New Maryland Legislation Would Expand Real Property Transfer and Recordation Tax Exemption to Affiliated LLC Transactions.

Posted by Aaron Rosenfeld on April 23, 2013

On April 8, 2013, the Maryland legislature passed a bill that, following the Governor’s signature (which is expected), will now extend a real property transfer and recordation tax exemption to certain transfers among affiliated limited liability companies.  Currently, Sections 12-108(p) and 13-207(a)(9) of the Maryland Code provide an exemption from real property transfer and recordation taxes for certain transfers among only affiliated corporations.  Limited liability companies do not qualify for the exemption.  The new legislation changes the term “corporation” in those provisions to “business entity,” which is defined for these purposes as a limited liability company or a corporation (but not a partnership).  The exemption (when enacted) is applicable to the following three types of transfers:

(1)  a transfer of real property between a parent business entity and its wholly owned subsidiary business entity or between 2 or more subsidiary business entities wholly owned by the same parent business entity.  To qualify, (a) the parent business entity must be an original owner of the subsidiary business entity, or (b) it must have become an owner through gift or bequest from an original owner of the subsidiary business entity, in either event, for no consideration, nominal consideration or consideration that comprises only the issuance, cancellation, or surrender of the ownership interests of a subsidiary business entity;

(2)  a transfer of real property resulting from a corporate reorganization described in § 368(a) of the U.S. Internal Revenue Code (which provision is not applicable to limited liability companies); or

(3)  a transfer of real property from a subsidiary business entity to its parent business entity for no consideration, nominal consideration or consideration that comprises only the issuance, cancellation, or surrender of the subsidiary’s ownership interest.  To qualify for this type of transfer, (a) the parent business entity must have previously owned the real property, (b) the parent business entity must have owned the ownership interest of the subsidiary for at least 18 months or (c) the parent business entity must have acquired the ownership interest when the subsidiary business entity was already in existence and had owned the real property for a period of at least 2 years prior to the acquisition.

Once signed by the Governor, the amended law will have an effective date of July 1, 2013 for all transfers occurring thereafter.

Got IDEAS for Maryland's Aging Assets? Recent P3 Legislation Could Provide Solutions

Posted by Rebecca Tzou on April 23, 2013

Lawmakers and Governor O’Malley are hoping that new legislation taking effect July 1, 2013 will inject renewed life into an existing business construct previously used primarily for Maryland’s transportation assets. By creating partnerships between the private and public sectors ( public – private partnership = P3) - addressing shortfalls in Maryland’s public asset and infrastructure management – the State is anticipating that a more robust submission and oversight process along with streamlined and clearer requirements will cause new types of government-owned assets and their private sector proponents to join the queue for the P3 structure. The new law provides for more unified terms, conditions and standards for P3 agreements, enhances inspection rights and performance security, and requires concurrent, instead of sequential, 30-day reviews, thus expediting the process. In addition to more traditional requirements for this State-supported program such as meeting specified minority business enterprise targets and prevailing wage and living wage standards, there is also a means for a reporting agency to incentivize the process by reimbursing a participating private entity for the costs incurred to develop even an unsuccessful response to a public notice of solicitation for a P3. The new law also creates an innovative method for the reporting agencies to consider unsolicited P3 proposals – protecting the submitter’s proprietary information, while engaging in a process to evaluate and then solicit similar proposals if the agency decides that the unsolicited P3 proposal meets its needs. Eagerly embracing the new legislation, Maryland’s Department of Transportation issued a Request for Information last week, seeking private sector input on how best to deliver and finance the Maryland National Capital Purple Line and the Baltimore Red Line transit lines. The new P3 legislation will soon be available to contractors relying on such law to aid in financing those transit projects and, hopefully, other future infrastructure projects.

Confessed Judgments - Another Tool in Creditors' Arsenal - But Process Matters

Posted by Rebecca Tzou on February 06, 2013

A recent Pennsylvania case, Graystone Bank v. Grove Estates, LP, upheld the enforceability of a confessed judgment provision even in light of alleged inconsistencies. In most cases, a confessed judgment is a debtor’s statement signed prior to a default that a stipulated amount is owed to a creditor and permits bypassing certain legal proceedings. In Greystone, the debtor’s arguments that the confessed judgment should be set aside because the provision was not on the same page as debtor’s signature, the subsequent loan modification failed to restate the confession of judgment and attorney’s fees set at 10% of the principal balance of the loan were unreasonable -- failed to sway the Pennsylvania court, even on appeal. The court remanded the decision for a review of the reasonableness of attorneys’ fees, but otherwise, upheld the confessed judgment provision.

