LIABLE - NOT JUST PRIMARILY LIABLE, OR - FIXING AN ATTORNEY GENERAL’S OPINION ON IDOTS 20 YEARS LATER

The senior assistant Howard County Solicitor kept trying to convince me of a particular point.  If a recordation tax on an indemnity deed of trust (an “IDOT”) becomes due and the grantor of the deed of trust does not pay it, then the lender must pay it, she contended.  No, I said, the lender does not have liability for payment of the recordation tax even in that instance.  We both relied on the same opinion of the Maryland Attorney General for our positions.  But after doing some digging in my old files, I realized why we were coming to the opposite answer to the question posed:  we were looking at different versions of the same opinion. 

Structure of IDOTs

IDOTs have been used as financing devices in Maryland for decades.  The structure for an IDOT transaction involves a loan to an entity (the “borrower”) and the guaranty of that loan by a different 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.  The same entity is guarantor, landowner, and grantor of the IDOT (for simplicity, that entity in all of its roles is called the “guarantor”).  Importantly for the IDOT structure, the guarantor cannot be primarily liable on the loan from the lender to the borrower at the time that the IDOT is recorded.  This is because if the guarantor is not primarily liable on the loan, then as to the guarantor, the secured debt on which the recordation tax is based “has not been incurred” within the meaning of Section 12‑105(f) of the Tax-Property Article of the Maryland Code (TP).

An IDOT does not provide an exemption from a recordation tax.  It provides only a deferral.  The recordation tax will become due if and when the guarantor becomes liable on its guaranty. 

Moreover, TP Section 12-105(f)(2) provides that the liability for payment of the recordation tax when it becomes due is that of the “debtor,” which in the case of an IDOT where the secured debt has become primary is the guarantor.

The consequences of this are as follows.  If the loan documents are properly drafted, when an IDOT is recorded no recordation taxes are due.  If the loan goes into default and the lender makes demand on the guarantor under the guaranty, the recordation tax becomes due.  It is the guarantor’s obligation to pay the recordation tax.  If the lender forecloses and sells the property, recordation and transfer taxes will have to be paid on the deed from the trustees to the purchaser, but the clerk or the county cannot insist on collecting the recordation tax on the IDOT as a condition precedent to the recordation of the new deed.

Court Action and Opinion in 1989

These rules are consistent with the opinion of the Attorney General published at58 Op. Att’y Gen. 792 (1973) (the “1973 Opinion”).  For many years, Maryland court clerks, taxing authorities, and their counsel understood and followed them.  However, in April, 1989, the Attorney General’s office filed a Motion to Intervene and a Complaint for Damages and Injunctive Relief in a foreclosure case involving an IDOT, in an effort to collect the recordation tax on the IDOT before the lender received the proceeds of the foreclosure sale.  However, under Maryland law, the State as tax collector does not have a lien for the unpaid recordation tax or a claim that is superior to the lender’s priority position. 

At the time, I was chair of the MSBA’s Section of Real Property, Planning and Zoning.  I appointed a committee to meet with Attorney General Joseph Curran and others in his office to explain why the Section felt that the Attorney General’s Office was taking an improper action.  Two important things happened as a result of the meeting.  The Attorney General withdrew the Motion and the Complaint in the foreclosure case, and he issued a new opinion regarding taxation of IDOTs.  The new opinion was published in 74 Op. Att’y Gen. 281 (1989) [Opinion No. 89-024 (July 28, 1989)] (the “1989 Opinion”).  It re-expressed and expounded uponthe 1973 Opinion, and it still serves as the basis for guidance about the imposition of recordation tax with respect to IDOTs.

Correcting the 1989 Opinion

The 1989 Opinion as originally released contained some language that I thought was incorrect or inappropriate.  The Opinion posed the question presented as who has “primary liability” for the payment of the recordation tax if and when it became due, and it answered that question by stating that the guarantor is “primarily liable.”  An inference that may arise from this is that although the guarantor may be “primarily liable,” perhaps another party is secondarily liable.  It was this language that caused the senior assistant Howard County Solicitor to contend that if the guarantor did not pay the recordation tax on an IDOT when it became due, then the lender has the obligation to do so.  To avoid this interpretation, when the 1989 Opinion was first released, I requested that the words “primary” and “primarily” be deleted.  Also, in the 1989 Opinion’s synopsis of the 1973 Opinion, it stated that the guarantor will not have incurred “secured debt” when an IDOT is recorded.  I thought that the words “secured debt” should be changed to “taxable debt” because the important point was that no tax is due when an IDOT is recorded.  I spoke and wrote about these points to Jack Schwartz, the Chief Counsel for Opinions and Advice and the second signatory of the 1989 Opinion, after Attorney General Curran.  Mr. Schwartz agreed with me on both issues, and he advised me that he would delete the words “primary” and “primarily” and change the words “secured debt” to “taxable debt” where they appeared in the 1989 Opinion.  These changes were made before the 1989 Opinion was published in the 1989 Annual Report and Official Opinions of the Attorney General of Maryland. 

On a related issue, in the Fall of 1989, Lawrence Haislip of Miles & Stockbridge sent a letter to Attorney General Curran and Mr. Schwartz in which he contended that the first version of the 1989 Opinion contained a paragraph that was legally incorrect in part.  The opinion had stated that the principal amount secured need not be stated on the face of IDOTs.  Mr. Haislip noted that this was true for some, but not all IDOTs.  He pointed out that IDOTs could be used in any of three situations: (a) to indemnify the party secured against loss from being an endorser, guarantor, or surety, (b) to secure an indemnity agreement, or (c) to guarantee the party secured against loss from being an obligee or creditor of a third party borrower or debtor.  Under the law at the time, IDOTs that were for the purposes of points (a) or (b) were exempt from the requirement that the principal amount secured by a deed of trust needed to be stated on its face, but those that were for the purpose of point (c) were not exempt.  Mr. Schwartz agreed with the reasoning of Mr. Haislip.  The paragraph was deleted (it was not amended or replaced because it was unnecessary to the conclusion of the 1989 Opinion), and it does not appear in the official, bound version of the compilation of opinions of the Attorney General from 1989. 

Unfortunately, LexisNexis and Westlaw picked up the earlier, unofficial version of the 1989 Opinion, and people who did searches with either of those services before October 5, 2009 obtained the wrong form of the 1989 Opinion.  When we advised LexisNexis and Westlaw of the revisions to the 1989 Opinion, they each posted the final version on October 5, 2009.  Also, the Attorney General’s own website contained the original version of the 1989 Opinion, but the Attorney General’s office has replaced it with revised version as of October 28, 2009.

Keep Your Old Files Handy

In preparing for a meeting with the Howard County Solicitor and the Director of the Department of Finance for Howard County as a member of the Committee on Transfer and Recordation Taxes of the MSBA’s Section of Real Property, Planning and Zoning, I reviewed my 20 year old file on IDOTs.  It explains the discrepancy in the two forms of the 1989 Opinions and demonstrates that the sole party liable for payment of the recordation tax when it becomes due on IDOTs is the guarantor.  I am glad I kept my old file in a convenient place.

Edward J. Levin is a partner in the Baltimore office of DLA Piper LLP (US).  He is a member of the Committee on Transfer and Recordation Taxes of the MSBA’s Section of Real Property, Planning and Zoning.  He served as chair of the Section from 1988 to 1990.