Master Financial, Inc. v. Crowder

ALAN M. WILNER, J., Retired, Specially Assigned. Before us are nineteen lawsuits, nine of which are class actions. In all of them, the plaintiffs, each of whom had allegedly obtained a loan secured by a second mortgage on residential property, claimed that their respective loan transactions violated the State Secondary Mortgage Loan Law (SMLL) in several respects, and they sought redress under that statute. Several of the plaintiffs also asserted violations of the State Consumer Protection Act (CPA), and a few sought a declaratory judgment that, because of a particular violation of the SMLL, the loan agreements, as a matter of common law, were void or voidable as illegal contracts. ⁵⁶ Named as defendants in all of the cases were the entities that had allegedly originated the respective mortgage loans to the plaintiffs (lender defendants) and entities that had purchased those mortgage loans from the lender defendants (holder defendants).

In some of the class action cases, a third category of defendant (non-holder defendants) was added. That category consisted of entities which had purchased from lender defendants mortgage loans made to persons other than the named plaintiffs but which were alleged to be “juridically linked” to the named plaintiffs. The Circuit Court for Baltimore City dismissed all of the actions, principally on the ground that, as none of the lawsuits had been filed within three years after the closing of the respective loans, they were barred by limitations. The court also held that the class action plaintiffs had no cause of action against the non-holder defendants, which had no connection with any of those plaintiffs or their loans.

On appeal, the Court of Special Appeals concurred in most of the conclusions and holdings of the Circuit Court, including the findings that the applicable limitations period was three years and that no cause of action was stated against the non-holder defendants. It disagreed, however, -with the Circuit Court’s finding that the actions under the SMLL were entirely barred by limitations and, to that extent, reversed the Circuit Court judgment. Crowder v. Master Financial, 176 Md.App. 631 , 933 A.2d 905 (2007). On cross-petitions, we granted certiorari to review the intermediate appellate court’s conclusions that (1) the claims under the SMLL were subject to the three-year statute of limitations, (2) they were, however, not entirely barred by limitations, and (3) the plaintiffs in the class action suits had no standing, on behalf of absent class members, to sue the non-holder defendants.

The thrust of the plaintiffs’ argument as to limitations was that their claims were based, at least in part, on the loan instruments, that some of those instruments were under seal or should be treated as if they were under seal, and that those ⁵⁷ claims were therefore subject to a 12-year statute of limitations under Maryland Code, § 5-102(a)(l) or (5) of the Cts. & Jud. Proc. Article (CJP) rather than the three-year period allowed by CJP § 5-101. The defendants averred that the claims were based entirely on the duties, obligations, rights, and remedies set forth in the SMLL and not on the loan instruments and that the period of limitations applicable to those statutory claims was three years.

As the case was presented in the Circuit Court, in the Court of Special Appeals, in the cross-petitions for certiorari, and, in the initial briefs and oral argument in this Court, neither side ever contended that the period of limitations applicable to claims under SMLL was anything but three years. That was assumed. As noted, the major dispute was whether the claims were, in fact or in law, statutory claims subject to that three-year period of limitations or were actions on loan instruments under seal. Following oral argument, this Court discovered a line of cases that cast doubt on that assumption, and, in order to permit the parties to address the issues raised by that line of cases, we directed that supplemental memoranda be filed and additional argument be scheduled on the following question: “If, as the lower courts held, the plaintiffs’ claims are based entirely on the duties, prohibitions, and remedies set forth in the [SMLL] and not on the respective loan instruments, whether, in light of the holdings in Greene Tree H.O. v. Greene Tree Assoc., 358 Md. 453 [ 749 A.2d 806 ] (2000), Mattare v. Cunningham, 148 Md. 309 [ 129 A. 654 ] (1925), and cases cited therein, those claims constitute [an] ‘other specialty’ under [CJP § 5-102].” 1 ⁵⁸ Having considered the supplemental memoranda and oral argument, we are convinced that the plaintiffs’ actions for civil penalties under SMLL do, indeed, fall within the category of “other specialty” under CJP § 5—102(a)(6) and that they are therefore subject to a 12-year statute of limitations.

