Who has to pay Maryland's recordation tax on an indemnity mortgage when a guarantor's loan default triggers it?

Plain-English summary

In 1989, the Clerk of the Circuit Court for St. Mary's County asked the Attorney General to sort out how Maryland's recordation tax applies to indemnity mortgages, an arrangement where a lender will only make a loan if a third party (a guarantor) promises to repay it and pledges real property to secure that promise. Because the guarantor's obligation to pay is contingent on the borrower defaulting, it was unclear when, and by whom, the recordation tax on that pledge was actually owed. The opinion answered four linked questions. First, the guarantor, not the borrower, is responsible for paying the recordation tax, and that responsibility arises when the borrower's default actually happens and the guarantor's liability becomes real, not when the mortgage is first recorded. Second, if that tax later goes unpaid, the lien securing the lender's loan is still valid; nonpayment of the tax does not undo the pledge of the property. Third, the State does not get priority over the lender's claim to the foreclosure sale proceeds just because recordation tax is owed and unpaid. Fourth, if the borrower later cures the default and the foreclosure case is dismissed, the recordation tax that already became due when the default occurred is still owed; curing the underlying loan default does not undo the earlier tax obligation.

Currency note

This opinion was issued in 1989. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

In 1989, who was responsible for paying Maryland's recordation tax on an indemnity mortgage?
The guarantor, according to this opinion, once the borrower's default (or whatever contingency the guarantee depended on) actually occurred and the guarantor's liability became real, not the borrower and not at the time the mortgage was first recorded.

Did failing to pay the recordation tax undo the lender's mortgage lien?
No. The opinion concluded, drawing on Genn v. CIT Corp. and an earlier 1973 AG opinion, that absent specific legislation making a lien valid only to the extent tax was paid, an unpaid recordation tax did not invalidate or limit the lender's lien on the pledged property.

If recordation tax went unpaid, did the State get first claim on foreclosure sale proceeds ahead of the lender?
No. Applying Farmers and Merchants Bank v. Schlossberg, the opinion concluded that a tax claim gets priority over an existing lien only when a statute clearly says so, and no Maryland statute gave the State's recordation tax claim that kind of priority over an indemnity mortgage lender's claim.

If the borrower cured the default and the foreclosure case was dropped, was the recordation tax still owed?
Yes. The opinion concluded that once the contingency triggering the guarantor's liability occurred, the debt was incurred and the tax became due; a later cure of the default or dismissal of the foreclosure action did not erase that already-triggered tax obligation.

Background and statutory framework

An indemnity mortgage lets a lender make a loan on the condition that a third party guarantees repayment and pledges real property to secure that guarantee. Recordation tax under Tax-Property Article ("TP") §12-102(1) applies to instruments recorded with a circuit court clerk, including a "mortgage, deed of trust, or other contract that creates an encumbrance on real property" under TP §12-101(c)(2)(ii), and ordinarily must be paid when the instrument is recorded, at a rate set by each local jurisdiction under TP §12-103(b). But TP §12-105(f)(1) provides that if the full amount of secured debt has not yet been incurred when the instrument is recorded, the tax applies only to the principal actually incurred at that time.

The opinion reaffirmed a 1973 AG opinion, 58 Opinions of the Attorney General 792, which had addressed the predecessor to §12-105(f)(1) and concluded that a guarantor's liability under an indemnity mortgage is contingent on the borrower's default, so the guarantor has not "incurred" a taxable debt merely by signing the mortgage; recordation without paying the tax was proper if the clerk confirmed the guarantor was not primarily liable like a co-maker. Building on that, the opinion applied TP §12-105(f)(2), which requires a sworn statement of the debt amount within seven days after the debt is incurred, with the recordation tax then "paid on the debt by the debtor," and concluded the guarantor, as the party who "incurs" the debt once the borrower defaults, bears responsibility for paying it at that point, not when the mortgage was originally recorded.

