Let your lawyers be excellent.

For want of a staple, a lawsuit was filed.

“For the want of a nail the shoe was lost,

For the want of a shoe the horse was lost,

For the want of a horse the rider was lost,

For the want of a rider the battle was lost,

For the want of a battle the kingdom was lost,

And all for the want of a horseshoe-nail.”

- Benjamin Franklin

On September 29, 2016 the Maryland Court of Special Appeals decided that the lack of a staple connecting a signature page to the remainder of a Will does not render the Will invalid.

The case of Castruccio v. Estate of Castruccio was an otherwise common Will contest. The twist was the disgruntled heir's reliance on an almost 90 year old case that nullified a Will for lack of an attached signature page. The heir challenged the Castruccio Will because the original filed in the courthouse consisted of six unconnected pages- none were stapled together. 

For lack of the traditional two-pronged metal fastener, long used to demonstrate the unity of a document, the disgruntled heir sought to undo the testamentary wishes of her relative.

For her proof, the heir's lawyer obtained a copy of the original Will with an affidavit stating that the court's scanner was precise enough to detect the absence of staple holes in the document. This evidence grounded the claim that the Will could not be valid because the signature page was disconnected from the prior pages. 

This opinion came pretty close to containing the phrase "poppy cock."  The appellate court declared that the ancient case law was not to be read in a way that would create an "engine of destruction" for commonly unified documents. For example, the use of a paper clip to secure the pages in a way that does not leave a mark on the page would have also nullified the Will under the heir's analysis. Only the tried and true staple for her!

Lawyers use word processing programs that are often formatted to keep signature pages separate, allowing minor revisions without disrupting pre-drafted signature blocks. Documents are scanned, and the "original" my now only reside on a hard-drive as a .pdf file. In fact, most of our courts now require electronically filed documents, with the electronic signatures. There are no "staples" to speak of.  For that matter, there is very little physical mail exchanged among lawyers, any more.

The Maryland Court of Special Appeals reconciled modern practices with some of the oldest legal principles, dating from the 1700's. It recognized that the "single document" requirement for Wills sought to assure witnesses were acknowledging documents that were continuous in content, and complete in form. Physical attachment was often the easiest means to identify a document as unified. But that is just not true, anymore.

Voided reverse mortgage generates free money for poor Mrs. Black.

Lien priority disputes in Maryland courts are often resolved with the almost automatic application of equitable subrogation- where a lender pays off prior liens but fails to record a new lien it will be granted the prior lien status. This operates to defeat intervening liens, including federal tax liens, other mortgage liens and judgment liens. It is predicated on fairness. The property owner is encumbered by no greater lien than he had before, and the intervening lien holders do not receive a windfall because of another's mistake.

Our appellate courts have said that negligence on the part of the lender or settlement company in conducting a title search will not bar application of equitable subrogation. Some lawyers in our office joke that the bar is low enough that settlement companies could send a blind pig to conduct a title search and the lender would still prevail over intervening liens by the application of equitable subrogation.

And so the September 30, 2015  Nutter v. Black opinion by the Maryland Court of Special Appeals arrived on my desk like a cup of black triple espresso- I was wide awake even at page thirty-five, where the court slaughtered the blind pig. Where I fully expected equitable subrogation to save the lender, the appellate court declared "no." Most surprising was that the lender in this decision paid off a prior mortgage lien, gave the borrower cash, promptly recorded its own lien and then lost it all.

James B. Nutter & Co. gave Mrs. Black a reverse mortgage. But whomever searched title failed to pick up that Mrs. Black was the subject of a guardianship dating from 1989. Not only did the title search miss the guardianship in the court dockets, but it missed reference to the guardianship in a deed and deed of trust granted by Mrs. Black's guardian to the prior lender.

Mrs. Black was allowed to back out of her reverse mortgage!

Mrs. Black's court appointed guardian found out about the reverse mortgage by accident- he received notice from Bank of America of the payoff. The guardian then discovered the reverse mortgage, and found further that over $57,000 in cash had been deposited in Mrs. Black's personal accounts.

