4th Cir. Holds Safe Harbor Under Md. CLEC Allows Self-Correction Of Usurious Interest Rate Within 60 Days Of “Discovery Of The Error”

In Askew v. HRFC, LLC, the U.S. Court of Appeals for the Fourth Circuit affirmed the grant of summary judgment in favor an automobile finance company on claims of breach of contract and violation of the Maryland Credit Grantor Closed End Credit Provisions (“CLEC”), Md. Code, Comm. Law § 12-1001, et seq., where the Finance Company self-corrected an otherwise usurious interest rate within the 60-day statutory safe harbor period following “discovery of the error.”

The Court rejected Borrower’s claim that the “discovery rule” required the Finance Company to correct the error within 60 days of its acquisition of the loan.  Although Borrower argued that Finance Company should have known upon acquisition that the interest rate exceeded the 24% maximum, the Court held that “discovery of the error means when the Defendant actually knew about” a mistake—in this case, charging an excessive interest rate.  Op. at 12.  To that end, the Court observed that the safe harbor under CLEC was intended to encourage credit grantors to self-correct, who would otherwise “have little incentive to correct their mistakes and make debtors whole” particularly given that the borrower is unlikely to discover on his own that the interest rate charged on a loan exceeds CLEC’s maximum.  Op. at 13.

However, the Court vacated dismissal of the claims under the Maryland Consumer Debt Collection Act (“MCDCA”), Md. Code., Com. Law § 14-201 et seq., which were premised upon alleged misconduct in collection of amounts owed. A copy of the opinion can be found here. 

Background

Borrower obtained financing of a vehicle under a retail installment contract from a dealership that subsequently assigned the contract to Finance Company.  The contract, which was subject to CLEC, charged a 26.99% interest rate, exceeding CLEC’s maximum allowable rate of 24%.  When Finance Company discovered the discrepancy, it sent Borrower a letter informing him that “the interest rate applied to [his] contract was not correct,” that it would compute interest at the new rate of 23.99%, that it was crediting Borrower’s account the difference, and that he would repay his loan earlier if he continued the same monthly payments, but that Finance Company would adjust his monthly payments so that the contract will be repaid on the date originally scheduled if he so requested.  Op. at 3.

Thereafter, Borrower fell behind on his payments, whereupon Finance Company contacted Borrower by letter and by telephone.   Borrower claimed that over the course of those contacts Finance Company allegedly made false and threatening statements to induce him to repay his debt, including alleged statements regarding a preparation of a lawsuit against him.

Borrower filed suit alleging violations of CLEC and the MCDCA, as well as asserting that Finance Company breached its contract with him by failing to comply with CLEC.  The District Court dismissed Borrower’s lawsuit, noting that Finance Company was protected under CLEC’s safe harbor allowing for correction of an error, that the contract claim could not survive absent a CLEC violation, and that Borrower’s allegations did not rise to the level of abuse or harassment to constitute an MCDCA violation.  Borrower appealed.

Discussion

In Maryland, a credit grantor may opt upon written election to make certain loans covered by CLEC.  If the statute applies, CLEC sets a maximum interest rate of 24% and mandates that “[t]he rate of interest chargeable on a loan must be expressed in the agreement as a simple interest rate or rates.” Op. a 5 (citing CLEC § 12-1003(a).  Generally, if a credit grantor violates this provision, it may collect only the loan principal rather than “any interest, costs, fees, or other charges.” § 12-1018(a)(2).  If a credit grantor “knowingly violates [CLEC],” it “shall forfeit to the borrower 3 times the amount of interest, fees, and charges collected in excess of that authorized by [the statute].” § 12-1018(b).

The statute also provides two safe harbors, one of which was applicable to this case.  “Section 12- 1020 affords credit grantors the opportunity to avoid liability through self-correction.”  Op. at 7.  That section provides:

A credit grantor is not liable for any failure to comply with [CLEC] if, within 60 days after discovering an error and prior to institution of an action under [CLEC] or the receipt of written notice from the borrower, the credit grantor notifies the borrower of the error and makes whatever adjustments are necessary to correct the error.

CLEC, Section 12-1020. 

