The Court of Special Appeals of Maryland, the intermediate appellate court in that state, recently held that a party who authorizes a foreclosure trustee to initiate a foreclosure action on a deed of trust must be licensed as a collection agency in the state before filing the foreclosure lawsuit, and that this licensing requirement applies to trusts formed outside of the State of Maryland. 

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

A statutory trust formed in Delaware filed two foreclosure lawsuits against homeowners in Maryland through a substitute trustee. The trust through its trustee had purchased two mortgage loans that the borrowers had defaulted on by failing to make payments.

The substitute trustees initiated foreclosure actions. At the time of foreclosure, the borrowers on one mortgage owed $3 million, and on the other mortgage, the borrowers owed $1.6 million. 

The homeowners filed counterclaims and filed motions to dismiss or enjoin the foreclosure. The trial court dismissed the foreclosures, holding that under the Maryland Collection Agency Licensing Act (MCALA), Maryland Code (1992, 2015 Repl. Vol.), B.R. § 7-101, et seq., the trustee for the foreign statutory trust had to be licensed as a collection agency and because it was not, it had no right to file the foreclosure actions and any judgment entered in the foreclosures was void. The trial court rejected the trust’s argument that it was exempt from the MCALA license requirements because it was a trust company. The substitute trustees appealed on behalf of the trust.

The Appellate Court affirmed both rulings, pointing out that under Finch v. LVNV Funding, LLC, 212 Md. App. 748, 758-63 (2013), it had ruled that a collection agency without a license may not file suit against a debtor and that a judgment entered in favor of an unlicensed debt collector is void.

The Court noted that the definition of a “collection agency” under B.R. § 7-101(c) (“a person who engages directly or indirectly in the business of … collecting…”) includes a trustee because the definition of the term “person” under B.R. § 7-101(g) includes a “trustee.” The Court also noted that the MCALA had been expanded in 2007 to include debt purchasers by including in the definition of “collection agency” those who engage in the business of collecting on claims that the person acquired when the debt was in default.

Here, the Appellate Court found that the trustee was in the business of buying defaulted mortgages and deeds of trust at a discount, such that when the trustee initiated the foreclosure actions it was acting as a collection agency under the MCALA.

The Court rejected the trust’s argument that the MCALA excluded actions taken to enforce a security interest such as foreclosure on a deed of trust. The trust argued that under Md. Code § 12-902(a), which is the corporations and associations article, foreclosing on a mortgage or deed of trust in Maryland is not considered “doing business.” The Court reasoned that § 12-908(a) limits that exception to that particular subtitle of the statute.

The Appellate Court referenced other sources in support of its ruling, including a ruling from the U.S. District Court for the District of Maryland. More specifically, the Court cited Ademiluyi v. PennyMac Mortgage Investment Trust Holdings I, LLC, et al., 929 F. Supp.2d 502, 520-24 (D. Md. 2013), in which the federal court held that a collection agency license was required under MCALA license to bring a foreclosure action. It also relied on an order from the Maryland State Collection Agency Licensing Board requiring at least one debt purchaser to stop initiating foreclosure actions without a license, which the Court gave particular weight to because that agency is charged with administering the MCALA. 

The Appellate Court also rejected the trust’s argument that it should be exempted from licensing because B.R. § 7-102(b)(8) exempts trusts from the MCALA. The Court explained that the statute does not define “trust company” so it relied upon Black’s Law Dictionary for the definition: “[a] company that acts as a trustee for people and entities and that sometimes also operates as a commercial bank.”

The Court found that the trust did not act as a trustee for any person or any entity and did not act as a bank as it was made up of two trustees, one of which was another trust. 

The Court also rejected the argument that the trust satisfied a second definition of “trust” from Black’s Law Dictionary: “a corporation formed for the purpose of taking, accepting, and executing all such trusts as may be lawfully committed to it, and acting as testamentary trustee, executor, guardian, etc.” The Appellate Court reasoned that the trust was not a corporation and there was no evidence that it acted as a trustee for anyone. 

The Appellate Court also considered several other definitions of the term “trust” in Maryland law but found that the trust did not meet any of them. 

Ultimately, the Court concluded that Maryland’s General Assembly did not explicitly exempt foreign statutory trusts from the licensing requirements of MCALA, which the Court took as “expressed clear intent” to subject them to the MCALA’s licensing requirement. 

Thus, the Appellate Court affirmed the trial court’s ruling that a foreign statutory trust that brings foreclosure actions in Maryland is subject to the licensing requirements of the MCALA.