Md. App. Ct. Holds Debtor Cannot Attack Prior Collection Judgment as Void, Where Defense Previously Rejected; Rejects “Meaningful Review” Allegations Under FDCPA

In Mostofi v. Midland Funding, LLC, et al., the Maryland Court of Special Appeals held that a debtor could not collaterally attack a credit card judgment on jurisdictional grounds, where he raised and lost on the same issues in the prior collection case.  The Court distinguished a prior decision – which held that judgments in favor of an unlicensed debt collector are void – because, unlike the present case, the judgments at issue in the prior decision were uncontested. 

The Court further rejected the Debtor’s claims under the Fair Debt Collection Practices Act, 15 U.S.C. §1692, et seq. (FDCPA), including claims that the Creditor’s attorney failed to engage in meaningful review prior to filing suit, and expressly rejected the rationale of Bock v. Pressler & Pressler, 30 F.Supp.3d 283 (D.N.J. 2014).

A copy of the opinion is available here.

In Mostofi, Debtor had incurred credit card debt that had ultimately been assigned to Creditor.  In a prior collection case, Debtor claimed that Creditor lacked standing, because he claimed it lacked a proper chain of assignment for the debt and challenged the count owed.  Ultimately, after exhausting his appeals, a final judgment was rendered in favor of Creditor. 

Separately, Debtor filed a lawsuit in state court, which was ultimately amended to assert that because Creditor “did not own the debt, [it] lacked standing to sue him and the judgment in the collection case was void.”  Slip Op. at 4.  Debtor also asserted claims against Creditor and its attorneys under the FDCPA and related state statutes premised upon his theory that Creditor’s claim of ownership and the amount of the debt constituted “false, deceptive, or misleading statements,”  Slip Op. at 5, and alleged that the attorneys failed to engage in meaningful review of the lawsuit before filing, asserting this conduct also violated the FDCPA as articulated in Bock v. Pressler & Pressler, 30 F.Supp.3d 283 (D.N.J. 2014).

Creditor moved to dismiss, contending that Debtors claims were barred by res judicata, and collateral estoppel, and otherwise failed to state a viable claim for relief.  After determining that the law firm had not been properly served, the trial court granted Creditor’s motion to dismiss, and Debtor appealed.

Affirming, the Maryland intermediate appellate court held that Debtor’s attack on the judgment was barred under the doctrine of res judicata due to the prior judgment in the collection action.  The Court explained that under Maryland’s permissive counterclaim rules, a defendant “is not required to ‘raise or waive’ that counterclaim unless successful prosecution of it would nullify the other party’s claim  . . . .”  Slip Op. at 9 (Emphasis added). 

The Court observed that Debtor’s “explicit purpose” in arguing that Creditor lacked standing to sue him, was to render the collection case’s judgment a nullity.  Slip Op. at 12.  “Having failed to convince one trial court that jurisdiction was a problem, and having failed to appeal, [Debtor] does not get another bite at the apple, even if we were to assume that he was right (and we do not) about who owned his debt.  His collateral attack on the underlying debt judgment, then, is barred under res judicata.”  Slip Op. at 14-15.

Relying on Finch v. LVNV Funding LLC, 212 Md. App. 748 (2013), involving an alleged unlicensed debt collection agency, Debtor argued that “a void judgment ‘may be assailed at all times,’ and ‘[i]t does not constitute res judicata.’”  Slip Op. at 12.   Notably, the Finch Court held that “[a] complaint filed by an unregistered collection agency is a nullity, and any judgment entered on such a complaint is void.”  Slip Op. at 13 (citing Finch, 212 Md. App. at 761).

However, the Court found Finch inapposite, because Finch involved uncontested default judgments, whereas here, it was undisputed that Debtor raised his lack of standing argument in the collection case.  Slip Op. at 14.  Because Debtor had raised the issue in the collection case, he could not use that same issue to collaterally attack the judgment in a subsequent lawsuit.  See Op. at 14  (“[W]here the issue of jurisdiction is raised and determined in favor of the jurisdiction, the ensuing judgment on the merits is not open to later collateral attack on the jurisdictional issue, whether or not the determination therein was erroneous.”) (citation omitted).

