement of a contract to assign property as security. The contract need not stipulate for the lien in express terms; it is enough if that is the fair and reasonable implication of the terms employed. A mere promise to pay a debt or obligation does not of itself, however, create a lien unless the intention to create it is apparent from the instrument and circumstances leading to it. Johnson v. Johnson, 40 Md. 189, 196 (1874). See 33 Am.Jur. Liens § 18 and 4 Pomeroy's Equity Jurisprudence §§ 1235-1237 (5th ed.1941); but also see 41 Harv. L.Rev. 404 (1928). [Id. at 305, 214 A.2d 168.] This is in accord with 4 J. Pomeroy, Equity Jurisprudence § 1235 (5th ed., S. Symons 1941), cited in Keyworth, where it is stated: The doctrine may be stated in its most general form, that every express executory agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund, therein described or identified, a security for a debt or other obligation, or whereby the party promises to convey or assign or transfer the property as security, creates an equitable lien upon the property so indicated, which is enforceable against the property in the hands not only of the original contractor, but of his heirs, administrators, executors, voluntary assignees, and purchasers or encumbrancers with notice. [Id. at 696.] .... In summary, it would appear that under our cases for an equitable lien to exist a specific intent to create a lien must be made manifest as, for instance, where a written instrument evidences an intent to create a lien but the instrument is imperfect in some regard, such as one with a defective acknowledgment. In the absence of a written contract construed to embody the full agreement of the parties, an equitable lien may be found only where the sum total of the circumstances of the dealings between the parties fairly may be said to evidence an intent to create such a lien. Id. at 256-60, 412 A.2d at 99-101 (alterations in original) (emphasis added). In Equitable Trust Co., Thomas L. Imbesi and his son borrowed $60,000.00 from The Equitable Trust Co. Mr. Imbesi signed a document titled a Covenant Not To Encumber or Convey Real Estate, in which Mr. Imbesi, as long as he was indebted to The Equitable Trust Co., would not make, or cause to be made any deed of trust, mortgage, conveyance or any other instrument or agreement having the effect of a lien upon or conveyance of the real estate now owned by me/us.... This document was recorded among the land records of Baltimore County. Mr. Imbesi's son then borrowed money from a different bank and he secured the loan with a mortgage on the property mentioned in the covenant not to encumber. The second bank eventually entered judgment against Mr. Imbesi and a suit to foreclose under the covenant not to encumber was filed by The Equitable Trust Co. This Court had to decide whether the covenant not to encumber was an equitable lien. The Court held that a negative covenant not to encumber or convey real property was not an equitable lien. The Court stated that: With that background, we turn to the instrument in question. It is plain and unambiguous. It does nothing more than to recite that there is a debt to Equitable and that in consideration of that debt Imbesi will not encumber or convey specified land so long as the debt remains unpaid. It will be recalled that the Court stated in Keyworth, 240 Md. at 305, 214 A.2d 168, that an equitable lien is based on specific performance of a contract to assign property as security. In Western Bank, 91 Md. at 621, 46 A. 960, cited by Jones, the Court said relative to an equitable mortgage, [I]n all such cases the intent to create a mortgage is the essential feature of the transaction. (Emphasis in original.) We have here no homemade security instrument in which the parties labored to produce a lien of some sort but fell short of the legal requirements and thus must be rescued by a court of equity. The form on which this agreement was placed was a printed document prepared by one of the largest banks in the State. We have no instrument which purports in any way to convey or to place a lien upon land. The agreement is barren of anything to indicate an intent to create a lien. We have nothing but an agreement not to do a particular thing. In the words of the West Virginia court in Knott[ v. Shepherdstown Manuf'g Co., 30 W.Va. 790, 5 S.E. 266 (1888) ] [t]he creation of a lien is an affirmative act, and the intention to do such act can not be implied from an express negative. Id. 30 W.Va. at 796[, 5 S.E. 266]. We agree. Accordingly, we find no equitable lien. It follows as a consequence that the instrument with which we are here concerned creates no lien paramount to subsequent mortgages or judgment liens on the same property. Id. at 270-71, 412 A.2d at 106-07. In Montgomery County v. May Department Stores Co., 352 Md. 183, 721 A.2d 249 (1998), a dispute arose between Montgomery County and May Department Stores over surplus proceeds from a mortgage foreclosure. May Department Stores had a judgment lien against the property that was part of the mortgage foreclosure. The claim of Montgomery County was that covenants running with the County's Moderately Priced Dwelling Unit program [19] gave the County a lien on that property that had a priority over the lien of May Department Stores. The Court held that the covenants did not create a lien. The Court could not find any language where the residents of the dwelling units agreed to the imposition of a lien on their particular lot. The Court also held that a statutory lien was not created because there was no express language creating a lien. While the Court recognized that express language