The question presented on this appeal is whether a "mortgage participation certificate," issued by a corporation mortgagee, distributing to subscribers, rights and interests under a single, specified mortgage, is taxable in the hands of a holder of the certificate, under article 81, section 214 of the Maryland Code, providing for taxation of "bonds, certificates of indebtedness and evidences of debt * * * of any corporation not exempt from taxation by the laws of this State." The lower court, reversing the State Tax Commission, held that such a certificate was not taxable; and the appeal is taken from that decision.
The particular certificate to be considered in this case is one issued by a corporation named the Securities Company of Baltimore. After a brief description of the mortgage, which in this instance, is one executed by two individuals to the Securities Company, to secure a loan of $3,000, the form of certificate as filled in reads: *Page 236
"Know All Men By These Presents: That the Securities Company of Baltimore, a corporation of the State of Maryland (hereinafter termed `the Company'), hereby certifies that it has received from Elmer N. Harper (hereinafter termed `the holder') the sum of three thousand dollars, in consideration of which the company hereby assigns unto the holder an undivided interest to the extent of said sum, with interest thereon at the rate of 5 1/2 per cent. per annum, from the date hereof, payable on the fifth of May and November in the mortgage above described, on the principal sum of which there is now owing the sum of three thousand dollars.
"Together with an undivided interest to the same extent in the obligation described in said mortgage, which mortgage, for the purpose of facilitating the collection of the debt and interest secured thereby, according to the terms thereof, the company retains in its possession, with all the papers relating thereto, agreeing, however, to note this assignment on the record of said mortgage on its books.
"To have and to hold the same to the holder, and to the successors, legal representatives, and assigns of the holder, subject to the terms hereof, which are hereby mutually agreed upon between the company and the holder.
"The company guarantees to the holder, the successors, legal representatives, and assigns of the holder, payment of the principal and interest of this certificate at the times hereinabove stated, provided that if the principal of the mortgage is not paid on the due date a further period not exceeding six months is granted in which to collect the principal. Regular payments of interest, however, are guaranteed meanwhile. The company further guarantees that said mortgage is a valid first lien on fee simple title to the property therein described.
"This certificate is one of a series all bearing the same mortgage number, the aggregate amount of principal of which certificates does not exceed the principal sum secured by said mortgage, and the share *Page 237 assigned by this certificate shall be a co-ordinate lien with all other certificates of said mortgage now or hereafter issued and any share retained by the company.
"The company is appointed irrevocably by the holder to act exclusively as the agent of any holder hereof, at its own expense, as follows: To collect, and in its own name sue for and receive the principal and interest secured to be paid by said mortgage, or any part thereof, and to satisfy and discharge the said mortgage in its own name on receiving full payment thereof, either before or after maturity, or to release any portion of the mortgage premises according to the terms of said mortgage; to collect, sue for and receive and settle or compromise the fire insurance in case of loss by fire and to exercise every right, option or privilege in said mortgage, and any agreements relating thereto or in any of them contained, and given to the mortgagee.
"Whenever the principal sum secured by said mortgage, or any part thereof, shall become due for any cause, the company shall have the right without expense to the holder hereof to collect the amount so due, and out of the proceeds of such collection to retain so much as may remain, after paying to the holder hereof whatever may be due, to such holder, of principal and interest on this certificate as herein provided.
"The mortgage aforesaid and all agreements relating thereto, have been set apart by the company for the holders of certificates therein and entry has been made on the record of this mortgage on the books of the company, of all certificates in said mortgage which have been issued, and the company agrees that said mortgage and mortgage papers shall remain so set apart until all certificates shall be surrendered to it and duly cancelled, or the amount of the principal and interest represented by any certificate not surrendered may be held as hereinafter provided.
"The company shall give to the holder hereof written notice of the time of the payment of the principal *Page 238 sum secured by said mortgage, or any part thereof, when this certificate is to be redeemed, by mailing such notice to the holder hereof at the address last left with the company, and on payment of said mortgage, the mortgage may be cancelled of record, although the holder hereof may fail to present this certificate. If the holder hereof shall fail to present this certificate, then on such payment to the company the principal sum of this certificate shall be deposited with it, together with accrued interest thereon to the date of such deposit at the rate aforesaid, as a special deposit for the benefit and credit of the holder hereof, to be paid to him with such interest as may be allowed by the company on the surrender of this certificate to the company; and from the time of such deposit all interest hereon shall cease.