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Maryland Court of Appeals Determines State Must Allow Credit Against County Income Tax For Taxes Paid on Out-of State Pass-Through Income

Posted by Allan Weiner on January 30, 2013

On January 28, 2013, in Maryland State Comptroller of the Treasury v. Wynne, the Maryland Court of Appeals (the highest court of Maryland in a 5-2 decision) held that Maryland must permit Maryland resident taxpayers with pass-through income from other states to claim a credit for out-of-state income taxes paid against not only their Maryland state income taxes but also their Maryland county income taxes. The Court determined that the failure to allow the credit against the county income tax is unconstitutional under the dormant Commerce Clause of the United States Constitution. Maryland resident taxpayers in similar circumstances should consult their tax preparers about seeking refunds for out-of-state income taxes paid on pass-through income but not credited against their Maryland county income taxes.

Calculating Lost Profits, Maryland Style

Posted by Aaron Rosenfeld on January 22, 2013

In CR-RSC Tower I, LLC v. RSC Tower I, LLC the Maryland Court of Appeal held that evidence of post-breach market conditions is not admissible to mitigate consequential lost profits if the contracting parties did not contemplate future market conditions at the time they entered into the contract. Specifically, the court determined that “consequential lost profits are calculated with reference to what the parties can reasonably be said to have anticipated when they entered into the contract” based on the information that was “known to the parties” when they contracted.

In this case, the court held that a commercial landlord could not introduce evidence of a real estate market crash that occurred after the breach of the contract in order to mitigate the consequential lost profits damages because, at the time the parties entered into the agreements that were the subject of the case, each party contemplated, and the terms of those agreements reflected, a relatively stable real estate market that would have resulted in profits to both sides. The court thus upheld a more than $36 million award against defendants who, after deliberately breaching and essentially refusing to go forward with their obligations under the contracts, were precluded from arguing that the final damages award was much too high in light of the changed market conditions resulting from the 2008 real estate crash.

This key case regarding the calculation of damages in Maryland highlights an extremely valuable lesson for those (e.g., land developers or potential real estate buyers or sellers) contemplating breaching a contract and betting that the cost of litigation will deter a prospective plaintiff from suing. A business person must ascertain in advance of deciding to breach what her/his ultimate final exposure may be. The Maryland Court of Appeals decision in CR-RSC Tower I will help immensely in that analysis.

Maryland Courts Preserve The Ability To Have One's Day In (Small Claims) Court

Posted by Michael Kosmas on December 14, 2012

The Court of Special Appeals of Maryland, Maryland’s second highest court, has now spoken firmly on an important issue that, surprisingly, had not been addressed previously in the state. In its decision in McKlveen v. Monika Court Condominium, handed down on November 28, 2012, the Court held that it is only the amount claimed in a plaintiff’s lawsuit, and not any amounts which a defendant may claim in a counterclaim, which are considered in determining whether the defendant can demand a trial by jury.

In this case, Monika Court Condominium filed suit against one its unit owners for unpaid assessments, and claimed damages of $3,219.17, plus interest of $127.00 and attorney’s fees of $724.79, for a total of $4,070.96. The suit was filed as a small claim, seeking the benefit of expedited proceedings in Maryland’s District Court for Prince George’s County.

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A Properly Notarized Document Is Not a Mere Technicality

Posted by Rebecca Tzou on December 06, 2012

Have you ever thought about “fudging” a little on properly notarizing a document? Perhaps you had the signature page sent ahead and begged a favor from a friendly notary, vouching for the absent party’s signature? A recent Delaware case where this occurred ended disastrously for the litigants. In Bessenyei, et al. v Vermillion, one of the plaintiffs was out of the country. The other plaintiff, a Pennsylvania attorney, convinced his legal assistant to notarize the absent plaintiff’s signature – on 3 different pleadings! The court did not take kindly to this lack of integrity and dismissed the case against BOTH parties with prejudice.

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Condo Associations and Property Management Companies May Be Subject to the Maryland Consumer Protection Act Even When They Are Not Direct Sellers

Posted by Cameron Argetsinger on June 15, 2012

Maryland condominium associations and the property management companies that service Maryland condos may be subject to liability under the Maryland Consumer Protection Act, even when they are not engaged in the sale of condo units, according to a recent decision by the Maryland Court of Appeals.  In MRA Property Management, Inc. v. Armstrong, the high court held that such parties could be liable under the Maryland Consumer Protection Act for disclosures they were required to make to condo buyers under Maryland Condominium Act, such as the estimated operating budget, if those disclosures were misleading or deceptive. 

