The Maryland Court of Appeals has held that a deed in lieu of foreclosure that is signed as a precondition to financing is a mortgage and a foreclosure sale must be conducted to allow the lien holder to take possession of the real property. This appeal which was pending at the Court of Special Appeals was granted review by the State's highest Court seemingly in order to stop once and for all an abuse of a landowner's right to redeem a default in a mortgage prior to losing ownership rights at a valid foreclosure.
In this case, Ministries approached Investors Financial seeking financing to buy a congregation building for its ministry. At the time of settlement, Ministries not only signed a deed of trust to Investors Financial granting them a lien in the building, but also signed a deed in lieu of foreclosure which stated that if Ministries missed two or more payments on the underlying mortgage, that a deed in lieu of foreclosure would be filed with land records and ownership of the building by Ministries would cease. Deeds in lieu are typically signed after a default occurs to avoid the foreclosure sale process. In this case, however, a deed in lieu of foreclosure was signed before any default ever existed. The Maryland Court of Appeals took light of this distinction and determined that the filing of the deed in lieu did not transfer ownership of the property and that a valid foreclosure sale had to be instituted to extinguish Ministries' ownership rights because, since no default existed at the time of the signing of the deed in lieu, then it was determined to be a mortgage requiring foreclosure under Maryland and Virginia Law. I say Virginia Law because interestingly enough that's where the building in question is located!
The Maryland Court of Appeals determined that it still retained jurisdiction of this matter as the Defendant, a Maryland limited liability company, maintained its principal place of business in the State of Maryland. As such, this company has availed itself to the jurisdiction of the Maryland Courts.
By this decision, the Maryland Court of Appeals has preserved and protected the right of real property owners to redeem property from default and disallow this type of deceptive practice apparently prevalent during the mortgage boom. Score one for the good guys.