Facts
- A Maryland lender made a loan of about $93,000 to a religious organization to purchase real property in Martinsville, Virginia.
- As loan security, the borrower executed (1) a deed of trust on the Virginia property and (2) a “deed in lieu of foreclosure” at the loan closing as a condition of receiving the loan.
- The deed in lieu was designed to permit the lender, upon default, to obtain title by recording the deed, without conducting a foreclosure.
- The borrower later defaulted, and the lender recorded the pre-executed deed in lieu to take title without initiating foreclosure proceedings.
- The borrower sued in Maryland circuit court seeking damages and declaratory relief, challenging the validity and enforceability of the deed in lieu and asserting the lender was required to foreclose.
Issues
- Whether a deed in lieu of foreclosure executed at loan origination as a precondition to making the loan, to be recorded upon future default, is valid and enforceable under Maryland law.
- Whether such an instrument impermissibly “clogs” the borrower’s equity of redemption by allowing the lender to obtain title upon default without foreclosure.
- Whether execution under seal or recited consideration affects enforceability when the instrument operates to cut off redemption rights outside the foreclosure process.
Decision
- The Court of Appeals of Maryland vacated the circuit court’s judgment for the lender and remanded.
- The court held the pre-executed deed in lieu, required at origination and intended to transfer title on default without foreclosure, was invalid and unenforceable under Maryland law.
- The lender could not rely on recording that deed after default to obtain marketable title while bypassing foreclosure.
Legal Principles
- A mortgagor retains an equity of redemption—the right to redeem the property until foreclosure is completed.
- Agreements made at the inception of the mortgage relationship that waive, surrender, or materially restrict the equity of redemption are void as against public policy.
- A deed in lieu may be valid when voluntarily negotiated after default as part of a workout; it is not valid when required at closing as a prospective forfeiture device triggered by default.
- Formal contract attributes (including execution under seal or recitals of consideration) do not render enforceable an arrangement that violates the anti-clog doctrine and the borrower-protective structure of foreclosure law.
Conclusion
Maryland law does not permit a lender to require, at loan origination, a deed in lieu that can be recorded upon default to transfer title without foreclosure; such a device unlawfully blocks the borrower’s equity of redemption and is unenforceable.