As to the FDCPA and state law consumer protection claims, the Court determined that such claims “are not necessarily barred by the doctrine of res judicata/claim preclusion if they are not asserted [in the collection action], because they do not attack a debt collection judgment per se.”  Slip Op. at 18.  However, “[w]hen a party tries to use one of these statutes to attack a judgment against him or her collaterally . . . res judicata/claim preclusion normally bars the attack.”  Slip Op. at 17.  Nevertheless, assuming without deciding that the FDCPA and related claims were not barred by res judicata (i.e., claim preclusion) the Court determined that they were, in any event, barred by collateral estoppel (i.e., issue preclusion).

“[W]hen [an] issue of fact . . . is actually litigated and determined by a valid final judgment, and that determination is essential to the judgment, the determination is conclusive in a later action between the parties, whether the same or different claim is asserted.”  Slip Op. at 18 (citations omitted).  Because Debtor’s FDCPA and related claims were predicated on allegations decided against him in the collection case--i.e., a judgment for a sum certain in favor of Creditor, despite his challenge to its ownership--those claims could not be re-litigated. 

Finally, the Court rejected Debtor’s claim that Creditor’s counsel (also a defendant) “could not establish that a meaningful review of [Debtor]’s file occurred before filing suit.”  Slip Op. at 19.  Notably, the Court expressly declined to adopt the New Jersey federal court’s interpretation of the FDCPA in Bock v. Pressler & Pressler, 30 F.Supp.3d 283 (D.N.J. 2014), which held that a lawyer violated the FDCPA by filing a lawsuit without meaningful review by an attorney, where the attorney had conceded that he only spent four seconds reviewing the complaint against a debtor. 

In this case, Debtor asserted that Creditor’s counsel had signed thousands of other complaints filed in the same month as the complaint filed against him.  Slip Op. at 19.  Rejecting Bock, the Court explained that such allegation “is not conclusive of the question of meaningful attorney involvement.”  Slip Op. at 20.  Notably, Creditor’s counsel “could have worked every day that month at twelve hours a day, and turned out 2000 complaints, giving him a full eleven minutes per complaint on average, compared to Bock’s four seconds.  Counsel could have short-shifted every other complaint filed that month and spent hours working on [Debtor]’s, and that would still be consistent with the facts [Debtor] has alleged. On a Bock theory—which again, we have not adopted—it is still [Debtor]’s burden to allege actual facts that, if believed, would demonstrate a lack of meaningful attorney involvement in his case. . . .  He has failed to do so.  And this case is hardly rocket science—the appellees alleged, and proved in the collection case, that they acquired a credit-card debt that remained unpaid, and it did not require complicated pleadings or cutting-edge research to prepare the case for filing or trial.”   Slip Op. at 20-21.

Accordingly, the intermediate appellate court affirmed the dismissal of the complaint with prejudice.

Md. App. Ct. holds that evidentiary hearing under Rule 14-211 not required where valid defense to foreclosure is not stated with particularity

In Buckingham v. Fisher, the Court of Special Appeals of Maryland affirmed the trial court’s denial of a motion to stay or dismiss a foreclosure proceeding pursuant to Maryland Rule 14-211 without an evidentiary hearing, where the challengers failed to state with particularity the basis for their claims of forgery or that the notice of sale was deficient. 

In doing so, the Court elaborated that “bare assertions of a broad defense to the validity of a lien instrument will not be sufficient,” because “the pleading standard is more exacting than the pleading standard for an initial complaint.[,]” and that “under Rule 14-211, a party must plead all elements of a valid defense with particularity.”  Op. at 9.

A copy of the opinion is available at: http://www.mdcourts.gov/opinions/cosa/2015/2416s13.pdf

In Buckingham, the personal representatives of the estate of the borrower (“Buckingham”) filed a motion to stay or dismiss the foreclosure sale on two grounds.  First, Buckingham claimed that one of the signatures of a deceased co-borrower was not authentic, according to the opinion of a handwriting expert, whose affidavit opined that “there is a strong possibility that the co-borrower did not sign” the deed of trust.   Second, Buckingham claimed the notice of foreclosure sale was insufficient to inform the interested parties of the details of the foreclosure sale because (i) in identifying the lien instrument, it referenced a 1997 modification to the original deed of trust, rather than the 2006 modification that was attached to the initial filings; (ii) the notice incorrectly indicated that the lien instrument was signed by the borrower with reference to his legal guardian, although such guardianship was not established until after the document had been executed; and (iii) the notice was not served on counsel of record.

