Md. Holds Borrower Law Firm That Regularly Offered to Negotiate Loan Modifications Subject to Regulation Under Maryland Credit Services Business Act

The Court of Appeals of Maryland recently determined that a law firm engaged in the business of assisting homeowners to modify their mortgage loans constituted a “credit services business” under the Maryland Credit Services Business Act, Md. Code, Comm. Law (“CL”) § 14-1901 et seq. (“MCSBA”), and was subject to regulation and licensure.  The Court also determined that, because the law firm had engaged in the credit services business on a “regular and continuing basis,” it was not subject to the Act’s exemption for attorneys.

A copy of this opinion is available here.

Background

Several homeowners facing foreclosure hired a Virginia law firm, which promised to help renegotiate their mortgage loans in exchange for payment.  After receiving a complaint from one such homeowner, the Maryland Commissioner of Financial Regulation (“Commissioner”) instituted administrative proceedings against Law Firm and its managing partner (collectively, “Law Firm”).  Following an evidentiary hearing, Commissioner found that Law Firm committed multiple violations of the MCSBA, which regulates “credit service businesses” purporting to assist consumers in obtaining credit.  Specifically, neither Law Firm nor any of its attorneys held a license under the MCSBA.  The Commissioner also found that Law Firm violated the MCSBA’s bonding and disclosure requirements.   After settlement efforts failed, the Commissioner entered a cease and desist order prohibiting law firm from engaging in any credit services business activities with Maryland residents, imposed a civil monetary penalty of $114,000 and, determining that its violations were willful, directed law firm and its principal to pay 57 Maryland consumers treble damages totaling $720,600.

Reversing the Commissioner’s order, both the trial court and the intermediate appellate court held that that Law Firm was not a “credit services business” under the MCSBA because its attempts to obtain loan modifications for its clients were “ancillary” to its provision of legal services.  The Commissioner thereafter obtained certiorari in the Court of Appeals.

Discussion

The Court of Appeals agreed with the Commissioner that Law Firm constituted a “credit services business,” which is defined to include “any person [or entity] who, with respect to the extension of credit by others, sells, provides, or performs, or represents that such person can or will sell, provide or perform” any of certain enumerated services “in return for the payment of money or other valuable consideration.”  Md. Code, CL § 14-1901(e)(1).  Such services include “obtaining an extension of credit for a consumer,” or providing advice or assistance to a consumer in connection with obtaining an extension of credit.

Notably, the Court determined that, in undertaking to renegotiate the terms of homeowners’ mortgage loans in exchange for payment, Law Firm was offering to assist the homeowners in “obtaining an extension of credit,” thus falling within the MCSBA’s definition of a “credit services business.”  Op. at 15-16.  The Court also examined the MCSBA’s legislative history and concluded that the statute was not limited to regulating only “ordinary credit repair services” or payday lenders.  Op. at 18.  “Rather, it is intended to provide broad protection to consumers of credit services.”  Op. at 18.   Moreover, the Act’s exemption for “mortgage assistance relief providers” who were separately regulated confirmed that “the General Assembly believed that those who offer to obtain loan modifications for homeowners would be otherwise covered by the MCSBA.”  Op. at 19.

The Court then evaluated whether Law Firm met its burden to show that its activities were exempt from regulation under a statutory provision exempting attorneys.  See Md. Code, CL § 14-1901(e)(3)(vi).  For the “attorney exemption” to apply, three requirements must be met:  “(1) the individual must be admitted to the Bar of the Court of Appeals of Maryland, (2) the individual must render the services within the course and scope of practice by the individual as a lawyer, and (3) the individual must not engage in the credit services business ‘on a regular and continuing basis.’”  Op. at 22.  The Court determined that Law Firm could not satisfy the third prong because, over the relevant time period, Law Firm entered into 57 agreements with Maryland homeowners, and consulted with hundreds of others.  Further, such agreements constituted a “very significant part of the firm’s business” and “accounted for most of the work of its Maryland-licensed attorney . . . .”  Op. at 23. 

The Court noted that “[a] Maryland attorney who counsels an individual client facing foreclosure and attempts to negotiate a mortgage loan modification would . . . ordinarily be exempt from the MCSBA.”  Op. at 23.  However, “there may be cases where there is a significant question at what point an attorney who frequently provides such services has crossed the line into providing ‘regular and continuing’ credit services.  That, however, is not this case.”  Op. at 23.  To that end, the Court observed that “[t]he consultations and agreements with Maryland homeowners seeking loan modifications were not only a very significant part of the firm’s business during the month’s in question, but also accounted for most of the work of its Maryland-licensed attorney by the time he left the firm.”  Op. at 23.  Consequently, the Court determined that there was substantial evidence to support the Commissioner’s finding that the law firm engaged in a credit services business on a regular basis.  Op. at 23.

