Monday, September 21, 2015

Windeshein v. Larocca (Md. Ct. App.)

Filed: June 23, 2015

Opinion by: J. Adkins


(1) When a person signs an affidavit containing incorrect information, such person is generally on inquiry notice of any claim arising under such affidavit and the statute of limitations for such claim will not be tolled absent evidence of fraud or concealment or a fiduciary relationship between the party preparing the affidavit and the affiant; and

(2) To be liable for engaging in indirect false advertising regarding secondary mortgage loans and their availability under Md. Code Ann., Commercial Law § 12-403 (the "Secondary Mortgage Loan Law"), mere knowledge of false advertisements is not sufficient to violate the Secondary Mortgage Loan Law, a lender must do some act to bring about the false advertising. 


In 2006 and 2007, three married couples (the "Borrowers") contacted realtors to express interest in selling their current homes and purchasing new ones.  The realtors encouraged Borrowers to purchase a new home before selling their current home by obtaining home equity lines of credit ("HELOCs") against their current homes and then obtain a primary mortgage for the new home.  The realtors referred Borrowers to Michelle Matthews, a loan officer for Propensity Mortgage Company, who informed Borrowers the HELOC strategy was a "common lending tool at Propensity." 

Propensity Mortgage Company and Matthews, advertised in flyers on the website of some of the realtors, claiming that they could provide "Home Equity Lines and Loans (to make your client non-contingent)."  Borrowers claimed they believed at all times that Matthews and Propensity were processing the HELOCs; however, Matthews referred the HELOCs to Suzanne Windesheim, a loan officer for National City Bank (now PNC Mortgage).  The HELOCs were processed through National City Bank using false information contained in Borrowers' signed affidavits, allegedly added by Windesheim with Matthews' knowledge. 

The Borrowers filed a putative class action lawsuit in the Circuit Court for Howard County, Maryland against National City and Windesheim alleging that National City and Windesheim engaged in indirect false advertising in violation of the Secondary Mortgage Loan Law through the actions of Propensity and Matthews.


Inquiry Notice:  Borrowers argued that, because the information contained in the signed affidavits was false and because they were encouraged to sign without reading them, the statute of limitations had been tolled until the Borrowers had been contacted by counsel in 2010 and 2011 informing them that they may have been the victims of mortgage fraud.  The Court, however, found no evidence to refute the fact that Borrowers were on inquiry notice of their claims in 2006 and 2007 when they closed their HELOCs and primary residential mortgages because: (1) Borrowers signed the affidavits containing the false information and there was no evidence National City Bank or Windersheim attempted to conceal the false information in the affidavits; and (2) neither National City Bank nor Windersheim owed Borrowers any fiduciary duties which would justify tolling the statute of limitations.

Secondary Mortgage and False Advertising:  The Court determined that the plain meaning of "indirect" as used in the Secondary Mortgage Loan Law provided two reasonable interpretation as to how a lender could advertise "indirectly" – (1) "by making a false or misleading statement to a potential borrower that the same potential borrower then re-communicates to another potential borrower" or (2) "by having another party advertise false or misleading statements on the first party's behalf." 

The Court looked to the legislative history and policy purpose of the Secondary Mortgage Loan Law and reasoned that, because it was meant to protect consumers, it was reasonable to conclude that the Maryland General Assembly intended to proscribe both definitions of "indirect."  The current law removed the phase "to cause to be placed before the public" from a prior version of the law and therefore, the Court inferred, the General Assembly intended that to be guilty of a violation of the Secondary Mortgage Loan Law a person must "bring about the placing of a false or misleading statement before the public."  The Court applied the second definition of advertising indirectly and determined that neither National City Bank nor Windesheim violated the Secondary Mortgage Loan Law and that "mere knowledge that another is falsely advertising" would not violate the Secondary Mortgage Loan Law. 

The Court also held that Windesheim and National City Bank were not vicariously liable for indirect advertising in violation of the Secondary Mortgage Loan Law under a civil conspiracy theory because there was no evidence that Windesheim knew Matthews and Prosperity were falsely advertising that Prosperity, not National City Bank, would handle the HELOCs.

The full opinion is available in PDF.

Friday, September 11, 2015

John Poling v. Caplease, Inc. (Cir. Ct. Balto. City)

Filed: May 13, 2015

Opinion by: Judge W. Michel Pierson

Holdings: (1) The conversion of preferred stock to cash in connection with a cash-out merger does not violate the redemption provisions of the preferred stock, when the transaction at issue does not constitute a redemption. (2) The conversion of preferred stock to cash in connection with a cash-out merger does not violate the provisions of the preferred stock that establish a limitation upon the right of preferred stockholders to convert their stock.

