Financial Litigation

Md. App. Holds Debt Buyer Statutory Trust Needs Collection Agency License

Md. App. Holds Debt Buyer Statutory Trust Needs Collection Agency License

The Court of Special Appeals of Maryland held that a foreclosure proceeding was subject to state law collection agency requirements, and therefore that a statutory trust that owned a consumer mortgage loan was required to hold a collection agency license prior to proceeding with foreclosure.  

Md. App. Allows Conversion Claim for Money Held in Escrow; Negligence Requires Expert Testimony for Settlement Company’s Standard of Care

In Roman v. Sage Title Group, LLC, the Court of Special Appeals of Maryland determined that a lender could bring a conversion claim against a settlement company for its employee’s misuse of funds held in the company’s escrow account.  The Court held that a conversion claim will not be barred “simply because funds were located in a single escrow account, without looking at the purpose of the account, the duties of the account holder, and whether the funds were sufficiently specific, separate, and identifiable.”  Op. at 16.

However, the Court affirmed judgment in favor of the settlement company on the lender’s negligence claim regarding the settlement company’s handling of such escrow funds, holding that expert testimony was necessary to establish the settlement company’s standard of care.

A copy of the opinion is available here.

Background

Lender, who provided interest-only “bridge loans” to real estate developers, deposited $2,420,000 into an escrow account of Settlement Company, to enable Developer to show liquidity for three projects (under a putative false escrow scheme).  Lender was led to believe that the money deposited into the escrow account would remain the property of Lender, and would not be at risk, because only Lender would have access to such funds.   Settlement Company’s branch manager thereafter disbursed the funds to Developer.  Branch Manager was later fired, pleaded guilty to wire fraud, and was disbarred.  Settlement Company never returned Lender’s money.

Lender sued Settlement Company for conversion and negligence.  Following a three-day jury trial, the trial court granted Settlement Company’s motion for judgment on the negligence claim, holding that expert testimony was required to establish the standard of care for a settlement company.  After the jury rendered a $2,420,000 verdict for Lender, the trial court granted Settlement Company’s motion for judgment notwithstanding the verdict, holding that because Lender’s funds were commingled with other funds in Settlement Company’s escrow account, the conversion claim was barred as a matter of law.  Lender filed the present appeal.

 Discussion

I. Conversion Claim: Money Held in Escrow Sufficiently Identifiable

As to the conversion claim, the Court reversed the judgment in favor of Settlement Company.  The Court noted that the tort of conversion covers “nearly any wrongful exercise of dominion by one person over the personal property of another.”  Op. at 6.  As to money, “[t]he general rule is that monies are intangible and, therefore, not subject to a claim for conversion.” Op. at 6-7.

“An exception exists, however, when a plaintiff can allege that the defendant converted specific segregated or identifiable funds. . . .  [C]onversion claims generally are recognized in connection with funds that have been or should have been segregated for a particular purpose or that have been wrongfully obtained or retained or diverted in an identifiable transaction.”  Op. at 7 (quoting Allied Investment Corp. v. Jansen, 354 Md. 547, 564-65 (1999).

Thus, the Court noted that in cases where Maryland courts have precluded claims for conversion of funds, “the plaintiff either never identified a specific dollar amount that was allegedly converted, or the defendant had no obligation to return those funds in the first place.”  Op. at 9.  Noting that the case of an escrow account presented a case of first impression, the Court observed that other jurisdictions had allowed a conversion claim to proceed against an escrow under certain circumstances.  See Op. at 10-12.

