Requiring Borrower To Escrow Deed In Lieu Of Foreclosure As Precondition To Getting Mortgage Loan An Illegal Title Clogging, Says Maryland High Court

In a recent court ruling, the Maryland Court of Appeals, the state's highest court, concluded that:

• A deed in lieu of foreclosure executed as a precondition to originating a loan, before any default on the loan occurs, is not valid under Maryland law, because it clogs a borrower’s equity of redemption.(1)

In reaching this conclusion, the Maryland high court vacated an earlier decision from a Montgomery County Circuit Court judge who, despite the fact that this type of scam has been found to be illegal going back centuries, didn't seem to think there was anything wrong with this ripoff.

For the 28-page ruling (which may provide some insight to those attorneys using civil lawsuits to fight equity stripping, foreclosure rescue rackets), see C. Phillip Johnson Full Gospel Ministries, Inc. v. Investors Financial Services, LLC, No. 115, ___ Md. ___ (January 28, 2011).

(1) The court, in footnote 8 of the ruling, provides a handy description and background on the anti-clogging/clogging of the equities doctrine, which begins as follows (bold text is my emphasis, not in the original text):

• The term “clogging” is widely used to describe various schemes to strip a mortgagor’s right to redeem her equity in the event of a foreclosure. The doctrine against “clogging” the so-called equity of redemption arose in the English Courts of Chancery, as an attempt to ameliorate the harsh result that obtained in the law courts in medieval England, before the concept of a mortgage had evolved. Before the adoption of the “anti-clogging” doctrine, a landowner wishing to borrow while pledging his land as security would deed the land outright to his creditor, in exchange for a stated sum of money, subject to the condition that if the landowner (borrower) repaid the creditor on a future specified day (called “law day”), title would revert to the borrower. If for any reason (even if he could not find the creditor) the borrower failed to pay on “law day,” he forfeited his title, regardless of whether the debt owed bore any reasonable relation to the value of the land.

(Editor's Note: While this case did not involve a sale leaseback, equity stripping foreclosure rescue ripoff, attorneys using civil lawsuits to fight these rackets on behalf of victimized homeowners may be well-advised to at least consider asserting a claim that this type of scam is void in that it is nothing more than a prohibited scheme/clog employed to circumvent the centuries-old "anti-clogging" rule.)

For a discussion on the clogging of the equities doctrine, see John C. Murray:

• Clogging Revisited,
• Title Insurance Coverage for Clogging Issues.