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State v. Goldberg

Court of Appeals of Maryland

February 26, 2014

STATE of Maryland
v.
Stanley GOLDBERG, et al.

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[Copyrighted Material Omitted]

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Matthew J. Fader, Asst. Atty. Gen. (Douglas F. Gansler, Atty. Gen. of Maryland, Baltimore, MD), on brief, for appellant.

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Edward J. Meehan (Groom Law Group of Washington, DC; Richard L. Brusca, Skadden Arps, Slate, Meagher & Flom LLP, Washington, DC; Sara H. Arthur, Arthur Law Group, LLC, Annapolis, MD), on brief, for appellees.

Charles Muskin as Amicus Curiae, on brief, for appellees.

Charles Muskin, Annapolis, MD, for Amicus Curiae brief of Charles Muskin, Trustee.

Argued before BARBERA, C.J., HARRELL, BATTAGLIA, GREENE, ADKINS, WATTS, DALE R. CATHELL (Retired, Specially assigned), JJ.

HARRELL, J.

[437 Md. 195] In this case, a re-match of sorts [1] between the General Assembly and certain Baltimore landlords, we revisit the [437 Md. 196] nature of Maryland's " ground lease" system. A group of plaintiffs-lessors holding ground leases brought this action against the State challenging, on Maryland Constitutional grounds, Chapter 286 of the Laws of Maryland, which 2007 legislation replaced ejectment with a lien-and-foreclosure process for defaulting lessees of ground leases when more than six months of rent is overdue. The Circuit Court for Anne Arundel County determined that the Legislature exceeded its powers and held Ch. 286 of the 2007 Laws of Maryland invalid as an abrogation of vested rights. The State appealed this decision, arguing that the Legislature is allowed to alter remedies by statute and that no vested property rights are implicated. Before the Court of Special Appeals could decide the appeal,[2] we granted certiorari to determine if the General Assembly indeed has authority to invalidate the ejectment clauses [3] present in extant ground leases.

I. Facts and Legal Background

The ground lease is a centuries— old home financing tool found almost exclusively in Maryland. See Banks v. Haskie, 45 Md. 207, 218 (1876). With roots in feudal England, the ground lease, although little known elsewhere in the United States, is common in Maryland. See Lewis Mayer, Ground Rents in Maryland 43 (Cushings & Bailey ed., 1883). Although ground leases have changed little over the centuries, recent legislation attempted " reforms" of the ground lease system. In late 2006, The Baltimore Sun published a three-part investigation into the ground rent system. Fred Schulte & June Arney, Part 1 of 3: On Shaky Ground, The Baltimore Sun, Dec. 10, 2006, http:// www. baltimore sun. com/ business/ bal- te. bz. ground rent 10 dec 10, 0, 5955952. story [437 Md. 197] (last retrieved Nov. 13, 2013). Focusing on some anecdotal reports of tenants being ousted from their homes due to missed payments totaling far less than the value of the home, these articles led to a legislative attempt during the 2007 session of the General Assembly to address perceived abuses of the ground lease system. Appellees, a class representing ground lease holders,[4] claim that the Legislature abrogated

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impermissibly their vested rights. Appellant, the State, counters that the legislation at issue is simply a substitution of remedies aimed at curtailing reported abuses of tenants by ground lease holders.

As noted earlier, the legislation at issue here is Chapter 286 of the 2007 Session Laws of Maryland, which revised Section 8-402.2 of the Real Property Article (" RP" [5]). Md.Code (1974, 2010 Repl. Vol.), § 8-402.2 of the Real Property Article. Appellees challenged three aspects of Chapter 286. The first challenge is to Chapter 286's revision of RP § 8-402.2(a)(2) to prohibit ejectment proceedings for residential ground leases with four or fewer units.[6] Second, Appellees challenged Chapter 286's enactment of RP § 8-402.3, establishing a lien-and-foreclosure process available for ground lease holders whose tenants owe at least six months' rent. [7] Finally, Appellees challenged Chapter 286's institution of [437 Md. 198]RP §§ 8-402.3(j)(3)(ii)-(k)(1)(ii), limiting the amount of attorney's fees that would be available as part of a judgment.