Accordingly, the Court held that Law Firm was subject to the MCSBA as a “credit services business,” but remanded the case to the trial court to determine whether Law Firm’s violations were willful.  Op. at 28.

Md. App. Holds Collection Agency License Not Required for Insurance Company Pursuing Subrogation Rights Against Consumer

In Old Republic Insurance Company v. Gordon, the Court of Special Appeals of Maryland determined that an insurance company under a credit insurance policy was not required to hold a collection agency license when it sued a consumer to enforce its subrogation rights under the policy.   At issue was the interpretation of the Maryland Collection Agency Licensing Act, Md. Code, Bus Reg. § 7-101, et seq. (“MCALA”), which defined “collection agency” to include any person engaged directly or indirectly “in the business of” collecting a consumer claim if the claim was in default when the person acquired it.  See Md. Code, Bus. Reg. § 7-101(c).  The Court concluded that the term “in the business of” was ambiguous, and, relying upon the legislative history of MCALA, determined that an insurance company pursuing subrogation rights under its credit insurance policy did not fall under the definition of “collection agency.” 

A copy of the opinion is located here. 

Background

Insurance Company issued a credit insurance policy to Lender to insure payments due under a mortgage loan made to Borrower.  Following Borrower’s default, Insurance Company paid Lender pursuant to the policy.  Insurance Company then sought repayment from Borrower under subrogation rights provided in the policy.  After Borrower’s failure to pay, Insurance Company ultimately sued Borrower. 

Borrower challenged the lawsuit, claiming that Insurance Company could not obtain a judgment against her because it had acted as an unlicensed collection agency under § 7-101(c) of MCALA, rendering any possible judgment against her void pursuant to the Court of Special Appeals’ ruling in Finch v. LVNV Funding LLC, 212 Md. App. 748 (2013).  Borrower claimed that, because Insurance Company obtained the right to collect the debt after her default, it constituted a “collection agency,” which under Section 7-101(c).

The trial court agreed with Borrower, holding that under MCALA’s plain language, Insurance Company was acting as a collection agency because it was asserting a consumer claim related to a debt that it acquired while the debt was in default.  The trial court found immaterial that Insurance Company acquired the debt through a subrogation agreement rather than a debt purchase.  Consequently, the trial court granted summary judgment to Borrower and dismissed Insurance Company’s lawsuit with prejudice.  This appeal followed. 

Discussion

Noting its prior holding in Finch that “a judgment entered in favor of an unlicensed debt collector constitutes a void judgment,” the Court determined that resolution of the appeal hinged on whether Insurance Company, in pursuing its subrogation rights against borrower, was a ‘collection agency’ under MCALA and required to hold a license.  Op. at 13.  Notably, the exclusions under Section 7-102, were not applicable.  Op. at 13, n. 4 (“[MCALA” specifically excludes certain persons, such as a bank and a mortgage lender.  BR § 7-102. . . . “[A]n insurance company pursuing subrogation rights is not included in this list.”).

The Court considered the language of § 7-101(c), which defined “collection agency” to include persons engaging “in the business of” collecting a consumer claims if the claim was in default when the person acquired it.  Op. at 18.  The Court determined that § 7-101(c)’s phrase “in the business of” had been interpreted differently by courts:  some considered the nature and extent of the activity, while others interpreted the phrase more broadly.   Consequently, the appellate court concluded that the phrase was ambiguous.  Op. at 18-20. 

The Court then examined MCALA’s legislative history and determined that the Legislature did not intend § 7-101(c) to target insurance companies pursuing subrogation rights.  Op. at 22.  Specifically, the expansive definition of collection agency was the result of an amendment in 2007.  The Court observed that the 2007 amendments of MCALA were specifically intended to regulate debt purchasers, who purchase debts at a discount or are otherwise compensated on a contingent basis.  Op. at 20-21.  

Given that Insurance Company was not a “debt purchaser” that purchased Borrower’s debt at a discount, the Court determined that it did not constitute a “collection agency” under the purview of MCALA.  Moreover, the Court noted that “[b]ecause an insurance company pursuing subrogation claims does not qualify as a collection agency, there wasneed to include an insurance company in the list of exclusions [from the definition of ‘collection agency’] found in BR § 7-102.”  Op. at 22, n. 9.   Accordingly, the appellate court reversed the judgment of the trial court.