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Maryland Legislature Effectively Kills the IDOT

Posted by Aaron Rosenfeld on May 16, 2012

The Maryland Senate’s passage of the widely debated and publicized Budget and Taxation bill effectively eliminates a long-used approach to avoid the current payment of mortgage recordation taxes on a commercial real estate loan. Rather than providing a direct deed of trust on the real estate to secure the loan, the property owner would create a related entity to act as borrower (usually a wholly owned subsidiary) and the property owner would guaranty the loan, securing the guaranty with an indemnity deed of trust (an “IDOT”). Under existing law, there is no current recordation tax on the IDOT.  Effective July 1, 2012, Maryland’s recordation tax law will apply to IDOTs (except in the case of an IDOT securing a loan of less than $1,000,000 or to the extent recordation tax is paid on another instrument securing such loan).  We expect this amendment to the recordation tax law to end the general use of IDOTs in Maryland, thereby increasing the cost of financing for most commercial real estate borrowers.

Maryland Court Reaffirms Rule That Agents of Disclosed Principals Cannot Be Held Individually Liable

Posted by Elizabeth Johnson on May 16, 2012

The United States District Court for the District of Maryland recently reaffirmed the rule that an agent who discloses his or her principal cannot be held personally liable for any representations made on behalf of that principal.

In Sears, Roebuck and Co. v. Riggs Distler & Co., Inc., 2012 WL 1391838 (D. Md. Apr. 20, 2012), Sears sued Riggs, a utility service company, for damage caused when Riggs hit an underground water line while performing drilling activities on Sears’ property at the White Marsh Mall. Riggs then sued a White Marsh Mall manager individually for indemnification and contribution, claiming that the manager had agreed that the Mall would assume any liability if the Riggs crew struck an unmarked water line during its drilling activities. Riggs’ Complaint specifically alleged that “the Mall was owned and managed by General Growth Properties (GGP)” and that, in her capacity as a Mall manager, the third-party defendant was “an employee and agent of GGP.”

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Maryland Court Holds Arbitration Clause in a Contract Partially Unenforceable

Posted by Stephen R. Freeland on May 07, 2012

In College Park Pentecostal Holiness Church v. General Steel Corp., Civ. No. PJM 09-2070 (D. Md.), the United States District Court for the District of Maryland struck down several portions of an arbitration clause in a standardized construction contract as unconscionable. The case was filed by the plaintiff church after the defendant construction company failed to erect a new building on the church’s property as required by the parties’ contract. After being pressured to sign the standardized contract used by the construction company, the church paid the construction company a $45,000.00 deposit. A year later, the church paid an additional $50,000.00 for what the defendant characterized as a “building change order.” The construction company thereafter refused to construct the building and, moreover, did not return any of the church’s money.

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Maryland House and Senate Approve Recordation Tax on Indemnity Deeds of Trust (IDOTs).

Posted by Aaron Rosenfeld on April 03, 2012

The Maryland State Senate and House of Delegates have approved the 2012 budget bill that included provisions that require the application of the state recordation tax at the time of recording on all indemnity deeds of trust (and indemnity mortgages) (IDOTs) securing the guaranty to repay loans of $1 million or more. The budget is now with a conference committee that will propose revisions to resolve the differences between the House and Senate versions, which may allow for additional changes to the bill. Assuming that the current language is included in the final budget bill, the new tax on IDOTs shall apply starting on July 1, 2012. We will keep you posted on further developments.

Maryland Budget Proposes to Eliminate Deferred Recordation Taxes on IDOTs in Excess of $1 Million

Posted by Aaron Rosenfeld on March 05, 2012

Buried within the Governor of Maryland’s budget is a proposal that eliminates the ability of a grantor, as guarantor of a loan, to defer payment of Maryland mortgage recordation taxes on an indemnity deed of trust (“IDOT”) until such time when the loan liability becomes directly payable by the grantor. Currently, based on a Maryland attorney general’s opinion, the grantor does not pay recordation tax at the time the IDOT is recorded because it only secures a contingent liability as the grantor, as guarantor of the loan, is not primarily obligated to pay the debt secured by the IDOT. In the past, various standalone bills that attempt to impose recordation taxes on IDOTs at the time of recordation have failed to pass; however, this is the first bill to be included in the Governor's budget. The current bill ties the IDOT provision directly to funding of teacher pensions. If enacted, the costs to most commercial borrowers in Maryland are expected to increase significantly because all new IDOTs in excess of $1 million would be subject to mortgage recordation tax. If the bill passes, the change would take effect on July 1, 2012.