To that extent, we disagree with the ultimate judgments of the two lower courts on that issue. We do agree with those courts, however, that the plaintiffs may not proceed against the non-holder defendants and that the claims under the CPA are subject to a three-year statute of limitations. We shall hold as well that the common law actions to declare the loans void or voidable are also subject to the three-year period of limitations. BACKGROUND The credit provisions of the SMLL are found in Maryland Code, §§ 12-401 through 12-415 of the Commercial Law Article (CL).

Among other things, the SMLL defines a secondary mortgage loan (§ 124t01(i)), prohibits a person from making such a loan unless the person is licensed under the Maryland Mortgage Lender Law 2 or is exempt from such licensing (CL § 12-402), limits the amount of interest, fees, points, commissions, and other charges that may be exacted in connection with a secondary mortgage loan (CL §§ 12-404 through 12-406), and requires certain disclosures to certain borrowers (CL § 12-407.1). Violators of those or any other provision of the SMLL are subject to civil and criminal penalties. Of particular relevance here is CL § 12-413, which provides for civil penalties: “Except for a bona fide error of computation, if a lender violates any provision of this subtitle he may collect only the principal amount of the loan and may not collect any interest, costs, or other charges with respect to the loan. In ⁵⁹ addition, a lender who knowingly violates any provision of this subtitle also shall forfeit to the borrower three times the amount of interest and charges collected in excess of that authorized by law.” In their respective complaints and in papers filed thereafter, the plaintiffs claimed that the defendants violated the SMLL by (1) not being licensed as required, (2) charging the plaintiff-borrowers, at the time of closing, costs, fees, and expenses in excess of those permitted by the law, and (3) failing to provide a mandated disclosure form at or before the time of closing.

In consequence of those alleged violations, all of the plaintiffs sought a refund of the unlawfully excessive fees charged at closing and all interest already paid by them on their loans and an order relieving them from the obligation to pay any further interest. In the nine class action suits, the plaintiffs alleged that the defendants had knowingly violated the SMLL and thus sought, as additional recompense, three times the amount of interest and excessive charges collected by the defendants. The Consumer Protection Act is found in Title 13 of the Commercial Law Article. CL § 13-301 defines certain unfair or deceptive trade practices, among which are (1) false or misleading statements or representations which have the capacity, tendency, or effect of deceiving or misleading consumers, (2) representations that consumer goods, realty, or services have a characteristic, use, or benefit which they do not have, (3) failure to state a material fact if the failure deceives or tends to deceive, and (4) misrepresentation, knowing concealment, or omission of any material fact with the intent that the consumer rely on the same in connection with the promotion or sale of consumer goods, realty, or services.

CL § 13-303 prohibits a person from engaging in any unfair or deceptive trade practice in the extension of consumer credit (a defined term in CL § 13—101(d)), and CL § 13-408 permits persons to bring an action to recover for injury or loss sustained as the result of a practice prohibited by the Act. Those plaintiffs suing under the CPA contended that, by engaging in the conduct alleged with respect to the SMLL, the ⁶⁰ defendants committed the unfair and deceptive trade practices noted above, and they claimed all damages allowable by the CPA resulting from those violations, plus attorneys’ fees and injunctive relief. The action, by some of the plaintiffs, for declaratory judgment that the loan transactions were void or voidable was based on the claim that the defendants (or at least the lender defendants) were not licensed as required by both the SMLL and the Maryland Mortgage Lender Law. Those plaintiffs argued that the licensure requirement is an integral part of the regulatory scheme embodied in the SMLL and that loan transactions entered into by entities required to be licensed but which were not were illegal and therefore void or voidable.