Md. App. Holds Judgment in Favor of Unlicensed Collection Agency Subject to Challenge "At Any Time"

In Jason v. National Loan Recoveries, LLC, the Court of Special Appeals of Maryland determined that a borrower could challenge a district court judgment as void beyond the catch-all three-year statute of limitations, where it was obtained against him by an unlicensed collection agency.  Noting that prior case law determined such judgments to be void, the intermediate appellate court held that a void judgment was subject to attack “at any time,” but an open question remained as to what remedies were available, including whether they were subject to the defenses of laches and waiver.

However, the Court determined that a three-year statute of limitations applied to Borrower’s claims for unjust enrichment relating to amounts received in satisfaction of the judgment through garnishment of his bank account, as well as Maryland statutory consumer protection claims relating to unlicensed collection activity.  Because the record was not clear as to when Creditor had been allegedly unjustly enriched, i.e., the date it received the garnished funds, the Court reversed the dismissal of the unjust enrichment claim for further proceedings.   However, the Court affirmed the dismissal of the statutory consumer protection claims on limitations grounds, noting that the Borrower was on inquiry notice of the alleged unlicensed collection activity more than three years before filing suit.

A copy of this opinion is available here.

Background

After acquiring a debt in default, Creditor sued Borrower, and subsequently obtained a judgment against him.   Thereafter, a writ of garnishment was served upon Borrower’s bank, and ultimately the judgment was satisfied through the garnishment proceedings. 

Three years after the original collection suit had been filed, Borrower filed a lawsuit seeking a declaration that the prior judgment against him was void because Creditor lacked a collection agency license, asserting a claim for unjust enrichment, and further asserting that Creditor’s unlicensed collection activity violated the Maryland Consumer Debt Collection Act, Md. Code, Comm. Law § 14-201 (“MCDCA”), and Maryland Consumer Protection Act, Md. Code, Comm. Law § 13-101 (“MCPA”).

Notably, Borrower alleged that Creditor constituted a collection agency because it acquired the loan when it was in default.  See Md. Code, Bus. Reg. § 7-101(c)(1)(ii) (defining a “collection agency” to include “a person who engages directly or indirectly in the business of . . . collecting a consumer claim the person owns, if the claim was in default when the person acquired it; . . .”).  Further, for purposes of the appeal, it was undisputed that at the time Creditor had filed suit against Borrower, it did not hold a Maryland Collection Agency license, nor did it obtain a license until after the writ of garnishment was issued.

Creditor moved to dismiss Borrower’s claims, which the trial court granted, determining that all of Borrower’s claims were barred by the three-year statute of limitations under Maryland Code, Courts and Judicial Proceedings (“CJP”) § 5-101.  This appeal followed.

Discussion

Addressing Borrower’s claims for declaratory relief, the Court noted that in Finch v. LVNV Funding, LLC, 212 Md. App. 748 (2013), it previously held that “a judgment entered in favor of an unlicensed debt collector constitutes a void judgment as a matter of law.”  Op. at 6.  Recognizing that Finch did not address the applicability of the statute of limitations, the Court nevertheless concluded that although “it is possible that the passage of time could limit the remedies available to the judgment debtor who is subject to a void judgment, there appears no time limit for asserting that a judgment is void.” Op. at 8 (Emphasis in original). 

Thus, although the Court reversed the dismissal of the claims for declaratory relief, it explicitly expressed no opinion regarding the remedial relief that the Borrower could ultimately obtain, and whether such relief was subject to defenses of laches or waiver.  Further, the Court noted that comments to the Restatement (Third) of Restitution and Unjust Enrichment indicated that payment on an invalid judgment resulting from valid debt does not create unjust enrichment.  See Op. at 8-9 n. 4.

The Court then determined that “a claim for unjust enrichment that seeks the remedy of restitution of money is subject to the general three-year statute of limitations” set forth in Maryland Code, CJP § 5-101.  Op. at 13.  Applying the discovery rule to Borrower’s unjust enrichment claim, the Court noted that it could not ascertain when Creditor obtained the funds from its judgment against Borrower.  Op. at 15.  Therefore, the Court could not determine whether the unjust enrichment claim was timely filed, and accordingly reversed the trial court’s dismissal of such claim for further proceedings.  Op. at 17.

Finally, the Court held that the three-year statute of limitations also applied to Borrower’s statutory consumer protection claims under the MCDCA and MCPA.  Op. at 18.  The Court rejected Borrower’s assertion that Creditor had a duty to disclose its lack of licensure.   Rather, the Court determined that Borrower was on inquiry notice of Creditor’s collection activities against him at least three years prior to filing his lawsuit, and was on inquiry notice to investigate potential claims against Creditor when it sought and obtained the judgment against him.  Thus, the Court held that Borrower’s statutory claims under the MCDCA and MCPA were time-barred, and affirmed the dismissal of such claims.  Op. at 18.