SUPERIOR COURT OF THE DISTR]CT OF TAX DIVISION

555850 FLORTDA AVENUE, L.L.C.

\r Tax Docket No. 7632-98

DTSTRICT OF COLUMBIA

MEMORANDUMOPINTON AND JUDGMENT

This tax assessment appeal presents an issue of first.

impression in t.he Superior Court.. The controversy herein concerns

a that was sold in whil-e still encumbered by

two unsatisfied notes. The purchaser was the same entity that held

the notes. The j-ssue is whether recordation and t.ransf er taxes may be assessed lawfuIIy based upon the deficiency amount that remained unpaid after the foreclosure sale, where the successful bidder did not conLract to pay such debt. Without question, the sum on which

the taxes were calculated herein was substantially greater than the

amount of money that was actually paid for the property as a result of the foreclosure auction. The taxpayer was forced to pay such

taxes and was denied a refund.

As a practical matter, the District contends that the Recorder of properly assessed the taxes based upon the outstanding mortgage liability that previously had encumbered the property.

The Dist.rict further argues that extinguishment of the buyer's own 2

of trust note somehow represents quantifiable ',consid.erationrl

that was actually paid for the property in t.he foreclosure sale.

This argument is an alternat.ive theory, in comparison with a very

different reason that. was explicitly given by the Recorder of Deeds

as to the reason for denying the refund. rt is apparent that the

District. cannot support the expl-icit basis on which the refund was denied.

The issue presented reguires the Court to interpret the

meaning and application of a specific statut.e. There are no

appellate cases directly on point. The Court musL interpret what

the relevant statute means and what. the Recorder of Deeds is

actually authorized and required to do" The decision herein also

requires analysis of t.he basic 1egal concepts that apply to

forecrosure sales and the meaning of a deficiency sum.t

The court has heard oral- argument on the Cross-Mot.j-ons for

summary Judgment. Based upon the followj_ng analysis, this court concl-udes that the taxpayer must prevail.

Nature of the Taxee rn Dispule: rn order to place this assessment appeal in a useful cont.ext, it is important to recapitulate certain basic concepts about the nature of these taxes

tAs far as the foreclosure auction is concerned., the scenario in the instant case was not weird or unusual. There is nothincr improper about lenders bidding on after having extended loans secured by such properties. Because this rs a common scenario, it is not clear why the issue herein has never been litigated in the superior court until- now. However, this Court will- not be diverted by speculation. The Court takes the case as the Court finds it. 5 and the method that is prescribed by statute for assessing them.

The explicit. reason for imposing recordation and transfer taxes is "to defray the approximate cost of operating the Office of the Recorder of Deeds. t' D.C. Code S 45-915 (b) (1981) . The purpose of these taxes is not to assess t.he fair market value of the realty. For the sake of clarity, the Court. pauses to emphasize that the District's basic system for taxing fair market value of real propert.y is embodied in regular assessments that were formerly rendered on an annual basis, but which are now issued every three years. This process is completely separaLe from that. of t.he imposition of recordation and transfer taxes as to one discrete transaction, such as a sale of realty.

The exclusive formul-a for assessing recordation taxes is found in the District of Col-umbia Code. It. provides, "At t.he time it is submitted f or recordation, a deed that. conveys L.it.Ie to real propert.y in the District shal-l be taxed at a rate of 1-.Ie" of t.he tbtal consideration for the deed. [emphasis suppliedJ " D.C. Code

S 4s-e23(a) (1e81). The formula for assessinq transfer taxes is also found in the Code. The law states, "There is imposed on each transferor for each transfer at the time the deed is submit.ted to the mayor for recordation a tax at the rate of L.1-Z of the consideration for such transfer; provided, that in any case where application of the rate of tax to the consideration for t.he transfer results in a total t.ax of less t.han Sf the tax shal1 be

$1 . " D. C. Code S 47-903 . Further details and definitions are set forth in the Code as 4

to what figures shall be used as the basis for calculating these

two taxes. When a property is sold, Lhe deed

shall be accompanied by a return under oath in such form as t.he Mayor may prescribe, executed by all the parties to the deed, setting forth the consideration for the deed or debt secured by the deed, the amount of tax payable, whether the property to which the deed or document refers is a residential as defined in S 47-1401, Lhe instrument number and date of any prior recorded supplemental deed, and such ot.her information as t.he Mayor may require so as to provide an accurate and complete public record of each t.ransfer of residential- real- property.