On the day Buckingham filed the motion, the trial court held an initial hearing, and following argument, denied the motion without scheduling an evidentiary hearing on the merits of the defenses.  However, the trial court ordered that the foreclosure sale be rescheduled, to accommodate service on Buckingham’s counsel.  Thereafter, the property was sold, and Buckingham appealed, asserting an entitlement to an evidentiary hearing before the motion could be denied.

On appeal, the Court affirmed that the trial court was not required to hold an evidentiary hearing, holding that Rule 14-211 required “that the factual and legal basis of a defense must be stated ‘with particularity’ and that any available supporting documents must be provided.”  Op. 7.  

Maryland Rule 14-211 provides the mechanism for an interested party to challenge a foreclosure pre-sale by filing a motion to stay or dismiss the foreclosure proceeding.  Under Rule 14-211(a)(3) such motion must “(A) be under oath or supported by an affidavit; (B) state with particularity the factual and legal basis of each defense that the moving party has to the validity of the lien or the lien instrument or to the right of the plaintiff to foreclose in the pending action; [and] (C) be accompanied by any supporting documents or other documents or other material in the possession or control of the moving party[.]”  Op. at 6 (emphasis in opinion).

Further, Maryland Rule 14-211(b)(1) provides the trial court with the discretion to deny such motion before holding a hearing on the merits, where the motion does not substantially comply with the requirements of the Rule, or does not state on its face a valid defense to the validity of the lien, lien instrument, or the right to foreclose.  See Op. at 8 (citing Rule 14-211(b)(1)).  In contrast, under Rule 14-211(b)(2), “[i]f the [trial] court finds that the motion was timely, complies with the requirements of the Rule, and states a valid defense, then an evidentiary hearing on the merits is required before the [trial] court makes a final determination on whether to grant or deny the motion.”  Op. at 8.

In addressing the particularity requirement of Rule 14-211(a)(3), the Court held that “particularity means that each element of a defense must be accompanied by some level of factual and legal support.  General allegations will not be sufficient to raise a valid defense requiring an evidentiary hearing on the merits.”  Op. at 10.

Applying that standard, Court determined that Buckingham’s forgery allegations were insufficient.  Notably, the definition of forgery is “[1] false making or material alteration, [2] with intend to defraud, [3] of any writing which, if genuine, might be of legal efficacy or the foundation of legal liability.”  Op. at 12 (quotations omitted).  According to the Court, Buckingham’s allegations met the first and third elements, but failed to assert “with particularity or without” that there was an intent to defraud.  Id.  “In the absence of any allegation and some evidentiary support for the existence of an intent to defraud, they have failed to sufficiently allege the grounds for their motion, and as a result, it was property denied without an evidentiary hearing.”  Id.

As to the notice of sale, the Court determined that, although Buckingham identified inconsistencies in the notice regarding identification of the lien instrument, Buckingham failed to allege with particularity the legal grounds pursuant to which the trial courts could determine that the notice would prohibit the foreclosure trustees from proceeding with the sale.  The Court explained that Rule 14-210(a) requires a foreclosing party to publish prior notice of the time, place and terms of sale, and that “the notice must contain a description or the property that is sufficient to enable an ordinary person to identify the property and seek further information.”  Op. at 13.  Observing that the notice at issue was, in fact, sufficient to enable the Buckingham to protect their interest in the property by filing the Rule 14-211 motion, the Court further noted that “[t]he rule does not require that the notice perfectly identify the lien instrument upon which the sale is proceeding.”  Op. at 14 n.5.  Finally, as to Buckingham’s claim that  counsel was not notified of the sale, the Court determined that no error was manifest, as the original sale date was delayed to enable copies of all filings to be furnished to Buckingham’s counsel.

Accordingly, the appellate court affirmed the trial court’s denial of Buckingham’s motion to stay and dismiss, determining that no evidentiary hearing on the merits was required prior to denial under Rule 14-211.

Md. App. Ct. Rejects Forfeiture of Deposit of Defaulting Foreclosure Purchaser, Where Resale is at the “Risk and Expense” of the Defaulting Purchaser

In Greentree Series V, Inc. v. C. Larry Hofmeister, Jr., et al., a case of first impression involving a defaulting foreclosure purchaser, the Maryland intermediate appellate court recently determined that, where a foreclosure purchaser fails to close on the sale, the trial court erred by ordering that the deposit be forfeited, if the property is to be resold at the cost and expense of such defaulting purchaser.