Appellees, 49 individual plaintiffs (" the Class" ), filed suit against the State on 1 November 2007 in the Circuit Court for Anne Arundel County. [8] In their suit, the Class claimed that by replacing ejectment with the lien-and-foreclosure procedure, the State abrogated unconstitutionally a vested property right. In addition to seeking declaratory relief, the Class sought $114 million in damages they claim were caused by the State's enactment of Chapter 286. Both sides moved for summary judgment. After we issued our opinion in Muskin v. State Dep't of Assessments & Taxation, 422 Md. 544, 30 A.3d 962 (2011), the Circuit Court heard the cross-motions for summary judgment, granted the Class' motion for partial summary judgment on their constitutional and damages claims, and dismissed the remaining claims as moot. On 11 April 2012, the court entered the judgment as final.

The Circuit Court began its analysis with the Maryland Constitution's prohibition against the Legislature enacting any law " authorizing private property, to be taken for public use, without just compensation, as agreed upon between the parties, or awarded by a Jury, being first paid or tendered to the party entitled to such compensation." Md. Const. art. III, § 40. In considering the constitutional implications, the Circuit Court addressed two questions in its ruling: the first is the threshold question of whether a ground lease holder's action for ejectment constitutes a vested right or a remedy; the second is the ultimate question of whether Chapter 286 constitutes an unconstitutional taking through abrogation of vested property rights. In answering the threshold question, the Circuit Court interpreted our decision in Muskin to hold that the

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bundle of vested rights that make up ground leases includes the vested right of re-entry upon default. Because it interpreted Muskin as holding that the right to re-enter in the event of default is a vested property right, the Circuit Court [437 Md. 199] held that Chapter 286 operates as an unconstitutional taking of the ground lease holder's property.

We granted certiorari to consider the following question:

Is legislation substituting one remedy for failure of a ground lease tenant to pay rent (lien and foreclosure) for another (ejectment) a permissible alteration of remedies that does not impermissibly abrogate vested rights of ground lease owners?

We shall affirm the Circuit Court's judgment.

II. Discussion

Because the Circuit Court's grant of partial summary judgment rested purely on questions of law in this case, we review the judgment without deference to the trial court. Conaway v. Deane, 401 Md. 219, 243, 932 A.2d 571, 584 (2007) (citing Livesay v. Baltimore, 384 Md. 1, 9, 862 A.2d 33, 38 (2004)).

The State argues that Chapter 286 replaced merely one remedy (" re-entry through ejectment" ) with another (lien-and-foreclosure). It relies therefore on our longstanding rule that legislation altering remedies does not offend the Maryland Constitution and concludes that this law is constitutional. The State avers that, because Chapter 286 does not inhibit a ground lease holder's ability to collect rents or abridge the lease owner's reversionary interest in the property, it neither impairs the underlying contract nor abrogates a vested right. In the State's view, the Circuit Court misinterpreted Muskin as foreclosing the possibility of legislative alteration of remedies concerning ground leases at all. Rather, it says Muskin was decided as it was because Chapter 290 represented a complete extinguishment of existing ground leases and cut off all remedies available to a ground lease holder. Under the State's theory, because Chapter 286 does not cut off all remedies and does not extinguish ground leases, it should be held valid.

The Class counters that because Muskin holds explicitly that the right to re-enter in the event of default is a vested [437 Md. 200] right, Muskin renders the present one a simple case. It points out that, in Muskin, we explained that the Maryland Declaration of Rights and Constitution prohibit the retrospective abrogation of vested rights. Muskin, 422 Md. at 555, 30 A.3d at 968 (" Maryland's Declaration of Rights and Constitution prohibit the retrospective reach of statutes that would have the effect of abrogating vested rights" ) (citing Dua v. Comcast Cable of Md., Inc., 370 Md. 604, 630 n. 9, 805 A.2d 1061, 1076 n. 9 (2002)). Because the right to re-enter and take possession of their properties in the event of default is a vested right, the Class urges, the Legislature cannot abrogate those rights under the guise of altering a remedy. The Class draws thus a meaningful distinction between the remedy of foreclosure and the right of re-entry by summary ejectment in the event of default.

The Class does not contest the ability of the Legislature to alter remedies. Rather, the Class contends, by cutting off the right of re-entry, the Legislature impaired a critical and vested right of the ground lease holder. In its view, because the statute's system of lien-and-foreclosure can never provide ground lease holders with possession of the property for which they hold legal title, it abrogates their vested property rights.

