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.

4th Cir. Affirms Certification of Rule 23(b)(2) Settlement Class Where Mandatory Release of FCRA Statutory Damages Claims Incidental to Agreed Injunctive Relief

In Berry v. LexisNexis Risk and Information Analytics Group, Inc., et al., the U.S. Court of Appeals for the Fourth Circuit affirmed the certification of a class pursuant to Federal Rule of Civil Procedure 23(b)(2) and the settlement of class claims under the Fair Credit Reporting Act, 15 U.S.C. §§ 1681, et seq. (the “FCRA”), wherein the defendant would provide injunctive relief, while releasing all class member’s claims for statutory damages.

Rejecting the arguments of several objectors to the class and the settlement, the Court determined that plaintiffs’ statutory damages claims were “not the kind of individualized claims that threaten class cohesion.”  Op. at p. 18.  Noting that individual class members retained the right to pursue any FCRA claim for actual damages, the Court agreed with the trial court that plaintiffs’ statutory damages claims were “incidental” to the injunctive relief provided, which was indivisible and benefitting all members of the Rule 23(b)(2) class.  See id. at pp. 17, 18.

Moreover, the Fourth Circuit expressly rejected any argument that certain dicta in the U.S. Supreme Court’s opinion in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), demanded that due process requires opt-out provisions in a Rule 23(b)(2) class.  Rather the Court re-affirmed the Fourth Circuit’s precedent of permitting certification of mandatory Rule 23(b)(2) classes involving monetary relief so long as such relief is “incidental” to the injunctive or declaratory relief sought.  See Op. at p. 24.

A copy of the opinion is available here.  

Background

Defendants, including several related corporations (for convenience, “Defendants”) collectively serve as a data broker that sells identity reports used to locate people and assets, authenticate identities, and verify credentials (“Identity Reports”).  For years, Defendant issued Identity Reports without complying with the FCRA on the theory that such reports were not “consumer reports” that trigger the Act’s provisions.  Eventually, in 2011, several individuals who were the subject of Identity Reports filed a class action lawsuit against Defendant, claiming, inter alia, that Defendant violated the FCRA “by selling [Identity Reports] without first ensuring that buyers were purchasing the reports for uses permitted by the FCRA.”  Op. at p. 10.  Plaintiffs sought both actual and statutory damages, but did not seek injunctive relief, as the FCRA does not provide for such remedy.

Over one-year later, after months of discovery and a series of negotiations with the aid of several “highly skilled” mediators, the parties reached a settlement agreement (the “Agreement”), which included a two certified classes, one of which was certified under Federal Rule of Civil Procedure 23(b)(2) (the “(b)(2) Class”).  The (b)(2) Class included all individuals about whom the Defendant’s database contained information from November 2006 to April 2013, amounting to “roughly 200 million people.”  Op. at p. 11.  Under the Agreement, the (b)(2) Class members would retain their rights to seek actual damages, though they would release any claim for statutory damages, as well as punitive damages.  See id.  In exchange, the (b)(2) Class members would receive injunctive relief – that is, “a fundamental change in the product suite that [Defendant] offers the debt-collection industry that will result in a significant shift from the currently accepted industry practices.”  Id. (internal citations omitted).

The trial court granted the parties’ joint motion for preliminary certification of the (b)(2) Class for settlement purposes.  Several Objectors filed motions challenging certification.  The trial court ultimately certified the (b)(2) Class and approved the Agreement, and the Objectors appealed.

Discussion

On appeal, the Fourth Circuit affirmed the certification of the proposed (b)(2) Class for settlement purposes.  The appellate court noted that, absent a “clear abuse of discretion,” it would give the trial court “substantial deference,” recognizing that a “district court possesses greater familiarity and expertise than a court of appeals in managing the practical problems of a class action.”  Op. at pp. 14-15 (citing Ward v. Dixie Nat’l Life Ins. Co., 595 F.3d 164, 179 (4th Cir. 2010)).

Under Rule 23(b)(2), certification of a class is permitted where “the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.”  Op. at p. 16 (citing Fed. R. Civ. P. 23(b)(2)).  A Rule 23(b)(2) class is assumed to be “a homogenous and cohesive group with few conflicting interests among its members,” such classes are “mandatory,” in that “opt-out rights” for class members are not provided.  Op. at pp. 16-17 (citing Allison v. Citgo Petroleum Corp., 151 F.3d 402, 413 (5th Cir. 1998)). 

Although Rule 23(b)(2) certification is inappropriate where monetary relief predominates, see Op. at p. 17 (citing Thorn v. Jefferson-Pilot Life Ins. Co., 445 F.3d 311, 331-32 (4th Cir. 2006)), such classes may be certified where monetary relief is “incidental” to the injunctive or declaratory relief.  Op. at p. 17 (Allison, 151 F.3d at 415 413).