The resulting circuit court conflict between the reverse mortgage lender and Mrs. Black's guardian centered on Mrs. Black's capacity to make a mortgage. The lender took the position that Mrs. Black may have been incompetent but that it was the guardian's duty to promptly ratify or avoid the deal.  The lender argued that the guardian waited over a year, to the great prejudice of the lender. After all, the prior mortgage was paid, its lien was released, and Mrs. Black received a lot of cash.

The guardian held firm that because Mrs. Black had been adjudicated disabled she thus had no ability to make any agreements with the lender. He refused to ratify the reverse mortgage or to even return money paid by the reverse mortgage lender to payoff the Bank of America lien. And he demanded that the lien be declared void.

As a back up legal position the lender requested application of equitable subrogation. This would have given the lender the same lien position held by the bank paid off by the reverse mortgage.  And it would have left Mrs. Black in no worse position- she had a mortgage before, and she would have a mortgage after.

The trial court and the appellate court began their analysis at the same legal point. Both started with an examination of Mrs. Black's status as a legally disabled person. Surprisingly, Maryland has very little precedent discussing whether contracts with incompetent persons are "void" (like it never happened) or "voidable" at the election of the disabled person or the guardian. In fact, we have to search back to 1926 to find another similar case. But once this appellate panel answered the question, the remaining issues fell against the lender.

This opinion makes clear that once a disabled person is adjudicated incompetent, and awarded a guardian of person and property, then a contract to make a loan in exchange for a mortgage lien is void. It is a non-event. The documents have absolutely no legal value, and the lender who mistakenly contracted for the loan has nothing to enforce against the borrower or the property.

The position follows a simple declaration contained within the Maryland Estates & Trusts Code that upon adjudication all property of the disabled person vests in the guardian.  And so, in this case Mrs. Black was deemed not to have any property rights at the time she contracted for the loan. Having no property rights, she was without any ability to pledge the real property as security for the reverse mortgage.

At this point within the appellate court's analysis a title lawyer would reasonably expect application of equitable subrogation to salvage a partial victory for the lender- the court should have awarded a partial lien for the money loaned at least to the extent of the prior payoff. The apparent negligence exhibited by the lender in not finding guardianship records, or even the signatures of the guardian on the prior lien documents, should not have barred application of equitable subrogation.

So were my expectations as I turned to page 23 of the opinion, where I fully expected the warm blanket of equitable subrogation to safely swaddle the lender.

But this appellate panel determined the lender had no rights to receive anything in exchange for paying off the prior Bank of America loan. Quoting prior cases, the panel explained that:

It is undisputed that once properly yoked with the label of "mere volunteer" or "officious payor," a plaintiff is prohibited from recovering under theories of unjust enrichment or subrogation. It is less clear, however, precisely when a plaintiff's payment to a third party satisfying the liability of the defendant renders a plaintiff a volunteer and casts him or her "into legal outer darkness."

Once again, it was Mrs. Black's status as a legally adjudicated disabled person that drove the court to cast the lender "into legal outer darkness." Having no property rights, herself, Mrs. Black was not obligated to any lender. Only her guardian had any rights to contract, and thus only he had legal obligations relating to Mrs. Black's property.

The lender argued for application of equitable subrogation, saying that it had committed a reasonable mistake, even though the court records and title documents identified the guardianship. To this the panel said:

Because a disabled person lacks he capacity to enter into contracts and cannot encumber property...no mortgage lender exercising even an iota of diligence and prudence would extend a loan to an adjudicated disabled person.

And there it is- the three judge panel drop their microphones and exit, stage right, leaving the lender with no loan, no lien, and no cash.

UPDATE:  On January 29, 2016, the Maryland Court of Appeals denied a petition for writ of certiorari (a permissive appeal to the highest appellate court on matters of public policy). The decision will thus remain, undisturbed, as the current statement of law in Maryland.

Several Maryland appellate decisions have recited that the neglect of a lender will not prevent equitable subrogation from saving at least a partial lien to the extent of the payoff to the prior lender. And within the last year a federal appellate court interpreting Maryland law correctly noted that equitable subrogation operates automatically, as a matter of law, at the very moment of payment. The lack of diligence or prudence of the lender is not the determining factor.

As the law of the land, we expect ongoing efforts by intervening lien holders to chip away at the automatic application of equitable subrogation by urging courts to more closely examine the relative lack of diligence or prudence of the lender.

