Opinion
by: Anne K. Albright
Facts: The following facts are as alleged by the plaintiffs in
their complaint and recited in the Circuit Court’s decision. Two homeowners’ associations (HOAs), through
two law firms, separately sought to recover HOA dues from two individuals. With respect to one individual, suit had been
filed in a District Court of Maryland to recover the dues. The law firm in that action threatened to move
forward with trial unless the individual signed a confessed judgment promissory
note to settle the matter. The
individual signed the note and made all the payments due under the note; however,
the law firm confessed judgment against the individual and filed a complaint
for judgment by confession in the District Court. With respect to the other individual, the law
firm threatened to file suit unless the individual signed a confessed judgment
promissory note to settle the matter.
The individual signed the note and began making the payments due under
the note; however, the law firm confessed judgment against the individual and
filed a complaint for judgment by confession in the District Court of
Maryland. In both instances, the
confessed judgment note included a clause that appointed an attorney on behalf
of the individual, who had authority, without any prior notice to or approval
from the individual, to file for entry of a confessed judgment against the
individual, in a way that waived the individual’s right to assert a legal
defense to any action. The law firms knew
or had reason to know that the HOA dues arose from a consumer transaction or
debt.
Based on
the facts set forth above, the two individuals filed suit against the law firms,
asserting the following six claims: (1) violations of the Maryland Consumer Debt
Collection Act (“MCDCA”); (2) negligent misrepresentation; (3) breach
of contract; (4) fraud; (5) money had and received; and (6) declaratory
judgment. The plaintiffs subsequently
abandoned the breach of contract claim.
The law firms moved to dismiss the five remaining claims for failure to
state a claim upon which relief can be granted.
The law firms sought to have all of the claims dismissed with prejudice
on the basis of res judicata, arguing that the individuals could have raised
defenses to the confessed judgments with the filing of a timely motion in the
District Court, and having failed to do so, the individuals were barred from
bringing those claims in the Circuit Court action. Alternatively, the law firms sought to have
the claims dismissed on the basis of the facts plead and the merits of the
claims.
Analysis/Holding: The Circuit Court
rejected the law firms’ res judicata argument, holding that, because the
individuals’ claims were not mandatory counterclaims in the underlying
confessed judgment proceedings before the District Court and were not litigated
in those proceedings, the individuals were not precluded from asserting the claims
in the Circuit Court. The Court also
noted that, even if they had wanted to, the individuals could not have asserted
their claims in the confessed judgment proceedings because the claims were either
equitable in nature or the amount in controversy exceeded $30,000, such that
the claims fell outside the jurisdiction of the District Court.
Next, the Court discussed the MCDCA claim (Count 1). The Court noted that “[t]o prove an MCDCA violation, a plaintiff must prove that 1) defendant is a debt collector; 2) defendant’s conduct in attempting to collect a debt was prohibited by the MCDCA [(e.g., to claim, attempt, or threaten to enforce a right with knowledge that the right does not exist)]; and 3) the underlying debt is ‘consumer’ in nature.” In seeking dismissal of the MCDCA claim, the law firms focused on the first and third elements listed above, arguing that because the debts arose out of confessed judgment promissory notes, which are settlements separate from the underlying consumer transaction, the law firms were not “debt collectors” seeking to collect “consumer” debt. The Court rejected that argument, holding that “the Law Firms used Confessed Judgment Promissory Notes and then sought confessed judgments. Because use of those notes and pursuit of those judgments are additional steps the Law Firms allegedly took in order to collect HOA dues, both steps are subject to the MCDCA.” The Court ultimately dismissed the MCDCA claim on the basis that the plaintiffs failed to allege that the law firms had any actual or constructive knowledge of wrongful conduct, as required under the second element of the claim. However, the dismissal was without prejudice and with leave to amend the complaint, with the Court noting that a viable MCDCA claim might be asserted if the law firms charged inappropriate “add-on” fees and costs, such as late charges, attorneys’ fees or default interest, with knowledge or reckless disregard of the fact that such add-on fees and costs were not properly chargeable.
Next, the Court discussed the MCDCA claim (Count 1). The Court noted that “[t]o prove an MCDCA violation, a plaintiff must prove that 1) defendant is a debt collector; 2) defendant’s conduct in attempting to collect a debt was prohibited by the MCDCA [(e.g., to claim, attempt, or threaten to enforce a right with knowledge that the right does not exist)]; and 3) the underlying debt is ‘consumer’ in nature.” In seeking dismissal of the MCDCA claim, the law firms focused on the first and third elements listed above, arguing that because the debts arose out of confessed judgment promissory notes, which are settlements separate from the underlying consumer transaction, the law firms were not “debt collectors” seeking to collect “consumer” debt. The Court rejected that argument, holding that “the Law Firms used Confessed Judgment Promissory Notes and then sought confessed judgments. Because use of those notes and pursuit of those judgments are additional steps the Law Firms allegedly took in order to collect HOA dues, both steps are subject to the MCDCA.” The Court ultimately dismissed the MCDCA claim on the basis that the plaintiffs failed to allege that the law firms had any actual or constructive knowledge of wrongful conduct, as required under the second element of the claim. However, the dismissal was without prejudice and with leave to amend the complaint, with the Court noting that a viable MCDCA claim might be asserted if the law firms charged inappropriate “add-on” fees and costs, such as late charges, attorneys’ fees or default interest, with knowledge or reckless disregard of the fact that such add-on fees and costs were not properly chargeable.
The Court
then dismissed the negligent misrepresentation claim (Count 2), with prejudice,
holding that the plaintiffs failed to allege, and that the Court could not
identify, a duty of care owed by the law firms to the individuals. The Court next dismissed the fraud claim
(Count 4) and the money had and received claim (Count 5) because the
individuals failed to allege actual facts, rather than general allegations, in
support of requisite elements of those claims.
Finally, the Court, having dismissed all of the other claims, held that
there was no current actual controversy between the plaintiffs and the law
firms, and dismissed the declaratory judgment claim (Count 6).
Opinions and conclusions in this post are
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