Each of the petitioner defendants moved to dismiss the complaints on the ground that the actions were barred by limitations. As noted, they averred that the applicable statute of limitations was three years, as provided in CJP § 5-101, that all of the operative facts underlying the claims were known to the plaintiffs at or before the closing on their respective loans, and that none of the complaints were filed within three years after the loans closed. The non-holder defendants moved to dismiss the claims against them on the alternative ground that, as they had no connection with any of the plaintiffs’ loans, the plaintiffs had no cause of action against them. The plaintiffs offered four responses to the limitations defense.

First, they argued that, because some of the plaintiffs had signed the notes or deeds of trust under seal, the applicable statute of limitations in their cases was twelve years, as prescribed by CJP § 5-102(a)(l) (promissory note or other instrument under seal) or § 5-102(a)(5) (contract under seal), not the three years allowed under § 5-101. Second, they urged that, by reason of the “discovery rule,” their causes of action did not accrue until they discovered the terms and remedies in the SMLL, i.e., until they knew that the defendants had acted unlawfully and they became aware of their right to sue, which, according to them, occurred within three ⁶¹ years before the actions were filed. Third, they averred that limitations did not bar their claims—at least not entirely— because they financed the closing costs (the unlawfully excessive fees and charges), that the acceptance of each payment made on the loan thus resulted in the defendants’ collecting a fee or charge they were prohibited by CL §§ 12-405(a)(3) and 12-411 from collecting, and that the acceptance of each such payment constituted a separate and continuing wrong. Finally, they claimed that, because the defendants failed to provide the disclosure statement required by CL § 12-407.1, the statute of limitations was tolled.

The Circuit Court rejected each of those responses, found the limitations defense to be valid, and dismissed the actions. It concluded that: (1) Because the plaintiffs’ actions were based entirely on the statutes and not on any provision in the notes or deeds of trust, CJP § 5-102 had no application and the applicable period of limitations was therefore three years; (2) A cause of action accrues under the discovery rule when the plaintiff has knowledge of the legally operative facts permitting the filing of a claim, and the plaintiffs undisputably had knowledge of those facts when they received the closing documents on the day their loans were closed; (3) The fact that the plaintiffs chose to finance the closing costs did not operate to delay the accrual of their cause of action under a “continuing harm” theory, in that the harm occurred when the allegedly excessive charges were assessed at closing and the plaintiffs were aware that those charges had been assessed at that time; and, finally (4) Limitations was not tolled because the plaintiffs did not receive the disclosure form specified in CL § 12-407.1, as that form is required only when the loan is for a commercial purpose, which was not the case with respect to any of the plaintiffs’ loans. The Court of Special Appeals agreed that the plaintiffs’ claims were solely under the SMLL (and, as to some plaintiffs, ⁶² the CPA by extension), that the applicable period of limitations was three years, not twelve, that accrual of the actions was not deferred until the plaintiffs discovered the terms of the SMLL and became aware that they might have legal remedies, and that accrual was not deferred by the failure of the lender defendants to give the plaintiffs the disclosure form specified in CL § 12-407.1. Those conclusions mandated an affirmance of the dismissal of the CPA claims.

The intermediate appellate court found, however, that the plaintiffs’ SMLL claims were not entirely barred. It noted that, under the civil penalty provision in CL § 12-413, a lender who violates any provision of the SMLL is entitled to collect only the principal amount of the loan and may not collect any interest or costs associated with the loan, and concluded that that provision was violated each time the defendants collected a monthly payment that included interest or an amortized part of the closing costs. Thus, it held that the plaintiffs’ claims “for recovery of monies wrongfully paid under CL § 12-413 did not finally accrue at the time of closing because the borrowers could not pursue the remedy provided in CL § 12-413 until the lenders had collected interest, costs, or other charges in excess of the principal amount of the loan.” Crowder v. Master Financial, supra, 176 Md.App. at 665 , 933 A.2d at 925 . Rejecting a contrary holding of the U.S. District Court and the U.S. Court of Appeals for the Fourth Circuit in Miller v. Pacific Shore Funding, 224 F.Supp.2d 977 (D.Md.2002), aff'd 92 Fed.Appx. 933 (4th Cir.2004) (per curiam unpublished), the Court of Special Appeals concluded that the plaintiffs were entitled to sue “following each payment of sums in excess of the principal” and that the statute of limitations “permits them to seek the statutory remedy for payments made within three years prior to the date of filing of their respective complaints.” Id. at 667, 933 A.2d at 926 .

