In the case of Nagle, Zaller, P.C. et al. v. Jahmal E. Delegall, the Maryland Court of Appeals addressed whether a law firm engaged in debt collection on behalf of clients, specifically involving the preparation of promissory notes with confessed judgment clauses and filing complaints to collect consumer debts, falls under the Maryland Consumer Loan Law. The court concluded that the law firm is not subject to this law, which requires lenders engaged in making loans to be licensed. The court accepted the factual background from the federal court's certification order, which highlighted that Nagle, Zaller, P.C. represents homeowners associations and condominium regimes in collecting delinquent assessments from homeowners. The case originates from a federal district court's request for clarification on Maryland law regarding the applicability of consumer loan regulations to the firm's activities. The court emphasized that it resolves questions of law rather than factual disputes, affirming that the nature of the firm's debt collection activities does not classify it as a lender under the Maryland Consumer Loan Law.
Promissory notes prepared by Nagle. Zaller included clauses allowing for confessed judgment in the event of payment default. The Complaint alleges that these notes, signed by Jahmal E. Delegall, stipulated that upon default, the note would become immediately due at the holder's option, with the maker waiving various notices and demands related to payment. When homeowners defaulted, Nagle. Zaller filed confessed judgment complaints. In February 2018, Delegall and others initiated a putative class action against Nagle. Zaller, contesting their debt collection practices. After amending the complaint to include HOA clients as defendants, the case was removed to federal court. Following procedural developments, a Third Amended Complaint was filed in August 2020 against Nagle. Zaller and Vineyards Condominium, focusing on Count VIII, which alleges violations of the Maryland Consumer Loan Law (MCLL). Delegall claims that both the HOAs and Nagle. Zaller qualify as "Lenders" but are unlicensed under the MCLL. Consequently, Delegall asserts that the promissory notes are void and unenforceable, preventing the collection of any payments made. Citing MCLL provisions, Delegall argues that unlicensed loans cannot yield any compensation. Nagle. Zaller moved to dismiss the Complaint, contending that the MCLL does not govern their debt collection actions. Due to the absence of Maryland appellate court precedents on whether law firms need MCLL licenses for debt collection, the parties jointly requested the federal court to certify a legal question, which was granted in July 2021.
Zaller argues that the General Assembly did not intend for law firms or homeowners associations (HOAs) to require a license for certain transactions, claiming they do not qualify as "lenders" under the Maryland Consumer Loan Law (MCLL). Conversely, Delegall asserts that promissory notes issued by the law firm represent "loans" facilitating credit extensions to homeowners for settling delinquent HOA debts, thus falling under MCLL regulations. Delegall contends that since neither the law firm nor the HOAs are licensed to make these loans, the promissory notes are void and unenforceable, referencing the Goshen Run Homeowners Association, Inc. v. Cisneros case, which classified similar promissory notes as extensions of consumer credit governed by the Maryland Consumer Protection Act (MCPA).
The excerpt further discusses the context of HOA assessment collections, noting the challenges HOAs face in collecting delinquent assessments. The Maryland Homeowners Association Act provides HOAs with various collection mechanisms, including in rem and in personam proceedings. The Act outlines the governance of HOAs, including operational regulations and budget establishment, allowing for the adoption of assessments to maintain common areas. Definitions within the Act clarify the roles of "homeowners association" and "governing body," emphasizing the importance of the declaration as the foundational authority for HOAs to impose fees for services related to the properties and common areas.
The HOA has the authority to levy mandatory assessments or fees on lot owners to fund services benefiting the lots or common areas, as outlined in its declaration. Under the HOA Act, lot owners are liable for all assessments due while they own their lots. To promote timely payments, the HOA can impose a late charge of $15 or 10% of the delinquent assessment, applicable only if the payment is at least 15 days overdue and not imposed more than once for the same delinquency. The HOA can enforce collection of delinquent assessments through both in rem and in personam legal actions, including imposing liens under the Maryland Contract Lien Act and filing lawsuits against delinquent owners.