Facts: Plaintiff was a holder of preferred shares in defendant corporation.  Defendant's charter authorized the corporation to issue shares of Series B Preferred Stock and Series C Preferred Stock. The Articles Supplementary classifying the preferred stock included the following terms:

[Section 3 provides for the payment of cumulative dividends at the yearly rate of 8.375% of the $25.00 per share liquidation preference of the Series B Preferred Stock (equivalent to a fixed annual amount of $2.09375 per share). The Series C Articles Supplementary contains similar terms, with an interest rate of 7.25% (equivalent to a fixed annual amount of $1.8125 per share). The Charter further provides that the Series B Preferred Stock is not redeemable prior to April 19, 2017, while the Series C Preferred Stock is not redeemable prior to January 25, 2018.]

On May 28, 2013, defendant entered into a Merger Agreement with an acquirer. According to the agreement, the acquirer would pay an amount in cash equal to $8.50 per share for each outstanding share of defendant's common stock, and each share of preferred stock would be converted into the right to receive the sum of $25.00 in cash plus an amount equal to any accrued and unpaid dividends up to but excluding the closing date of the merger.

Plaintiff felt aggrieved because holders of the preferred stock would lose their right to receive future dividends after the merger. On October 8, 2013, Plaintiff sued the defendant and alleged that the merger was a breach of the company’s contract with its preferred stockholders and that the directors had violated fiduciary duties.

Analysis: The complaint of plaintiff contained four counts, each denied by the court.

For Count I, plaintiff asserted a breach of contract claim alleging the transaction violated the redemption provisions of the Articles Supplementary. The court discussed the following: (1) While section 6 of the Articles Supplementary does limit defendant’s right to redeem the preferred stock, which would restrict the conversion of the preferred stocks, the transaction at issue did not constitute a redemption, because defendant did not acquire the stock. In addition, the Maryland General Corporation Law ("MGCL") authorizes a Maryland corporation to merge into another entity. The MGCL provides that in such a merger stock may be converted into money. See MGCL Section 3-103. (2) Contrary to plaintiff’s contention, Section 9 of the Articles Supplementary does not prevent the conversion of the preferred shares to cash upon a merger. The court interpreted this provision of the Articles Supplementary to establish a limitation upon the right of preferred stockholders to convert their stock, distinguishing the preferred stock at issue from convertible preferred securities. (3) The court declined to speculate about the possible ramification of Section 7(b) of the Articles Supplementary, related to voting rights, which had not been expressly argued.

For Count II, the court held that the plaintiff had failed to state a claim based on the defendant’s breach of fiduciary duty. The breach of fiduciary duty claim largely relied upon the allegations that defendants’ conduct contravened the Articles Supplementary. However, the court already rejected plaintiff’s contention that the merger violated the Articles Supplementary.

The court briefly discussed plaintiff’s claims for declaratory relief and aiding and abetting for Count III and Count IV, before granting defendant’s motion to dismiss.

The full opinion is available in PDF

Wednesday, September 9, 2015

A Guy Named Moe, LLC v. Chipotle Mexican Grill of Colorado, LLC (Ct. of Special Appeals)

Filed:  May 29, 2015

Opinion by Krauser, C. J.

Holding:  A foreign limited liability company that had its right to do business in Maryland forfeited, but nonetheless continued to do business in Maryland, cannot maintain a suit in Maryland and the filing of a petition for judicial review filed during that time of forfeiture is void ab initio.

Facts:  A foreign limited liability company filed a petition requesting the circuit court review a decision of the City of Annapolis Board of Appeals.  The petition was filed within the 30-day period for filing a petition under Rule 7-203(a); however, the petition was filed several years after the company’s right to do business in Maryland had been forfeited.  An affidavit of a business manager of the company asserted that articles of revival and the accompanying payment were submitted prior to the filing of the petition.  The manager also asserted that four months after filing the petition with the circuit court, the company learned that the articles of revival were rejected.  The company subsequently obtained a certificate of good standing.

The circuit court dismissed the action citing lack of standing under Section 4-401(a) of the Land Use Article.  The court affirmed on different grounds.

Analysis:  The court agreed that the Maryland LLC Act allows a foreign limited liability company to “cure the infirmity” of forfeiture to maintain suit.  Yet, the court disagreed that securing the right to maintain suit permitted the company to rely on a petition it filed when it had no right to do so.  While no direct precedent was available, the court noted precedent recognizing that the forfeiture to do business in Maryland does not prevent a limited liability company from defending any action.  The court also noted that Section 4A-1009(a) of the Maryland LLC Act “expressly bars a foreign limited liability company from maintaining suit when it is doing business in Maryland with no right to do so.”

The court then reviewed corporate cases involving charter forfeitures, which support the notion that a limited liability company may not revive a suit, though timely filed, when the suit was initiated by an entity after the entity had lost the right to do business in Maryland and yet persisted in doing business in Maryland.

