FRANK v. STORER

RODOWSKY, Judge.

In Standard Finance Co. v. Little, 159 Md. 621, 152 A. 264 (1930), this Court held that a mortgage which had been copied into the land records but which had not been indexed in the general index was a recorded instrument under the Maryland recordation statutes. This case presents the same problem. Because there has been no substantial change in the recordation statutes following Standard, we shall hold that the unindexed instrument involved in this case is recorded and shall determine the priorities of the parties accordingly.

The contest here is between trustees for the holders of a note secured by a deed of trust upon, and the debtor's grantee of, property which was substituted as security under the deed of trust by an unindexed modification agreement. In July 1980 Hy Wayne and Marie Wayne (the Waynes) became the holders of a promissory note in the original principal amount of $42,500 made by Lawrence E. Storer and Dottie L. Storer (the Storers) which was secured by a deed of trust to the petitioners, Morton Frank and Edith C. Rollins, trustees. The deed of trust conveyed two lots in Montgomery County and a third lot located in a subdivision known as Fletcher's Addition to Takoma Park in Prince George's County. On December 30, 1980, the Storers, the trustees, and the Waynes entered into an agreement (the Modification Agreement) modifying the deed of trust and agreeing "to allow the security interest in" one of the Montgomery County lots "to be transferred to certain property in Prince George's County, Maryland, known as" the Waterford Lot. The Modification Agreement was copied into the land records of Prince George's County on January 28, 1981, but was not indexed, as hereinafter explained.

The Storers conveyed the Waterford Lot to the respondent, Robert G. Glenn (Glenn), on August 18, 1981. A statement of facts stipulated to by petitioners and respondent recites that "[t]he existence of the Modification Agreement, and the Waynes' lien of record, allegedly [were] not discovered at the time of this transfer."

The trustees docketed foreclosure proceedings against the Waterford Lot on February 4, 1985, in the Circuit Court for Prince George's County. Glenn moved to dismiss the proceedings on the theory that the deed of trust did not cover the Waterford Lot because the Modification Agreement was not validly recorded. He assigned three reasons. First, the Modification Agreement had been "determined to be deficient by the Clerk of the Court," had been returned, and "was not indexed amongst the land records." Second, it had not been certified in accordance with Md.Code (1974, 1981 Repl.Vol., 1986 Cum.Supp.), § 3-104(f)(1) of the Real Property Article (RP) which in relevant part reads:

Third, Glenn urged lack of compliance with RP § 3-104(f)(2) which reads:

At the hearing on the motion Glenn called as a witness the Assistant Chief Deputy of the Land Records Division of the Office of the Clerk of the Circuit Court for Prince George's County. The witness brought with her a copy of the Modification Agreement made from the land records. That copy was introduced in evidence. It appears that the method of copying documents into the Prince George's County land records is by microfilming them and the exhibit was a print from that film. The copy reflects that, before photographing, each of the three pages of the Modification Agreement was stamped at the top with a liber number, 5366, and a folio number, respectively 172 through 174. The first page was also stamped to indicate the time of receipt to be 1:30 p.m. on January 28, 1981. To the left of the center of the first page on the print is a black area, two and one-half inches square, which the witness identified as the film impression of a "red tag" which had been placed on the original. A red tag reads:

The witness said that the original of the Modification Agreement, when submitted for recording, would have been handled by a "release clerk." She explained that the original was red tagged because it did not contain a recording reference to the original deed of trust. The Modification Agreement, at the very end of the document, also contained the following

Please mail to:

The witness concluded that the original Modification Agreement, with the red tag, would have been returned to the above firm.

The balance of the hearing on the motion consisted of argument of counsel. The role of Bell, Cornelius & Shore in the transaction leading to the Modification Agreement was not developed by direct evidence or express stipulation. Counsel for the trustees stood foursquare on the holding in Standard, supra.

The circuit court granted the motion and dismissed the foreclosure proceeding. In a written opinion the court stated "that all parties agree and the court finds as a matter of fact that the original `Modification Agreement,' although recorded in the Land Records and given a liber and folio number, was not indexed and was `red tagged' and returned to the grantee." (Footnote omitted). The court further stated that "[i]t is undisputed that the grantee [i.e., the trustees] in this case was on notice that reference to the `modification agreement' was not being placed in the index to the Land Records." The court then held:

On appeal by the trustees, the Court of Special Appeals affirmed, essentially for the reasons given by the circuit court. Frank v. Storer, 66 Md.App. 459, 504 A.2d 1163 (1986). The intermediate appellate court distilled the rule of law which it was applying as follows:

In view of this holding the Court of Special Appeals did not opine on the effect of the omissions from the Modification Agreement of a certification by the preparing attorney and of a reference to the election district in which the Waterford Lot is located.