creating a lien was not an absolute prerequisite to the recognition of an equitable lien, the Court could not find any language that created an equitable lien. The Court stated that [i]n the matter before us Article X of the Avenel MPDU covenants is even further removed from an equitable lien than was the covenant not to encumber or convey that was involved in Equitable Trust. Id. at 197, 721 A.2d at 256. The courts of our sister states have also held that in order to create an equitable lien there must be a clear intent by the parties to establish the lien. Warren v. Warren, 11 Ark.App. 58, 61, 665 S.W.2d 909, 910-11 (1984) (the mere loan of money for the purchase of property does not result in an equitable lien in favor of the lender where the evidence does not show an agreement to give the lender a lien); Leveyfilm, Inc. v. Cosmopolitan Bank & Trust, 274 Ill.App.3d 348, 355, 210 Ill.Dec. 680, 653 N.E.2d 875, 880 (1995) (However, we also recognize that if a contract expressly covers the entire subject matter and does not provide for a lien, a lien will not be created by implication.); Wright v. Wright, 311 N.W.2d 484, 485-86 (Minn. 1981) (The district court was correct in determining that this was in fact a loan, due and payable at the time of the sale of the homestead. As the sale of the homestead had not yet occurred, the loan was not due and defendant was not in default.... [A] loan made to enable a borrower to purchase or pay for a homestead does not give the lender a right to a lien upon the homestead even if there is an oral agreement to give security thereupon.); Bosler v. Short, 277 Or. 697, 700, 561 P.2d 1025, 1026 (1977) (However, if there is no such agreement and the promissor agrees only to pay the debt out of the sale of the property if the property is sold, an equitable lien is not created, either in the land or in the proceeds of the sale.) [20] ; Hoza v. Hoza, 302 Pa.Super. 72, 79, 448 A.2d 100, 104 (1982) (to establish a right to an equitable lien, the evidence must be clear, precise and indubitable as to the intention of the parties). Petitioner has also pointed to the fact that the City Loan agreement established a rehabilitative easement, which is an encumbrance on the property, as proof that petitioner and the City intended to establish an equitable lien. In Manor Real Estate Co. v. Jos M. Zamoiski Co., 251 Md. 120, 125, 246 A.2d 240, 243 (1968), we stated that there are many encumbrances, such as easements, that are not liens. Easements of many kinds, utility easements, right of way easements, water access easements, and now rehabilitation easements may exist and many properties are subject to them. They are not considered to be liens. Although the rehabilitation easement placed an encumbrance upon petitioner's property, it did not establish an equitable lien upon the property so as to trigger the SMLL. Moreover, in Chevy Chase Bank v. Chaires, 350 Md. 716, 715 A.2d 199 (1998), a case in which we held that Shore Erosion Control Liens statutorily created by the State Legislature (not by a municipality), did constitute prior encumbrances for purposes of the SMLL, we explained why: The modern conception of a lien is that it is a right given by contract, statute or rule of law to have a debt or charge satisfied out of a particular property. Here, NR § 8-1006(c) creates a statutory lien in favor of the State (A benefit charge assessed under this subtitle shall be a lien on the real property against which the benefit charge is assessed.), not only as to an annual installment in default (which shall be a first lien on the benefitted property, subject only to prior State, county, or municipal real property taxes) but also as to the outstanding balance of a benefit charge [which] shall be afforded normal lien priority. Further the method for enforcing the lien is not tied to annual taxes. The State may enforce collection in the manner specified for foreclosure of mortgages. Id. at 731, 715 A.2d at 206 (internal citations omitted) (alteration in original). The thrust of our statement in Chevy Chase was that the State statute creating the Shore Erosion Control Lien, contained specific language creating lien status, and thus lien and encumbrance priorities for SMLL purposes. In the present case there exists neither express statutory language, such as that existing in the SECL statute, nor is there any such express language in the document evidencing the loan arrangement. The mere indication of mortgage on the blue back [21] does not make the document that type of instrument that may constitute a lien or encumbrance for purposes of the SMLL. The writing on the blue back is not part of the instrument; it merely is an aid to the recorder as to where the person forwarding the document desires it to be recorded, and where it should be returned after recording. The actual document in the present case does not describe the instrument as a mortgage, nor does it describe it as a lien against the particular property, nor does it provide that upon default it is that type of lien that can be enforced in the manner specified for the foreclosure of mortgages. Moreover, as we indicated subsequent to Chevy Chase, in Montgomery County v. May Department Stores Co., 352 Md. 183, 200, 721 A.2d 249, 257 (1998), in the somewhat related context of a local government attempting, by local statute, to insert its claims in respect to advances of loan sums for a housing unit under a local moderately priced housing program, ahead of the priority of judgment lien holders: If we assume, arguendo, that as a matter of statutory construction, § 25A-9(e) attempted to effect a reordering of priorities