D.C. Code S 45-923 (b) (1981) lemphasis supplied] .

More precisely, t.he Code specifies the definition of rrmeans "consideration." This term the price or amount actually paid, or required to be paid, for real- property, including any morLgages, l-iens, thereon, construction loan deed of trust or mortgages or permanent l-oan deeds of trust or mortgages. rl

D.C. Code S 4s-92I(5) (1981) lemphasis supplied].

The District. also directs the CourL's atLention to regulations

I'consideration'r that define as what is "actual-ly paid or ul-timately required to be paid for real property, whether that consideration is in the form of cash or is in some other form. " 9 D.C.M.R. SS

502.4 and 602.2 (IAay 1995) These regulat.ions, however, do not add any criteria that. are not readily embraced in the Code definition.

Uncontested Material Facts of Record: This case does not involve a factual- dispute. The judgment herein exclusively t.urns on the leqal interpretation of the formula by which the recordation 5

and transfer taxes are to be assessed where, Ers here, the auct.ion

purchaser is the same party that previously held outstandingi notes

secured by the realty. For purposes of adjudicating the instant

Motions, it is useful to recapitul_ate those facts that are uncontested and which are essential for just adjudication of the issues.

1. The taxpayer herein (a limited liabj-Lity company) had previously purchased two notes that were secured by the subject property. Those delinquent notes had a combined outstanding value of $309,847.2r. The property was a building known as 52 euincy Pl-ace, N.W. in the District of Columbia.

2- on March r, 1996, the t.axpayer purchased the subject properly at a public auctj-on for Lhe price of g1o,o0o.o0 (ten thousand dollars). This was the taxpayer,s bid. There were no other bidders.

3. when the taxpayer attempted to record the new deeds, the

Recorder of Deeds assessed the transfer and recordation taxes based upon a tot.al valuation of $309,84't.2i.. The amount on which the taxes were calcul-ated is the sum of the outst.anding loan balances, not the purchaser's bid that was accepted by the Trustee. The holder of the outstanding loans is the same entity that bought the property in forecl-osure, i.e. the taxpayer herein.

4. As a prerequisite to this tax appear, the petitioner paid all taxes that were assessed by the Recorder of Deeds, i.e. s6814.00.

5. A refund of 95594.00 with interest is demanded herein by 6

the taxpayer, and the refund was denied previously by the Recorder

of Deeds.

6. The Trustee's return that accompanied the deed in this

case reflected that the only sum "paid or required to be paid', for

the propert.y was t.he discrete amount of $t-0,000.00. The Trustee,s

return did not. report any mortgages, loans assumpt.ions, promises,

or any other type of obligation that was to be secured. by this

property or which was part of the consideration which the taxpayer

contracted to pay. A copy of the Trustee's return is found in the

court record as Exhibit 8 attached t.o the Petitioner's Moti-on for

Summary ,fudgment. '7 . The Trustee's return is typed. However, it. bears the

handwritten f igures t.hat were added at the insist-ence of the

Recorder of Deeds subsequent to the auction. on its face, the

return bears handwritt.en changes in t.he bl-ock denominated as

"Consideration and Financing. " The handwritten changes includecl

the substitution of the sum of $304,847.21- as "out.standing note

consideration." The taxes due were changed accordingly, also

through handwritt.en modifications to this typed form. A11 such

handwritten changes were made as a requirement of the Recorder of

Deeds. The taxes were t.hen cal-culated based upon the Recorder, s views as to what should be included on the return, rather than on

the amounts that were reported under oath on the return by the

Trustee.

