FRONT FOOT BENEFIT ALERT! New Court Case Affects Collection Rights

Author: Michael A. Faerber Date: 02/25/2020

Categories: Real Estate Law

Businessman's hands with calculator at the office and Financial data analyzing countingFor those of you who either create, collect, buy or sell private front foot benefits for water and sewer installation reimbursements, a new Maryland court case affects the ability to collect delinquent charges from homeowners.  The Maryland Court of Special Appeals, in H.C. Utilities, LLC v. Song Y. Hwang, December Term, 2019,  No. CSA-REG-2423-2018, issued an opinion dated January 29, 2020, in which the Court ruled that front foot benefit declarations do not create a “contract” between the utility company that is enforcing and collecting the charges, and the homeowner whose lot or unit is subject to the Declaration, such that the utility company would have the right to bring an action in court seeking a personal judgment against the homeowner.  The court noted that the recording of the Declaration does create a “contract” for the purposes of being able to file a lien against the property of a delinquent owner under the Maryland Contract Lien Act, but without the homeowners having signed the Declaration to which they are being held responsible, personal liability does not apply.

The facts relevant to the case were that the initial homeowners of the applicable lot failed to pay the water and sewer charges, and also failed to pay their mortgage.  The lender holding the mortgage foreclosed on the property, and the Hwang family purchased the property from the foreclosure proceeding.  The utility company then filed a lawsuit against the Hwangs for the water and sewer charges that were unpaid by the initial owners.  A lower court ruled that the unpaid water and sewer charges were wiped out by the foreclosure.  The utility company appealed and the Hwangs filed a counter-appeal.  The Court of Special Appeals upheld the foreclosure decision and then, answering a question raised by the Hwangs, issued its ruling regarding the question of personal liability.

The court based its decision upon the statute of frauds which requires that a contract be signed in writing by the party to be charged in cases where (i) the contract cannot be completed within one year, and (ii) the contract concerns an interest in land. From the standpoint of those with interests in creating, collecting, buying or selling these charges, this decision presumably eliminates one of the available remedies for recovering unpaid charges.  

It is not clear if signed disclosures from initial purchasers obtained either at the time of contract signing and/or at settlement of the property, acknowledging the existence of the charges and the obligation to pay them, would satisfy the requirements of a contract in writing under the statute of frauds, but this could certainly be an argument.   Parties should review the wording of their disclosures and ensure that the disclosures are not only provided to the homeowner but signed by the homeowner.  This does not, however, address the issue of subsequent purchasers from the initial or later owners.  Parties may need to consider how they can make these subsequent owners contractually liable if this court decision remains the law of the land.  It is also unclear how this opinion affects other types of recorded documents that create future payment obligations, such as HOA and Condominium Declarations, shared driveway easements, shared maintenance agreements, etc.

The party who lost at the Court of Appeals is working on a reconsideration request based upon several different theories, and if he is unsuccessful with that request, is likely to appeal the decision to the Court of Appeals, the court of last resort in Maryland.  These procedures could take quite some time and, in the meantime, the H.C. Utilities case remains the current law in Maryland.  We will keep you updated on the progress of the case as we know more.

Please contact Michael Faerber at 301-251-1180 or if you would like to discuss further how this may affect your projects and transactions.