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REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 661 SEPTEMBER TERM, 1997

MAY DEPARTMENT STORES, Assignee

v.

MONTGOMERY COUNTY, MARYLAND et al.

Wenner, Cathell, Byrnes, JJ.

Opinion by Cathell, J.

Filed: December 3, 1997

-2-

May

Department

Stores,

Inc.

(May),

and

Avenel

Community

Association, Inc. (Avenel), judgment lien holders, appeal from the decision of the Circuit Court for Montgomery County that denied them the priority of their judgment liens in respect to the disbursement of surplus funds following a judicial foreclosure sale. The court instead disbursed the entire surplus to an agency

of Montgomery County (County) pursuant to the purported authority of a Montgomery County ordinance. issues on appeal: 1. Whether the court below erred by failing to order that Appellants' valid judicial liens be satisfied from the surplus proceeds of a foreclosure sale[.] 2. Whether the Montgomery County Moderately Priced Dwelling Unit Ordinance is violative of the Maryland and U.S. Constitutions when applied in a fashion that deprives judgment lienholders of surplus proceeds in a foreclosure sale[.] 3. Whether the Court below erred by failing to address the equity argument presented by Appellant, Avenel Community Association, Inc. In the resolution of this appeal, we shall resolve only the first issue. address Resolution of this issue renders it unnecessary to the constitutional issues or the equity Appellants present several

extensively

argument made by Avenel.

We shall be concerned primarily with We shall hold that the

arguments relative to the first issue.

County is preempted from asserting the provisions of a local ordinance that provide for a priority of liens that is in direct

conflict with provisions of the Maryland Code, the Maryland Rules of Procedure, and Maryland cases. We will explain our decision

after we briefly recount certain pertinent facts. The Facts Montgomery encourage housing.1 County adopted to a local for ordinance and designed to

developers

provide

low

moderate-income

Apparently, in order to ensure that the program excluded

speculators who could purchase the properties at a low price and then quickly resell for a high profit, the County ordinance

contained provisions limiting the resale of properties for an extended period of time. These restrictions set up methods for

establishing resale prices and a method for computing the sums required to be remitted to the housing authority if the housing units were sold within the prohibited resale periods. In 1992, Deborah Farr purchased one of the units through the Montgomery County Department of Housing and Community Affairs from Rock Run Limited Partnership, the developer. the limited partnership. Farr's deed was from

Farr obtained financing from the Housing

Opportunities Commission for Montgomery County in the amount of $94,100, secured by a deed of trust. Farr defaulted on the loan,

and the property subsequently was sold at a foreclosure sale on

Numerous provisions of that ordinance designed to facilitate developer participation are not relevant to the issue at bar. -2-

1

August 14, 1996, to William T. Wheeler for $147,000.2 resulted.

A surplus

On October 26, 1994, after Farr had obtained title to the property but before the foreclosure suit was filed in 1996, May Department Stores, Inc., d/b/a/ Woodward and Lothrop, obtained a judgment against Farr. The judgment subsequently was filed as a

"Notice of Lien" in the Circuit Court for Montgomery County. Farr also defaulted on her payments to her homeowner's association, Avenel Community Association, Inc. Prior to the filing of the

foreclosure action, Avenel also had obtained a judgment against Farr. It was filed in the Circuit Court for Montgomery County in

November of 1995. Both May and Avenel filed claims against the surplus resulting from the foreclosure sale. After the foreclosure proceeding was

instituted but prior to the sale itself, the Department of Housing and Community Affairs of Montgomery County wrote a letter to a law firm informing them that [t]he MPDU Law provides that if an MPDU is sold through a foreclosure or other Court-ordered sale during the first ten years after the original sale, any amount of that sale price that exceeds the total of the approved resale price plus reasonable foreclosure costs must be paid into the County's Housing Initiative Fund. After payment is made, the covenants will be released by the County. Apparently, lawyers in that firm were the trustees conducting the foreclosure sale.
2

Wheeler is not a party to this case. -3-

As far as we can determine, the County, prior to the auditor's report, never filed a claim against the surplus proceeds of the sale in the proceeding. The auditor brought this to the attention

of the court in the Auditor's Answer to Exceptions to Auditor's Report. The answer provided:

[E]xamination of the Docket Entries does not disclose a claim being file[d] on behalf of County Department of Housing and Community Affairs. That there is attached to the vouchers furnished to the Trustee letter 7/29/96 from Department of Housing and Community Affairs requesting surplus proceeds. The County's letter, however, must have caused concern for the auditor because after the sale was ratified, he notified the trial court that he was unable to determine payment of the surplus proceeds and requested a hearing be held before the trial court to determine the apportionment of the surplus. Montgomery County then

filed what it termed "Exceptions to Auditor's Report, Motion to Pay Excess Proceeds to Montgomery County"3 and requested a hearing. A

hearing was held after which the trial court rendered its opinion. It found: According to the County, said excess triggers distribution pursuant to Section 25A-9(e), which in essence means the County receives the entire surplus notwithstanding any prior "junior" liens on the property. . . . According to the . . . County, "senior liens" mean either a first mortgage or first deed of trust. No The docket entries reflect that in November 1996, the County filed this Motion to Pay Excess Proceeds to Montgomery County. We have been unable to find a copy of it in the extract. The document referred to as the County's motion and identified as being located on page thirty-two of the extract is an affidavit, not a motion. -43

other lienholder, including judgment lienholders, fall within the definition of senior lien. Hence, the only liens to be paid prior to the county obtaining proceeds pursuant to Section 25A-9 are first deeds of trust and liens filed under the Maryland Contract Liens Act. The [C]ounty further asserts that the Declaration of Covenants for Avenel, incorporated into the Deed, act to protect the count[y']s interest and to put any creditors on notice. . . . . . . . Upon review . . . this Court finds that pursuant to Section 25A-9(e) of the Montgomery County code, surplus proceeds from the foreclosure sale . . ., shall be paid to the Montgomery County Housing Initiative Fund. In support of its ruling the court further finds that the restrictions set forth in this section as provided in the Declaration of Covenants for Avenel Subdivision are covenants that run with the land. . . . Clearly, the covenants run with the land and judgment liens arising after the covenants had been recorded are bound [and] are subject to Section 25A-9(e) of the [Montgomery County] Code. The next issue . . . is whether judgment liens constitute "senior liens" for the purposes of Section 25A-9(e)(4) of the County Code. The Court need not address the status of judgment lienholders in the ordinary course of property transactions.[4] The narrow issue . . . is to define senior lienholder within a specific context. Traditionally, first or prior mortgages and deeds of trust have been labeled "senior" to those of secondary mortgages and deeds of trust. The Court accepts this distinction for purposes of Section 25A-9(e)(4) . . . . The trial court went on to find that the County had a

paramount claim to the surplus proceeds because, even though

It is here that the trial court made its most serious mistake. The status of lienholders in respect to judicial sales is dictated by the provisions of the Maryland Code and case law. As we shall indicate, local governments cannot unilaterally change or attempt to preempt State law. -5-

4

appellants' judgment liens were recorded prior to any assertion of a lien or claim by the County, these liens were not "senior" liens as described in the Montgomery County Code because they were not first mortgages or deeds of trust. In other words, the County

ordinance was found to control the priorities of the various liens following a judicial sale of a property that had been purchased through this particular County agency. The County argues in its brief that under its home rule power and under the authority of the Maryland Code, section 12.01 of Article 66B, it has the power to enact an affordable housing law and to impose restrictions on the resale of such housing. agree. We

Section 12.01(a)(2) of Article 66B expressly permits the

legislative bodies of counties, in conjunction with affordable housing programs, to impose "restrictions on . . . resale of housing . . . to ensure that the purposes" of the act are carried out. This statute is made applicable to the County by section 7.03 of Article 66B. affordable Clearly, the County had the power to create an program that imposed resale prohibitions.

housing

Accordingly, we must examine the County ordinance. We agree with the County that the State statute permits the County to impose restrictions on the resale of affordable housing units. We shall presume, but not decide, that the County has the

power to impose restrictions on foreclosure sales and did, in fact, exercise the power to impose such restrictions. -6We then must

address

whether

the

authority

granted

to

the

County

was

sufficiently broad, and sufficiently clear, to enable the County to change the priority of liens, i.e., to confer unilaterally upon

itself (a general creditor) a priority ahead of judgment liens afforded a higher priority by State statute. We initially note

that the State statute, while specifically granting to the County the ability to enact resale prohibitions, does not grant to the County any specific power to alter the priority status of judgment lien holders. The County created its affordable housing program by enacting Chapter 25A of the Montgomery County Code. The County ordinance,

among other things, requires a developer/applicant to execute and record covenants assuring that the ordinance's "restrictions . . . run with the land for the entire period of control," Montgomery County Code

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