Additionally, the Maryland Condominium Act governs condominium formations, management, and terminations, defining a condominium as a property comprising individually owned units with shared facilities. A condominium is established by recording a declaration, bylaws, and a condominium plat, which detail administrative powers and fee collection procedures. The governing body, the Council of Unit Owners, can delegate authority to a Board of Directors and is responsible for creating an annual budget that includes maintenance costs. Unit owners are liable for assessments due while they own their units. Unpaid assessments incur an interest rate of 18% per annum, with the potential for late charges similar to those in the HOA Act, contingent on a 15-day delinquency period.
Homeowners have specific remedies when the governing body of a Homeowners Association (HOA) or condominium fails to comply with state consumer protection laws in their collection efforts. While the governing body is authorized to collect delinquent assessments, interest, and fees, these actions must align with the organization's bylaws and relevant state and federal laws, including the Maryland Consumer Protection Act (MCPA). The MCPA sets minimum standards to protect consumers and prohibits unfair or deceptive trade practices, including the use of confessed judgment clauses in consumer contracts.
In the case of Goshen Run, it was determined that the collection of HOA assessments through such clauses violates the MCPA. Confessed judgment clauses allow for a judgment to be entered against a debtor without a trial upon default, which is viewed unfavorably in Maryland due to their ex parte nature and limited defenses for the debtor. The court found that homeowners qualify as "consumers" under the MCPA, and the assessments are considered "consumer debt." Therefore, the use of confessed judgment clauses in promissory notes for HOA assessments is prohibited.
In Goshen Run, the HOA had obtained a confessed judgment against a homeowner based on such a clause, leading to the case's dismissal under Maryland Rule 3-611(b). Although the homeowner argued that the entire promissory note was void due to the clause, the court upheld the note's validity through its severability clause, allowing the remaining provisions to stand. The ruling emphasized that homeowners should not evade their financial responsibilities simply because of the inclusion of a prohibited clause.
The dismissal of the confessed judgment against a Homeowners Association (HOA) is ruled to be without prejudice, allowing the HOA to pursue a separate breach of contract claim based on a promissory note, with the confessed judgment clause removed. According to the ruling in Goshen Run, an HOA cannot utilize a promissory note with a confessed judgment clause to recover overdue assessments, as this contravenes the Maryland Consumer Protection Act (MCPA). Violations of the MCPA are enforceable through civil and criminal penalties by the Consumer Protection Division of the Attorney General's Office. Both the Maryland HOA Act and the Condominium Act integrate public enforcement provisions from the MCPA, permitting homeowners to seek enforcement through the Attorney General.
Additionally, individuals may pursue private actions under the Maryland Consumer Debt Collection Act (MCDCA) against anyone attempting to collect a debt in violation of the Act. The MCDCA prohibits specific conduct by debt collectors, including enforcing nonexistent rights. A complainant must demonstrate that the collector lacked the right to collect the debt and knowingly attempted to do so. The term "with knowledge" requires evidence that the collector acted with actual knowledge or reckless disregard regarding the falsity of the claimed right. Under CL. 14-203, violators of the MCDCA are liable for damages caused by the violation, including emotional distress and mental anguish. The case of Andrews v. Lawrence Professional Services, LLC clarifies that not all debt collection efforts by law firms qualify for the professional services exemption under the MCPA. The current determination focuses on whether Nagle & Zaller's debt collection activities fall under the MCDCA, following principles of statutory interpretation aimed at revealing the Legislature's intent without altering the statute's clear language.
Statutory interpretation involves a holistic approach, ensuring that every component of a statute is meaningful and consistent with the overall legislative intent. Interpretation is not limited to isolated language; rather, it requires contextual analysis within the broader statutory framework. Ambiguity can arise when words are examined in isolation, thus necessitating a review of legislative history and prior case law for clarity. Evaluating the consequences of different interpretations helps avoid illogical or unreasonable outcomes, adhering to a principle that favors interpretations yielding reasonable results.