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A. History of Ground Rents in Maryland

Leases for ground rents have been present in Maryland since Colonial times. Banks, 45 Md. at 218. Like any lease, they are intended to benefit mutually the lessor and lessee. Id. at 217. The lessee enters into the agreement to " acquire a perpetual interest in the leased premises, which would justify his making permanent improvements thereon, and enable him to avail himself of the value of the property thus enhanced...." Id. The lessor enters into the agreement, among other reasons, " to secure the prompt payment in perpetuity of the interest on a sum of money, equivalent to the value of the property...." Id. Ground leases have also been traded commodities since at least the Nineteenth Century. Id. People seeking safe investments would purchase them from ground lease holders as an income stream. Id. Additionally, because [437 Md. 201] often the property increased in value with the development of the surrounding area, lessees would sell their rights to possess the land. Id.

The language of ground rent leases has changed little since 1750. Frank A. Kaufman, The Maryland Ground Rent-Mysterious but Beneficial, 5 Md. L.Rev. 1, 15 (1940). In a ground lease, " the lessor grants to the lessee, his executors, administrators, and assigns a specifically described lot along with the improvements on that lot and all rights and appurtenances connected with it for a term of ninety-nine years." Id. " The lessee covenants in return for himself, his executors, administrators, and assigns to pay a specified yearly rental during the running of the lease in equal semi-annual installments and also agrees to pay all the taxes and assessments on the leased property." Id. The lessee and his assigns are given the valuable option to renew the lease at any point during the ninety-nine year term. Id. at 16.

Ground leases are either redeemable or irredeemable. A redeemable ground lease grants the tenant the absolute right to tender an amount of cash to the ground lease holder that extinguishes the ground lease and vests a fee simple absolute in the tenant. Mayer, supra, at 120. Sections 8-110 and 8-110.1 of the Real Property Article govern the process by which a ground lease tenant may redeem the ground lease.[9] If the ground lease was created after 8 April 1884, a ground lease tenant has an absolute right to redeem [437 Md. 202] the ground lease that the ground lease holder cannot abrogate or resist. Kaufman, supra, at 20 (citing Md.Code (1939) Art 21, Secs. 110, 111); see Brager v. Bigham, 127 Md. 148, 160, 96 A. 277, 280-81 (1915) (holding that the right of redemption is read into a ground lease, and no covenant in the lease can estop the lessee from exercising the right to redeem the ground lease). An irredeemable ground lease, on the other hand, is a ground lease that does not contain a provision

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allowing the leaseholder tenant to redeem the ground lease. RP § 8-110.1(a)(5). As indicated above, all such ground leases must have been created prior to 9 April 1884. Id.

The lease specifies typically what action the lessor may pursue in court if the lessee is late paying rent. Traditionally this relief included: (1) to make distress on the arrearage; (2) after 60 days of nonpayment, to take over the premises by re-entry and hold them until the arrearage is paid up; and (3) after six months of nonpayment, re-enter the premises and possess them as if the lease had never been made. See Kaufman, supra, at 15-16; see also Mayer, supra, at 51-53. The right of re-entry is inserted into the ground lease principally as security for the payment of rents. Before the Legislature passed Chapter 286, RP § 8-402.2(a) afforded the leaseholder the opportunity to pursue ejectment, which allowed it to re-enter and take possession of the property. Md.Code (1974, 2003 Repl. Vol.), § 8-402.2(a) of the Real Property Article. The pre-2007 Code provided:

Whenever, in a case that involves a 99-year ground lease renewable forever, at least 6 months ground rent is in arrears and the landlord has the lawful right to reenter for the nonpayment of the rent, the landlord, no less than 30 days after sending to the tenant by certified mail, return receipt requested, at the tenant's last known address a bill for the ground rent due, may bring an action for possession of the property under § 14-108.1 of this article[.]