B. When the taxpayer demanded a refund of the overpayment of taxes, the lett.er issued by the Of f ice of Tax and Revenue suppl-ied 7

the reason for the denial of refund. This lett.er is found in the

court f ile as Exhibit 11 attached t.o the Pet.it.ioner's Motion for

Summary.Tudgment. fn this letLer of April 2, 1998, the Recorder of

Deed denied the refund stating in pertinent part: "D.C. Code, secLion 45-924 and section 47-904, when the consideration paid for

real- property is nominal, recordation and transfer taxes are

imposed upon the fair market va1ue. At. the time of recordat.ion,

this propert.y was assessed at $420,100.00 for which the stated

consideration of $10,000.00 is clearly nominal. Accordingly, your

claim for refund is denied. "

Relevant Case Law: A proper analysis of this case turns in

part upon a correct understanding of t.he significance of a deed of

trust, ds well as a solid understanding of what. happens at a

foreclosure sale. In any evenL, taxes shoul-d not and cannot be

cal-culated upon the personal whim of the Recorder of Deeds. There must be a firm legal basis for t.he assessment of any tax.

The l-aw of the District of Columbia is quite transparent as to

the nature of a deed of trust that. is not satisfied at a

foreclosure sale. The deed of trust is not a guarantee that the note-holder will receive payment of the entire amount borrowed. At best., the deed of trust only provides the l-ender with the priority opportunity to have a Trustee sell the property for the highest bid. Once that process has ended, the lender must accept the result. which coul-d be a substantial loss. However, the lender st.i1l may sue the borrower for the def j-ciency amount. See Finley 8

v. Frj-edman , L59 A. 2d 668 , 670 (n. C. 1950 ) .

The aftermaLh of a foreclosure sale may or may not result in

the original l-ender being made who1e. Many scenarios may emerge.

For example, the original borrower may be judgment-proof, oy t.he

property may have become substantially deval-ued over time prior to

the foreclosure. This could happen in any given situation because

of accidenLs, vandalj-sm, or economic market forces.

The Dist.rict of Columbia Court of Appeals has ruled that the

remedies of suing on a note and foreclosing on property that

secures the note are independent remedies and do not confl-ict with

each ot.her. A creditor "may seek both a judgment against a maker

or guarantor of the deed of t.rust note and a foreclosure (judicial

or non-judicial) pursuant to the deed of trust,and may do so in any

sequence.I' Szeqo v. Kinqsley Anvanwut.aku, 651- A.2d 3l-5, 318 (D.C.

a994). In Szeqo, the Court of Appeals hel-d t.hat the tria1 courL

erred in concluding that the appellants were precluded from pursuing forecl-osure based upon the doctrines of res judicata,

collateral estoppel, and el-ectj-on of remedies. " fd.

Adjudication of the Issue: There are two level-s on which this

Court must anal-yze the merit of the Pet.itioner's case.

The taxpayer and the District describe Lhe issue in different

semantical terms. However, this is not critical to the merits of

the issues. The taxpayer couches its appeal in terms of seeking I' relief f rom a "denial of refund. The Di-strict argues that a Superior Court tax appeal is a de novo proceeding and, thus, the 9

Court shoul-d not focus on the merit of what was contained within the four corners of the Recorder's letter to the taxpayer. fnstead, the District argues, this Court should focus only on the question of whether the Recorder lawfully assessed a tax

"deficiency."

These labels reflect a distinction without a real difference, because the operative facts of what t.he Recorder did in denying the refund are the same underlying facts that. comprise the rrassessment. " Thus, under either rubric, the real- lega1 debate is the same. For the sake of completeness, Lhe Court will- eval-uate the literal reason for the denial of the refund, ds well as the

District's more recent justification for the denial.

1. The Recorder's Letter of Denial.

As a threshold matter, t.his Court has already rul-ed upon the lack of merit. i-n the Recorder's stated reason for denial- of the refund. In a published opinion, this Court discredited in great detail the notion that money paid for a property in foreclosure can be ignored as "nominal" simply because t.he purchase price is l-ower than the alleged fair market val-ue of the property. Askin v.

District of Columbia, Tax Docket No. 55'72-93, L23 D.W.L.R. 156

(Super. Ct.. August 14,1995). For the sake of brevity, this Court wil-l incorporate herein by reference its analysis set forth in

Askin. However, certain parts of this Court's ruling shoul-d be emphasized, for purposes of helpful comparison.