The Maryland Consumer Loan Laws, codified in Title 12 of the Commercial Law Article, establish a detailed regulatory framework for consumer lending, addressing terms, conditions, interest rates, fees, and charges linked to various consumer loan types. Different Subtitles under Title 12 govern specific loan categories, with varying maximum interest rates depending on the loan type. Additionally, Title 11 of the Financial Institutions Article outlines comprehensive licensing requirements, with the Commissioner of Financial Regulation overseeing the issuance of consumer credit licenses and regulatory compliance.
The General Assembly has established a legal framework for consumer lending transactions, requiring the integration of Title 12 of the Commercial Law Article and Title 11 of the Financial Institutions Article. The Maryland Consumer Loan Law (MCLL) is divided into two sections: the Credit Provisions (CL 12-301 et seq.) and the Licensing Provisions (FI 11-201 et seq.). Together, these provisions are collectively known as the Maryland Consumer Loan Law.
Under the MCLL Credit Provisions, individuals must be licensed to engage in loan-making activities, and a "lender" is defined as either a licensee or a person making loans under this law. A "licensee" is someone required to be licensed, irrespective of their actual licensing status, while a "loan" encompasses any monetary advance subject to these provisions. The Credit Provisions apply to loans of $25,000 or less intended for personal, family, or household use.
Certain exclusions exist within the Credit Provisions, such as loans made under specific legal subtitles, loans made by individuals making three or fewer loans annually, and loans between employers and employees. Loans under $25,000 made by unlicensed individuals are deemed void and unenforceable, preventing the retention of any principal by the lender. The provisions also include regulations on lender advertising, anti-discrimination measures, interest rate limitations, permissible fees, lender duties, and restrictions against taking confessed judgments as loan security.
The Credit Provisions (CL. 12-301 et seq.) and Licensing Provisions (FI. 11-201 et seq.) do not provide any exemptions from licensure requirements, meaning that any entity making a loan under the Credit Provisions must be licensed. The Maryland Consumer Loan Law (MCLL) explicitly states that it does not alter the powers of individuals or entities not required to be licensed. The Commissioner is prohibited from licensing banks, trust companies, savings banks, credit unions, or savings and loan associations. In contrast, the Interest and Usury Subtitle includes licensing exemptions for certain lenders.
The Licensing Provisions define "loan" similarly to the Credit Provisions and establish that a "license" is required to make loans under the MCLL. A person must be licensed by the Commissioner to make a loan or utilize any benefits of the MCLL. The Licensing Provisions mandate that licenses be obtained through the Nationwide Multistate Licensing System. They outline qualifications for license applicants, application requirements, fees, and surety bond filings. The Commissioner holds various powers, including investigating applicants, granting or denying licenses, issuing cease and desist orders, suspending or revoking licenses, and creating regulations to enforce the MCLL.
The applicant must demonstrate at least $20,000 in liquid assets for business operations related to the license. The business must also provide community benefits. Key stakeholders involved with the applicant must possess adequate experience, character, financial responsibility, and fitness. Before any cease and desist order or license suspension by the Commissioner, a hearing must be conducted per the Administrative Procedures Act. Aggrieved applicants can appeal the Commissioner’s decisions in the circuit court, with further appeal rights to the Court of Special Appeals. The initial license is valid for one year, renewable annually upon application, payment of an $850 fee, and meeting renewal criteria. Violations of licensing provisions, such as lending without a license, may result in misdemeanor charges, punishable by fines up to $5,000 or three years of imprisonment. The Commissioner is obligated to report any alleged violations of the Maryland Consumer Loan Law (MCLL) to the State’s Attorney. Under the MCLL, engaging in loan-making without proper licensing is prohibited, and any unlicensed loan is rendered void and unenforceable. The definition of "loan" is broad, encompassing various financial transactions. Delegall argues that specific actions taken by Nagle and Zaller, such as drafting notes and collecting payments, classify them as individuals who made loans under the MCLL, thereby subjecting them to licensing requirements and liability under agency principles. The MCLL applies to any person making loans of $25,000 or less, irrespective of licensing status.
