Does substituted service on SDAT violate due process? Mayor & City Council v. Prime Realty

By Brad McCullough

Business entities such as corporations, limited partnerships, and limited liability companies must have a resident agent in Maryland who is authorized to accept service of process. If an entity fails to abide by its statutory obligations regarding maintenance of a resident agent, or if good faith efforts to serve the resident agent fail, the Maryland State Department of Assessments and Taxation may be served in the resident agent’s stead. Does that service on SDAT, however, comport with due process? Does it matter if the party trying to serve the resident agent knows that the resident agent’s official address might be wrong and might know the resident agent’s actual address? In that situation, does service on SDAT satisfy due process? The Court of Appeals was recently faced with these questions in Mayor & City Council of Balt. v. Prime Realty Assocs., Inc., No. 53, Sept. Term, 2019, 2020 WL 2460110 (May 12, 2020). In its opinion, the Court essentially created a “safe harbor” for a party that makes substituted service on SDAT in strict compliance with the applicable rule of procedure. Yet the Court also hinted that the safe harbor might disappear if the serving party has actual knowledge that the resident agent’s address listed with SDAT is wrong. That answer, however, must await another day.

In 2005, Prime Realty Associates, LLC acquired a residential property in Baltimore and for several years was able to rent the property. But, after a while, “according to Prime Realty, the tenants were robbed and mugged ‘repeatedly’ and moved out. Thereafter, the property remained vacant and its condition deteriorated.” Id. at *2.

The City eventually issued a Code Violation Notice and Order declaring the property “unfit for human habitation or other authorized use,” in accordance with the Baltimore City Code. Id. (internal quotation marks omitted). The Code “allows the City to abate the public nuisance created by vacant and problem properties,” and to initiate a process that can result in the City bringing an action in the District Court seeking the appointment of a receiver to sell the property. Id. The City posted that violation notice on the property “and mailed a copy of the notice to a Silver Spring post office box address that Prime Realty used for, among other things, tax and water bills from the City.” Id. After Prime Realty failed to raze or rehabilitate the property, as required by the Code, the City sought appointment of a receiver.

Since its inception in 2005, Prime Realty had designated Miguel Belen as its resident agent, with an address of 1313 South Dahlia Court in Bel Air. In 2010, Mr. Belen moved, and he advised SDAT that his new mailing address was a post office box in Silver Spring, which presumably was the same post office box where the City had been sending tax and water bills. But this was a problem, for SDAT does not allow a resident agent to use a post office box as an address. So SDAT sent Prime Realty a rejection notice, advising that Mr. Belen could not register a post office box as his address. SDAT, however, sent that notice to the Dahlia Court address in Bel Air, which remained listed with SDAT as the address for Prime Realty’s resident agent.

The City used the Dahlia Court address when it initially tried to serve Prime Realty, mailing papers to that address, by both regular and certified mail. The City also tried, unsuccessfully, to serve Mr. Belen by private process server at that address. The City apparently did not try to send papers to the Silver Spring post office box where it sent water and tax bills. Having failed in those attempts, the City asked the Court to continue the hearing and to issue new service papers. The City then proceeded under Md. Rule 3-124(o), which permits substituted service on SDAT when attempted service on a resident agent fails. The City served SDAT with papers for Prime Realty. Prime Realty failed to appear at the hearing, and the District Court appointed a receiver.

After the Court appointed the receiver, the City sent Prime Realty a letter, “both to the Dahlia Court address and the Silver Spring post office,” telling Prime Realty that a receiver had been appointed and would sell the property at a public auction. Id. at *3 (emphasis added). The receiver sold the property on December 11, 2018, and two weeks later, Mr. Belen reviewed the District Court case file. At that time, “Prime Realty was operating under a forfeited charter. Prime Realty failed to take any action in this case for another two months until February 15, 2019, when it took the necessary steps to reinstate the charter with SDAT prior to defending the receivership action.” Id. (footnote omitted).

The receiver sent the District Court a “report of sale,” which the Court sent to Prime Realty at Dahlia Court. A notice of sale was posted on the property, and about a month later, the Court ratified the sale. The receiver and purchaser settled on the sale, and on March 14, 2019, the receiver filed the final accounting.

The next day, Prime Realty moved to vacate the judgment, “contending that the City did not adequately serve Prime Realty, therefore violating its due process rights.” Id. at *4. The District Court denied the motion and Prime Realty appealed to the circuit court, which agreed with Prime Realty and vacated the judgment, “citing the City’s knowledge of the ‘homeowner’s whereabouts above and beyond which SDAT had in their records,’ i.e. the Silver Spring post office box address.” Id. The Court of Appeals granted the City’s cert petition and reversed the circuit court.

In an opinion authored by Judge Joseph M. Getty, the Court began by discussing Maryland’s long history of allowing substituted service, noting that “substituted service upon SDAT has a deep-rooted foundation in Maryland’s legal history.” Id. at *5 (footnote omitted). The current provision governing District Court actions is found in Rule 3-124(o), which allows service on SDAT if any of three situations exist: the entity to be served lacks a resident agent; “the resident agent is dead or is no longer at the address for service of process maintained with” SDAT; or “two good faith attempts on separate days to serve the resident agent failed.” Id. at *7 (quoting Rule 3-124(o)).