By the same reasoning, the court found that the plaintiffs were entitled to seek declaratory relief “with respect to any payments made within that same time period as well as with respect to any ongoing or future liability under the loans.” Id. ⁶³ DISCUSSION I. Limitations Nature of Plaintiffs’ Claims We shall address first the contention raised in the plaintiffs’ cross-petition for certiorari that, in at least seventeen of the cases, the plaintiffs signed the note or deed of trust under seal, that their claims were based on those loan instruments, and that the applicable statute of limitations is therefore twelve years, rather than three. For purposes of this argument, we shall assume that, in those seventeen cases, the plaintiff’s signature is under seal, and we shall further assume (but expressly do not decide), that, if the instruments would otheiwise be regarded as “specialties” under CJP § 5-302(a)(1) or (5) because the plaintiffs’ signatures are under seal, they do not lose that status as to the defendants merely because the lender was not required to sign the instruments and did not, in fact, do so. 3 ⁶⁴ The governing fact here, as both lower courts observed, is that these actions are not on the notes or deeds of trust. The plaintiffs are not seeking to enforce those instruments, or to invalidate or reform them based on any alleged imperfection in the instruments themselves. The sole bases of their complaint under the SMLL are that (1) the lender was not properly licensed, (2) they were charged excessive origination fees, and (3) they were not given a disclosure form supposedly required by the statute, and the only remedies sought were those provided by CL § 12-413.

Those alleged facts and the consequences of them are entirely extraneous to the notes and deeds of trust. The deed poll statute itself, § 4-102 of the Real Property Article, supports that distinction. As noted ante in footnote 3, acceptance of delivery of the deed of trust binds the grantee “to the provisions of the deed,” but it is not the “provisions of the deed” that are either challenged or sought to be enforced here. Notwithstanding that the civil penalty provision in CL § 12-413, if applied, would excuse the borrower from having to pay the interest provided for in the note and deed of trust, neither the statute nor an action under it in any way alters the terms of the note or deed of trust. ⁶⁵ That is true as well with respect to the action under the CPA and the action to declare the loan transactions void or voidable.

The sole basis of both of those claims is the violation of the SMLL, not anything inherent in the loan instruments. It is the SMLL violations that were alleged to constitute the unfair or deceptive trade practices under the CPA and to render the loan instruments invalid. The only damages sought in the CPA claim are those allowed by the CPA—damages “allowable by statute resulting from the violations” plus attorneys’ fees, costs, and restitution. The focus, then, is on the statute of limitations applicable to those statutory claims.

CPA Claims The period of limitations applicable to the CPA claims is the issue most easily resolved, for there is direct and recent precedent. In Greene Tree H.O.A v. Greene Tree Assoc., 358 Md. 453 , 749 A.2d 806 (2000), we held that claims based on the CPA are not specialties for purposes of CJP § 5-102 and are therefore subject to the three-year period of limitations provided for in CJP § 5-101. We are not asked by the plaintiffs to overturn that decision in that regard, and we have no inclination to do so. That aspect of the Court of Special Appeals judgment will be affirmed.

Claims For Civil Penalties Under SMLL We have expressed our concurrence with the conclusions of the Circuit Court and the Court of Special Appeals that the plaintiffs’ claims for civil penalties under CL § 12-413 are based solely on the duties, obligations, rights, prohibitions, and remedies provided for in the SMLL. The limitations question, then, is whether such claims, based on that statute, constitute an “other specialty” within the meaning of CJP § 5-102(a)(6). If so, the limitations period is twelve years; if not, it is three years. As most recently pointed out in Greene Tree, this Court has dealt with the issue of whether a statutory claim constitutes a specialty in a number of cases, dating back to Ward v. Reeder, ⁶⁶ 2 H. & McH. 145 (1789).