Nagle. Zaller acknowledges its role in debt collection activities that are subject to various consumer protection laws, including drafting promissory notes, collecting debts, and charging attorneys’ fees to delinquent homeowners. The firm recognizes that the Maryland Consumer Protection Act (MCPA) prohibits the use of confessed judgment clauses in such transactions. However, Nagle. Zaller contends that the Maryland Consumer Loan Law (MCLL) is distinct from the MCPA, applicable only to those "in the business of making loans." The firm argues that neither it nor the Homeowners Association (HOA) fits this definition, positing that a broader interpretation would unreasonably require all law firms involved in drafting loan-related documents to obtain a consumer loan license.
The MCLL stipulates that only licensed individuals may engage in consumer lending, but it does not clarify what constitutes being "in the business of making loans." Citing the Court of Special Appeals' observation of the lack of authority on this term in Maryland law, Nagle. Zaller references a New Hampshire Supreme Court interpretation of "in the business of" as either an activity with or without profit motives. While law firms provide legal services, including those related to loans, the critical issue is whether their actions classify them as "making loans" under the MCLL. The statutory language is deemed ambiguous, prompting a review of the legislative history, which reveals that Maryland's licensing requirements for lenders trace back to a 1912 Act that regulated petty loan brokers and established fee caps and disclosure mandates for loans.
In Price v. Murdy, 462 Md. 145 (2018), the court examined the evolution of Maryland's regulations governing small loans, starting with the 1912 Act, which mandated licensing for petty loan brokers and rendered any unlicensed loans null and void, allowing borrowers to recover all payments made. This was replaced in 1918 by the Uniform Small Loan Law, which capped interest rates for loans under $300 from unlicensed lenders and aimed to prevent false statements, regulate charges, and oversee wage garnishments. The law emerged from concerns over the exploitation of vulnerable borrowers. In 1945, the Maryland Industrial Finance Law was enacted to address loan amounts up to $1,500, requiring licensure and regulating various lending practices without repealing the 1918 law for smaller loans, which continued until its repeal in 1977. Exemptions from the 1945 law included banks, attorneys, licensed pawnbrokers, and businesses extending credit in connection with merchandise sales, among others.
Article 11 was repealed during the recodification of consumer credit laws into the new Commercial Law Article, leading to the removal of the business exemption previously found in Article 11.166, as indicated by Ch. 33, 1980 Md. Laws 136. Delegall contends that this repeal suggests the General Assembly intended to include lawyers under the Maryland Consumer Loan Law (MCLL). However, the argument is countered by noting that the repeal was part of a broader legislative change with no specific commentary on the exemption's removal. The absence of a categorical exclusion for attorneys does not imply that licensing requirements of the MCLL apply to all attorneys drafting loan documents. It is possible the General Assembly viewed the exclusion as unnecessary since attorneys are not primarily in the loan business. The MCLL's licensing requirement, established in the 1975 Act, has persisted with minor language updates and mandates that no person may engage in loan-making without proper licensing or exemption under Title 11, Subtitle 2 of the Financial Institution Article. Notably, since the repeal of the exemption, attorneys involved in drafting loan agreements or collecting debts have not sought MCLL licenses or faced enforcement actions, indicating a long-standing understanding of their non-application under MCLL provisions. The recodification process, which began in 1970 and concluded in 2016, included significant legislative changes to modernize Maryland's legal code.
A person is prohibited from making loans under the Licensing Provisions of the 1918 Act and its counterpart in CL. 12-302, which states that one cannot engage in the business of making loans. The Commission identified several differences between the current provisions of Art. 58A and Art. 11, without knowing the reasons for these discrepancies in policy or practice. To prevent unintended substantive changes, no efforts were made to align these provisions. In 1977, the General Assembly repealed the 1918 Uniform Small Loan Law to consolidate Maryland's small and consumer loan laws into a unified Maryland Consumer Loan Law (MCLL). By the end of the recodification, the credit provisions from Article 11 were revised and became part of the MCLL-Credit Provisions, while the licensing provisions from Article 58A became the MCLL-Licensing Provisions.
