Maryland Legal Alert for Financial Services
Maryland Legal Alert - September 2021
IN THIS ISSUE:
MARYLAND COURT OF APPEALS CLARIFIES THE MARYLAND CONSUMER DEBT COLLECTION ACT
ANOTHER CIRCUIT COURT RULING REINFORCES THE UTILITY OF WORKOUT AGREEMENTS
ASSESSING UNAUTHORIZED FEES MAY LEAD TO LENDER LIABILITY
Maryland Court of Appeals Clarifies the Maryland Consumer Debt Collection Act
Maryland’s highest court recently issued an opinion in two consolidated cases, in which it held that the scope of the Maryland Consumer Debt Collection Act (MCDCA) is not limited to the methods that a debt collector employs to collect a consumer debt, but it also covers the collector’s conduct in collecting that debt.
These cases involved landlords and their lawyers attempting to collect on judgments entered against consumers for unpaid rent using writs of garnishment. In their garnishment pleadings, the landlords, through their lawyers, sought to collect post-judgment interest at the rate of 10% per annum, which is the rate generally applicable under Maryland law to judgments for money. When it comes to judgments relating to unpaid residential lease payments, however, Maryland law provides that the rate of interest is 6% per annum, which was confirmed by the Court of Appeals in 2018 (see the analysis of that case by our Real Estate colleague, Edward J. Levin).
The MCDCA, among other things, prohibits a person, in collecting or attempting to collect a consumer debt, from claiming, attempting or threatening to enforce a right with knowledge that the right does not exist. In these cases, the consumers alleged violations of the MCDCA on the basis that the landlords attempted to collect post-judgment interest at the rate of 10% per annum when they were only entitled to collect post-judgment interest at the rate of 6% per annum.
Citing prior decisions of the Maryland Court of Special Appeals and the U.S. District Court for the District of Maryland, the defendants argued that the MCDCA cannot be used to challenge the validity or amount of a consumer debt because its scope is limited to the methods that a debt collector employs to collect a debt. Because the defendant landlords had a right to enforce the judgments and had used permissible methods of collection (i.e., writs of garnishment), the defendants asserted that the plaintiffs’ claims under the MCDCA were simply attempts to challenge to the amount due and, therefore, must be dismissed.
The Maryland Court of Appeals disagreed and held that nothing in the MCDCA suggests that the General Assembly intended such a narrow scope. Rather, the Court of Appeals noted that the MCDCA’s purpose is to protect consumer debtors from unfair or deceptive collection practices, which could include both the methods that a collector uses and the collector’s conduct in employing those methods (e.g., attempting to collect an amount to which the creditor is not entitled). Because the defendant landlords had no right to post-judgment interest of 10% per annum, the Court of Appeals found that their attempts to collect excessive interest fell within the scope of the MCDCA.
The defendants next argued that the claims should, nevertheless, be dismissed, because their attempts to collect impermissible interest occurred before the 2018 decision and, thus, could not have been made with the requisite knowledge that the defendant landlords were not entitled to post-judgment interest of 10% per annum. The Maryland Court of Appeals again disagreed with the defendants and held that the MCDCA does not immunize debt collectors from liability for mistakes of law. The Court of Appeals confirmed prior decisions that the “knowledge” prong is satisfied if the collector acted with actual knowledge or with reckless disregard as to the falsity of the existence of the right. Because the plaintiffs pleaded facts sufficient to support a finding that the defendants acted with reckless disregard with respect to the permissibility of collecting interest of 10% per annum, the Court of Appeals reversed the lower courts’ dismissals and remanded the cases for further proceedings.
Practice Point: Readers are reminded that, unlike the federal Fair Debt Collection Practices Act, the definition of “debt collector” contained in the MCDCA is broad and includes any person who collects or attempts to collect a consumer debt, which can include a lender and a lender’s lawyer.
Please contact Andrew D. Bulgin for questions concerning this topic.
Contact Andrew D. Bulgin | 410-576-4280
Another Circuit Court Ruling Reinforces the Utility of Workout Agreements
The U.S. Court of Appeals for the 5th Circuit filed a decision that reinforced a recent ruling regarding lenders with troubled loans.
This decision reinforced the ruling by the U.S. Court of Appeals for the 10th Circuit that we reported on last month, which illustrated how forbearance agreements and loan modifications can help mitigate potential lender liability claims.