We granted the trustees' petition for certiorari. It questions (I) the basis of decision below; (II) the alternative grounds under § 3-104(f)(1) and (2) advanced by respondent below; and (III) the propriety of moving to dismiss a foreclosure. Respondent did not file any conditional cross-petition and does not argue that the reason given in the red tag for not indexing the Modification Agreement supports the judgments below.1

I

Our analysis begins with the statutes. "Registration systems are purely of statutory origin, and the convenience or inconvenience of searching the records as well as the authority and effect of the registry acts are subjects of the legislative will." Plaza Corp. v. Alban Tractor Co., 219 Md. 570, 582, 151 A.2d 170, 176 (1958). The applicable statutes are codified in the Real Property Article wherein the term "deed" is defined to include "any deed, grant, mortgage, deed of trust, lease, assignment, and release, pertaining to land or property or any interest therein or appurtenant thereto." RP § 1-101(c). Title 3 of that article addresses "Recordation." Within title 3, subtitle 1 presents, "General Rules and Exceptions," subtitle 2, "Priorities Based on Recording," and subtitle 3, provisions relating to "Record Books and Indexes." Title 4 of the Real Property Article deals with the "Requisities of Valid Instruments."

In the instant matter the ultimate issue is whether Glenn's title to the Waterford Lot is subject to the deed of trust. The controlling provision is RP § 3-203 which provides:

The Modification Agreement is either a "deed or other instrument" within the meaning of § 3-203.3 Thus the question is whether the Modification Agreement was "recorded."

The verb, "to record," and variations thereof are not specifically defined in the Real Property Article. RP § 3-301(a) in part states that

RP § 3-302(a) in part provides that "[t]he clerk of the circuit court of each county shall make and maintain a full and complete general alphabetical index of every deed, and other instrument in a well-bound book in his office." The predecessors of these statutes were the basis of decision in Standard.

Standard was an action against a court clerk for money damages brought by the party which had caused a mortgage to be delivered to the clerk for recording. Judgment was entered in favor of the clerk on demurrer. The lender's declaration alleged that the mortgage had been copied into the land records but that it had not been indexed in the general alphabetical index. The declaration further alleged that the realty encumbered by the mortgage had been conveyed by the mortgagor to a subsequent vendee who had no actual notice of the mortgage with the result that the mortgagee was deprived of its security by the omission of the clerk. We held that "the lien would be secured and continue unaffected by the omission from the index, and that the declaration does not therefore show the possibility of loss assumed." 159 Md. at 622, 152 A. at 265.

This Court contrasted the provisions of Md.Code (1924), Art. 21, §§ 1, 13, 15, and 32, dealing with the execution, acknowledgment, and recordation of deeds and mortgages, with Art. 17, §§ 59, 61, and 62, dealing with alphabetical indexes. The Court, speaking through Chief Judge Bond, concluded that "[t]hroughout these articles in the Code, the recording of an instrument, which effectuates the passing of title, is referred to as a mere transcription before the indexes are made; and it seems to the court that the indexing has not been conceived of as part of that recording." Summarizing the very arguments relied upon by the respondent, and adopted by the courts below, this Court concluded the opinion in Standard by saying:

Standard clearly placed on the subsequent purchaser the risk of the initial loss resulting from a clerk's failure to index. Standard also called upon the General Assembly to shift that risk of initial loss to the party presenting the instrument for record if the General Assembly disagreed with the initial allocation as determined by this Court's interpretation. The statutes dealing with recording and indexing have been amended many times following Standard, including the general recodification effected as of January 1, 1973, by Ch. 349 of the Acts of 1972, but the General Assembly has not reallocated the risk.4 This legislative acquiescence in the interpretation which Standard placed on the recording and indexing statutes should not be judicially altered. See Williams v. State, 292 Md. 201, 438 A.2d 1301 (1981); Harbor Island Marina v. Calvert County, 286 Md. 303, 407 A.2d 738 (1979). Moreover, stability of the law, with consequential predictability of result, is particularly desirable in the field of real property law. Knowing where the risk of initial loss lies enables parties to be governed accordingly in their transactions. A party may either knowingly accept the risk, commercially insure against it, or bargain a reallocation or express indemnification.

The trial and intermediate appellate courts viewed the instant matter as factually distinguishable from Standard and thereby subject to a different rule of law. In this connection we shall assume that Bell, Cornelius & Shore were agents of the trustees and of the Waynes and that knowledge of the red tagging by those agents is attributable to the principals. Nevertheless, we do not agree with the Court of Special Appeals that Standard's holding is limited to situations in which the party presenting the instrument for record had no notice, prior to the subsequent conveyance, of the clerk's failure to index. The declaration demurred to in Standard does not reflect when or how the lender learned of the failure to index. More important, Standard held that an unindexed instrument is a recorded instrument. The Modification Agreement in this case does not cease to be a recorded instrument, and does not cease to enjoy the priority conferred on an earlier recorded instrument by RP § 3-203, solely because the grantee had actual notice that it was not indexed.5