In the 2018 Legislative Session, revisions were made to the Credit Provisions, including updating definitions and raising the loan threshold from $6,000 to $25,000. The Fiscal and Policy Note for House Bill 1297 indicated that these changes implemented recommendations from the Maryland Financial Consumer Protection Commission (MFCPC), introducing new requirements for "covered loans" that prohibit unlicensed lending. The bill also stipulates that loans of $25,000 or less cannot be made by unlicensed individuals and establishes that certain violations render the loan void and unenforceable. The bill was a collaborative effort involving the Consumer Protection Division, the Office of the Commissioner of Financial Regulation, and Maryland bankers, aiming to provide consumer protections while updating outdated lending laws.
A lender, starting January 1, 2019, has the option to elect to make a loan under the Interest and Usury Subtitle or the Credit Provisions of the Maryland Consumer Lending Law (MCLL) by specifying this in the loan documentation. The Retail Installment Sales Act enhances consumer protections under both the MCLL and the Interest and Usury Law, particularly addressing predatory lending practices. It emphasizes that the substance of a transaction should be evaluated to determine if it constitutes a loan and if it is usurious.
House Bill 1297 modified the maximum loan amounts under the MCLL and updated certain definitions but did not alter the licensing requirements for lenders under the MCLL or the Financial Institutions Article. The legislative intent behind these laws historically aimed to regulate consumer lending and combat loan sharking. The statutes indicate that even without a written election, loans for amounts of $25,000 or less fall under the Usury and Interest Subtitle if not subject to the MCLL.
The legislation's history and recent amendments suggest no intention to broaden MCLL’s reach beyond traditional consumer lenders. The General Assembly's regulations are directed specifically at businesses engaged in consumer lending rather than at lawyers or law firms involved in loan documentation or collections.
There is no evidence indicating that the Legislature intended for homeowners' associations (HOAs) or condominium regimes to be licensed in order to collect delinquent assessments or establish payment plans for overdue charges. The licensing requirements under the Maryland Consumer Lending Law (MCLL) do not apply to law firms or HOAs, as the criteria for obtaining a license require that the applicant's business promotes community convenience and advantage, which does not pertain to these entities. The MCLL is specifically designed to regulate those "in the business of" consumer lending, and its application is limited to that industry, distinct from the broader Maryland Consumer Protection Act (MCPA), which addresses a wider range of unfair or deceptive conduct.
Interpreting the MCLL to include all small loans or credit extensions, regardless of the lender's business focus, would lead to unreasonable outcomes, mistakenly imposing licensing requirements on various organizations—like HOAs, medical offices, or law firms—that do not primarily engage in consumer lending. Such an interpretation would undermine the statute's explicit language regarding business intent and conflict with existing licensing practices enforced by the Office of the Commissioner of Financial Regulation.
Under Delegall’s interpretation, Maryland lawyers representing creditor-clients settling claims for $25,000 or less through payment plans, and drafting related agreements, would need to be licensed under the Maryland Consumer Loan Law (MCLL). If a law firm drafts such documents without a consumer loan license, the resulting indebtedness would be void and unenforceable, which is not the General Assembly's intent for the MCLL. It is concluded that law firms preparing promissory notes or engaging in debt collection on behalf of homeowners' associations (HOAs) do not qualify as "lenders" under the MCLL, as their activities are legal or debt collection services rather than consumer lending. Similarly, an HOA offering a payment plan for delinquent assessments is not considered "in the business of making loans," as such credit extensions are ancillary to their operational purpose of maintaining community infrastructure. The conclusion also rejects concerns that this ruling would lead to unregulated transactions; existing laws, including the Maryland Consumer Protection Act (MCPA) and federal debt collection statutes, provide oversight over debt collection practices. Fees associated with HOAs and condominiums are regulated under the respective HOA and Condominium Acts, and other credit statutes may apply to smaller loans where the MCLL does not.
