Md. App. Ct. Reverses Dismissal of Foreclosure Case; Non-Borrower Spouse’s Post-Sale Challenge to Due-On-Sale Clause was Untimely Post-Sale

In Devan v. Bomar, the Court of Special Appeals reversed the dismissal of a foreclosure case, where such dismissal was premised on a non-borrowing spouse’s claim that the secured party violated federal law prohibiting the exercise of a “due-on-sale” clause, where title to the property was transferred to a surviving spouse upon the death of her husband.  The Court reaffirmed that such pre-sale challenges must be made prior to the foreclosure sale, explaining that “[a]s with statutes of limitations generally, procedural deadlines for raising certain challenges are established and strictly enforced.  An unexcused failure to comply with a clear deadline may doom what might otherwise have been a highly meritorious challenge, has it been timely filed.”  Op. at 1.

A copy of the opinion is available here.

Background

Husband and Wife owned their marital home as tenants by the entireties, however, only Husband was a borrower under the promissory note.  Following his death in 2008, Wife continued making monthly mortgage payments.  After her husband’s estate was closed, the loan servicer refused to accept further monthly payments from her, and demanded payment in full.  Thereafter, foreclosure proceedings were initiated, and nearly one-year later, the property was sold to the lender. 

After the sale, Wife filed exceptions to the sale claiming that she was wrongly prevented from making payments on the promissory note in violation of federal prohibitions on the exercise of a “due-on-sale” clause upon a transfer caused by the death of a spouse.   See 12 C.F.R. § 591.5(b).  The trial court sustained the exception, and set aside the foreclosure sale.  The substitute trustees appealed.

Discussion

As an initial matter, the Court determined that it need not consider the binding effect of the federal regulation.  Rather, the Court noted that the appeal concerned the procedural issue of whether a challenge to the sale based upon a violation of the regulation must be raised before the foreclosure sale, or if it is one that may also be raised as a post-foreclosure exception.

Under Maryland law, a foreclosure proceeding is a two-step process.  “A borrower’s ability to challenge a foreclosure sale is in part determined by whether relief is requested before or after the sale. Prior to the sale, a borrower may file a motion to stay the sale and dismiss the foreclosure action under Maryland Rule 14-211. . . . The situation is different after a foreclosure sale.” Op. at 5 (quoting Thomas v. Nadel, 427 Md. 441, 443-44, 48 A.3d 276 (2012)).

Consequently, the Court reaffirmed that “[a] post-sale exception to a foreclosure sale is not an appropriate vehicle to challenge the broad equities of the entire foreclosure proceeding itself. It is, rather, a narrow challenge to the procedures employed in the execution of the sale process itself.” Op. at 8.

In this case, the Court observed that Wife’s claim was “a sweeping attack on the Bank’s entitlement to initiate the foreclosure proceeding at the very outset,” Op. at 12, that was “fully knowable” to Wife a full year before the sale.   Thus, the Court determined that the subsequent challenge, whatever might have been its merit, simply came too late.  “Bad timing can be as fatal as lack of merit.”  Op. at 12.

The Court rejected attempts to “wriggle out” from prior decisions establishing the timing requirements of a foreclosure challenge.   The Court determined inapplicable its decision in Bierman v. Hunter, 190 Md. App. 250, 988 A.2d 530 (2010), in which the intermediate appellate court upheld a challenge to a foreclosure sale where a spouse proved her signature on the mortgage documents were forged.   The Court noted that part of the rationale in that case had been expressly rejected by subsequent opinions of the Court of Appeals, and noted that “[t]he Bierman opinion, despite its earlier tilt in a different direction, does not help [Wife] in this case.”  Op. at 17.  

Accordingly, finding Wife’s claims untimely, the Court reversed the trial court’s order to set aside the sale, and determined moot the substitute trustee’s evidentiary challenges to the trial court’s ruling.

Md. App. Ct. Rejects Per Se Rule Establishing Debtor's Ownership of Joint Bank Account in Garnishment Proceeding; Non-Debtor Can Rebut Presumption of Ownership

In Morgan Stanley & Co., Inc. v. Andrews, the Court of Special Appeals of Maryland addressed a non-debtor’s defense to a garnishment proceeding against funds in a bank account jointly owned with the judgment debtor, who was not his spouse.   The Court determined that while there is a prima facie presumption of ownership by each named account owner, that presumption can be rebutted by clear and convincing evidence as to which portion of the account funds belong to which owner.  Thus, in this case, the Court agreed that the trial court correctly determined that the funds in an account jointly held by a father and son were not subject to garnishment, where the father successfully proved that he was the sole contributor and owner of all of the funds.

A copy of the opinion is available here.

 Background

In this case, after obtaining a judgment against the judgment debtor (“Son”), Creditor sought to garnish funds held in an account jointly titled in both Son’s name and Father’s name.  Father asserted his claim to the garnished funds under Maryland Rules 2-645(i) and 2-643(e), and after his claim was initially denied on the papers, following an appeal, the case was remanded to the trial court for an evidentiary hearing.  

Thereafter, on remand, the trial court held an evidentiary hearing to determine Father’s claim to the funds in the joint bank account, and determined that Father had established that all of the funds in the joint account belonged solely to him, and that Son had not deposited any of his own funds into the account.  Creditor then filed the present appeal.

Discussion

On appeal, Creditor argued that funds in the joint account were per se subject to garnishment because the judgment debtor was a named owner, regardless of whether co-owners of the account were also judgment debtors.  The appellate court disagreed, determining instead that, while there is a presumption that a bank deposit belongs to a named owner of the account, “a co-owner of a joint account can rebut the presumption of ownership by proving, by clear and convincing evidence, which portion of the account belongs to each co-owner.”  Op. at 14.

Notably, the Court differentiated between legal title to a joint account and equitable title to the funds within the account.  Op. at 11.  The Court adopted the majority rule followed by at least 23 other states, which provides that a judgment creditor of one joint account holder may execute against the joint account only to the extent of the debtor’s equitable interest in the account.  Op. at 11. 

In determining the debtor’s equitable interest, the Court identified two primary factors: (1) control over the funds; and (2) original contribution of the funds.  Op. at 13.  Other relevant factors include whether a party’s social security number appears on the account, which party’s name appears on checks, which party signs checks, which party pays taxes on interest from the account, and which party possesses the passbook and other related documents.  Op. at 13.  The Court cautioned that the titling of the account, and the right to withdraw from the account, do not necessarily indicate equitable ownership.  Op. at 18.

Consequently, the Court agreed with the trial court’s determination that Father was the sole owner of all funds in the account, observing that the most important factor was that it was undisputed that Father was the original contributing source of all the funds.  Op. at 20-21. 

Although the Court described how the prima facie presumption of ownership can be rebutted, it left unanswered what type of prima facie presumption applied.  The Court observed that some jurisdictions use an “equal share” approach, imposing a rebuttable presumption that account holders own equal shares, while others use a “full share” approach, presuming that each co-owner beneficially owns the entire account.  Op. at 13. 

In addition, the Court noted that its opinion did not affect the existing restriction upon garnishment of property owned jointly by spouses.  See Maryland Code, Courts and Judicial Proceedings § 11- 603(a) (“[A] garnishment against property held jointly by [spouses], in a bank, trust company, credit union, savings bank, or savings and loan association or any of their affiliates or subsidiaries is not valid unless both owners of the property are judgment debtors.”).

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.