Bradshaw v. Hillco Receivables, LLC (Maryland U.S.D.C.)

Filed: February 23, 2011

Opinion by: Judge Richard D. Bennett

Held: A debt collector violates the Fair Debt Collection Practices Act (“FDCPA”) by violating State law for failing to register as a debt collector. In addition, the unlicensed filing of lawsuits to collect debts purchased from original creditors is violative of the FDCPA. Both questions are issues of first impression in this district and in the Fourth Circuit.

Facts: On June 17, 2009, the creditor (Defendant in the underlying case) filed suit against the debtor in the District Court of Maryland for Frederick County in order to collect a debt that it purchased from the debtor's original creditors after the debt went into default. The debtor then brought a separate class action against the creditor, asserting claims that the creditor acted as a debt collector in the State of Maryland without a license and that the creditor unlawfully filed lawsuits against the debtor and others as part of its debt collection practices. The debtor contends that the creditor, through its actions, violated the FDCPA, 15 U.S.C. § 1692 et seq., the Maryland Consumer Debt Collection Act (“MCDCA”), Md. Code Ann., Com. Law § 14-201 et seq., and the Maryland Consumer Protection Act (“MCPA”), Md. Code Ann., Com. Law § 13-101 et seq.

Analysis: The creditor acquired the debtor's delinquent account while it was in default, and the creditor is a person who engages directly or indirectly in the business of collecting such consumer claims. According to the Court, the creditor is therefore a "collection agency" within the meaning of the Maryland Collection Agency Licensing Act, Md. Code Ann., Bus. Reg. § 7-101, et seq. ("MCALA"). In the Court's view, the statutory scheme and its legislative history confirm that the statute is intended to cover not only agents of the original owners of consumer debts but also purchasers of such debt such as the creditor here. Debt purchasers who collect consumer claims through civil litigation are therefore subject to the licensing requirement. The Court found that the creditor violated this requirement when it failed to obtain a collection agency license prior to suing the debtor to collect a debt purchased from the debtor's original creditor. According to the Court, although the creditor's violation of MCALA's licensing requirement does not itself give rise to a private right of action, it may support a cause of action under the FDCPA. The Court specifically declined to hold that any violation of state law, no matter how trivial, constitutes a per se violation of the FDCPA. The FDCPA prohibits the use of any “false, deceptive, or misleading representation or means in connection with the collection of any debt,” 15 U.S.C. §1692e, and provides a non-exhaustive list of conduct that violates the FDCPA, including “[t]he threat to take any action that cannot legally be taken.” 15 U.S.C. § 1692e(5).

The creditor argued that it was not liable for violating the FDCPA because it did not threaten to take illegal action against the debtor but, rather, merely filed an illegal lawsuit against him. Although noting a split of authority among the circuits, the Court adopted the majority view, holding that the relevant section of the FDCPA prohibits the taking of “action that cannot legally be taken,” as well as the threatening of such action. Furthermore, under the "least sophisticated debtor" standard prevailing in the Fourth Circuit, the Court held that the filing of an illegal collection lawsuit would reasonably be construed by such a debtor as a threat to take illegal action.

The Court also held that the creditor was also not protected by the "bona fide error" defense, namely, that “the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.” 15 U.S.C. § 1692k(c). The Court held that this defense was not available to the creditor because of the Supreme Court's recent holding in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 130 S. Ct. 1605, 1608 (2010) that it does not apply to a violation resulting from a debt collector’s mistaken interpretation of the legal requirements of the FDCPA.

For essentially the same reasons as it found the creditor liable for violating the FDCPA, the Court also determined, on summary judgment, that the creditor had violated the MCDCA and the MCPA. Similar in purpose and scope to the FDCPA, the MCDCA states that a “person collecting or attempting to collect an alleged debt arising out of a consumer transaction” may not “[c]laim, attempt, or threaten to enforce a right with knowledge that the right does not exist.” Md. Code Ann., Com. Law §§ 14-201(b) & 14-202(8). The MCPA prohibits “unfair or deceptive trade practices,” Md. Code Ann., Com. Law § 13-301, and expressly designates as “unfair or deceptive trade practices” those that constitute any violation of the MCDCA. Each statute provides for a private right of action for its violation. The Court determined that because the creditor was not immunized from its conduct based on a mistake of law (i.e., that it was not required to be licensed under the MCALA), and because the creditor actually violated that law and was reckless as to whether its conduct was proscribed, the knowledge element of the MCDCA was satisfied. For the foregoing reasons, the Court ruled that the debtor was entitled to partial summary judgment, on liability only, on its claims for damages under the FDCPA, the MCDCA, and the MCPA (Counts II, III, and IV).

As a result of Judge Blake's recent opinion in Hauk v. LVNV Funding, LLC, __ F. Supp. 2d __, 2010 WL 4395395 (D. Md. Nov. 5, 2010), the Court held that declaratory and injunctive relief was not available to the debtor in the case at bar. The Court therefore found that the creditor was entitled to summary judgment on the debtor's Count I, which sought such relief.