The Maryland Court of Appeals held that the Maryland Consumer Loan Law (MCLL) does not apply to law firms engaged in debt collection on behalf of clients, emphasizing that the MCLL specifically regulates entities "in the business" of consumer lending. The ruling, which divides costs equally between the parties, followed a certified question of law related to the case Nagle. Zaller, P.C. v. Jahmal E. Delegall, with a dissenting opinion asserting that Nagle. Zaller should be subject to the MCLL based on the complaint's facts.
The dissenting view noted that Nagle. Zaller, a law firm providing legal and debt collection services for homeowner associations, required debtors to sign promissory notes with confessed judgment clauses, typically not exceeding $25,000. It detailed a protocol where employees contacted consumers, presenting the signed notes as the only means to avoid further legal action. The dissent argued that the factual allegations of the complaint, when treated as true, indicated the firm’s actions fell within the scope of the MCLL, as the promissory notes pertained to personal, household, family, or agricultural debts. The dissent further criticized Nagle. Zaller's practice of initiating legal actions even after consumers made required payments, highlighting the oppressive nature of the confessed judgment clauses that waived consumers' rights to defend against judgments.
Zaller is accused of adding costs, pre-assessed interest, and unreasonable attorney's fees to the principal amount owed, raising legal concerns under the Maryland Consumer Loan Law. This law defines “lenders” as entities making loans subject to certain credit provisions, requiring licensing unless exempt. Specifically, loans of $25,000 or less for personal, family, or household purposes fall under this regulation. The complaint alleges that Zaller, while representing homeowner associations, drafted promissory notes with confessed judgment clauses for individuals owing up to $25,000 in assessments, resulting in amounts owed exceeding the principal claims. Zaller allegedly solicited signatures on these notes, collected payments, kept part of the payments as fees, and initiated lawsuits based on the confessed judgment clauses. The complaint suggests that Zaller created new loan obligations rather than merely collecting existing debts, thus functioning as a lender rather than just an agent or attorney for the associations. This interpretation is supported by case law, specifically Goshen Run Homeowners Ass’n, Inc. v. Cisneros, which recognized that a promissory note with a confessed judgment clause constituted an extension of credit under the Maryland Consumer Protection Act, thereby confirming Zaller's actions as lending activities.
The Promissory Note explicitly indicates an extension of credit for homeowner association assessments, representing a personal debt incurred by the individual for household purposes. The promissory notes in question, which include confessed judgment clauses, fall under the Maryland Consumer Loan Law. In the related case of Goshen Run, although the law firm representing the homeowner association was not a party to that case, it highlighted that law firms are not automatically exempt from consumer protection laws or credit provision statutes. Specifically, the law firm Nagle & Zaller is deemed to be engaged in the business of making loans, which is consistent with prior judicial opinions that indicate law firms can be subject to consumer protection statutes when they engage in debt collection or credit services. The Maryland Consumer Loan Law applies here, categorizing Nagle & Zaller as a lender due to its issuance of promissory notes, thus confirming its regulatory obligations under this law.
The term "loan" encompasses any money or credit advance under the relevant subtitle, irrespective of the manner in which it is issued. The promissory notes in question qualify as loans under CL. 12-301(e)(1) since they involve credit advances of $25,000 or less for personal or household purposes, specifically to settle debts owed to homeowner associations. The complaint alleges that Nagle Zaller, rather than the homeowner associations, acted as the lender for these promissory notes. The inclusion of confessed judgment clauses in these notes was not part of the original agreements with the homeowner associations. Thus, Nagle Zaller's role transcended that of merely an agent collecting an existing debt, as they effectively created new debts through the promissory notes. The homeowner associations' involvement was passive, limited to receiving a share of the payments collected by Nagle Zaller. Denying the application of the Maryland Consumer Loan Law in this scenario would allow law firms like Nagle Zaller to circumvent regulations against making loans and using confessed judgment clauses, which the General Assembly intended to prohibit. This would create an unintended loophole in the law that the legislature did not foresee. The dissent expresses the view that this practice undermines the integrity of the Maryland Consumer Loan Law.