The Court then considered whether that substituted service meets the requisites of due process, which require that a party “must receive notice, and an opportunity to be heard.” Id. at *8 (internal quotation marks omitted) (quoting Pickett v. Sears, Roebuck & Co., 365 Md. 67, 81 (2001). While notice must be reasonably calculated to apprise an interest party that the action is pending and provide an opportunity to present the party’s position, “potentially less effective methods of service may be employed where traditional or more effective methods of service have been attempted and were unsuccessful.” Id. (citing Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950) and Miserandino v. Resort Props., Inc., 345 Md. 43, 65 (1997). Moreover, the method used for serving “a business entity may be different than that which would be used to serve an individual.” Id. (citing Miserandino, 345 Md. at 65).

The Court opined that the Rule’s “well established legislative history coupled with the statutory requirements expected of an LLC demonstrate that substituted service upon SDAT is a practical method of service which affords litigants their due process rights.” Id. The Court further noted that substituted service on SDAT is not the “default rule,” but is available only in three limited circumstances, and that once SDAT is served, it is required to forward a copy of the service papers to the business entity at its known mailing address or its principal place of business. Id.

The Court also noted that the Court of Special Appeals and the United States District Court for the District Court had “scrutinized” Md. Rule 2-124(o), which applies in circuit courts and also allows substituted service on SDAT, and that both courts “concluded that the method of service affords litigants their due process rights.” Id. at *9 (citing Thomas v. Rowhouses, Inc., 206 Md. App. 72 (2012) and Biktasheva v. Red Square Sports, Inc., 366 F. Supp. 2d 289 (D. Md. 2005)). The Court agreed with the holdings of those two courts, concluding that “longstanding legislative history…, as well as the statutory obligations of an LLC, demonstrate that this method of service affords litigants their due process rights.” Id. at *10. Each limited liability company is obligated “to accurately record its resident agent’s address with SDAT and to understand the requirements restricting the use of post office box addresses.” Id.

The Court noted that the City twice tried to serve Prime Realty at the address listed with SDAT before relying on substituted service on SDAT. Plus, the fact that Prime Realty’s resident agent was no longer located at the address on file with SDAT also justified the use of substituted service. The Court explained, “Prime Realty’s failure to accurately update its resident agent’s address with SDAT does not invalidate the City’s attempts of service, and therefore does not constitute a due process violation.” Id. (footnote omitted). The Court also noted that any due process violation would have constituted “harmless error because Prime Realty’s resident agent inspected the receivership file on December 28, 2018, conferring actual notice of the receivership action on Prime Realty. Prime Realty could have petitioned the District Court to remove the receiver.” Id. n. 9.

Relying on the Court’s holding in St. George Antiochian Orthodox Christian Church v. Aggarwal, 326 Md. 90 (1992), Prime Realty argued “that the City’s knowledge of an additional address for its resident agent nullifies the City’s service attempts prior to serving SDAT.” Id. The Court responded to that argument:

Aggarwal required this Court to determine what steps were necessary of a tax sale purchaser to notify the property owner of an impending foreclosure. 326 Md. at 92, 603 A.2d 484. The tax sale purchaser in Aggarwal had actual knowledge that the address he was using in attempting to notify the property owner was a “bad address.” Id. at 99, 603 A.2d 484. Evidence demonstrated not only that the tax sale purchaser knew the address would not accomplish actual notice, but that he also knew the address corresponded to a vacant lot. Id. at 99–100, 603 A.2d 484.

Id.

The Court rejected Prime Realty’s argument, finding that “Aggarwal is not analogous to this matter.” Id. The Court explained that Aggarwal did not address Rule 3-124(o) “or the method of substituted service employed by the tax sale purchaser.” Id. The Court then said: “The City’s knowledge of the Silver Spring post office box address does not correlate to the City having actual knowledge that the Dahlia Court address was a ‘bad address.’” Id. (emphasis added). The Court therefore held that Rule 3-124(o),“which allows substituted service of process on an LLC by service on SDAT, satisfies a litigant’s due process rights,” and “Prime Realty’s failure to update its resident agent’s address with SDAT does not invalidate the City’s attempts of service or the City’s use of substituted service upon SDAT.” Id.

In reversing the circuit court, the Court of Appeals dealt with Prime Realty’s “actual knowledge” argument in two paragraphs at the end of the opinion. The question arises, what facts would be sufficient to show that the party making service actually knew that the address listed with SDAT was wrong? Here, the City knew that Prime Realty used the Silver Spring post office box as a mailing address—it mailed bills to that address and it mailed a “courtesy letter” to that address, advising Prime Realty that a receiver had been appointed and the property would be sold at public auction— but that was not enough for the Court of Appeals to conclude that due process required the City to serve Prime Realty at that address. While that might have been enough to show that the City knew that Prime Realty had an alternative address, it was not enough to convince the Court that the City knew that the address listed with SDAT was the wrong address. Different facts, however, could lead to a different result. While a party serving a business entity has a bit of a “safe harbor” if it serves SDAT in the manner authorized by Rules 2-124 and 3-124, that safe harbor might no longer be available if the serving party actually knows that the address listed with SDAT is wrong.

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