Practice Tip: Judge Bennett specifically noted that the "FDCPA is a strict liability statute and a consumer has only to prove one violation in order to trigger liability." Consumer debt purchasers would therefore be wise to comply fully with this statute and its Maryland counterpart in order to avoid liability to consumers, including those, like the debtor in this case, who do not dispute the validity or amount of the underlying debt.

Related Opinion: In an earlier opinion granting the debtor's motion to strike the creditor's affirmative defenses, Judge Bennett held that the plausibility standard set forth in Bell Atlantic Corporation v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) and Ashcroft v. Iqbal, 566 U.S.__, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009) applies to the pleading of affirmative defenses.

The full opinion is available in pdf..

McKinney v. Fulton Bank (Maryland U.S.D.C.)

Filed: June 21, 2010
Opinion by Judge Catherine C. Blake.

Held: A contract alone does not create a tort duty owed by a Bank to a Borrower in a loan transaction unless the Borrower is a vulnerable party or other special circumstances exist.

Facts: A borrower applied for a $930,000 loan to build a second home but entered into a $997,000 loan with a bank on April 27, 2006. The borrower claimed the bank "violated several federal and state laws by failing to make certain disclosures and issue documents on time" and the bank forced her to refinance a $67,000 second mortgage on her principal residence by unilaterally increasing the loan.

The borrower also claimed the deed of trust on her primary home granted her a three-day right to cancel the loan transaction and because she was not informed of this right she had an extended right to cancel. The borrower alleged this right was exercised by rescission letters sent on April 6, 2009 to the bank's counsel and president voiding any security interest of the bank. The bank foreclosed on the second home. The borrower claimed damages relating to costs of the loan and improvements made to the second home.

Analysis: The Court dismissed a majority of the claims alleging violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act and the Maryland Consumer Protection Act due to expiration of the statute of limitations, the lack of a private cause of action under the statute and the borrower's failure to meet the heightened pleading standards.

The borrower also brought a negligence claim. While "the Maryland Court of Appeals has found that a bank did owe a consumer a duty of care in a loan transaction" in Jacques v. First Nat'l Bank of Md., 515 A.2d 756 (Md. 1986), the finding arose from more than just the contract. A contractual duty does not by itself become a tort duty. A duty must be imposed by law independent of the contract. "The Fourth Circuit has interpreted the holding of Jacques as limited to circumstances involving a vulnerable party." As the court neither found an independent duty nor considered the borrower to be vulnerable, the negligence claim was also dismissed.

The full opinion is available in pdf.

The Gabelli Global Multimedia Trust Inc. v. Western Investmnet LLC, et al. (Maryland U.S.D.C.)

Filed: April 1, 2010.

Opinion by Judge Richard D. Bennett.

Held: A closed-end fund registered under the Investment Company Act does not have standing to assert a private cause of action under sections 12(d)(1)(A) and 48(a) of the Investment Company Act of 1940.

Facts: Plaintiff, a closed-end fund, sued Defendants, alleged arbitrageurs, contending the Defendants breached the anti-pyramiding provision of the Investment Company Act of 1940 by illegally acquiring Plaintiff's voting stock and threatening to use the voting power in a proxy contest at Plaintiff's next shareholders' meeting. The anti-pyramiding provision is designed "to prevent a registered investment company from controlling other investment companies and creating complicated pyramid structures."

Defendants moved to dismiss. Both parties argued whether Plaintiff had standing to assert private causes of action under sections 12(d)(1)(A)(i) and 48(a) of the Act.

Analysis: In order to find the Plaintiff had standing, the Court must determine whether the statute displayed an intent to create both a private right and a private remedy. First, the statutory language must contain "rights-creating" language. Second, if such language is present, the Court must then interpret "whether the statute's remedial scheme entrust[s] government agencies or private parties with primary responsibility for statutory enforcement." See Alexander v. Sandoval, 532 U.S. 275 (2001).

Plaintiff argued that since the language of 12(d)(1)(A) focuses on the company whose shares are being targeted for purchase, the Plaintiff falls within the protected class and therefore has standing. The Court disagreed, finding the Act to protect individuals who invest in investment companies rather than the investment companies themselves. The Court found Plaintiff's argument to assume that an investment company would always resist another company's attempt to acquire an interest in the investment company. Yet, 12(d)(1)(A) prevents all inter-fund investments beyond certain levels, not merely hostile acquisitions.

The Court also addressed whether an individual investor has a right to bring a private cause of action under the provisions. The Court noted that while there is an initial focus on the individual, the remainder of the language imposes regulations upon investment companies. Also, following the second part of the analysis, the enforcement scheme is designed for the SEC alone.

The Court noted the distinction between relying on cases pre- and post-Sandoval when analyzing whether standing to assert a private cause of action is present.

The opinion is available in pdf.