And in Maryland your broken leg is still the trustee's broken leg, even if you forgot to tell him.

The intersection between bankruptcy law and state tort law trips many lawyers and their clients. Just about one year ago, we posted about a District of Columbia case ("Your broken leg is now the trustee's broken leg, feel better?") where a fellow lost his right to sue in the Superior Court for personal injury precisely because he forgot to list the claim in his D.C. federal bankruptcy petition.  And now a Maryland appellate court has confirmed the same result for a Maryland litigant who fails to disclose a potential state court claim in a Maryland federal bankruptcy petition.

The Maryland case is called Schlotzhauer v. Morton, decided July 30, 2015, if you're inclined to read the published opinion. But here it is, in a nutshell:

• Ms. Schlotzhauer filed for bankruptcy and did not disclose that she had a claim for personal injury.
  
• She waited until the bankruptcy was over to file a lawsuit in a Maryland Circuit Court.
  
• The Circuit Court granted the defendant's motion and kicked Ms. Schlotzhauer out of court because her claim belonged to the bankruptcy trustee, and not to her.

Ms. Schlotzhauer had to fight to get her claims back, and that included reopening her old bankruptcy to regain control over her personal injury claim. She then had to return to the Maryland courts to overturn the summary judgment.  With this decision, the Maryland Court of Special Appeals has released her to pursue her claim in the Circuit Court. 

But her lawyers sure could have saved themselves a whole bunch of aggravation.  If you have tort claims against others (personal injuries or intentional actions such as assaults, libel, slander or even fraud) when you file for bankruptcy, here is the game plan:

• Disclose the potential claims in your bankruptcy petitions. The moment you file a petition for federal bankruptcy protection, all of what you own becomes "property of the estate," and within the control of the trustee.You can't demand protection from your creditors without upholding your obligations to make full disclosure.
  
• Negotiate with the trustee. Most trustees are not interested in pursuing tort claims, and will consent to release the claim back to you and your lawyer.  This is called "abandonment" of the claim by the trustee. If you skip this step, the claim remains under the trustee's control even after the bankruptcy case is dismissed.
  
• Don't miss your statute of limitations! Whether the claim is held by the trustee or you, that limitations period just keeps ticking along.  Act promptly.

And if you have simply forgotten or through some mistake a claim was never listed in your past bankruptcy, now what?  Like Ms. Schlotzhauer, you will have to return to the bankruptcy court to reclaim your rights to make the state court claim. Ms. Schlotzhauer waited almost three years. The passage of time did not resolve the issue--her state tort claim remained property of the bankruptcy estate under the control of the trustee. 

Your bankruptcy case is a matter of public record, and your petition and schedules remain available for review to anyone searching the national federal database long after the case is closed.   And when you file a lawsuit in state court the lawyers for the other side are going to search those records to determine if your broken leg is really your broken leg, or if it is still the trustee's broken leg.

How to beat a bank for a quarter million bucks.

Maryland’s law of equitable subrogation is fairly settled.  Where a lender has advanced money for the purpose of discharging a prior lien, and the disbursement is in reliance upon the lender receiving a security equivalent to the discharged lien (payoff of a first lien to obtain first lien position), without actual knowledge of the junior lien then the new lender is deemed subrogated to the prior lien. Decisions by our appellate courts now add nuance to this rule based on a limitless supply of neglectful or honestly mistaken loan transactions.

 On October 9, 2014 Maryland’s Court of Special Appeals decided National Institutes of Health Federal Credit Union v. BAC Home LoansServicing, LP (Sept. Term, 2011, No. 2103). This unreported decision addressed the relative lien priority of a Home Equity Loan (known as an “HELOC”) when compared to a later recorded refinance deed of trust. For Maryland lenders and title folks, the decision applies well known equitable subrogation law to a slightly re-ordered timeline of events. For those not familiar with equitable subrogation it is an excellent primer.

An HELOC loan is most commonly an open ended line of credit secured to real property.  The recorded lien instrument will describe a maximum amount, and will also commonly include a statement that the credit line must remain open unless and until the borrower signs a formal request to close the account. The lien is released only after the credit line is closed. And so, in a Maryland real estate settlement involving payoff of an HELOC, the payoff must be accompanied by the borrower’s request to close out the account.  And if the settlement officer fails to obtain authorization to close the account, the borrower is free to run the HELOC back to its maximum limit even after the refinance. The risk to the refinance is obvious-- the new HELOC balance will prime the refinance deed of trust.