Md.Code (1974, 2003 Repl. Vol.) § 8-402.2(a) of the Real Property Article. Thus, under a ground lease, the landlord could gain possession of the property rather directly: by giving notice, waiting 30 days, and bringing an action for [437 Md. 203] possession under RP § 14-108.1.[10] If the landlord complies then with the provisions of § 8-402.3, it could hold the property free and clear of the tenant's interest after six months. As § 8-402.2(b)(2) of the Real Property Article provided before 2007, the property would be:

discharged from the lease and the rights of all persons claiming under the lease are foreclosed unless, within 6 calendar months after execution of the judgment for possession, the tenant or any other person claiming under the lease: (i) Pays the ground rent, arrears, and all costs awarded against that person; and (ii) Commences a proceeding to obtain relief from the judgment.
[11]

Under the challenged 2007 law (Chapter 286), the ejectment provision set forth immediately above " does not apply to residential property that is ... used ... for four or fewer dwelling units." So, in 2007 these residential ground lease holders lost the right to re-enter on default and obtain discharge of tenants' and mortgagees' rights. Rather, under the new law set forth in RP § 8-402.3(d), the landlord was given a right to a lien against the real property on default, if the ground rent is unpaid six months after its due date. This lien " has priority from the date the ground lease was created." RP § 8-402.3( l )(2). If the ground rent remains unpaid, the

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ground lease holder may foreclose on the lien, and have their debt paid from the proceeds of the sale. RP § 8-402.3(n).[12] [437 Md. 204] If the ground lease is redeemable, the ground lease holder receives also the redemption amount from the proceeds of the foreclosure sale, and the foreclosure sale buyer takes title free of the ground lease. RP § 8-402.3(n)(3)(i). If the ground lease is irredeemable, however, the foreclosure buyer takes subject to the ground lease. RP § 8-402.3(n)(3)(ii).

B. Arguments by the Class

To reiterate, the Class makes three arguments for the invalidity of Chapter 286. These arguments are: (1) Muskin made the right to re-enter in the event of default a vested property right; (2) the right of re-entry in the event of default is a right distinct from the remedy of ejectment; and (3) Chapter 286 transfers ground lease holders' property without just compensation.

C. Muskin Governs the Outcome

Put simply, the hash of the present case was settled effectively by the Court's opinion in Muskin v. State Dep't of Assessments & Taxation, 422 Md. 544, 30 A.3d 962 (2011). " Together, Maryland's Declaration of Rights and Constitution prohibit the retrospective reach of statutes that would have the effect of abrogating vested rights." Id. at 555, 30 A.3d at 968 (citing Dua, 370 Md. at 630 n. 9, 805 A.2d at 1076 n. 9). " It is only in times of revolution that, by a stroke of the pen, vested rights founded upon contract have been annihilated." Mayer, supra, at 128.

In Muskin, we reiterated the well-settled principle that " Article 24 of the Maryland Declaration of Rights, guaranteeing due process of law, and Article III, § 40 of the Maryland Constitution, prohibiting governmental taking of property without just compensation, have been shown, through a long line of Maryland cases, to prohibit the retrospective reach of statutes that would result in the taking of vested property rights." Muskin, 422 Md. at 555-56, 30 A.3d at 968 (footnote omitted) (citing Dua, 370 Md. at 604, 805 A.2d at 1061). We said there, as well as in Dua, that

[437 Md. 205] " [i]t has been firmly settled by this Court's opinions that the Constitution of Maryland prohibits legislation which retroactively abrogates vested rights. No matter how ‘ rational’ under particular circumstances, the State is constitutionally precluded from abolishing a vested property right or taking of a person's property and giving it to someone else."

Id. at 556-57, 30 A.3d at 969 (alteration in original) (quoting Dua, 370 Md. at 623, 805 A.2d at 1072).[13]

Thus, as we did in Muskin, " [t]o determine whether [the challenged statute (Chapter 286 in this case) ] is constitutional under Maryland law, we evaluate whether

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the statute purports to apply retrospectively and abrogates a vested right or takes property without just compensation." Id. at 557, 30 A.3d at 969. " If a retrospectively-applied statute is found to abrogate vested rights or takes property without just compensation, it is irrelevant whether the reason for enacting the statute, its goals, or its regulatory scheme is ‘ rational.’ " Id. (citing Dua, 370 Md. at 623, 805 A.2d at 1072). " [T]he relevant standard for determining whether a retrospective statute is constitutional is ‘ whether the vested rights are impaired and not whether the statute has a rational basis.’ " Id. (quoting Dua, 370 Md. at 623, 805 A.2d at 1072).

i. Chapter 286 Operates Retrospectively.