We observed in Greene Tree that “attempts to identify a statutory specialty by defining the nexus between a claim and the statute at issue have led to complexities and, arguably, conflicting results,” and, apart from noting that statutory specialties “usually have involved an action of debt for a fixed or determinable sum,” we eschewed an attempt, beyond what the Court had already stated, “to state an all-encompassing definition of a statutory specialty.” (Emphasis added). Greene Tree H.O.A. v. Greene Tree Assoc., supra, 358 Md. at 481-82, 749 A.2d at 821 . There is no need for us to repeat the extensive history recited in Greene Tree in order to bolster the conclusions we reach in this case. We start with the undisputed propositions that, although claims based on a statute may fall within the meaning of “other specialty” under CJP § 5-102(a)(6), not all claims based in some way on rights, duties, obligations, prohibitions, or remedies mentioned or provided for in a statute do fall within that category.

The problem, left unresolved in Greene Tree, is to discern a reasonable standard for determining when a statutory claim would qualify for inclusion in that category. Because we are dealing with statutes, one preliminary and possibly decisive factor is whether the Legislature has provided a specific period of limitations for enforcement of the statute. Some statutes that prohibit or require conduct and provide remedies for violations contain such provisions, and if they do, those provisions ordinarily will govern. See, for example, CL § ll-109(c) (requiring that civil action seeking-damages for violation of Foreign Discriminatory Boycotts Act be brought within four years); CL § ll-209(d) (same for bringing civil action for damages for violation of Antitrust Act); CL § 12-1019 (requiring that civil action for violation of Credit Grantor Closed End Credit Act be filed no later than six months after loan is satisfied).

The issue of CJP § 5-102(a)(6) ordinarily arises only if the regulatory statute is silent in that regard. ⁶⁷ In Mattare v. Cunningham, 148 Md. 309 , 129 A. 654 (1925), this Court seemingly did adopt a general principle for distinguishing those statutory claims that would be regarded as specialties subject to a 12-year period of limitations from those that would not. The action, to recover death benefits ordered by the Workers’ Compensation Commission, was filed seven years after issuance of the award. At the time, the predecessor statute to CJP § 5-102, codified as Art. 57, § 3 of the 1924 Code, provided a 12-year period of limitations for a “bill, testamentary, administration or other bond (except sheriffs and constables’ bonds), judgment, recognizance, statute merchant, or of the staple or other specialty whatsoever (emphasis added), and the issue was whether an action based on the award constituted an “other specialty whatsoever.” In holding that the claim did constitute such a specialty—a statutory specialty—the Court relied on two authorities. It cited first Wardle v. Hudson, 96 Mich. 432 , 55 N.W. 992, 993 (1893), in which the Michigan court concluded that: “Specialty by statute means some right or cause of action given by statute which does not exist at common law.

In such cases the nature or cause of action does not depend, in any degree, upon any contractual relation. There is no original obligation whatever created by the act of the parties.” Mattare, supra, 148 Md. at 314-15 , 129 A. at 656 . The Court’s principal reliance was on a passage from Wood on Limitation § 39, at 137-38, which it quoted at length and apparently regarded as providing a general rule for determining when a statutory claim constitutes a specialty: “The test, whether a statute creates a specialty debt or not, might be said to be whether, independent of the statute, the law implies an obligation to do that which the statute requires to be done, and whether independently of the statute a right of action exists for the breach of the duty or obligation imposed by the statute. If so, then the obligation is not in the nature of a specialty, and is within the statute [of limitations] so long as the common law remedy is ⁶⁸ pursued; but if the statute creates the duty or obligation, then the obligation thereby imposed is a specialty, and is not within the statute [of limitations].” Mattare, supra at 315 , 129 A. at 656 .