On the lien-validity question, the opinion looked to the 1973 opinion's own suggestion that the legislature could make a lien valid only pro tanto to the recordation tax actually paid, noting the General Assembly had never enacted such a limit (a 1983 bill, Senate Bill 405, to require prepayment of the tax before further secured debt was incurred, was introduced but not passed). It found support in Genn v. CIT Corp., where the Court of Special Appeals held that an inaccurate financing-statement amount and unpaid recordation tax did not limit a security interest to the amount actually taxed, reasoning a financing statement was merely a notice instrument. The opinion concluded the same rationale extended to indemnity mortgages: absent legislation, an unpaid recordation tax does not invalidate or cap the lender's lien.

On priority in foreclosure, the opinion addressed a live dispute where the State had sought to intervene in a foreclosure action to claim priority for unpaid recordation tax from the sale proceeds, a claim that had chilled lenders' and title insurers' willingness to use indemnity mortgages while it remained unresolved. Applying Farmers and Merchants Bank v. Schlossberg's rule that a tax claim outranks an existing lien "only when the applicable statute clearly so provides," and noting no statute gave the State's recordation tax an express lien or sale-proceeds priority (though the opinion acknowledged an equitable lien theory might exist, citing Griffith v. Dale and State v. Balto. & Susa. Steam Co.), the opinion concluded that even if the State had an equitable lien, it would arise only when the guarantor's liability became fixed, later in time than the lender's own mortgage lien, so the State's claim could not outrank the lender's. The opinion noted the State could still separately sue the guarantor for the unpaid tax under TP §§14-864 through 14-869, or pursue criminal charges under TP §14-1011.

Finally, on the effect of a cured default, the opinion applied TP §12-105(f)(3), which excuses tax only where a new advance's sole purpose is repaying an earlier advance, a narrow exception the opinion found inapplicable here. It also cited two earlier opinions on related refund questions, 43 Opinions of the Attorney General 353 (1958), allowing a refund of prepaid tax if the underlying debt was never incurred, and 61 Opinions of the Attorney General 817 (1976), denying a refund once a debt was in fact incurred regardless of how the funds were later used. Because a guarantor's debt was already incurred once the borrower's default occurred, the opinion concluded that a later cure of that default or dismissal of the foreclosure case could not retroactively erase the recordation tax obligation already triggered.

Citations and references

Statutes:

• Tax-Property Article §12-102(1), imposing recordation tax on instruments recorded with a circuit court clerk
• Tax-Property Article §12-101(c)(2)(ii), defining a taxable "instrument of writing" to include a mortgage or deed of trust
• Tax-Property Article §12-105(f)(1), limiting recordation tax to the principal debt actually incurred at recording when the full debt is not yet incurred
• Tax-Property Article §12-103(b), letting each local jurisdiction set its own recordation tax rate
• Tax-Property Article §12-105(f)(2), requiring a sworn debt statement within seven days of the debt being incurred, with tax paid by the debtor
• Tax-Property Article §12-105(f)(3), the narrow exception excusing tax on a new advance used solely to repay an earlier advance
• Tax-Property Article §§14-864 through 14-869, authorizing a separate State action against a guarantor to collect unpaid recordation tax
• Tax-Property Article §14-1011, authorizing criminal charges for unpaid recordation tax
• former Article 81, §277(k), the recordation tax statute's predecessor, which a failed 1983 bill (Senate Bill 405) would have amended to require prepayment before further secured debt was incurred

Cases:

• Genn v. CIT Corp., 40 Md. App. 516, 522, 392 A.2d 1135 (1978), holding an inaccurate financing statement and unpaid recordation tax did not limit a security interest to the taxed amount, since a financing statement is merely a notice instrument
• Farmers and Merchants Bank v. Schlossberg, 306 Md. 48, 507 A.2d 172 (1986), holding a tax claim outranks an existing lien only when a statute clearly so provides
• Griffith v. Dale, 109 Md. 697, 72 A. 471 (1909), and State v. Balto. & Susa. Steam Co., 13 Md. 181 (1859), cited on the possibility of an equitable lien for unpaid taxes in the absence of an express statutory lien

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1989/Volume74_1989.pdf (this opinion appears at printed pages 281-287 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

Taxation - Recordation Tax - Indemnity Mortgages And Deeds Of
Trust - Responsibility For Payment Of Tax - Effect Of Failure To
Pay Tax

                            July 28, 1989

The Honorable Mary R. Bell
Clerk of the Circuit Court
for St. Mary's County

 You have requested our opinion concerning the process by which

recordation tax is to be collected for indemnity mortgages and deeds of
trust.1 Specifically, your inquiry raises the following questions:

1. Who has responsibility for payment of recordation tax on an

indemnity mortgage that is being foreclosed?

