The U.S. Circuit Court of Appeals for the Fourth Circuit recently held that, in order for a borrower to recover under Maryland’s Credit Grantor Closed End Credit Provisions (CLEC), the borrower must have repaid more than the original principal balance of his or her loan.

Additionally, the Court held that a motion under Federal Rules of Civil Procedure 23(d)(1)(B) to provide notice to putative class members can (and in most cases should) be denied at the pre-certification stage because ordinarily there was little danger of prejudicing “absent class members” unless there is substantial evidence of “reliance interest” even at that early stage.  It also expressed doubts that Rule 23(d)(1)(B) permitted notice to class members before a class has been certified.

A copy of the opinion is available at: Link to Opinion.

The two putative class plaintiffs each entered into retail installment sales contracts to finance the purchase of automobiles.  Both contracts were drafted by the finance company, and designated the CLEC, Md. Code Com. Law § 12-1001 et seq., as the applicable law.

After making some payments (but nowhere near the principal amount owed on either loan), the plaintiffs defaulted.  The finance company repossessed their cars and provided the plaintiffs with notice that their cars would be “sold at public sales.”  The finance company sold the cars for less than the amount owed under the contracts and issued post-sale notices to the plaintiffs explaining the deficiency.

Later, the plaintiffs filed separate class action complaints against the finance company, alleging counts for: (1) CLEC violations; (2) breach of contract; (3) declaratory judgment and injunctive relief; (4) restitution/unjust enrichment; and (5) violation of Maryland’s Consumer Protection Act, Md. Code. Com. Law § 13-101 et seq. (MCPA).  They also moved to provide notice to class members under Rule 23(d)(1)(B).

More specifically, the plaintiffs alleged that the finance company’s pre-sale notices “mischaracterized the sales as public, when in fact they were private, due to a $1,000 refundable cash entrance fee required to view the sale.”  Additionally, they alleged that because of that “mischaracterization” the finance company’s post-sale notices lacked certain disclosures required under CLEC for “private sales.”

Accordingly, because of the allegedly defective post-repossession notices, the plaintiffs claimed they were entitled to a refund of (1) the funds collected after repossessing their cars and (2) payments during the life of their loans to cover interest, costs, fees, and other charges.

The plaintiffs based their breach of contract, unjust enrichment, and MCPA claims on the damages alleged under CLEC.  Additionally, as to the breach of contract claim, they argued alternatively, that even if they were not entitled to damages under CLEC, they still had a claim for nominal damages.  Also, in support of their MCPA claim, they asserted that the defective notices “constitute unfair and deceptive trade practice(s).”

Prior to deciding this appeal, the Fourth Circuit had certified a question to the Maryland Court of Appeals as to whether the sales were public or private under Maryland law.  The Maryland Court of Appeals definitively held that the sales were private.  Thus, for this appeal and the purposes of its analysis, the Fourth Circuit treated the sales as private.

Nonetheless, the Fourth Circuit held that even if the sales were private, the borrowers could not recover under CLEC.

Two CLEC Provisions at Issue

There were two CLEC provisions at issue on appeal.  First, the civil remedies section which provides that “except for a bona fide error of computation, if a credit grantor violates any provision of this subtitle the credit grantor may collect only the principal amount of the loan and may not collect any interest, costs, fees, or other charges with respect to the loan.”  See Md. Code Com. Law § 12-1018(a)(2).

Second, the CLEC repossession section provides that if “the provisions of this section, including the requirement of furnishing a notice following repossession, are not followed, the credit grantor shall not be entitled to any deficiency judgment to which he would be entitled under the loan agreement.”  See id.at § 12-1021(k)(4).

As it had in previous cases, the Fourth Circuit interpreted § 12-1018(a)(2)’s “plain language” to “limit a debtor’s relief” under CLEC to amounts paid in excess of the principal.

Importantly, the Fourth Circuit also noted that unlike statutes such as the federal Fair Debt Collection Practices Act (FDCPA), CLEC does not provide a fixed statutory damages award. This, it held, was fatal to the plaintiffs’ CLEC claim because without statutory damages, the plaintiffs could not alleged any actual damages at all given that they had not paid anything “in excess of the principal amount due” which is all they could possibly have recovered under CLEC.

Rather, applying even the most generous analysis of their payments where “all of the borrowers’ payments during the life of the loan were credited to the principal [and none to interest]” the Court held that the plaintiffs “each still owe roughly $11,000 in principal on their loans.”

Additionally, the Fourth Circuit rejected the plaintiffs’ claim that they were entitled to a refund of (1) funds the lender collected post-repossession and (2) payments to interest, etc. during the life of the loan.

Plaintiffs’ Claim for Refund was Erroneous

The Court also held that the plaintiffs’ claim for a refund of post-repossession funds was erroneously based on a “misreading” of Maryland law because it was premised on only part of a sentence in a Maryland Court of Appeals decision.  In the Complaint and briefs, the plaintiffs quoted that section out of context to argue that the lender “is now limited to the proceeds of the sale as satisfaction of the debt” because it violated CLEC.

