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.

4th Cir. Holds No FDCPA Violation For Filing Proof of Claim on Time-Barred Debt

In Dubois v. Atlas Acquisitions, LLC, a majority panel of the Fourth Circuit recently held that, while the filing of a proof of claim in a borrower’s bankruptcy proceeding constitutes “debt collection”, filing a proof of claim in a Chapter 13 bankruptcy based upon a time-barred debt does not violate the FDCPA or state collection laws so long as the statute of limitations itself does not extinguish the debt.  The Court noted that under Maryland law, the statute of limitations does not extinguish the debt itself, but merely bars the remedy. 

Consequently, the Fourth Circuit rejected the Eleventh Circuit’s holding in Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1259-60 & n.6 (11th Cir. 2014), noting that the “[t]he Eleventh Circuit in Crawford is the only court of appeals to hold that filing a proof of claim on a time-barred debt in a Chapter 13 proceeding violates the FDCPA.”

A copy of the opinion can be found here. 

 Discussion

At the outset, the Court determined that filing a proof of claim is debt collection activity subject to the FDCPA.  The Court explained that “[d]etermining whether a communication constitutes an attempt to collect a debt is a ‘commonsense inquiry’ that evaluates the ‘nature of the parties’ relationship,’ the ‘[objective] purpose and context of the communication[],’ and whether the communication includes a demand for payment.”  Op. at 9 (citations omitted).

In the bankruptcy context, the “only relationship between [the parties] [is] that of a debtor and debt collector. . . . [and] the ‘animating purpose’ in filing a proof of claim is to obtain payment by sharing in the distribution of the debtor’s bankruptcy estate.” Op. at 9-10.  Consequently, “[p]recedent and common sense dictate that filing a proof of claim is an attempt to collect a debt.  The absence of an explicit demand for payment does not alter that conclusion, . . . nor does the fact that the bankruptcy court may ultimately disallow the claim.” Op. at 10.

Nevertheless, in an explicit departure from the Eleventh Circuit’s holding in Crawford, the Court determined that filing a proof of claim based on a debt that is beyond the applicable statute of limitations does not violate the FDCPA. 

To that end, the Court considered whether a time-barred debt fell within the definition of a claim in the bankruptcy context.   The Court observed that “while the Bankruptcy Code provides that time-barred debts are to be disallowed, see, e.g., 11 U.S.C § 558, the Code nowhere suggests that such debts are not to be filed in the first place.”  Op. at 16.  Rather, recent amendments to Rule 3001 suggest that “the Code contemplates that untimely debts will be filed as claims but ultimately disallowed.”  Op. at 16-17.  As such, they fall within the definition of a claim within the bankruptcy context.

Further, the Court determined that excluding time-barred debts from the scope of bankruptcy “claims” would frustrate the Code’s intended effect to define the scope of a claim as broadly as possible, and provide the debtor the broadest possible relief.  The Court also observed that under applicable Maryland law, the statute of limitations does not extinguish the debt, but merely bars the remedy.  Accordingly, the Court concluded that “when the statute of limitations does not extinguish debts, a time-barred debt falls within the Bankruptcy Code’s broad definition of a claim.”  Op. at 17.

Moreover, the Court noted a unique consideration in the bankruptcy context: “if a bankruptcy proceeds as contemplated by the Code, a claim based on a time-barred debt will be objected to by the trustee, disallowed, and ultimately discharged, thereby stopping the creditor from engaging in any further collection activity.”  Op. at 18.  Alternatively, “[i]f the debt is unscheduled and no proof of claim is filed, the debt continues to exist and the debt collector may lawfully pursue collection activity apart from filing a lawsuit.”  Op. at 19. 

The Court rejected the borrower’s claim that trustees and creditors fail to object to time-barred debts, noting that “for most Chapter 13 debtors, the amount they pay into their bankruptcy plans is unaffected by the number of unsecured claims that are filed.”  Op. at 20.  “As additional claims are filed, unsecured creditors receive a smaller share of available funds but the total amount paid by most Chapter 13 debtors remains unchanged.  Thus, from the perspective of most Chapter 13 debtors, it may in fact be preferable for a time-barred claim to be filed even if it is not objected to, as the debtor will likely pay the same total amount to creditors and the debt can be discharged.”  Op. at 20-21 (emphasis in original).

Moreover, the Court noted various other considerations that differentiate filing a proof of claim on a time-barred debt from filing a lawsuit to collect such debt.  Op. at 21-23.  Consequently, the majority concluded that “filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the FDCPA when the statute of limitations does not extinguish the debt.”  Op. at 23.  Accordingly, the Court affirmed the dismissal of the Debtor’s FDCPA and state law collection claims.