 2. What effect, if any, does the unpaid tax have on the status of

the lien created by the indemnity mortgage?

3. Is the unpaid recordation tax a priority item payable out of the

foreclosure sale?

4. If the borrower cures the default that led to the institution of

the foreclosure action, and the action is dismissed, is the recordation
tax still due?

For the reasons stated below, we conclude as follows:

1. The guarantor/mortgagor is responsible for payment of the

recordation tax due on the indemnity mortgage.

 2. The lien created by the mortgage is not invalidated by reason

of the non-payment of the recordation tax.

3. The State's claim for unpaid recordation tax does not take

precedence over payment of the debt due the secured party.

 1 In this opinion, we shall use the term "indemnity mortgage" to refer to both

kinds of instruments.

4. A curing of the default by the borrower does not relieve the

guarantor of the obligation to pay the recordation tax that had become
due.

                                        I

                       Applicability of Recordation
                       Tax To Indemnity Mortgage

An indemnity mortgage works this way: A lender agrees to loan

money to a borrower, but on two conditions, that a third party
guarantee repayment of the loan, and that the guarantor execute a
mortgage on real property to secure the guarantee. An indemnity
mortgage is the instrument embodying the pledge of the property. An
indemnity mortgage is recorded so as to establish a lien on the
property.

Under §12-102(1) of the Tax-Property Article ("TP" Article),

"recordation tax is imposed on an instrument of writing ... recorded
with the clerk of the circuit court for a county." An "instrument of
writing" includes "a mortgage, deed of trust, or other contract that
creates an encumberance on real property." TP §12-101(c)(2)(ii).

 Ordinarily, the recordation tax must be paid at the time that the

instrument is submitted to the clerk to be recorded.2 Under TP §12-
105(f)(1), however, "if the total amount of secured debt has not been
incurred at the time of recording or filing the instrument of writing, the
recordation tax applies only to the principal amount of the debt
incurred at that time."

In 58 Opinions of the Attorney General 792 (1973), the Attorney

General considered the applicability of the predecessor to TP §12-
105(f)(1) to an indemnity mortgage. "The pertinent inquiry," the
Attorney General stated, "is when can a guarantor, for purposes of the
tax in question, properly be said to have 'incurred' a 'debt'?" 58
Opinions of the Attorney General at 794. The Attorney General
pointed out that the guarantor's liability is contingent on the occurrence
of other events, most importantly, the default by the borrower. 58

 2 The tax rate is set by each local jurisdiction. TP §12-103(b).

Opinions of the Attorney General at 795-96. The Attorney General
thus concluded that the guarantor under an indemnity mortgage will not
have incurred a taxable debt at the time of recordation. "Accordingly,"
the Attorney General advised a clerk of the circuit court, "we believe
that when a mortgage securing a guarantee is presented to you for
recordation, and you are satisfied by an examination of the note and
guarantee, by a certification, or otherwise, that the guarantor is not a
party primarily liable, e.g., as a co-maker of the note, ... the mortgage
may be recorded without payment of the tax." 58 Opinions of the
Attorney General at 797.3 We reaffirm this conclusion.

                                      II

             Responsibility for Payment Upon Default

 No prior opinion addresses the issue of payment of the recordation

tax when the event occurs upon which the guarantor's liability is
contingent. However, TP §12-105(f)(2) provides that within seven
days after the debt is incurred, "a statement under oath of the amount
of ... debt shall be filed with the clerk of the circuit court ..., and the
recordation tax shall be paid on the ... debt by the debtor." The
responsibility for paying the recordation tax on an indemnity mortgage
is imposed on the guarantor; the guarantor is the person who has
"incurred" the debt that is secured by the indemnity mortgage.