"In the event of the payment of a part of the principal sum secured by said mortgage, the company shall have the right to retire any certificates to an equivalent amount or to hold the amount so paid for the benefit of the holders of the certificates of said mortgage.
"Any excess of interest collected by the company on said bond and mortgage beyond the rate mentioned in this certificate shall belong to the company.
"The interest of the holder of this certificate shall be assignable only on the books of the company in person or by attorney."
An agreed statement of facts filed by the parties adds that the Securities Company is the record holder of the mortgage, and other facts as to the practice pursued by the company which seem to be sufficiently outlined in the certificate itself and so need not be repeated.
Adhering to the terms employed, the appellee contends that he has nothing more than an assignment of a mortgage, which places him in the legal situation of the mortgagee. It is further contended that it is the policy of this State to impose no tax on a mortgage or interest in a mortgage, on property *Page 239 in Baltimore City, and most of the counties, at least, such being the express provision of the Acts of 1920, ch. 332, Code, art. 81, sec. 198; and that accordingly the form of security now under consideration is not taxable.
It is not correct to say that the statutes, or the settled policy of this State, exempt all interests in mortgages, for ordinary mortgage bonds are taxed. Section 214 of article 81 expressly provides for taxing "bonds" of any corporation not exempt. And any form of security which might be classified as an "evidence of debt," under this statute, seems to be made equally taxable without reference to the possibility of its being secured by a mortgage on land. The question is whether this mortgage participation certificate, according to its real substance and effect, amounts to a bond, "certificate of indebtedness"; or "evidence of debt" of the corporation.
It is not, of course, an assignment of mortgage according to the ordinary meaning of those words, for the holder of the certificate does not have ownership and control of the mortgage transferred to him. The issuing company remains mortgagee of record, and, therefore is, so far as other persons are concerned, conclusively presumed to be the holder of all title in the mortgage. Code, art. 66, sec. 25. And by the express terms of its contract with the certificate holder it retains control, and is to release or foreclose in its own name. The company receives for its profit a margin of interest secured to it by the mortgage over and above that attached to the certificates issued, together with whatever other amounts might be charged the mortgagor in the transaction. The only change in the legal position of the company is that, instead of holding the mortgage in its own right, as by virtue of the record it is presumed to do, it holds upon an unrecorded trust for the certificate holder; and that it takes upon itself, over and above that, a direct obligation for payment, irrespective of the mortgage security. This undertaking of the corporation is not exactly a guarantee, as it is termed in the certificate, for it is not collateral to a principal obligation held by the certificate holder directly against the *Page 240 borrower. The certificate holder has a direct relation only with the issuing corporation, and what he holds, exactly, is the contractual obligation of the corporation for payment of the principal and interest represented by the certificate, primarily perhaps, out of the proceeds of the mortgage held by the corporation, but, in any event, for payment either out of the proceeds of the mortgage or out of its other resources.
In the argument of appellee, importance was attached to the decision of the Circuit Court of Appeals in Fidelity Trust Co.v. Lederer, 289 Fed. 1009. In that case certificates of interest in rentals from a lease of railroad equipment were held not liable to the stamp tax, which was imposed by Act of Congress "on all bonds, debentures, or certificates of indebtedness issued by any person, and all instruments, however termed, issued by any corporation, with interest coupons or in registered form, known generally as corporate securities." That decision has since been reversed by the Supreme Court. Lederer v. Fidelity TrustCompany, 267 U.S. 17, 45 Sup. Ct. Rep. 206, 69 L.ed. 234. In reversing it, however, the Supreme Court dwelt almost altogether on the phrase in the act, "known generally as corporate securities," and held that the precise limits of the corporate undertaking were unimportant, for the certificates were clearly securities. We have no such phrase to deal with in the Maryland law.
In this case our opinion is that the certificate, while issued against, or on the basis of, the mortgage held by the corporation, is not to be regarded as an assignment of the mortgage, but rather as an obligation of the issuing corporation, accompanied and secured by an agreement to hold the specified mortgage owned and controlled by it allocated to the certificate. And we have not been able to agree that the statutes of the State, or the settled policy, exempt such securities from taxation as evidences of debt, but, on the contrary, feel constrained to hold them taxable as evidences of debt of the issuing corporation. The order of the lower court will, therefore, be reversed.
Order reversed, with costs to the appellants. *Page 241