Pursuant to Maryland Rule 14-305(g), where a purchaser fails to close on a foreclosure sale, a circuit court may order a resale “at the risk and expense of the purchaser or may take any other appropriate action.”  (Emphasis added).   According the Court, either the deposit could be forfeited, or the property could be resold at the risk of the defaulting purchaser, but not both.  A copy of the opinion is available at http://www.mdcourts.gov/opinions/cosa/2015/1246s13.pdf

Background

Greentree Series V, Inc. (“Greentree”) was the high bidder at a foreclosure action for $172,000, having paid a $33,197 deposit at the time of the auction.   In addition to requiring the deposit, the advertisement of sale had provided that the “[b]alance of the purchase price is to be paid in cash within ten (10) days of the final ratification of sale[.] . . . If payment of the balance does not take place within ten days of ratification, the deposit will be forfeited and property will be resold at the risk and expense of the defaulting purchaser.”

After failing to settle on the balance of the purchase price, the trial court entered an order that the property “shall be resold at the risk and expense of” Greentree, and also provided that the “the deposit monies in the amount of $33,197.00 be and are hereby forfeited.”  Op. at 3.

At the second foreclosure sale, Greentree was again the high bidder, at $244,000.00, and ultimately followed through with the settlement.  Thereafter, the court Auditor proposed that the original deposit should be returned to Greentree.  The trial court disagreed, noting that Greentree’s failure to go to settlement on the first sale caused the Trustees to incur additional expenses of $33,379.61, inclusive of interest on the indebtedness, even though the higher sale price still allowed the Trustees to realize $38,620.39 more than they would have if Greentree had closed on the first sale.

Consequently, viewing the failure to settle as indicative of unclean hands, the trial court ordered that, in addition to having the property resold at the risk and expense of the defaulting purchaser, forfeiting the deposit constituted an “appropriate action” under Rule 14-305(g).  Greentree appealed, and the Court of Special Appeals of Maryland reversed, narrowing the trial court’s interpretation of Rule 14-305(g).

Discussion

Before addressing Rule 14-305(g), the Court initially determined that the forfeiture provisions in the advertisement, which also provided for a resale at the risk and expense of the defaulting purchaser, amounted to a penalty, and was not a valid liquidated damages clause that could be enforced.

In Maryland, there are three elements of an enforceable liquidated damages clause:  “First, such a clause must provide ‘in clear and unambiguous terms’ for ‘a certain sum’.  Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach.  Thirdly, liquidated damage clauses are by their nature mandatory binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact.”  Op. at 12 (quoting Board of Education of Talbot County v. Heister, 392 Md. 140, 156 (2006) (internal citations and alternations omitted)).

Here, the Court determined that the advertisement of sale did not meet any of these requirements, and the forfeiture provisions therefore amounted to a penalty that was not enforceable.  Notably, no “certain sum” could be ascertained at the time of default, because Greentree might be forced to pay more if the resale price was lower than the original, or insufficient to cover the additional interest and cost of resale.  See Op. at p. 13.

The Court also rejected the trial court’s determination that Greentree had unclean hands barring recovery of the deposit, explaining that “failure to go to settlement was simply a breach of contract and, for purposes of applying the unclean hands doctrine, a party does not act ‘wrongfully’ simply by breaching a contract.”  Op. at 14.  Moreover, the Trustees ultimately received interest for the delay, and after expenses, “recover[ed] over $38,000 dollars more than they would have received if there had been no default.”  Id.

Regarding Maryland Rule 14-305(g), the Court rejected the trial court’s interpretation that it had discretion to order both that the initial deposit be forfeited and the property be resold at the risk and expense of Greentree.  Under that Rule, “[i]f the purchaser defaults, the court, on application and after notice to the purchaser, may order a resale at the risk and expense of the purchaser or may take any other appropriate action.”  Md. Rule 14-305(g) (emphasis added).

According to the Court, the Rule is disjunctive in nature in permitting resale at the risk and expense of the purchaser “or” other appropriate action.  Thus, the Court held that the trial court “has the power to act only in the alternative.”  Op. at 20.  “[O]nce the court selects one of two alternative remedies, it is not appropriate to award the second alternative remedy.”  Id.

Consequently, the Court determined that, in accordance with the Auditor’s report, the deposit should be returned to Greentree.  However, the Court acknowledged that “[n]othing in this opinion should be interpreted as preventing the Trustee or mortgagor, in the event of a default by a foreclosure sale purchaser, from utilizing the deposit to offset any losses occasioned by a resale.”  Op. at 21, n. 6.