Largest Maryland Trade Mission to India Coincides with Liberalization of Indian Securities Laws

Posted by Rebecca Tzou on January 31, 2012

Maryland is working hard to actively develop new business and investments in India. Late last year, more than 100 state officials and business leaders, accompanied by Maryland Governor Martin O’Malley, traveled to India for six days to foster new commercial relationships. This, the largest Maryland trade mission to India and the only one headed by a sitting Maryland governor, was primarily self-funded by the participants. O’Malley cites upwards of ten Maryland businesses that signed term sheets or actually entered into joint ventures with India business partners during the trade mission for a touted $60 million in investments to date. The business deals signed ranged from consulting and engineering transactions to biotech and pharmaceuticals and should aid in continuing to fuel increased trade to and from India evident in the Port of Baltimore trade statistics, registering a 49% increase in India trade from 2010. This Maryland initiative comes at an opportune moment in India’s business development as India’s Securities and Exchange Board recently liberalized the Indian securities market regulations to permit certain investors meeting specified requirements (“Qualified Foreign Investors” or “QFIs”) to directly invest in India public companies. While there are still protocols to follow, an individual QFI can now hold up to 5% of the share equity in an Indian company and can sell such shares and receive bonus shares and dividends. For further details on this developing opportunity, see a Client Advisory Note from our affliate Mumbai office, "Qualified Foreign Investors Can Now Invest Directly in Public Companies." Maryland has opened a trade office in India to support its states’ entrepreneurs in utilizing the momentum instigated by the recent trade mission and expects the positive outcome from the mission to continue to develop, aided by the facilitating changes in the Indian equity markets. Kelley Drye & Warren welcomes the opportunity to partner with Maryland business owners to expand their reach into India, take advantage of the more permissive Indian securities regulations and offer our firm’s already well-established ties to India and our colleagues resident there.

To Waiver or Not to Waiver, that is the Question?

Posted by Aaron Rosenfeld on July 26, 2011

In Hovnanian Land Investment Group, LLC, et. Al. v. Annapolis Town Centre at Parole, LLC the Maryland Court of Appeals held that a party’s conduct (whether express or implied) may waive a condition precedent set out in a written purchase agreement despite a specific clause in the agreement requiring that all waivers must be in writing.  Relying on its own past opinions and the opinions of renown jurists, Benjamin Cardozo and Oliver Wendell Holmes, the court, quoting Cardozo, determined that “[t]he clause [in a contract] which forbids a change may be changed like any other.  The prohibition of oral waiver may itself be waived.”  Citing the common law rule, the court reaffirmed its past holding that the freedom to contract does not guarantee the validity of a non-waiver clause, and that “even when a contract specifically states that no non-written modification will be recognized, the parties may yet alter their agreement by [oral] negotiation.”  This decision is an important reminder that actions can speak louder than words.  Thus, a contracting party’s actions may result in the waiver of a contract’s express terms even with the most careful and artful drafting.

Word Placement Makes $1 Million Difference in Contract Dispute

Posted by Cameron Argetsinger on May 16, 2011

A recent decision by the Maryland Court of Appeals underscores the importance of paying careful attention to detail when drafting a contract.  In Weichert Co. of Maryland, Inc. v. Dorothy Crago Faust (Md. Apr. 27, 2011), a real estate agency, Weichert, sued its former vice president, Faust, alleging that she had violated the terms of her employment agreement by (1) breaching her duty of loyalty, and (2) breaching a non-solicitation clause included in the contract.  Specifically, Weichert claimed that Faust, after leaving the company, recruited several Weichert employees to work at her new company.  A jury found that Faust had indeed breached her duty of loyalty to Weichert, but found that there was no breach of the non-solicitation clause.  Even though the real estate agency prevailed on one of the two claims, the court ordered Weichert to pay Faust’s attorney fees, which totaled nearly one million dollars.  What happened?

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New Maryland Tax Measures Affecting Local Businesses

Posted by Brooke Ringel on May 12, 2011

When the Maryland General Assembly’s 2011 legislative session ended last month, it left in place several tax-related measures that will affect Maryland businesses.

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Maryland Court Holds that Interest may be Abated in Foreclosure Sales Only When Closing Delays are Caused by Third Parties

Posted by Aaron Rosenfeld on March 11, 2011

Under the foreclosure rules in Maryland, interest may accrue on the unpaid balance of the foreclosure purchase price from the date of the foreclosure sale until final settlement.  The Court of Special Appeals of Maryland recently held in Zorzit v 915 W. 36th Street, LLC that a court may abate the accrued foreclosure sale interest only when third parties cause delays in the final settlement.  A court does not have discretion to abate accrued interest due to delays resulting from the judicial process or caused by the purchaser when the "Terms of Sale" set out in the foreclosure advertisement provide that the purchaser will pay interest through the date of final settlement.

