The U.S. Court of Appeals for the Fourth Circuit recently held that a finance company properly cured a contractual interest rate provision in excess of the statutory cap, and was not liable under the Maryland Credit Grantor Closed End Credit Provisions, Com. Law § 12-1001 et seq. (MCLEC).
However, the Court also held that the defendant could be liable under the Maryland Consumer Debt Collections Act, Com. Law § 14-201 et seq. (MCDCA), if it falsely claimed to have taken legal actions against the debtor.
A copy of the opinion is available at: Link to Opinion
In 2008, a customer entered into a retail installment sales contract (RIC) with a car dealership to finance the purchase of a used car. The dealership sold and assigned the RIC to the defendant, a finance company.
The RIC was subject to the MCLEC, and originally provided for a 26.99% interest rate, which exceeded MCLEC's maximum allowable interest of 24%. The finance company realized this discrepancy and sent a letter to the customer in September 2010 informing him that the interest rate on the loan was incorrect, crediting $845.50 to his account, and advising him that there would be a new interest rate until final payment was made. The finance company did not disclose in the letter the new interest rate, which was 23.99%.
Shortly after receiving the letter, the customer defaulted on his payments. From July 2011 to December 2012, the finance company contacted the customer four times by letter and once by telephone. The customer alleged that the finance company made several false and threatening statements during these communications.
The customer filed suit in state court for breach of contract and violations of CLEC and the MCDCA. The finance company removed the case to federal court.
After limited discovery, the finance company successfully moved for summary judgment on all claims. The district court held that the customer presented insufficient evidence of a MCLEC violation and that section 12-1020's safe harbor provision shielded the finance company from any other liability under the statute. The lower court further found that the customer had no claim for breach of contract if he could not prevail on his claim under MCLEC. Finally, the lower court ruled that the finance company's course of conduct in attempting to collect the customer's debt did not rise to a level that constituted violation of MCDCA. The customer appealed this ruling to the Fourth Circuit.
The Fourth Circuit began its analysis "by sketching out CLEC's basic framework." The Court noted that violators of MCLEC may collect the principal of a loan but not interest, costs, fees or other charges. If
a credit grantor "knowingly violates [MCLEC]," 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). MCLEC's two safe-harbor provisions allow a violator to avoid liability through self-correction, unless for a knowing violation, in which case the statute affords protection from liability only if the party cures its violation within 60 days.
The Court rejected the customer's first argument that the finance company was liable under MCLEC because it failed "to expressly disclose in the contract an interest rate below the statutory minimum." The Fourth Circuit noted that, taken to its logical conclusion, the customer's argument would impose strict liability for any written contract providing for an interest rate above 24%, but in its view the only disclosure required under the statute was to express the rate to the customer as a simple interest rate.
Accordingly, the Fourth Circuit held that the "mere failure to disclose an interest rate below [MCLEC's] statutory maximum is not a distinct violation of section 12-1003(a) for which liability may be imposed."
The Court also rejected the customer's second argument that it should apply Maryland's "discovery rule" from the statute of limitations context to find that the finance company did not avoid liability through self-correction. The standard for under the discovery rule is when a party knew or should have known of a potential claim. The customer argued that application of the discovery rule means that the finance company knew or should have known about the violation as soon as it was assigned the contract, in which case more than 60 days had passed before it cured its error.
The Fourth Circuit disagreed, holding that the 60 days afforded under Section 12-1020's safe harbor provision did not run until the violator had actual knowledge of the violation. The Court noted that if the discovery rule governed section 12-1020, credit grantors would have little incentive to cure their violations. Moreover, the Court held, the customer's interpretation of the statute did not comport with its purpose, which was in part to "entice creditors to do business in the state."
The Court also rejected the customer's argument that the finance company's correction letter was too vaguely worded to meet section 12-1020's requirement that "the credit grantor notif[y] the borrower of the error." The finance company's letter identified a "problem" with the interest rate on the loan and informed the customer of a credit to his account in the amount of $845.40. Taken together, the Court found that the finance company complied with the notice required under section 12-1020.
The Court similarly rejected the customer's final argument for liability under MCLEC — that the statute prohibits charging and collecting any interest on a loan when the interest rate is above 24%. Based on the purpose of the statute to encourage credit grantors to self-correct, the Court found it "inconceivable" that a customer would receive an interest-free windfall as a result of a MCLEC violation. Instead, the Court held, the finance company only needed to credit to the customer the interest collected in excess of the 24% interest rate and correct the interest rate moving forward, which it did here.
Thus, the Fourth Circuit affirmed the district court's order granting summary judgment on the CLEC claim.
Turning to the question of whether the district court properly granted summary judgment on the customer's breach of contract claim, the Court noted that the RIC "incorporates all of [MCLEC] — including its safe harbors." Accordingly, the Court held, just as liability under MCLEC begets breach of contract, defenses under MCLEC preclude liability. Thus, because the Court found no liability under MCLEC, it found no liability for breach of any contract based on MCLEC. The Court held that any contrary scenario would nullify the effect of MCLEC's safe harbor provisions because credit grantors would still face contract liability after properly curing their mistakes.
Accordingly, the Fourth Circuit affirmed the district court's order granting summary judgment on the breach of contract claim.
As to the customer's MCDCA claim, the Court reversed the district court's ruling and concluded that a reasonable jury could find that the finance company violated the statute. The Fourth Circuit explained that the portion of MCDCA at issue was section 14-202(6), which prohibits a debt collector from communicating with a debtor with frequency, at unusual hours, "or in any other manner as reasonably can be expected to abuse or harass the debtor."
The customer argued that the finance company violated MCDCA because it represented that certain legal actions had occurred when such actions had not, in fact, occurred. The customer specifically alleged that the finance company suggested it had obtained a replevin warrant, provided notice of a complaint to the Maryland MVA's fraud division, and represented that the instant case was dismissed when it was still pending.
The Court ruled 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) of MCDCA. The Court pointed out that a similar claim under section 14-202(6) survived a motion to dismiss where the defendant allegedly falsely represented that the plaintiffs' home had been foreclosed upon when no such foreclosure occurred. See Zervos v. Ocwen Loan Servicing, LLC, 2012 WL 1107689 (D. Md. Mar. 29, 2012).
Zervos and other cases suggested to the Court that threats of appropriate legal action against a debtor are different than false representations that legal action against a debtor has already been taken. With the latter, a jury could find that these actions could have reasonably been expected to abuse or harass the debtor, and therefore violate MCDCA.
Accordingly, the Court reversed the district court's order granting summary judgment on the MCDCA claim.