Borrower claimed that Finance Company violated CLEC by failing to disclose an interest rate below the statutory maximum, which he claimed was not curable.  Additionally, Borrower claimed that the “discovery rule” required the Finance Company to correct the error within 60 days of its acquisition of the loan, because it should have known at that time that the interest rate exceeded the 24% maximum.   Borrower also claimed that the Finance Company failed to notify him of the error and make necessary judgments.

The Fourth Circuit rejected these claims.  Interpreting the statute, the Court determined that “the first sentence of section 12-1003(a) bars credit grantors from collecting or charging interest above 24%, while the second sentence, quoted above, requires credit grantors to express the rate as a simple interest rate.” Op. at 9.  Otherwise, the Court determined that the statute would impose a “meaningless technical requirement while doing little to help consumers. . . . Instead, read as a whole and in context, the provision targets far more immediate dangers to consumers: being charged excessive interest and being duped into accepting a deceptively high rate.” Op. at 9.

The Court also rejected Borrower’s claim that Finance Company should have discovered the that the interest rate exceeded 24% maximum interest rate when the contract was assigned to it.  The Court declined to adopt Borrower’s interpretation of “discovering” in Section 12-1020, noting that such interpretation was typically used in cases involving the running of statutes of limitation, rather than “a safe-harbor provision placing a deadline on a defendant.” Op. at 12.  Instead, the Court determined that “interpreting the term ‘discovering an error’ in section 12-1020 as actually uncovering a mistake constituting a violation of the statute better comports with CLEC’s text, public policy, and the statute’s purpose.”  Op. at 12. Accordingly, “discovery of the error means when the Defendant actually knew about” a mistake—in this case, charging an excessive interest rate. Op. at 12.

The Court also determined that the Finance Company’s cure letter provided Borrower notice of the error, “albeit somewhat cryptically.”  Op. at 15.  It identified a “problem” with Borrower’s interest rate and then told him that he was due a credit of $845.40.  “Taken together, this information implies that [Borrower]’s interest rate was too high—the ‘error’ that [Finance Company] cured under section 12-1020. We think this was enough to comply with the statute’s notice requirement.”  Op. at 15.  The Court distinguished the notice requirements from cases involving disclosure errors, explaining that “[d]isclosure errors are rooted in some defect in conveying information. . . .  An anti-usury provision, on the other hand, exists to stop the collection of excessive interest. Requiring more specificity strikes us as a far more useful remedy in the former case than in the latter.” Op. at 15-16.

Addressing Borrower’s Breach of Contract claim, which was premised upon a CLEC violation, the Court determined that the “contract incorporates all of CLEC—including its safe harbors.” Op. at 19.  “[J]ust as liability under CLEC begets a breach of the contract, a defense under CLEC precludes contract liability. A contrary outcome would nullify the effect of CLEC’s safe harbors because credit grantors that properly cure mistakes—as CLEC encourages—would still face contract liability. We decline to accept such an anomalous result.”  Op. at 19.

The Court determined, however, that the Finance Company was not entitled to summary judgment on the MCDCA claim.  The Court noted that a jury could find that attempting to collect a debt by falsely claiming that legal actions have been taken against a debtor violates section 14-202(6), which prohibits a debt collector from “[communicating] with the debtor or a person related to him with the frequency, at the unusual hours, or in any other manner as reasonably can be expected to abuse or harass the debtor.” Op. at 20.  The Court also observed that “[t]here is a line between truthful or future threats of appropriate legal action, which would not give rise to liability, and false representations that legal action has already been taken against a debtor, as HRFC allegedly made here.” Op. at 21-22.  Because Finance Company allegedly told Borrower on at least three occasions that it had taken legal action against him when it had not, the Court determined that a jury could find that such conduct, “at least in the aggregate, could reasonably be expected to abuse or harass [Borrower].”  Op. at 22.  The Court therefore reversed the grant of summary judgment on the MCDCA claim, while affirming judgment in favor of the Finance Company on the CLEC and breach of contract claims.