II

The trustees' certiorari petition raises the other issues which respondent had raised in the Court of Special Appeals but which that court did not reach. Specifically the petitioners submit that the Modification Agreement is effective as a recorded instrument without a certification of preparation by a Maryland attorney and without a reference to the election district in which the property is located as called for by RP § 3-104(f)(1) and (2). Sub-subsection (1) declares that "[n]o ... deed of trust may be recorded ... unless it bears [the certification]," and sub-subsection (2) declares that "[e]very deed ... shall contain [the] reference[.]" We shall assume that the Modification Agreement falls within the ambit of both of those provisions. But neither provision specifies the result of its violation. Nor does either provision address the efficacy of the recording if, despite the absence of the certification or reference, the clerk nevertheless records the instrument.

Glenn draws an analogy to the recordation of an unacknowledged agreement which is by law required to be acknowledged. He cites Clarke v. Brunk, 189 Md. 353, 55 A.2d 919 (1947) and Cockey v. Milne's Lessee, 16 Md. 200 (1860) for the proposition that no constructive notice is given by copying into the land records an unacknowledged instrument which is required to be acknowledged. While the analogy is helpful, we draw the opposite conclusion from it.

The rule applied in cases like those cited by Glenn caused the General Assembly annually, prior to 1973, to pass curative acts to protect parties from certain formal deficiencies in recorded instruments. See Comment to Subtitle 1 of Title 4 of former Art. 21 by the Code Revision Committee of the Section of Real Property, Planning and Zoning Law of the Maryland State Bar Association, 2A Md.Code (1957, 1973 Repl.Vol.), at 225-26. The general revision of the laws relating to real property effected by Ch. 349 of the Acts of 1972 to which those comments were addressed included for the first time a curative provision which operated prospectively. It is now RP § 4-109. It provides:

Section 4-109 reflects a public policy which is contrary to the position advanced by Glenn. The defects enumerated in § 4-109 do not affect the validity of the recorded instrument unless the instrument is attacked within a limited time. We recognize that the deficiencies which are automatically cured by § 4-109 do not include the failure to abide by the prerequisites to recording set out in § 3-104(f)(1) and (2) although both of the latter provisions antedated the 1973 adoption of the prospective curative provision.6 Nevertheless we do not believe that the General Assembly intended a failure to comply with § 3-104(f)(1) and/or (2) to have consequences which were more serious than the consequences of omitting one of the formal requisites enumerated in § 4-109. Rather, sub-subsections (1) and (2) of § 3-104(f), reflecting the General Assembly's objectives that the certification and reference be included, authorize the clerk to refuse to accept for record an instrument governed by those provisions which does not comply with them. Where, as here, however, the clerk does not enforce the provision but accepts the instrument for record, the validity of the instrument is unaffected and its recordation operates as constructive notice.

III

The petitioners also assert that the trial and intermediate appellate courts erred in allowing Glenn to raise his contentions by means of a motion to dismiss petitioners' order to docket the foreclosure. The petitioners reason that allowing Glenn to attack the foreclosure by a motion to dismiss circumvented the rules governing injunctions to stay foreclosures, particularly Maryland Rule W76.b.

The analysis by the Court of Special Appeals was that the Modification Agreement, due to lack of indexing, failed to subject the Waterford Lot to the lien of the deed of trust and to the power of sale on default vested in the trustees. We have seen in Part I that the unindexed Modification Agreement was, nevertheless, a recorded instrument and it does not, on that score, fail to make the Waterford Lot subject to the power of sale. Inasmuch as the intermediate appellate court's reason for approving use of a motion to dismiss was not well founded, it is not necessary to decide the scope of appropriate use, if any, of a motion to dismiss in a foreclosure proceeding.7

We do observe, however, that the point sought to be made by Glenn and accepted by the trial and intermediate appellate courts carries strong overtones that the petitioners should be estopped from relying on the recorded Modification Agreement. Only abbreviated testimony was taken at the hearing on the motion to dismiss in this case and that was directed to the legal issue of recordation vel non. Glenn is not precluded on remand from introducing additional evidence in an appropriate procedure directed toward demonstrating an estoppel or other ground for relief against the foreclosure.

JUDGMENT OF THE COURT OF SPECIAL APPEALS REVERSED. CASE REMANDED TO THAT COURT WITH DIRECTIONS TO REVERSE THE JUDGMENT OF THE CIRCUIT COURT FOR PRINCE GEORGE'S COUNTY AND TO REMAND THIS CASE TO THE CIRCUIT COURT FOR PRINCE GEORGE'S COUNTY FOR FURTHER PROCEEDINGS CONSISTENT WITH THIS OPINION. COSTS TO BE PAID BY THE RESPONDENT, ROBERT G. GLENN.