In our title insurance practice, we have experienced home sellers who drew on their unreleased HELOC to gamble in Atlantic City or invested in failing business concerns, leaving the new owners, their title insurers and lenders to sort through the wreckage.

In this case, the borrower took a $1 Million Dollar loan from BAC to refinance a prior $800,000 purchase money loan, and a HELOC. But in a twist not seen in prior cases, the refinance deed of trust was immediately. The HELOC, however, had been funded one year earlier but was not recorded in the land records until one month AFTER the refinance deed of trust.  Predictably, after the refinance the borrower ran the HELOC right back to its limit to bolster his failing business interests.  And just as predictably, the borrower defaulted on all his loans and drifted into bankruptcy.  The court case grew from the refinance lender’s attempt to foreclose, and the HELOC lender’s attempt to establish priority. The HELOC lender lost at trial before the Circuit Court.

It was very important to the intermediate appellate court that the HELOC lien instrument was not yet recorded at the time of the refinance loan. The refinance lender received the borrower’s application, which disclosed the existence of a line of credit, but a title search confirmed there was no recording in the land records---the search showed what is commonly called “clear title.”

It was also very important to the appellate court that the HELOC lender used a standard payoff statement that made reference to a “release fee” to be submitted with the payoff. And since the title report showed no recorded lien, the refinance lender did not include a lien release fee with the payoff disbursement for the full amount listed in the payoff statement.

The evidence was that the HELOC lender did not communicate a single thing to the refinance lender to suggest a secured lien.  After the refinance lender’s best efforts, it could only reasonably conclude that the payoff was going toward an unsecured debt. And it was on this basis that the trial court was affirmed. 

The HELOC lender thus took nothing from the foreclosure sale, and was effectively wiped out by a sale price that covered only the first secured lien of the refinance lender. The failure to record timely cost this HELOC lender over $250,000.

Equitable subrogation is a powerful tool, as demonstrated in this decision, but we have seen instances where trial courts dig deep into a refinance lender's files to impute "actual knowledge" of the unrecorded or late recorded interest of another lender. For example, in one recent trial, the court looked to a prior loan file for the same borrower that contained a credit report making reference to the other lender's "mortgage loan." Even though the refinance loan described in the file did not close, and it was one year before the refinance loan at issue, the court ruled that possession of this information in the refinance lenders business records was enough to impute "actual knowledge" to the entire corporation. The case settled quickly, so we do not know what the court of special appeals would have done on that set of facts.

So, get yourself some equitable subrogation--it's better than a gun.

Want a jury? Don't just check off the box!

You may want to avoid jury duty, but if you are a plaintiff or defendant in a civil lawsuit, you may want a jury. It is a powerful thing to have six members of your community make decisions about your legal rights, and whether large amounts of money must be passed between you and the other side.

This week, Maryland's Court of Special Appeals had to issue an opinion on something that should be quite simple-- how to properly demand a jury trial in civil cases.

In Lisy Corporation v. McCormick, issued October 7, 2014, the court wrote that merely checking off the "jury trial" box on the civil information cover sheet (a pre-printed form that must accompany every newly filed complaint) is not enough.  Without a clear statement in the body of the complaint, such as "the Plaintiff demands a jury," the check in the pre-printed box will not preserve your right to a jury trial.

It's a simple, simple detail of drafting and filing complaints. But even the best of us can use the reminder.

When does the fat lady sing?

Appeals can only be taken from a final order of the trial court. A non-lawyer may well presume that a court order saying "you lose" on a motion is final, and will send the case to Annapolis (where our appellate courts are located).

Nope.

The court order declaring "you lose" is often just an early step in a battle to get to the final-final decision, and your right of appeal. In fact, one of the most common questions our law firm gets from potential clients is "when may I appeal?"  The Maryland Court of Special Appeals explained how this works in a very recent appeal arising from a foreclosure, called Baltimore Home Alliance v. Geesing.