Md. App. Holds that Trustees’ Lack of Physical Presence (as Opposed to Constructive Presence by Telephone) At Auction Does Not Invalidate Foreclosure Sale

In Fisher v. Ward, a majority of a panel of the Court of Special Appeals of Maryland affirmed the trial court’s ratification of a foreclosure sale, determining that the trustee’s constructive presence by telephone, rather than “in-person” presence at the foreclosure auction, did not warrant invalidating the sale absent a showing of prejudice.   Rather, the “absence of the trustee from the sale is merely a circumstance to be considered by the court in the ultimate determination of the fairness of the proceedings.”  Op. at 8.  “Absent other irregular factors,” the intermediate appellate court concluded, “‘presence’ by telephone did not create unfairness or prejudice to [the borrower] to warrant reversal…”  Op. at 10.

A copy of this opinion is available here.

Background

Following Borrower’s default on her mortgage payments, the lender appointed Trustees to begin foreclosure proceedings.  At the sale, although none of the Trustees were physically present, one Trustee monitored the sale and was connected by cell phone to the auctioneer, who was at the sale.   Auctioneer announced the initial bid, which the Trustee had offered via telephone, on behalf of the lender, which was conceded to be more than the fair market value of the property.  Op. at 3.  Borrower filed exceptions to the sale, claiming that the sale was unlawful because no Trustee was physically present, and that the report of sale incorrectly represented that the Trustee had directed and supervised the auction.      

In response, Trustees asserted that the constructive presence of the trustee was sufficient to satisfy the “presence” requirement, and that Borrower suffered no prejudice from the alleged irregularity.   The trial court overruled the Borrower’s exceptions, and Borrower appealed.

Discussion

Although the Court of Special Appeals determined that “ancient” precedent required a trustee to attend the sale, Op. at 6-7 (citing Hopper v. Hopper, 79 Md. 400 (1894)), the Court observed that case law “condoned, if not actually permitted” the concept of constructive presence.  Op. at 7 (discussing Wicks v. Westcott, 59 Md. 270 (1883)).   Thus, “absence of the trustee from the sale is merely a circumstance to be considered by the court in its ultimate determination of fairness of the proceedings.”  Op. at 8. 

“[W]hat is sufficient to constitute constructive presence will depend on the facts before the court.”  Op. at 8.  On the record of this appeal, the Court deemed the Trustee “readily accessible” throughout the sale via the auctioneer’s cell phone, and concluded that “[a]ny problems or concerns could have easily been addressed.”  Op. at 8-9.   Notably, the proceedings were “brief and uncluttered,” no competing bids or questions to the auctioneer were presented, and no objections were made by persons in attendance.  Op. at 8.  Consequently, the Court was satisfied that the Trustees satisfied the requirement that the “property [be] sold under such conditions and terms as to the advertisement and otherwise, as a prudent and careful man would employ, seeking to obtain the best price for his own property.”  Op. at 9 (citations omitted).

Moreover, the ratification of a foreclosure sale is presumed to be valid.  Op. at 9.  Although the burden is on an excepting party to show prejudice caused by any irregularities in the sale, there is also a heightened scrutiny of the sale when the foreclosure sale purchaser is the mortgagee or his assignee.  Op. at 9-10.  “Despite the heightened standard, the burden continues to be borne by the excepting party to show both invalidity and resulting prejudice.”  Op. at 10.  In this case, the Borrower’s challenge was based solely on the “absentee participation” of the Trustee in the sale itself; no assertion of irregularity was asserted to any other aspect of the proceeding, and there was no challenge to the sufficiency of the price.   Op. at 10.  “Absent other irregular factors,” the Court concluded that, although required, the Trustee’s “presence” at the sale by telephone did not create unfairness or prejudice to Borrower to warrant reversal of the foreclosure judgment.  Op. at 10.  Accordingly, the appellate court affirmed the judgment of the trial court.  Op. at 10.

In a concurring opinion, one judge agreed there was no prejudice, and therefore that reversal was not appropriate.   Concurring Op. at 5.  However, according to the concurring judge, “the failure of a trustee (or an empowered and properly supervised delegate) to physically attend the sale remains an irregularity in the sale, which, should it result in actual prejudice, would be fatal to the sale.”  Concurring Op. at 1.