In Askin, the taxpayer had purchased a number of condominium 10 units f or t.he price of $5, 000 . 00 each. The sale was noL a foreclosure sal-e. Rather, the condominium was selling off units that could not command the expected price on the open market. fn identical fashion to what. happened in the instant. case, Lhe

Recorder of Deeds ignored t.he actual purchase price. The Recorder insisted upon assessing the recordation and transfer taxes on the basis of what the Recorder deemed to be the fair market vaIue.

This Court ruled in Askin that there was no statutory authority whatsoever for assessing taxes in this manner, i.e. based upon the Record's subjective opinion t.hat the price had been

'rnominaf ." In other words, this Court out.l-awed exactly the same procedure that t.he Recorder invoked in the instant case.

The District of Col-umbia never appealed this Court's ruling in

Askin.

It. is st.riking that the Recorder of Deeds nonetheless continued t.o assess these taxes in the same wdy, totally ignoring the Court's decision. Indeed, the instant case represents an act that is essentially in contempt of the Superior Court. The decision in Askin was filed on April !9, 1"995and published in the

Daily Law Reporter on August. 14, 1995. Yet, the

Recorder of Deeds repeats the same illegal decisions in the instant case through his l-et.ter of April 2 , 1998 . Without doubt, the

Recorder's act had been found to be lacking l-awful- authorit.y before the foreclosure sale herein had ever taken place.

2. The Dist.rict's Theorv of "Consideration" Evidenced by

Extinquishment of the Lien. 11

It is apparent that the District searches for a way to justify

t.he tax assessments herein, knowing that the explicit. reason given

for the denial- of a refund is legaIly defective.

As an alternative theory, the Dist.rict contends that when the

taxpayer's own lien was effectively extinguished by the foreclosure

sal-e, the taxpayer somehow provided the value of the outstanding mortgage amount as t.he real consideration for the deed. The

Recorder of Deeds arbit.rarily substituted the deficiency amount as

the "consideration," despite the Trustee's sworn return indicating t.hat the sole consideration was the sum of $10,000. The Recorder did not even add the $10,000 as part of the consideration.

Upon close analysj-s, the Court concludes as a matter of l-aw that the District' s theory l-acks merj-t .

There are several- factors that expose the faultv nature of the

District's position.

One, the deficiency of what was still owed on the original mortgage is certainly not an amount of money that the taxpayer was requi-red to pay itself in order t.o obtain t.itl-e t.o the property. lf anyone ot.her t.han the taxpayer had been the successful- bidder, no other party would have been required to give debt in exchange for the deed, €.9.required t.o assuming responsibility for completing pa)rments on the note. In fact., in any foreclosure sale, if the sale does not generate enough revenue Lo satisfy a lien, the note-hol-der who took the deed of t.rust as security can stil1 pursue the original borrower for t.he balance that is owed.

The District of Columbia Court of Appeals long ago observed, L2 'rrt makes no difference that both a note and deed of trust are executed,' a creditor can have but one satisfaction, and after a foreclosure sare the proceeds must be applied to payment of the debt leaving the note actionable for the deficiency on]y.,, Finlev v. Friedman, supra, l_59 A.2d at 670. Two, the Recorder of Deeds had no lega1 authority Lo substitute his own opinion for that. of the sworn return of .he Trustee, ds to what constituted the actual consideration. To be sure, the code does prescribe that where a loan is secured by the property being purchased, the information about such debt must be reported in the Trustee's return following a sal_e. This precisely is the source from which the Recorder of Deeds learns what consideration was given for the Deed. yet, in the

instant case the Recorder presumed to re-write history. rt is the Trustee, not the Recorder of Deeds who certifies the elements of the transaction. This is the whole purpose of t.he Trustee's return. The Recorder is not empowered to re_write the contract yet, of sale. this is exactly the essence of what the District seeks to justify.

The Court pauses to nole that the Code provides that fair market value may be used to assess recordat.ion and t,ransfer taxes ',no in onry one situation, i.e. when price or amount is paid or required to be paid for the real property or for the transfer of an economic interest in real- property or where the price is nominal

. [emphasis supplied] " D.C. Code S 45 _924(a) (1981_). C1early, however, these are not the facts herein. There was a specific 13 purchase price of $1o,ooo.0o, which is manifestly not nominal-.