between judgment lienors and the County, as a general creditor under the MPDU program, then the attempt would be invalid. Under those circumstances § 25A-9(e) would be preempted by conflict with public general statutory law, for the reasons stated by the Court of Special Appeals. May Dep't Stores, 118 Md.App. at 448-63, 702 A.2d at 992-99. The Court of Special Appeals in May Department Stores v. Montgomery County, 118 Md.App. 441, 461, 702 A.2d 988, 998-99 (1997), found in relevant part that: What the County has attempted is to advance, by its ordinance, the County's possible future status as a general creditor above the status of existing judgment creditors without ever obtaining a judgment. Judgment creditors normally are created by judicial action pursuant to State statutes and court rules. In the absence of State legislative action that gives Montgomery County's inchoate claims specific priority over judgment creditors, Montgomery County cannot by local ordinance give to itself a senior status, even under its general home rule powers or, specifically, its delegated authority to create a local affordable housing program. The County cannot elevate its status above the status afforded by State law and the status afforded other judgment lien holders. [Emphasis added.] In the case sub judice, we have been directed to no State statute, or for that matter to any Federal statute, nor do we know of any, that authorizes the City of Baltimore to claim liens or encumbrances against a specific property, merely because it enters into a loan agreement with a private party, for funds for that party to use in rehabilitating the property, reserving to the City only the right to enter upon the property to see to the proper application of the loan proceeds, and the right to demand payment from the debtor, if the debtor transfers the property. Not only is there no State authorization supporting the position the City would have to take in order to validate the claims of petitioner that the loan agreement constitutes a prior lien or encumbrance against the specific property, we have been directed to no local ordinance or law (valid or otherwise), nor know of any, upon which Baltimore City might attempt to rely if it were to assert a lien priority over the mortgage held by the respondents in the present case. Under the circumstances of this case, Baltimore City, absent State statute, would not be able to assert a priority over the mortgage of respondents. That is the effect of our holding in May Department Stores, supra. Even if there was a valid city statute, the actual language of the loan arrangement's repayment provisions, its right to demand repayment from the petitioner, would come into play only upon the transfer of the property by the petitioner. At that point, the City's recourse would be to proceed against the debtor on her personal promise to pay, or to, perhaps, proceed against the proceeds of sale, or of loan proceeds, to the extent such proceeds remain in the hands of the debtor or the debtor's agents. At the point that the City could, under the provisions of the City Loan agreement, demand payment, the property would already be transferred, i.e., mortgaged. Thus, even if the loan agreement was sufficiently specific to qualify as a lien under State law, or under a local law if such a local law was authorized by State law, it would only qualify as a lien, if at all, in the future, at a time after the mortgage or deed of trust in the present case was recorded. Thus the mortgage from respondents in the case at bar is a first mortgage, not a secondary mortgage. In the final analysis, petitioner has failed to prove that the parties created a lien on petitioner's property. Petitioner cites the WHEREAS language in the Baltimore City Deferred Loan Agreement, which states that the Owner is willing to subject the Property to a rehabilitation easement and to the claim of the City for the repayment of the Loan pursuant to the terms and conditions set forth in this Agreement. This language contained only in the WHEREAS clauses, and not in the operative clauses of the agreement, fails to sufficiently establish a lien on the property at issue. As stated, supra, an easement is an encumbrance on property, but it is not a lien. The other language in the Agreement only provides the City with a claim for repayment under the conditions of the Agreement. The Agreement, itself, only provides the City with an opportunity to demand repayment if the property is sold or transferred. The City may then have a claim against the proceeds from the sale of the property, but has no claim against the property. Prior to the time of transfer, the city has no claim for repayment. There is no language in the Agreement calling for a current lien on the property. In the operative section of the Agreement [22] that states when the Owner has to repay the loan, there is no mention of a lien on the property. In the section of the Agreement that states what can occur upon a default by the Owner, there is no mention of a lien or a security interest on petitioner's property. There is no mention of right to enforce payment by way of foreclosure. There is little implication that the City, as the drafter of the document, and petitioner intended to create an equitable lien against petitioner's property. There is no statute, Federal, State, or local, which would serve to create a lien on behalf of the City attaching to the specific property here at issue. The clear analysis is that this was a loan that provided that the City could demand payment only after a borrower's transfer of property. It did not create a prior lien for purposes of the SMLL.