However, as the Fourth Circuit noted, the full sentence provides important context.  In full it reads: “If the debtor can show that the creditor failed to abide by the requirements of CLEC in selling the collateral, the creditor may be barred from a deficiency judgment and limited to the proceeds of the sale [itself] as satisfaction of the debt.”  The Fourth Circuit held that in this sentence, the Maryland Court of Appeals was “merely acknowledging” the reality that a creditor who violates CLEC would likely be unable to collect anything after a repossession sale because a creditor who violates CLEC is barred from seeking a deficiency judgment for any principal still remaining unsatisfied.

Moreover, and contrary to the plaintiffs’ assertion, the Fourth Circuit held that “[n]owhere does the court’s opinion or CLEC itself say that creditors who violate CLEC cannot try to collect the deficiency by means other than a judgment,” or apply any funds they collect or receive after and apart from the sale, to the principal.  Indeed, the Court held that the borrowers argument “read[s] ‘judgment’ right out of Section 12-1021(k)(4) and ignore[s] the fact that Section 1018(a)(2) expressly permits creditors who violate CLEC to [still] collect the principal amount of the loan.”

In addition, the Fourth Circuit held that the plaintiffs’ claim for a refund of fees, interest, etc. collected during the life of the loan was similarly misplaced.  To support that claim, the plaintiffs attempted to analogize CLEC to the Maryland Mortgage Lender Law (MMLL), Md. Code Fin. Inst. § 11-501 et seq.

As you may recall, similar to CLEC, a provision in the MMLL provides that violators “may collect only the principal amount of the loan and may not collect interest, costs, finder’s fees, broker fees, or other charges with respect to the loan.”  See id. at § 11-523(b).

Based on this similar language and a single administrative decision interpreting the MMLL, the plaintiffs argued they were entitled a refund of the fees, costs, and other relief.  In relevant part in the administrative decision based on the MMLL, the Maryland Commissioner of Financial Regulation awarded reimbursement of “all amounts collected other than principal” to a debtor.  Thus, the plaintiffs argued that the same result must occur under CLEC.

The Fourth Circuit disagreed because that administrative decision was easily distinguishable.  In the MMLL case, the lender violated the MMLL at “the time the loan was originated” and thus the lender collected “interest etc. after the violation,” whereas here, the lender’s “pre-repossession collection of interest, etc. occurred before any violation” and that this “difference in timing” rendered the MMLL case “inapposite.”

Additionally, the Fourth Circuit rejected the plaintiffs’ claim for declaratory and injunctive relief.  Under this claim, the plaintiffs sought an injunction barring the finance company from seeking a deficiency judgment against them based upon the allege CLEC violations and CLEC provisions barring deficiency judgments by violators.  However, while the case was still pending at the trial court level, the finance company had explicitly abandoned its deficiency claims.   Accordingly, the Fourth Circuit held that there was “no case or controversy” and thus the declaratory and injunctive relief claim had been properly dismissed.

The Fourth Circuit also held that declaratory and injunctive relief barring all attempts to collect on the deficiency was inappropriate because CLEC only bars creditor violators from seeking a “deficiency judgment.”  Thus, the lender could still pursue the deficiency balance of their loans using “out-of-court” collection methods.

Plaintiffs Sustained No Actual Damages

Next, the Fourth Circuit summarily dealt with the plaintiffs’ breach of contract, unjust enrichment and MCPA claims.  As explained above, the Court held that the plaintiffs had sustained no “actual damages” because the lender had not “unlawfully collected” any of the principal, fees, or other amounts  Accordingly, the finance company was not unjustly enriched either.

Likewise, the Court held that even assuming a breach of the loan agreement by lender based upon the defective notices, no actual damages flowed from that breach.  It also declined to allow the claim to proceed on the basis of “nominal damages.”  Accordingly, it held that the plaintiffs failed to state a claim for breach of contract.

The Fourth Circuit also held that the MCPA claim lacked merit because, in relevant part, the MCPA requires “claimants to show they were actually injured by the defendant’s violation of the Act.”  The Court held that here, even assuming that the defective notices were an “unfair and deceptive trade practice” as alleged by the borrowers, there was no injury or loss post-notice.   Therefore under the plain terms of the MCPA the plaintiffs failed to state a claim.

Finally, the Fourth Circuit found no abuse of discretion in the U.S. District Court for the District of Maryland’s denial of the borrowers’ Rule 23(d)(1)(B) motion.  As you may recall, that Rule states that in “conducting an action under [Rule 23], the court [in its discretion]… may issue orders to protect class members and fairly conduct the action—[including] giving appropriate notice to some or all class members….”

The Fourth Circuit held that even “[a]ssuming for the sake of argument…that this rule permits notice to putative class members before a class has been certified” the District Court had not abused its discretion.

As the Fourth Circuit explained, a “pre-certification dismissal does not legally bind absent class members” and at the pre-certification stage a class member “has at best a mere reliance interest, the strength of which will vary from case to case.”  Here, the Court held, the putative plaintiff borrowers (in this pre-certification case) had not put forth any evidence demonstrating that “the reliance interest of putative class members…is so compelling that the district court’s denial of notice constituted an abuse of discretion.”

Accordingly, for all of these reasons, the Fourth Circuit affirmed the District Court’s denial of the Rule 23 Motion and dismissal of the substantive claims in the Complaint.