The District refuses t.o recognize a rather fundamental principle, i.e. that the party who determines what is ',required to paid" be is t.he sel-ler. The bidder who is abl_e to buy a property in a foreclosure sale need only submit the highest. bid and nothing more.

Even the Trustee cannot "require" more consideratj-on Lhan what

is proposed in the winning bid. Manifestly, then, the Recorder cannot do so-

fnsofar as the holder of the notes herein was the 'sel1er,rl

the law would not require this party to pretend that it received

ful-I payment of the notes simply because it purchased the property.

Af t.er all, a l-ender in f oreclosure typically does not want the property- The lender realistically wants the sum of money t.hat. is owed. Purchasing the property at auction only resulLs in a third possibility, i.e. that the lender one day might resell the property if a suit for money is unsuccessful_.

Three, obj ecti-veIy, the code itserf recognizes that consideration and debt secured. by a deed are different and should not be confused. The Code requires that the return must identify "the consideration for the deed or debt secured by the deed . .', D.C. Code S 45_923 (rg8r) [emphasis suppliedl. 'rdebt Obviously, consideration paid and secured. by the deedn are two different items that may be reported on Lhe Trustee,s return.

The code itself speaks of them as separate matters. rf the transaction itself does not explicitry call for the use of the I4 propert.y as security for a loan, then a previously out.standing loan bal-ance from some other sale is not part of the consideration paid for the deed in the present sal-e.

Finally, the Court will pause to consider the District's novel argument that. the rrmergier" of the estates of the lender and the foreclosure purchaser resulted in additional considerat.ion for the deed. The District. argues that the term "consideration" shoufd be interpreted to incl-ude the very same money that. the foreclosure fai]ed to produce. The District relies upon a unique theory that rrmerged,'r the "estates" of the mortgagor and mortgagee when the l-ender bought the property as a bidder.

The District contends that the "merger" signifies a form of consideration, ostensibly on the theory that extinguishment of the l-ien represenls t.he victory of having obtained t.he vafue of the unpaid mort.gage balance. The District builds t.his argument upon a

Maryland case that is distinguishable from the facts in the instant case. The District rel-ies upon Warfiel-d v. Christiansen, 93 A.2d

560 (Ma. 1953).2 This case warrants cl-ose scrutiny only because the District. perceives that. it is pivotal.

In Warfield, dfl individual extended a mortgage secured by a house. This individual- later died and left the note as an asset of his own estate. The income from this note was distributed to his widow. The persons who originally had purchased the house conveyed the properly to the widow, making her t.he owner of the house

'Although Maryland l-aw is not controlling, the of Maryland can be instructive where there is no District of Columbia case law on point. 15

iLself.

rmportant language is found in the deed for this transaction.

This deed contained the fol-lowing provision: "'This conveyance,

however, is made subject to a certain duly recorded mortg.age,

executed by Dorsey B. sloul and Gertrude stout, his wife. The

party of the second part, by the acceptance of this deed, does

hereby assu.ne the said mortgage and relieves the parties of the

first part. from the payment. thereof and all_ obligations

thereunder.'rr Id. at 561 lemphasis suppliedJ . When the widow

died, her daughter inherit.ed the house and l-ater sold it to someone el-se.

Eventually, despite a chain of subsequent resales of the

house, the decedent.'s estate of the widow stil-l- owned. the note as

a receivable. The fiduciary of the widow's estate attempted to

collect payments from the last. purchaser in the chain. This last purchaser resisted the obligation to assume payments on the not,e and did noL prevail in t.he court of Appeals of Maryland. The reason for this result is inst.ructive in the instant case, but does not support the District,s position.

The Maryland appellate court reasoned that because the conveyance to the widow explicitly recited that the conveyance was being made "subject to" t.he mortgage, the mortgage had not been extinguished in any way and was stil-l payable as a lien on the realty. rd. at 562 . The appellate court. recognized., ,,where a conveyance is made subject to a mortgage, the amount due on the mortgage is presumptively a part of the consideration for the T6

purchase." Id. This principle does no harm to the Pet.itioner

herein, because this taxpayer's bid did not contain any contractual

agreement to purchase the deed by giving any debt or assuming the

obligat.ions under the mortgage.

