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State v. Braverman

Court of Special Appeals of Maryland

June 1, 2016


          Woodward, Arthur, Zarnoch, Robert A., (Retired, Specially Assigned), JJ. [*]


          Arthur, J.

         Maryland landowners brought a class action against the State, alleging a taking in violation of the Maryland Constitution. After several years of litigation, two motions for summary judgment, and an appellate ruling in a related case, the landowners ultimately prevailed, and the Court of Appeals affirmed the decision in their favor.

         Upon a request by the landowners' attorneys, the circuit court ordered the State to pay $5 million in attorneys' fees. The State appealed. We reverse.

         Factual and Procedural History

         A. Introduction: Ground Leases and the 2007 Modifications to the Ground Lease System

         This case is the latest chapter in the litigation that grew out of the 2007 legislative modifications to Maryland's centuries-old system of financing real estate purchases through the use of "ground leases." See generally State v. Goldberg, 437 Md. 191 (2014); Muskin v. State Dep't of Assessments and Taxation, 422 Md. 544 (2011).

         In very brief summary, a ground lease is a 99-year, perpetually renewable lease, by which an owner rents land to a lessee, who is allowed to use and improve the land much as a typical landowner would. Ground leases are quite common in residential real estate in Baltimore City and have been employed in other areas of the State as well.

         Under a ground lease, the lessee agrees to pay a specified amount of yearly rent, as well as taxes and other assessments. If the lessee defaults, the ground-lease owner may become entitled to reenter the property and eject the tenant, terminate the lease, and take possession of the land and any improvements. When the ground-lease owner successfully enforces the right of reentry, the lessees lose any equity that they had accrued.

         In late 2006, the Baltimore Sun ran a series of articles highlighting what it considered to be grave and unfair abuses by ground rent owners. Among other things, the articles reported that tenants had been evicted, and had lost all of their equity, after they failed to make ground-rent payments totaling far less than the value of their homes.

         Galvanized by the articles, the General Assembly unanimously passed two laws that altered the ground-rent system in the 2007 legislative session. Chapter 290 mandated that the lessors record their leases in a central registry upon pain of losing their reversionary interests and having fee-simple title vest in their lessees. Chapter 286, the provision at issue in this case, eliminated an action for ejectment in most cases involving a failure to pay ground rents on residential real estate. In place of the action for ejectment, Chapter 286 established a lien-and-foreclosure remedy, similar to the remedy for mortgage foreclosures. Under the lien-and-foreclosure remedy, the tenants would not lose their equity if the proceeds of the foreclosure sale exceeded the unpaid rent and the recoverable costs.

         After the 2007 legislation, the market for ground leases, previously seen as a stable, low-risk investment, dropped drastically.

         B. The Early Phases of this Litigation

         On November 1, 2007, William Braverman, Stanley Goldberg, and 47 other plaintiffs filed suit in the Circuit Court for Anne Arundel County to challenge Chapter 286. After several amendments, their complaint alleged that the legislation resulted in both the physical and regulatory taking of property without just compensation in violation of the federal and State constitutions and that it violated the Contract Clause[1] and the Tenth Amendment of the United States Constitution.[2] The sole defendant was the State of Maryland.

         The State removed the case to federal court, but the court on its motion exercised its discretion to remand the case to the circuit court. The circuit court rejected the State's effort to transfer the case to Baltimore City on grounds of improper venue and forum non conveniens. The court did, however, dismiss all claims that alleged a physical taking of property. In addition, the court certified the case as a class action for purposes of liability, but not damages.[3]

         After several years of litigation, in September 2010, both parties filed cross-motions for summary judgment. On January 6, 2011, the circuit court denied the motions, stating "that the evidence presents genuine and novel questions of law as to whether Chapter 286 constitutes a taking."

         C. The Muskin Decision

         Meanwhile, a challenge to Chapter 290, the registration provisions of the 2007 legislation, was wending its way through the courts. On October 25, 2010, the Circuit Court for Baltimore City upheld Chapter 290. Exactly one year later, however, a divided Court of Appeals reversed. Muskin v. State Dep't of Assessments and Taxation, 422 Md. 544, 554 (2011). In a 5-2 decision, the Muskin Court held that, by extinguishing ground rents and transferring title to lessees as a penalty for the failure to record ground leases, the legislation abrogated vested rights and took private property without just compensation in violation of the Maryland Constitution. Id. at 553; id. at 560; id. at 563; id. at 565.[4] Judge Adkins, joined by former Chief Judge Bell, dissented. Id. at 568 (Adkins, J., dissenting).