The Court quoted further from Wood: “If the statute imposes an obligation, and gives a special remedy therefor, which otherwise could not be pursued, but at the same time a remedy for the same matter exists at common law independently of the statute, and the statute does not take away the common law remedy, the bar of the statute [of limitations] is effectual when the common-law duty or liability is pursued, but is not applicable when the special statutory remedy is employed.” Id. Applying those principles, the Court concluded that the award of the Commission was a statutory specialty and that a suit on the award was thus subject to the 12-year period of limitations. The same principles were applied in Baltimore v. Finance Corp., 168 Md. 13 , 176 A. 480 (1935) and in Sterling v. Reecher, 176 Md. 567 , 6 A.2d 237 (1939), although, on the facts, they produced different results. The action in Baltimore v. Finance Corp. was based on a statute that required the counties and Baltimore City to refund taxes that had been paid erroneously or mistakenly.

Under common law, taxes paid under a mistake of fact could be recovered, but taxes paid under a mistake of law could not be. The statute removed that distinction and provided for the recovery of taxes paid under a mistake of law. The action, to recover taxes paid under a mistake of law, was brought more than three years, but less than twelve years, after the taxes were paid, and, as in Mattare , the issue was which period of limitations applied. Citing but distinguishing Mattare , the Court held that the suit to recover taxes paid under a mistake of law was essentially a common law action in assumpsit rather than one based solely on the statute.

To hold otherwise, the Court noted, would allow a ⁶⁹ 12-year period of limitations for actions to recover taxes paid under a mistake of law when the equivalent action to recover taxes paid under a mistake of fact, under the common count for money had and received, was subject to the normal three-year period of limitations, an anomaly the Court chose not to bless. Sterling v. Reedier involved a statute making the stockholders of a bank liable to the bank for up to the par value of their stock but allowing that liability to be enforced only by a receiver, trustee, or assignee of the bank, appointed upon an insolvency. The action by the receiver, Sterling, was filed six years after commencement of the receivership, and the issue was raised whether it was barred by limitations. The stockholders’ liability was entirely statutory; the issue was the remedy.

Concluding that the remedy also was entirely statutory, available only to a receiver, trustee, or assignee acting under court jurisdiction, the Court held that the action was a statutory specialty subject to the 12-year period of limitations. Compare Ins. Comm. v. Wachter, Etc., Inc., 179 Md. 608 , 21 A.2d 141 (1941), where an assessment against subscribers of a reciprocal insurance exchange was held to be based on a contractual liability, subject to the three-year limitations period, rather than on a statute that required such liability to be expressed in the contracts. Although it does not appear from the Opinions in these preGreene Tree cases that the determination of whether the action was a statutory specialty actually hinged on whether the damages sought were liquidated or unliquidated, in Greene Tree, we observed that the close relationship between statutory specialties and the form of action of debt “strongly indicates that a claim for unliquidated damages is not one based on a statutory specialty.” Greene Tree, supra, 358 Md. at 476-77 , 749 A.2d at 818 .

The Court also noted that, whether damages were liquidated or unliquidated, actions on a promissory note, bond, judgment, or recognizance usually involve a fixed sum, but noted as well that, in Gildenhorn v. Columbia R.E. Title, 271 Md. 387 , 317 A.2d 836 (1974), we held that an action for unliquidated damages based on a title insurer’s ⁷⁰ failure to defend the insured’s title, as required by a title insurance policy under seal, was on a specialty subject to the 12-year period of limitations. The defendants read these passages from Greene Tree as a holding that an action for unliquidated damages cannot constitute a specialty, but that is not what the Court said or held. We made no such express ruling and, indeed, refrained from adopting any “encompassing definition of a statutory specialty,” being content merely to hold that an action for unliquidated damages under the CPA did not constitute a statutory specialty. The general statute of limitations in Maryland is three years; as