Here, several Objectors contested the certification of the (b)(2) Class, claiming that the statutory damages waived under the Agreement predominate over the injunctive relief awarded and are not “incidental” to such relief.  See Op. at p. 18.  Although the Court noted that there are individualized monetary damages claims at issue (i.e., those for actual damages under the FCRA), it emphasized that class member’s retained their rights to seek such damages.  Op. at p. 19.  However, with statutory damages under the FCRA, “what matters is the conduct of the defendant,. . . . which, as the district court emphasized, ‘was uniform with respect to each of the class members.’”  Op. at pp. 18-19.  Agreeing with the trial court, the Fourth Circuit concluded that the “meaningful, valuable injunctive relief” afforded by the Agreement is “indivisible,” “benefitting all members” of the (b)(2) Class at once. . . .  And the statutory damages claims released under the Agreement are not the kind of individualized claims that threaten class cohesion and are prohibited by Dukes.”  Op. at p. 18 (citing Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011)).

Although Objectors contended that statutory damages are not “incidental” because Plaintiffs’ original complaint did not seek any injunctive relief under the FCRA, the Court rejected such argument.  See Op. at pp. 20-23.  Although the FCRA does not provide for injunctive relief, the Fourth Circuit agreed with the trial court that, “[i]n the settlement context, ‘it is the parties’ agreement that serves as the source of the court’s authority to enter any judgment at all.’”  Op. at p. 20 (citing Local Number 93 v. City of Cleveland, 478 U.S. 501, 522 (1986)).  Likewise, Plaintiffs’ failure to seek injunctive relief in the original complaint does not independently preclude certification under Rule 23(b)(2).  Rather, by its express terms, Rule 23(b)(2) apples so long as “final injunctive relief . . . is appropriate respecting the class as a whole.”  Op. at p. 22 (emphasis in opinion); but see Op. at pp. 22-23 (explaining that Rule 23(b)(2) may preclude certification of a class when injunctive relief is “illusory” or “may only to justify a damages award that otherwise would be improper under Rule 23(b)(2)”).

Alternatively, relying on dicta in the Dukes decision that noted the “serious possibility” that due process requires opt-out rights, the Objectors asserted that the principles of due process precludes certification of the (b)(2) Class without opt-out rights.  See Op. at p. 23 (citing Dukes, 131 S. Ct. at 2559).  Again, the Fourth Circuit disagreed, explaining that federal courts have long permitted certification of mandatory Rule 23(b)(2) classes involving monetary relief so long as such relief is “incidental” to the injunctive or declaratory relief sought.  See Op. at p. 24.  In the context of Rule 23(b)(2) class certification, because the relief sought is uniform, so are the interests of class members, making class-wide representation possible and opt-out rights unnecessary.  Op. at pp. 25-26 (citing Dukes, 131 S. Ct. at 2558; Thorn, 445 F.3d at 330 & n.25; Allison, 151 F.3d at 413-14).  Again, the Fourth Circuit favorably noted that class members retain their right to pursue actual damages under the FCRA.  See Op. at pp. 26-27.

Next, the Objectors complained that the class settlement was “unfair and inadequate because it releases class members’ statutory damages claims without providing for any monetary relief in exchange.”  Op. at p. 30.  However, the trial court deemed the case to be “speculative at best,” which the Fourth Circuit characterized as a “generous” description.  Op. at p. 32.  Notably, “with agency guidance expressly specifying that [the subject] reports are not subject to the FCRA, . . .it is hard to see how [Defendant] can be said to have acted unreasonably by adopting that reading.”  Op. at pp. 32-33.  Moreover, the trial court described the injunctive relief as a “significant shift” in industry practices, making [Defendant] “the industry leader” in consumer-information protection.  Id. at p. 33.  Indeed, the Fourth Circuit observed that the record included a finding that the injunctive relief “provided consumers with benefits so substantial that their monetary value is in the billions of dollars.”  Id.

Finally, as to one Objector’s challenge to the approval of class counsel’s fees for securing injunctive relief, amounting to approximately $5.3 million, the Fourth Circuit found no reversible error.  Acknowledging that the trial court’s discussion of the fee award was brief, the Fourth Circuit noted that the trial court did provide a sufficient basis for such award: “that class counsel ‘expended large amounts of time and labor,’ and ‘achieved an excellent result in this large and complex action.’” Op. at p. 39 (citing Berry v. LexisNexis Risk & Info. Analytics Grp., Inc., No. 3:11-CV-754, 2014 WL 4403524, at *15 (E.D. Va. 2014)).

Accordingly, the Fourth Circuit affirmed the decision of the trial court in its entirety.

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.