Personal Jurisdiction and Forum Selection Clauses in Maryland

Posted by Elizabeth Johnson on February 08, 2011

The Maryland Court of Special Appeals handed down an opinion yesterday in which it held that the ownership of undeveloped land in Maryland is not enough to obtain personal jurisdiction over foreign residents.  At the same time, the Court noted that a forum selection clause requiring the parties to submit to the jurisdiction of “any” state or territory within the United States could be invalid as overbroad.

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Maryland Bar Business Law Section Proposes Revisions to MD LLC Act

Posted by Aaron Rosenfeld on January 12, 2011

On January 6, 2011 a business law committee of the Maryland State Bar Association released a report  detailing its proposed revisions to the Maryland Limited Liability Company Act (the “LLC Act”).  The proposed revisions are intended to strengthen the LLC Act to ensure that "the maximum effect [is given] to the principle of freedom to contract and to the enforceability of operating agreements."  (See § 4A-102 of the Maryland Limited Liability Company Revision Act of 2011).  Additionally, the proposed revisions provide clarification of certain default rules governing the operation of a limited liability company when the members have not adopted an operating agreement.

The committee has not yet set a timeframe to submit a bill covering the proposed revisions for consideration by the Maryland General Assembly.  Moreover, before adoption of any revisions to the LLC Act, we expect additional modifications and refinements to address input from other interested parties.

Maryland and DC Tax Return Deadline - Important Information

Posted by Allan Weiner on January 05, 2011

Federal, DC and Maryland individual income tax returns and estimated payments are due on Monday, April 18, 2011 (even though April 15, 2011 is a Friday this year).  Under the federal tax law, if the date for filing returns falls on a legal holiday, Saturday or Sunday, the filing date is extended to the next day which is not a legal holiday, Saturday or Sunday. For this purpose, legal holidays include legal holidays in the District of Columbia. Thus, this year the filing date is changed because DC celebrates Emancipation Day on April 15.  The next day that is not a legal holiday, Saturday or Sunday, is Monday, April 18.

Please click here to see the IRS notice and click here to see the Maryland notice concerning the deadline.  

Maryland Homebuilder Sales Contract Requirements

Posted by Jennifer Kasman on December 21, 2010

The Circuit Court for Baltimore City recently concluded on November 22, 2010 that a residential sales contract prepared by a homebuilder (for new construction) violated the Maryland Consumer Protection Act (the “CPA”) by not properly preserving the buyer’s right to obtain consequential damages. The CPA provides that no “seller … of consumer realty [may use] … a clause limiting or precluding the buyer’s right to obtain consequential damages as a result of the seller’s breach or cancellation of the contract.” The facts of the case indicate that the contract used for the sale in this particular instance was a form contract for which little adjustment of inconsistent boilerplate was made. Although form contracts are attractive options since they may be cost effective, by choosing to use a boilerplate contract, one may risk serious damages. Homebuilders, and their real estate developer affiliates, should audit the contracts they use in connection with home sales to ensure that such contracts comply with, among other things, the Maryland CPA.

For more information, please contact Jennifer Kasman at jkasman@kelleydrye.com.

Maryland Benefit Corporations

Posted by Danielle Fisher on December 15, 2010

The State of Maryland became the first state to recognize a new type of corporation, the “Maryland Benefit Corporation,” that can be formed to pursue both public benefits and company profits. The Maryland Benefit Corporation combines the characteristics of both for-profit and non-profit corporations. Benefit corporation status is important for companies that want to carry on their business activities to provide both social benefits for the public good and profits for their shareholders. Electing to become a benefit corporation may also help a company attract customers and investors who favor businesses that will look beyond their own profits to pursue a social good.

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Maryland Confessed Judgment Clause May Not Protect

Posted by Brooke Ringel on December 07, 2010

Lender liability law, which gained prominence during the savings and loan crisis of the 1980s, has again become an active area of litigation in recent years. Lenders in Maryland traditionally have had at least two ways to protect against plaintiffs seeking to challenge the enforceability of a commercial loan. First, lenders often include a confession of judgment clause in the agreement, permitting the lender to seek default judgment against a defaulting borrower immediately without trial. Second, the Maryland Credit Agreement Act, Md. Code, Cts. & Jud. Proc. § 5-408, requires all commercial (not personal) loan agreements to be in writing. By extension, the Credit Agreement Act prohibits the use of alleged oral promises to modify the terms of the commercial loan agreement.

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