The full opinion is available in PDF.

Tuesday, September 8, 2015

White v. Green Tree Servicing, LLC (Maryland U.S.D.C.)

Filed:  August 4, 2015

Opinion by:  Richard D. Bennett

Holdings:  (1) Fair Credit Reporting Act (''FCRA'') claims alleging provision of false information and failure to investigate such information were dismissed to the extent plaintiff premised her claim on a theory of negligence.  (2) Plaintiff satisfied 12(b)(6) sufficiency standard by merely alleging she notified consumer reporting agency of disputed information.

Facts:  In 2001, Plaintiff acquired property in Baltimore City with her former husband, becoming sole owner after a 2007 divorce.  Five years later, servicing rights for the loan were transferred to Defendant.  Following the June 1, 2013 date of transfer Plaintiff alleged she made every ensuing payment in full and on time.

In October 2013, Plaintiff attempted to refinance the loan through her personal bank, receiving approval and a commitment letter conditioned on Plaintiff resolving unrelated disputes on her credit report.  Plaintiff fulfilled the conditions in January 2014, but Defendant soon thereafter reported to Plaintiff, Plaintiff’s personal bank, and the three major credit reporting agencies that she was no longer current on her mortgage payments.  Pursuant to the FCRA, 15 U.S.C. §1681, et seq., on January 27, 2014, Plaintiff notified the reporting agencies and Defendant that she disputed Defendant’s reporting of late mortgage payments.  One day later, Plaintiff’s bank denied her for final approval of the refinanced mortgage.

Defendant responded in February 2014, maintaining its position that Plaintiff was behind on her payments.  Defendant thereafter issued several letters indicating it would investigate disputed payment information, but ultimately sent another statement in March 2014 informing Plaintiff she had fallen farther behind on her mortgage, incurring additional late fees.

In June 2014, Plaintiff filed in Circuit Court for Baltimore City, alleging violations of the Maryland Consumer Protection Act (''MCPA''), Debt Collection Act, (''MCDCA''), and Mortgage Fraud Protection Act, (''MMFPA''), contending Defendant failed to investigate or correct the payment information and that she suffered economic damages.  Defendant moved to dismiss, arguing the complaint was preempted by the FCRA.  Plaintiff thereafter amended her complaint to allege identical state claims but add FCRA claims.  Defendant again moved to dismiss the common law claims as preempted by the FCRA, and to dismiss the FCRA claim because Plaintiff had failed to state a claim on which relief could be granted.

Analysis:  The court began by explaining that the FCRA’s preemption provisions –  15 U.S.C. §1681t(b)(1)(F) as to state statutory claims and 15 U.S.C. §1681h(e) as to state common law claims – had been consistently interpreted to preempt claims arising from inaccurate information provided to credit reporting agencies.  Accordingly, the court dismissed Plaintiff’s counts alleging violations of the MCPA, MCDCA and MMFPA as a result of Defendant’s purported materially false, misleading oral or written statements, omissions, or representations related to the Plaintiff’s loan status or mortgage lending process.

The court next moved to Plaintiff’s FCRA claims, which focused on Defendant’s provision of allegedly false information and failure to investigate the allegedly false information.  To the former, Plaintiff alleged Defendant’s liability in defamation for making a series of false and misleading statements as to the late mortgage payments.  Here, the court cited §1681h(e):
[No] consumer may bring any action …in the nature of defamation… with respect to the reporting of information against …any person who furnishes information to a consumer reporting agency, … based on information disclosed by a user of a consumer report to or for a consumer against whom the user has taken adverse action, based in whole or in part on the report except as to false information furnished with malice or willful intent to injure such consumer.
Accordingly, the court granted Defendant’s motion to dismiss the defamation claim in part and only to the extent the claim was premised on a theory of negligence.

Plaintiff’s second FCRA claim alleged that Defendant violated §1681s-2(b) by a failure to investigate allegedly false information for several months after it was informed of the disputed information.  FCRA §1681s-2(b) imposed a duty to investigate disputed information after receiving notice [from a credit reporting agency].  Defendant moved to dismiss, arguing Plaintiff failed to explicitly allege that Defendant received such notice.  Finding no controlling Fourth Circuit authority, the court looked to decisions of the U.S. Courts of Appeal for the Seventh and Ninth Circuits, indicating that under the FCRA a plaintiff triggered a defendant-furnisher’s duty to investigate by merely notifying the consumer reporting agency of a dispute.  In the court’s view, all that was required to meet the Rule 12(b)(6) pleading sufficiency standard was plaintiff’s allegation that she notified the reporting agency of disputed credit information.  As a result, Plaintiff’s second FCRA claim survived Defendant’s motion to dismiss.

The full opinion is available in PDF.