The principle that emerges from Warfiel-d does not help the

District of Columbia. If anything, it supports the Petj-tioner when

it is read in ful-l- context. The followincr further analvsis is

important.

fn Warfield, Lhe Court relied upon the concept. that the role

of t.he outstanding mortgage is subject to contractual- terms within

a deed. If the provisi-ons within the deed recite that the sal-e is

"subject to" the mortgage, t,hen the outstanding mortgage is clearly

"consideration" for the sal-e. However, if the contact. of sale or the deed does not contain this agreement, then the outstanding sum

due on the mort.gage would not be "consideration" for the safe. This analysis fits very precisely with the principle that when a

sale extinguishes a mortgage, Lhe disappointed lender may still

pursue other remedies against the default.ing borrower. In effect,

the District seeks to erect a special exception t.hat only applies

to the original lender as a foreclosure purchaser. There is no

basis in law for such an exception.

As the appellate court in Warfield noted, "the acquisition of

the equity of redemption in mortgaged property by the mortgagee

results in a merger of the two estales, vesting the mortgagee with

the complete and putting an end to his rights under the mortgiage. " Id. at 562 [emphasis supplied] . A reference t.o 1,7

"putting an end" to rights under the mortgag'e certainly does not mean that the lender in fact. has been fuIIy repaid the amount of the loan. This is the fiction that the District. now attempts to use in order to justify t.he assessment herein.

It is important not to infl,ate a deed of trust beyond what it really is. It is vehicl-e to a possible remedy -- but no more. It is a vehicle through which the l-ender acquires priority to force a sale that may or may not satisfy t.he exist.ing loan. This j-s a risk with any deed of trust.

The mere fact that the original l-ien has been extinguished by the foreclosure does not mean t.hat anyone actually paid the fu1l balance of the note as consideration for the deed. It also does not guarantee or signify that anyone "ultimateIy" will- ever pay to the original lender the fuII deficiency amor.rnt. Yet, this is the concepLual fallacy that underlies the Dist.rict's position in the instant case.

In conclusion, the concept of merger of estates as applied in

Warfield, is mis-used by the District.

The District's position, whether or not the District will acknowledge it, seems to be fueled by Lhe perplexing or annoying reality that this property was sold at a bargain price. The same theme pervaded the record in Askin. The Recorder of Deeds was simply struggling for a way to tax more than an apparent bargain price, but coul-d not lawfully do so. This case merely represents another version of the arbitrariness displayed in Askin.

The Court concfudes as a matter of 1aw that the assessment 18

herein was made totally afou] of applicable law and that the District owes this taxpayer the refund that. was demanded. rnsofar as the Recorder of Deeds imposed a so-call-ed ,rdef iciency assessmeflt," such assessment is unLawful. The deniar of the request. for refund was completely unjustified. rn the f inaL analysis, where t.he Code speaks of ,,actual,l consideration, that term means what it says. rt does not denote an amounL of money that i-s figurative or metaphysical. WHEREFORE,it is by the Court this __8o^A"V of Augusr, 2000 ORDEREDthat the Petitloner's Motion for Summary ,Judgment is hereby granted; and it is FURTHER ORDEREDthat the District. of Col-umbia, s Cross-Motion for Summary Judgment is hereby denied,. and it. is FURTHERORDERED that the District of Col-umbia shal] refund to the Petitioner the sum of $6,594.00 plus interest at the statutory rate until paid. such interest shatl accrue from the docketing date of the instant order.

C 19

Copies mail-ed to:

Richard G. Amato, Esq. Assistant Corporation Counsel 441- Fourth Street, N.W. Sixt.h Floor North Washington, D.C. 20001

Jeffrey W. Rubin, Esq. Schulman, Rogers, Gandal, Pordy & Ecker, P.A. 1,]-921 Rockville Pike Third Floor Rockville, Maryland 20852

Claudette Fluckus Tax Officer