Md. Holds Borrower Law Firm That Regularly Offered to Negotiate Loan Modifications Subject to Regulation Under Maryland Credit Services Business Act

The Court of Appeals of Maryland recently determined that a law firm engaged in the business of assisting homeowners to modify their mortgage loans constituted a “credit services business” under the Maryland Credit Services Business Act, Md. Code, Comm. Law (“CL”) § 14-1901 et seq. (“MCSBA”), and was subject to regulation and licensure.  The Court also determined that, because the law firm had engaged in the credit services business on a “regular and continuing basis,” it was not subject to the Act’s exemption for attorneys.

A copy of this opinion is available here.

Background

Several homeowners facing foreclosure hired a Virginia law firm, which promised to help renegotiate their mortgage loans in exchange for payment.  After receiving a complaint from one such homeowner, the Maryland Commissioner of Financial Regulation (“Commissioner”) instituted administrative proceedings against Law Firm and its managing partner (collectively, “Law Firm”).  Following an evidentiary hearing, Commissioner found that Law Firm committed multiple violations of the MCSBA, which regulates “credit service businesses” purporting to assist consumers in obtaining credit.  Specifically, neither Law Firm nor any of its attorneys held a license under the MCSBA.  The Commissioner also found that Law Firm violated the MCSBA’s bonding and disclosure requirements.   After settlement efforts failed, the Commissioner entered a cease and desist order prohibiting law firm from engaging in any credit services business activities with Maryland residents, imposed a civil monetary penalty of $114,000 and, determining that its violations were willful, directed law firm and its principal to pay 57 Maryland consumers treble damages totaling $720,600.

Reversing the Commissioner’s order, both the trial court and the intermediate appellate court held that that Law Firm was not a “credit services business” under the MCSBA because its attempts to obtain loan modifications for its clients were “ancillary” to its provision of legal services.  The Commissioner thereafter obtained certiorari in the Court of Appeals.

Discussion

The Court of Appeals agreed with the Commissioner that Law Firm constituted a “credit services business,” which is defined to include “any person [or entity] who, with respect to the extension of credit by others, sells, provides, or performs, or represents that such person can or will sell, provide or perform” any of certain enumerated services “in return for the payment of money or other valuable consideration.”  Md. Code, CL § 14-1901(e)(1).  Such services include “obtaining an extension of credit for a consumer,” or providing advice or assistance to a consumer in connection with obtaining an extension of credit.

Notably, the Court determined that, in undertaking to renegotiate the terms of homeowners’ mortgage loans in exchange for payment, Law Firm was offering to assist the homeowners in “obtaining an extension of credit,” thus falling within the MCSBA’s definition of a “credit services business.”  Op. at 15-16.  The Court also examined the MCSBA’s legislative history and concluded that the statute was not limited to regulating only “ordinary credit repair services” or payday lenders.  Op. at 18.  “Rather, it is intended to provide broad protection to consumers of credit services.”  Op. at 18.   Moreover, the Act’s exemption for “mortgage assistance relief providers” who were separately regulated confirmed that “the General Assembly believed that those who offer to obtain loan modifications for homeowners would be otherwise covered by the MCSBA.”  Op. at 19.

The Court then evaluated whether Law Firm met its burden to show that its activities were exempt from regulation under a statutory provision exempting attorneys.  See Md. Code, CL § 14-1901(e)(3)(vi).  For the “attorney exemption” to apply, three requirements must be met:  “(1) the individual must be admitted to the Bar of the Court of Appeals of Maryland, (2) the individual must render the services within the course and scope of practice by the individual as a lawyer, and (3) the individual must not engage in the credit services business ‘on a regular and continuing basis.’”  Op. at 22.  The Court determined that Law Firm could not satisfy the third prong because, over the relevant time period, Law Firm entered into 57 agreements with Maryland homeowners, and consulted with hundreds of others.  Further, such agreements constituted a “very significant part of the firm’s business” and “accounted for most of the work of its Maryland-licensed attorney . . . .”  Op. at 23. 

The Court noted that “[a] Maryland attorney who counsels an individual client facing foreclosure and attempts to negotiate a mortgage loan modification would . . . ordinarily be exempt from the MCSBA.”  Op. at 23.  However, “there may be cases where there is a significant question at what point an attorney who frequently provides such services has crossed the line into providing ‘regular and continuing’ credit services.  That, however, is not this case.”  Op. at 23.  To that end, the Court observed that “[t]he consultations and agreements with Maryland homeowners seeking loan modifications were not only a very significant part of the firm’s business during the month’s in question, but also accounted for most of the work of its Maryland-licensed attorney by the time he left the firm.”  Op. at 23.  Consequently, the Court determined that there was substantial evidence to support the Commissioner’s finding that the law firm engaged in a credit services business on a regular basis.  Op. at 23.

Accordingly, the Court held that Law Firm was subject to the MCSBA as a “credit services business,” but remanded the case to the trial court to determine whether Law Firm’s violations were willful.  Op. at 28.