The 5th Circuit also lended support for lenders’ ability to take strong negotiating positions in workout scenarios
In the most recent case, the debtor companies obtained two sizable lines of credit from their lenders and, within a year, had breached some of their obligations. The parties, thereafter, modified the lines of credit and, in connection with the modification, the debtors’ sole owner executed a personal guaranty. Also, at the lenders’ urging, the debtors hired a chief restructuring officer (CRO).
The debtors continued to flounder, and the lenders grew frustrated that the debtors and the guarantor did not fully empower the CRO to address the debtors’ financial issues. The lenders, thereafter, demanded that the debtors hand over full authority to the CRO within 48 hours or face an acceleration of the debt. The debtors complied but, nonetheless, defaulted on a sizable loan payment. Thereafter, the debtors and the guarantor executed two forbearance agreements in which they confirmed that the amended loan agreements were valid and enforceable, and waived and released the lenders from all claims.
After the second forbearance agreement expired, the lenders accelerated the debt and sued the guarantor for amounts owed under his guaranty. In defense, the guarantor claimed the lenders engaged in a bait-and-switch scheme to obtain his guaranty and then install the CRO to control the businesses. Claiming that he only agreed to execute the guaranty and forbearance agreements under intense business pressure, the guarantor asserted affirmative defenses of fraudulent inducement and duress, both of which were rejected by the trial court on summary judgment.
On appeal, the 5th Circuit noted that because the guarantor ratified the guaranty in connection with the forbearance agreements, the guarantor would need to invalidate the forbearance agreements before he could escape liability under the guaranty. The court found no basis to support a fraudulent inducement defense since the guarantor signed the first forbearance agreement after he already agreed to cede control over the companies to the CRO.
Interestingly, the 5th Circuit also held that the guarantor’s duress defense, likewise, lacked merit. The guarantor argued that he only agreed to relinquish control to the CRO and execute the forbearance agreements because the lenders threatened to accelerate the loans. The court rejected this defense, noting that duress requires a threat of unauthorized action. The lenders were authorized to accelerate the loans and were simply using their leverage to extract a concession that they desired (i.e., installing the CRO). The court further noted that “difficult economic circumstances do not alone give rise to duress.” Indeed, the 5th Circuit t opined that loan modifications would become rare if a borrower could later invalidate the agreement because of the economic pressure that precipitated the modification in the first place.
Practice Point: This case reinforces the notion that so long as a lender is acting within the bounds of its loan agreement authority, it may elect to apply appropriate pressure to obtain valuable concessions from its troubled borrower. Further, a well-crafted loan modification or forbearance agreement can help mitigate potential exposure to lender liability claims.
Please contact Bryan M. Mull for questions concerning this topic.
Contact Bryan M. Mull | 410-576-4227
Assessing Unauthorized Fees May Lead to Lender Liability
The Maryland Court of Appeals recently affirmed a decision by the Maryland Court of Special Appeals (CSA) that addressed the scope of Maryland’s interest and usury law, specifically, Section 12-121 of the Commercial Law article.
The provision we reported on last year prohibits a “lender” from imposing a fee for a visual inspection of real property. In that decision, the CSA ruled that mortgage servicers and assignees fall within the definition of “lenders” under that statute and, thus, are subject to the prohibition against imposing a fee for visual property inspections.
In its ruling, the Court of Appeals held that the prohibition against visual inspection fees endures for the life of the mortgage loan, applying equally to the loan originator, assignees and servicers.
Notably, however, the Court of Appeals reversed the prior ruling as to a separate issue regarding the borrower’s claims against the servicer under the Maryland Consumer Debt Collection Act (MCDCA). The MCDCA, among other things, prohibits a person, in collecting or attempting to collect a consumer debt, from claiming, attempting or threatening to enforce a right with knowledge that the right does not exist.
The CSA had affirmed the dismissal of the borrower’s MCDCA claim, reasoning that claims under the MCDCA are limited to those concerning the “methods” of debt collection, as opposed to the “validity” of the debt. Since the borrower’s MCDCA claim concerned the amount of the debt (i.e., the inclusion of visual inspection fees), the CSA held that dismissal was appropriate.
On the same day as this ruling, the Court of Appeals held in a separate opinion that the MCDCA should not be interpreted in such a narrow fashion (see our analysis above). Relying on this ruling, the Court of Appeals in this case held that the borrower could raise a claim under the MCDCA for the servicer’s attempt to collect an unauthorized fee.
Practice Point: As noted above, the MCDCA applies more broadly than the federal Fair Debt Collection Practices Act. Lenders and servicers should pay careful attention to the fees and interest that they claim with respect to consumer loans.
Please contact Bryan M. Mull for questions concerning this topic.