As we stated in Muskin, " [r]etrospective statutes are those ‘ acts which operate on transactions which have occurred or rights and obligations which existed before passage of the act.’ " Muskin, 422 Md. at 557, 30 A.3d at 969 [437 Md. 206] (citing Langston v. Riffe, 359 Md. 396, 406, 754 A.2d 389, 394 (2000)). Generally, retrospective statutes that abrogate vested rights are unconstitutional. Id. Although " there is no bright line rule for determining what constitutes retrospective application, ... retrospective statutes are those that ‘ would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed.’ " Id. at 557-58, 30 A.3d at 969 (quoting John Deere Const. & Forestry Co. v. Reliable Tractor, Inc., 406 Md. 139, 147, 957 A.2d 595, 599 (2008)). In determining whether a statute acts retrospectively, we evaluate " ‘ fair notice, reasonable reliance, and settled expectations' to determine ‘ the nature and extent of the change in law and the degree of connection between the operation of the new rule and a relevant past event.’ " Id. at 558, 30 A.3d at 970 (quoting Landgraf v. USI Film Prods., 511 U.S. 244, 270, 114 S.Ct. 1483, 1499, 128 L.Ed.2d 229, 255 (1994)). See also John Deere, 406 Md. at 147-48, 957 A.2d at 599-600 (adopting the Supreme Court's Landgraf factors analysis for retrospectivity analysis in this State).

Applying the Landgraf model to the present case, as we did in Muskin, fair notice is not satisfied by the provisions of Chapter 286. Chapter 286 was passed on 2 April 2007, and made effective three months later on 1 July 2007. Thus, if a tenant defaulted prior to the enactment of Chapter 286, but the ground lease owner had not acted upon his/her/its accrued right to re-enter (i.e. had not begun yet the process for ejectment), the ground lease holder's present right to seek a judicial remedy is eliminated by Chapter 286 in but three months.

Moreover, Chapter 286 impacts severely the reasonable reliance and settled expectations of ground rent owners by virtue of its extinguishment of the right of reentry and destruction of the reversionary interest. As this Court stated in Muskin, the settled expectations of ground rent owners does not lie solely in future rents, but rather " [g]round rent owners rely reasonably on the future income from ground rents or the [437 Md. 207] ability to sell the fee simple interest on the open market or in the future, if necessary. " Muskin, 422 Md. at 558, 30 A.3d at 970 (emphasis added). " [A] ground rent holder's fee simple interest remained ... as settled an expectation as any fee simple owner's interest in real property. " Id. (emphasis added) (citing Heritage Realty, Inc. v. Mayor of Baltimore, 252 Md. 1, 248 A.2d 898 (1969)). " The terms of the ground rent lease are fixed over the 99 year lease period and the conditions that create a reversionary interest in the property are predetermined. "

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Id. (emphasis added). Just as the Court found in Muskin, prior to adoption of Chapter 286, " owners of ground rent properties had no reason to believe that their interests were anything but well-settled, and had a reasonable basis to rely on the continuation of the state of the law permitting ground rent leases to continue." Id.

As established further in Muskin, " [g]round rent leases, established through transactions consummated many years ago, create rights and obligations for ground rent owners and leaseholders." Muskin, 422 Md. at 559, 30 A.3d at 970. One of these rights for the ground rent owners is the right to re-entry in the event of default, which Chapter 286 extinguishes for all intents and purposes. Thus, Chapter 286 acts retrospectively to impair a strand of the ground lease holder's bundle of rights, namely its right to reentry in the event of default. The remaining question is whether this right is a vested one.

ii. The Inseparable Bundle of Vested Rights in Maryland Ground Rent Leases.

To determine whether a right is vested, we analyze the nature of the right implicated by the challenged statute. We explained the proper framework for this analysis regarding the ground leaseholder's rights in a ground rent lease most recently in Muskin. When analyzing the implicated rights under the proper framework for ground rent leases ( i.e., the bundle of vested rights that is the essence of these leases), the ground leaseholder's right of reentry must be [437 Md. 208] viewed as an inextricable part of the bundle of vested rights which the Legislature may not ...


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