Finding those cases analogous, the Court determined that, although the Lender’s funds were placed with other funds in the Settlement Company’s escrow account, “the $2,420,000 deposited to that escrow account was sufficiently specific, segregated, and identifiable to support a claim for conversion.”  Op. at 14.  “[Lender] identified the specific funds at issue through the three checks and the corresponding notations on [Settlement Company]’s balance reports.  In other words, [Lender] was able to ‘describe the funds with such reasonable certainty that the jury may know what money is meant.’” Id. (quoting Jasen, 354 Md. at 565).  “The funds were segregated because, by agreement, the funds were to be placed in an escrow account, belong to [Lender], be accessible only by [Lender], and be returned to [Lender]. Finally, the funds were sufficiently identifiable, because all of [Lender’s] monies were not returned by [Branch Manager] to [Lender], nor were they disbursed with [Lender’s] permission.”  Op. at 14.

The Court rejected Settlement Company’s argument that conversion could not occur because the funds were commingled with other funds in the escrow account, noting that such view of commingling is too broad.  “Commingling of funds, in our view, does not occur when funds are placed in an escrow account to be disbursed only by agreement, even if those funds are physically located in the same account with other funds. In other words, if the funds, although physically mixed with other funds in an escrow account, are still under the control of the owner or restricted in use by agreement with the owner, commingling of such funds does not occur.”  Op. at 15.

II. Vicarious Liability for Employee’s Misuse of Funds

The Court also held that sufficient evidence existed to present to the jury the issue of whether Settlement Company was vicariously liable for Branch Manager’s misconduct.  The Court noted the general rule that “an employer cannot be held liable for the criminal acts of an employee, unless they were committed during the course of employment and to further a purpose or interest, however excessive or misguided, of the employer.”  Op. at 19-20.

Here, because Branch Manager was authorized to receive and disburse funds from the Settlement Company escrow account in order to conduct Settlement Company’s business, including the receipt and disbursement of Lender’s funds, and Settlement Company earned closing fees on the projects in question, the Court concluded that a reasonable jury could find that Branch Manager’s misconduct – disbursing Lender’s funds pursuant to Developer’s instructions, instead of returning the funds to Lender per their agreement – was in furtherance of the employer’s business and authorized by the employer.”  Op. at 21.

Moreover, the Court noted that such misconduct was foreseeable, because Branch Manager had previously violated Settlement Company’s policy in an incident where he accepted personal checks, and therefore, as articulated by the trial court, Settlement Company was “on notice that [Branch Manager] may be engaging in questionable conduct.”  Op. at 21.

III. Negligence: Expert Testimony Required

The Court affirmed the judgment in favor of Settlement Company on the negligence claim, because Lender failed to adduce or designate expert testimony as to the standard of care for a settlement company.  The Court noted that “[a]lthough ‘expert testimony is generally necessary to establish the requisite standard of care owed by the professional[,]’ such testimony is not needed when ‘the alleged negligence, if proven, would be so obviously shown that the trier of fact could recognize it without expert testimony.’” Op. at 27 (citing Schultz v. Bank of America, 413 Md. 15, 30-31 (2010)).

However, in this case, expert testimony was required to establish Settlement Company’s negligence, “because most lay people are not familiar with the operation of escrow accounts, nor with any standard of care a title company owes to individuals or entities who are not customers, but who deposit funds in escrow with the title company. . . . [Settlement Company’s] procedures and safeguards would ‘occur behind closed doors, out of the sight of the customer, and may involve numerous unknown procedures’ that are ‘beyond the ken of the average layperson.’” Op. at 29 (quoting Schultz, 413 Md. at 30).

Moreover, the Court noted that the “parties in this case also were sophisticated developers accustomed to working with title companies and multiple parties to move large sums of money in and out of escrow accounts; the standard of care for title companies in such circumstances is unknown to the average juror.”  Op. at 29.  Further, the Court rejected Lender’s claim that expert testimony was not required because Settlement Company had no policies, no procedures, no guidelines or no safeguards in place, observing that “the jury still did not know whether the standard of care required [Settlement Company] to have any policy at all.  Expert testimony was required to show the need for such policies in the first place, as well as what those policies should provide.” Op. at 30.

Accordingly, the Court reversed judgment in favor of Settlement Company on the conversion claim, remanded the case for further proceedings, and affirmed judgment in favor of Settlement Company on the negligence claim.