                                     III

           Effect on Nonpayment on the Lender's Lien

The answer to the second question, regarding the effect of non-

payment of the tax when due on the lien created by the mortgage, is
suggested by the 1973 opinion discussed above and caselaw. In 58

 3 In an earlier opinion, this office concluded that a mortgage given by two

individuals to secure a corporate debt was subject to recordation tax where the
mortgage stated that it had "the same force and effect as if the Mortgagors were
primarily indebted to the Mortgagee." 49 Opinions of the Attorney General 503
(1964). In that case, the mortgagors' liability was not contingent upon the occurrence
of a future event. In a later opinion, 60 Opinions of the Attorney General 722 (1975),
this office concluded that a mortgage was taxable upon recording where the
mortgagors included the parties primarily liable on the debt.

Opinions of the Attorney General at 797, the Attorney General
commented that "the Legislature may wish to make a lien or
conveyance valid only pro tanto to the required tax which has been
paid." This comment clearly implies that unless the General Assembly
provides otherwise, the lien is valid for the amount stated even if the
applicable recordation tax is not paid. The General Assembly has
never enacted a provision similar to the one suggested in the 1973
opinion.4

In 1977, the Court of Special Appeals addressed the issue of

whether the lien created by a financing statement was limited to the
amount of debt stated in the financing statement upon which
recordation tax was paid. In Genn v. CIT Corp., 40 Md. App. 516,
522, 392 A.2d 1135 (1978), the Court held as follows:

         The appellant claims that the inaccurate statement of the
      principal amount secured and the failure to pay the
      appropriate recordation tax should render the appellee's
      security interest unperfected as to any amount greater than
      the amount stated on the face of the financing statement.
      We disagree. Even though the failure to pay the
      appropriate recordation tax may constitute a violation of
      [the statute] and subject the recording party to a penalty,
      it does not necessarily follow that the amount of the
      secured debt is limited to that amount stated on the
      financing statement or on which the recordation tax was
      paid.

The Court of Special Appeals based its holding, in large part, on the
fact that a financing statement is simply "an instrument of notice" and
not "an instrument of legal effect equivalent to a security agreement."

Although an indemnity mortgage is not just a notice instrument like

a financing statement, the rationale of the Genn v. CIT holding appears
to apply. It is also consistent with the position implied in 58 Opinions
of the Attorney General 792 that the lien of the mortgage, absent
legislation, is not limited to the amount on which tax is paid and,

 4 In 1983 a bill, Senate Bill 405, was introduced to amend former Article 81,

§277(k) to provide for payment of recordation tax by the debtor before any additional
secured debt is incurred. This bill was not enacted.

therefore, would not be invalidated by the failure to pay the recordation
tax when due.

                                    IV

                        Priority in Foreclosure

In a recent case, a borrower defaulted on a guaranteed loan. The

lender then filed a foreclosure action against the guarantor's property,
which had been pledged under an indemnity mortgage to secure the
loan.5 The State sought to intervene in the foreclosure action,
asserting an equitable lien entitling it to priority for the unpaid
recordation tax out of the proceeds of the foreclosure sale.6

 In that context, of course, the State was an advocate, urging a

litigation theory in support of its efforts to obtain collection of the
unpaid tax. The State hoped to obtain a judicial determination of the
validity of its position.

