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.  

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.