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U.S. judge sends ground rent suit back to state

The Baltimore Sun

A federal judge said yesterday that he thought Maryland's ground rent law had been due for an overhaul because ground rent holders were able to eject homeowners for overdue rents and gain the entire value of their houses.

"Let's be perfectly clear," U.S. District Judge Andre M. Davis said during a hearing on a challenge to ground rent reform. "There's no question that the windfall of being able to take these houses cried out for legislative change."

But despite his views, which Davis stated at the conclusion of the hearing, the judge ruled to simply send the matter back to the state court where it had been filed. He said that level of the judiciary is the best place to decide whether ground rent owners had suffered harm as a result of last year's legislative reforms.

Davis issued his ruling after an hourlong hearing on a lawsuit filed by dozens of ground rent holders who are seeking compensation from the defendant, the state of Maryland. They are asking for compensation that could exceed $400 million, contending the new laws amount to a taking of property.

The judge ruled that state court would be the best place to determine that, even though some of the claims filed were federal in nature. The claims that deal with specific instances, he ruled, "indisputably require that plaintiffs go to whatever state remedy is available. It seems pretty clear that ground rent owners are entitled to ... an income stream."

Tens of thousands of homeowners in Baltimore and a few other jurisdictions must pay rent on the ground beneath their houses to holders who buy and sell the leases as an investment.

In their lawsuit, the holders allege that the state's overhaul of the Colonial-era ground rent system effectively seized their properties. The legislature acted in response to The Sun's December 2006 series that found a small number of investors had seized hundreds of homes over back rents as small as $24. The last of the reform measures became law July 1.

The holders filed suit in Anne Arundel Circuit Court last year, and the state sought to shift it to federal court.

"Since the state moved it to federal court, it seems they thought they had a better shot there," said Robert Strupp, director of research and policy at the Community Law Center.

"It certainly didn't give the state what they wanted. But I really can't gauge from it who benefits from sending it back to state court," said Strupp, who has studied ground rent and its impact on the community.

"We're going forward with our suit in state court, which is exactly what we wanted from the beginning," said Edward J. Meehan, an attorney with Skadden, Arps, Slate, Meagher & Flom LLP, representing the holders. "From the plaintiffs' point of view, our case is back on course."

A lawyer for the state said that the reason the lawsuit had been moved was because it contained federal claims. "Ultimately, nothing has changed," said Charles J. Butler, an assistant attorney general. "The state court will find that the statute is constitutional and doesn't effect a taking."

The state had asked the judge to rule on the federal claims yesterday, noting that the plaintiffs had not made allegations that any ground rent tenant had stopped paying rent.

"They're assuming every ground rent tenant in Maryland is going to be an outlaw," Butler said. "They haven't even alleged that a single tenant has stopped paying the ground rent."

Meehan argued that ground rents are now analogous to unsecured credit rather than the secured credit they used to be. Since July 1, holders have had to file suit to put a lien on the property to recover debts.

"There really are no consequences that are effective," he said. "We don't get the property back. We don't get our costs and fees."

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