The State's motion has not been heard, and very likely never will

be. Hence, the State's theory will not quickly be adjudicated. We are
advised that this situation, a litigation position by the State asserting
a priority claim to a portion of the proceeds of a foreclosure sale, but
no prospect of an early judicial determination as to the State's position,
has adversely affected the willingness of lenders and title insurers to
enter into indemnity mortgages. This portion of our opinion is
intended to resolve the uncertainty by stating our opinion that, whether

 5 A temporary accommodation between the lender and borrower stopped the

foreclosure action. A settlement of the matter is highly likely.
6 No statute expressly provides that unpaid recordation tax due under TP §12-
105(f) is a lien on the property or a charge against the proceeds from sale of the
property with respect to which the tax is due. Nevertheless, a reasonable argument
can be made that principles of equity entitle the State to such a lien. See, e.g.,
Griffith v. Dale, 109 Md. 697, 72 A. 471 (1909); State v. Balto. & Susa. Steam Co.,
13 Md. 181 (1859).
The State undoubtedly may file a separate action against the guarantor to collect
the unpaid tax. See TP §§14-864 through 14-869. In some instances, however, the
foreclosed property might be the guarantor's only asset.
In addition, the State may pursue criminal charges against the guarantor. TP §14-
1011.

or not the State has an equitable lien arising from the unpaid tax, the
State is not entitled to priority in the foreclosure action.

 In Farmers and Merchants Bank v. Schlossberg, 306 Md. 48, 507

A.2d 172 (1986), the Court of Appeals held that "a tax claim will be
accorded priority over an antecedent lien, including a perfected security
interest, only when the applicable statute clearly so provides." 306
Md. at 67. Otherwise, a statutory lien in favor of the State for unpaid
taxes will take whatever position its timing gives it.

The lien created by an indemnity mortgage arises at the time of the

recording of the indemnity mortgage. If the State has an equitable lien
for unpaid recordation taxes, it would arise only later, when the
guarantor's liability is fixed. We think it most unlikely that a court
would accord more advantageous status to the State's equitable lien for
unpaid taxes than it would were there an express statutory lien. Hence,
under Schlossberg, the State's lien would not be senior to that of the
lender, because no statute gives the State's lien a priority.

                               V

                   Effect of Cure of Default

 The answer to the final question, whether cure of the default

excuses payment of the recordation tax, may be derived from the
pertinent statute, TP §12-105(f). The statute provides that once the
debt is incurred, the tax is due. The only recognized exception is set
forth in TP §12-105(f)(3), which provides that no tax is due on an
additional debt incurred if the sole purpose of the new advance is to
make payment on an earlier advance. This exception is not applicable
to the indemnity mortgage situation, where the guarantor incurs the
debt by reason of the borrower's default. A subsequent curing by the
borrower of the default, or payment of the debt by the borrower or
guarantor to avoid foreclosure on the property, does not negate the fact
that the debt was incurred by the guarantor and the recordation tax
became due.

 In 43 Opinions of the Attorney General 353 (1958), the Attorney

General concluded that if recordation tax is prepaid before the debt is
incurred and the debt is subsequently never incurred, the prepaid tax
is refundable. Similarly, in 61 Opinions of the Attorney General 817

(1976), the Attorney General stated that no refund is authorized where
the debt was, in fact, incurred, regardless of whether the money was
spent or subsequently returned unused to the lender.

 When the contingency occurs that gives rise to the guarantor's

liability on the debt secured by an indemnity mortgage, the debt has
been incurred. A subsequent renegotiation of the loan by the parties
and dismissal of any foreclosure proceeding commenced with respect
to the indemnity mortgage does not alter the fact that the debt was
incurred by the guarantor. The recordation tax remains due and
payable based on the principle amount of debt outstanding at the time
the borrower's default occurred, thereby triggering the guarantor's
direct liability.

                              VI

                         Conclusion

 In summary, it is our opinion that: The guarantor is liable for

payment of the recordation tax that becomes due on an indemnity
mortgage when the contingency, usually the borrower's default, occurs
that gives rise to the guarantor's liability. The tax remains due even
if the default is subsequently cured and any foreclosure action on the
indemnity mortgage is dismissed. The failure of the guarantor to pay
the recordation tax does not invalidate the secured party's lien under
the indemnity mortgage, however, nor does it give the State priority to
payment out of the proceeds of the foreclosure sale.

                                   J. Joseph Curran, Jr.
                                   Attorney General

                                   Jack Schwartz
                                   Chief Counsel
                                     Opinions and Advice