You Are Not A Loan

The Maryland Court of Appeals answered a question certified by the federal district court

This case comes to us from the United States District Court for the District of  Maryland (the “federal court”) pursuant to a certification order requesting that we answer the following question, which we have rephrased:

Is a law firm that engages in debt collection activities on behalf of a client, including the preparation of a promissory note containing a confessed judgment clause and filing of a confessed judgment complaint to collect a consumer debt, subject to the provisions of the Maryland Consumer Loan Law, Md. Code, Commercial Law Article § 12-301, et seq.?

As we explain below, the answer to that question is “no.”

Posture

This case arises from debt collection activity by Nagle & Zaller, P.C. (“Nagle & Zaller”), a law firm, on behalf of its clients. The clients are homeowners associations and condominium regimes (collectively, “HOAs”) that retain Nagle & Zaller to undertake collection efforts against lot owners in HOAs and unit owners in condominium regimes (collectively, “homeowners”) seeking to recover delinquent assessments. The HOAs retained Nagle & Zaller to represent them in negotiating and drafting promissory notes with homeowners that memorialized the repayment terms of the delinquent assessments. The promissory notes drafted by Nagle & Zaller included confessed judgment clauses. When homeowners defaulted on their obligations, Nagle & Zaller filed confessed judgment complaints against them.

In February 2018, Jahmal E. Delegall and others filed a putative class action against Nagle & Zaller in the Circuit Court for Montgomery County challenging the law firm’s above-described debt collection practices. After the plaintiffs filed an amended complaint adding the HOA clients of the law firms as defendants, the defendants removed the case to the federal court.

Majority holding

we hold that a law firm that prepares promissory notes or undertakes debt collection activity on behalf of a HOA client is not subject to the MCLL because it is not a “lender” that is “engaged in the business of making loans” under the provisions of the MCLL. Rather, a law firm is in the business of providing legal or debt collection services to its clients. Although a law firm’s conduct is subject to regulations under the Fair Debt Collection Act and similar statutes, when the law firm engages in debt collection activities,  such activities are not synonymous with consumer lending activities that require a license under the MCLL. We similarly conclude that a HOA that extends a payment plan for the repayment of delinquent HOA assessments is not “in the business of making loans” and, therefore, not subject to the MCLL. Any extension of credit by a HOA under these circumstances is an ancillary function of the HOA’s operations associated with the protection and maintenance of common areas and community-related infrastructure. Offering a payment plan to a homeowner for the payment of delinquent HOA fees does not transform the HOA into a consumer lender that must be licensed under the MCLL.

Dissent by Judge Watts

Respectfully, I dissent. I would answer the certified question of law “yes” and hold that, based on the facts set forth in the operative complaint, which was incorporated into the federal court’s certification order, Nagle & Zaller, P.C. (“Nagle & Zaller”), a law firm, is subject to the provisions of the Maryland Consumer Loan Law, Md. Code Ann., Comm. Law (1975, 2013 Repl. Vol.) (“CL”) §§ 12-301 to 12-317 (Credit Provisions), and Md. Code Ann., Fin. Inst. (1980, 2011 Repl. Vol.) (“FI”) §§ 11-201 to 11-223 (Licensing Provisions)…

Based on the facts alleged in the operative complaint, Nagle & Zaller was engaged in the business of making loans subject to the Credit Provisions. According to the complaint, in hundreds, if not thousands, of instances, while representing homeowner associations, Nagle & Zaller drafted promissory notes with confessed judgment clauses to be signed by people who typically owed up to $25,000 in allegedly delinquent homeowner association assessments. The amounts owed under the promissory notes were higher than the alleged principal amounts owed. Nagle & Zaller contacted people, convinced them to sign the promissory notes, sent them the promissory notes, received the signed copies, collected payments, kept at least a portion of the payments for itself as attorney’s fees, and sued the people based on confessed judgment clauses in the promissory notes.

Under the circumstances described in the complaint, which we accept as true, Nagle & Zaller used the promissory notes it drafted to create new advances of credit—i.e., loans—with new terms of repayment and new consequences of nonpayment, namely confessed judgments. In other words, Nagle & Zaller did not simply attempt to collect, or arrange for the deferment of, existing debts owed to homeowner associations. As such, Nagle & Zaller did not merely act as an attorney or an agent of the homeowner associations. Rather, Nagle & Zaller created new loan obligations with new terms, including a provision for confessed judgments, and obtained attorney’s fees for itself by operation of the confessed judgment clauses.

Loophole

To conclude that the Maryland Consumer Loan Law does not apply in this case is to essentially create a loophole allowing law firms, like Nagle & Zaller, to engage in the business of making loans, i.e., creating new extensions of credit with confessed judgment clauses. It is clear that the General Assembly expressly intended to prohibit confessed judgment clauses in contracts for loans subject to the Credit Provisions. See CL § 12- 311(b)(1). From my perspective, this prohibition cannot and should not be circumvented by permitting the outsourcing of responsibility for collecting a debt to a law firm that would, as Nagle & Zaller does, engage in the business of making loans. Such a practice would create a gap in the Maryland Consumer Loan Law that the General Assembly did not intend.

(Mike Frisch)