In this case, the third-party purchaser put down $27,000 dollars at the auction but failed to close the deal.  The foreclosing lender declared the third-party in default and asked the circuit court to enter an order permitting a second auction sale, and forfeiture of the deposit.   The circuit court granted the motion, and the property went back up for auction, where it was purchased by another party. The deposit was forfeited to the foreclosing lender.

Seems pretty final, right?  A broken deal, a court order of default and forfeiture of the $27,000 deposit and a resale of the property.The Baltimore Home Alliance thought so, and it filed an appeal with the Maryland Court of Special Appeals.

The case was not final, and the appeal was premature.  But why?

In the context of foreclosures, it is the final auditor's report that signals the fat lady to tune up. Once the court approves the audit, then all prior decisions are deemed final for purposes of appeal. And so while the court ordered that the third-party buyer's $27,000 was forfeited to the foreclosing lender, it did not say whether it would be a credit against other damages incurred because of the lost sale.  That would show up in the auditor's report. And even then, the parties could object to the auditor's treatment of the court's order and make argument for their positions at a hearing. Only after disposition of those objections is the forfeiture order, entered much earlier in the case, deemed final.

And so, "finality" is not the same in every case.  It depends on the nature of the action, the number of parties, and the stage of the proceeding when the adverse ruling was made. What seems final to you may just be the beginning of the next fight.

The Fat Lady sings a different tune in every case.

Delivery means giving up control of the deed.

 Ownership of your home is transferred by a written deed. It is very common to jointly title a home in the name of a husband and wife to keep the house out of probate.  It is easy to write a deed that says "Joe gives this land to Joe and Jenny, as husband and wife," so that the married partners jointly own the home. And when one or the other dies, the survivor gets full ownership of the home, outside of the formal probate process.  In this situation, ownership passes from one spouse to the surviving spouse at the moment of death, with nothing more required--it is automatic. 

     But simply writing and signing the deed is not enough. There is an important step in the process, dating back hundreds of years, that is often forgotten. The Maryland Court of Special Appeals just reaffirmed the historical concept that a deed must be "delivered" in order to effectively transfer title to real property. Without this final step, absolutely no transfer of ownership is accomplished.

     In Daniels v. Daniels, the intermediate appellate court relied on this ancient concept to pull  title to a home away from a surviving wife so that it would be included in the estate of her dead husband. It held that the ownership interest was not "delivered" because the deed remained for six years in a filing cabinet in the couples home. Because the husband who wrote the deed to transfer an interest to his wife had access to the deed, and because he could have destroyed the deed at any time, the court ruled that the deed had not been delivered. The wife knew about the deed, and both understood that the document made them joint owners, but the trial court and appellate courts  both concluded that this simply was not enough.  A fully executed deed that is accepted by the other party is just not enough to transfer ownership unless it is "delivered." And that means giving up any right to get the deed back, or to destroy the deed.

            The method for delivery of ownership has changed a bit since the days of old. Hundreds of years ago, ownership of land was officially delivered through a ceremony often called the “Liveryof Seisin.” In this ceremony the person giving the land would present he person receiving the land with a clump of earth from the property being transferred.

           As is described in this court decision, delivery is now complete when the person who is giving the land no longer has any control over the deed. He must not only surrender physical possession of the actual land, but he must have no right to recall the deed giving legal title to the land-- the deal must be final. While this seems simple, it has gotten people into trouble just like Mr. Daniels.
     Mr. Daniels clearly intended that his wife of over forty years would inherit full ownership of their home. And the trial court even acknowledged this fact. But because he did not take the advice of others to record the deed and because he chose to keep it in a filing cabinet with the couple's important papers, his wife was denied full ownership. Instead, Mr. Daniels daughter was able to use the lack of formal delivery to defeat his intent and force the home into probate, where the daughter would inherit partial ownership.
     Unfortunately, property ownership and inheritance is too often the ultimate family battle ground. We can only guess at the daughter's motivation for wresting the house away from mom.

      So how can you make sure that you have properly delivered a deed? The best method of delivery is to record a deed in the Land Records. Once a deed has been recorded in the county land records, it becomes a matter of public record and it can’t be taken back. Mr. Daniels might have saved his wife lots of trouble, and he might have prevented a big family squabble if he had taken the advice of his professionals to simply record the deed.