Md. Holds Garageman’s Lien Does Not Include Lien Enforcement Costs Where Owner Redeems Vehicle Prior to Sale

In Allstate Lien & Recovery Corp. v. Stansbury, the Court of Appeals of Maryland determined that a “garageman’s lien” on a vehicle does not include “lien enforcement costs” or “costs of process” if the lien is redeemed prior to the non-judicial sale of the vehicle. 

Rather, the Court determined that the plain language of the applicable statute, Maryland Code, Comm. Law § 16-202(c), only provides for a garageman’s lien to include costs for repairs, rebuilding, storage, and tires or accessories.   Recovery of such costs was only appropriate after the vehicle was actually sold, where they could be authenticated, or alternatively, in a replevin proceeding or other judicial action, where the amount owed for enforcement costs would be subject to judicial scrutiny.

A copy of this opinion is available here.

Background

Following an automobile accident, Owner left his vehicle to a Repair Shop for servicing and repairs.  Four months later, due to a delay in obtaining certain parts, Repair Shop notified Owner that the repairs were complete and presented a bill.  Upon Owners failure to retrieve the vehicle and pay the bill, Repair Shop sent Owner a notice that the vehicle would be sold, listing $6,630.37 in repair charges as well as a $1,000 “cost of process” fee. Ultimately, the vehicle was sold at auction.

Owner sued Repair Shop, and several other parties, alleging violation of several consumer protection laws and common law theories challenging, among other things, the right to collect the amounts claimed by the Repair Shop. 

Owner argued that the text of Maryland Code, Comm. Law § 16-202(c), which provided for the Repair Shop’s “garageman’s lien” on the vehicle, did not permit recovery of the $1,000 processing fee where the vehicle was redeemed prior to the sale.  The trial court agreed, and after it instructed the jury as a matter of law that the “$1,000 processing fee is not an appropriate part of the lien,” the jury returned a verdict for Owner.

The intermediate appellate court affirmed, and the Court of Appeals granted certiorari to consider whether a lien and recovery company hired to execute a garageman’s lien could include its lien "enforcement costs and expenses for executing the lien" as part of the amount necessary to redeem the vehicle.  Op. at 1 n.2.

Discussion

As an initial matter, the Court explained that a garageman’s lien is “an ex parte, prejudgment creditor’s remedy”, Op. at 15, which is provided for under Maryland Code, Comm. Law § 16-202(c).   Based upon the plain language of the statute, the Court determined that “[a] processing fee is not included as part of the lien.”  Op. at 18 (quotations omitted).  Rather, Section 16-202(c) provides:

(c)  Motor vehicle lien. – (1)  Any person who, with the consent of the owner, has custody of a motor vehicle and who, at the request of the owner, provides a service to or materials for the motor vehicle, has a lien on the motor vehicle for any charge incurred for any:

(i)  Repair or rebuilding;
(ii)  Storage; or
(iii)  Tires or other parts or accessories.

(2)  A lien is created under this subsection when any charges set out under paragraph (1) of this subsection giving rise to the lien are incurred.

Md. Code, Comm. Law § 16-202(c).

Consequently, the Court explained “the basic premise presented in our garageman’s lien statutory scheme is that costs incurred by the repair company to sell the vehicle subject to a garageman’s lien, can only be recovered from the proceeds of the actual sale of the vehicle, when actual expenses for lien enforcement costs were known and could be authenticated.” Op. at 22. 

The Court noted that alternatively, such costs may be recovered where an owner filed a replevin action to recover possession of the vehicle or posted a bond to stay a sale, subject to a judicial action.  However, in either circumstance, “the amount owed for enforcement costs incurred, not the subject of a lien established under Section 16-202(c), would be subject to judicial scrutiny for reasonableness, at the least.”  Op. at 22.

The Court posited that a different interpretation of the statute would permit a repair company to demand any amount for lien enforcement costs prior to an ex parte sale, thereby inhibit vehicle owners from redeeming their vehicles.  Op. at 22-23. 

Accordingly, the Court concluded that “a garageman’s lien includes charges incurred for ‘repair or rebuilding, storage, or tires or other parts or accessories’, but does not encompass lien enforcement costs or expenses or cost of process fees prior to sale, should the owner attempt to redeem the vehicle before sale.”  Op. at 23.