         Muskin did not directly concern Chapter 286 and its replacement of the right of reentry with the lien-and-foreclosure remedy. Nonetheless, in reaching its decision, the Muskin majority implied that the owner of a ground lease had a vested right in the right of reentry. For example, the Court stated: "A ground lease creates a bundle of vested rights for the ground rent owner, a contractual right to receive ground rent payments and the reversionary interest to re-enter the property in the event of a default or if the leaseholder fails to renew." Muskin, 422 Md. at 559 (emphasis added). The Court added: "These two rights cannot be separated from the other; together they are the essence of this unique property interest, and as such, vested rights analysis must consider them together." Id. at 559-60 (emphasis added).

         On the other hand, the Muskin Court recognized "an exception" to the "general prohibition" against abrogating vested rights. Id. at 561. The exception, wrote the Court, "applies solely to remedies and rules of evidence." Id. Under the exception, "the Legislature has the power to alter the rules of evidence and remedies, which in turn allows statutes of limitations and evidentiary statutes to affect vested property rights." Id. (citations omitted).

         In short, Muskin did not clearly decide the question of whether the General Assembly had impermissibly deprived ground-lease owners of a vested right, or whether it had merely altered the applicable remedies, when it substituted the lien-and-foreclosure remedy for the right of reentry that was implemented through an action for ejectment.

         D. Summary Judgment and Affirmance on Appeal

         Immediately after the Muskin decision, the plaintiffs in this case renewed their motion for partial summary judgment on the claim that Chapter 286 violated the Maryland Constitution by abrogating their vested right to reenter the leased property in case of a default. On December 20, 2011, the circuit court granted their motion.

         After the grant of summary judgment on the State constitutional claims, the plaintiffs secured a final judgment by having the court dismiss all remaining claims, including any individual claims for damages by the two named plaintiffs, on mootness grounds. The State appealed, and a divided Court of Appeals affirmed. State v. Goldberg, 437 Md. 191, 199 (2014).

         In reaching its decision, the Goldberg majority rejected the State's contention that Chapter 286 abrogated no vested rights, but simply substituted the new lien-and-foreclosure for the previous remedy of ejectment, which facilitated the right of reentry. Instead, the majority held that the legislation unconstitutionally impinged upon a vested right to reenter the leased premises and to terminate the lease. Id. at 216-17. Two judges dissented. Id. at 217 (Adkins, J., dissenting); id. at 227 (Watts, J., dissenting).

         On remand, the State agreed not to enforce the unconstitutional statute. The court awarded no damages.

         E. The Fee Award

         Class counsel represented the class on a contingent-fee basis, under which no fee would be due or payable unless the action were successful. The fee agreement did not identify a percentage of any recovery that would accrue to counsel in the event of settlement, trial, or appeal. See Md. Lawyers' R. of Prof'l Conduct 1.5(c). Instead, counsel agreed that if the lawsuit were certified as a class action (as it was), they would "apply to the court for any success fee."

         In response to the Court of Appeals' decision in Goldberg, the plaintiffs filed a fee petition in the circuit court. In the petition, class counsel requested over $5, 560, 000.00 in fees, $109, 925.45 in costs, and a "fee multiplier" of 1.5 times the fee award, or more than $2, 780, 000.00, because of the undesirability of the representation, the State's refusal to resolve the case, and the amount of value restored to the class.[5]

         After an evidentiary hearing, the circuit court ordered the State to pay $5 million in fees. In reaching that decision, the court employed a number of theories: 42 U.S.C. § 1988, which authorizes an award of attorneys' fees in an action to enforce the provisions of a number of federal statutes; the common-fund doctrine, under which class counsel may receive a fee from the monetary recovery that they generate for the class; Md. Code (1974, 2015 Repl. Vol.), § 12-106 of the Real Property Article ("RP"), which allows a court to award reasonable legal fees that a prevailing "defendant" has "actually incurred" in a condemnation action; and Md. Rule 1-341, which allows a court to award the "reasonable expenses, including reasonable ...

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