FYI: 11th Cir Reverses Limited Atty Fee Award Where Plaintiff Had No Actual Damages But Proved Statutory Violation

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed a trial court's award of $2,500 in statutory damages to a plaintiff whose private information was improperly viewed by a Sheriff's Deputy who had a romantic relationship with the plaintiff's ex-husband in violation of the federal Driver's Privacy Protection Act (DPPA), holding that the statute did not provide for cumulative damages of $2,500 per violation.

 

In so ruling, the Court reversed the trial court's award of only 10% of the amount of attorney's fees requested by the plaintiff's counsel.

 

The trial court limited the attorney fee award because the plaintiff failed to prove any actual damages, therefore only recovering the statutory penalty, which the trial court likened to cases in which "a party 'recovers only nominal damages because of his failure to prove an essential element of his claim for monetary relief,' where 'the only reasonable fee is usually no fee at all.'" 

 

In reversing the trial court's limited fee award, the Eleventh Circuit held that a plaintiff need not prove actual damages to recover the other types of remedies provided by the statute at issue, including attorney's fees, and that the statutory penalty was a "liquidated damages" remedy rather than only "nominal damages."

 

A copy of opinion is available at:  Link to Opinion

 

The plaintiff and her husband divorced in 2010. The following year, the former husband married an Orange County Sheriff's Deputy with whom he had an affair while still married to the plaintiff.

 

Between January 2010 and November of 2011, the Sheriff's Deputy, "while sitting alone in her patrol car, … used her access to law enforcement databases … to search [plaintiff's] name."  After the divorce, plaintiff made a Freedom of Information Act (FOIA) request and "learned that [the Sheriff's Deputy] had been searching her name on drivers' license databases."

 

Plaintiff then filed an administrative complaint with the police department and during the investigation the Sheriff's Deputy admitted "that she did not have a legitimate business or law enforcement reason for accessing [plaintiff's] information." The deputy "was suspended for 60 hours without pay and placed on disciplinary probation for six months."

 

The plaintiff sued the Sheriff's Deputy for violating the DPPA and her civil rights under 42 U.S.C. § 1983, alleging that she suffered emotional distress.

 

The trial court granted plaintiff's motion for judgment as a matter of law on the issue of liability after a jury trial. The plaintiff waived her 42 U.S.C. § 1983 claim and agreed to pursue damages only under the DPPA.

 

At trial, the court provided the jury with a verdict form containing three interrogatories to determine damages. In response to the first interrogatory, the jury found that the Sheriff's Deputy violated the DPPA 101 times. In response to the second interrogatory, the jury found that the Deputy's actions did not cause the plaintiff to suffer any actual damages. The jury did not reach the third interrogatory, which asked what amount of compensable damages were attributable to the Deputy's conduct.

 

The plaintiff requested $252,500 in liquidated damages: $2,500 for each of the Deputy's]101 violations of the DPPA, as well as attorney's fees of $153,787 and costs of $4,227.44.  The trial court awarded only $2,500 in liquidated damages, $15,379 in attorney's fees, and $4,227.44 in costs.  The trial court reasoned that the case did "not implicate the purposes of the DPPA, [the deputy] did not use or disclose [plaintiff's] private information, and [plaintiff] did not suffer any actual damages." As to attorney's fees, the trial court reasoned that the reduction was justified because the plaintiff recovered none of the compensatory damages she sought and only 1% of her statutory damages, and therefore in the trial court's view only 10% of the requested attorney's fees was a reasonable amount. The plaintiff appealed.

 

On appeal, the Eleventh Circuit began by analyzing the text of the DPPA, 18 U.S.C. § 2724, which provides that "[a] person who knowingly obtains, discloses or uses personal information, from a motor vehicle record, for a purpose not permitted under this chapter shall be liable to the individual to whom the information pertains, who may bring a civil action in a United States district court." The statute further provides that "[t]he court may award … (1) actual damages, but not less than liquidated damages in the amount of $2,500; (2) punitive damages upon proof of willful or reckless disregard of the law; (3) reasonable attorneys' fees and other litigation costs reasonably incurred; and (4) such other preliminary and equitable relief as the court determines to be appropriate."

 

The Court characterized as "an issue of first impression in this Circuit" the plaintiff's argument that she was entitled to $2,500 per violation, pointing out that despite plaintiff's argument that the statutory language was clear, it found the language "far from clear." The Eleventh Circuit noted that the text of the DPPA does not explicitly require per violation awards, but it does not seem to rule them out either.

 

The Eleventh Circuit held, however, that the remedy part of the statute's use of the word "may" "does use plainly permissive language. … Not only does the use of the word "may" imply permissiveness, but we have expressly held so when interpreting this exact provision of the DPPA."  In a prior ruling, the Court held that "[t]he use of the word 'may' [in § 2724(b)] suggests that the award of any damages is permissive and discretionary."

 

Having found that an award of any damages was discretionary, the Court concluded that because the jury found that plaintiff did not suffer any actual damages, "[t]he district court properly used its discretion to fashion a damages award appropriate for this situation. A textual reading of § 2724 leads us to the conclusion that the district court's discretion is only limited in the sense that it must award at least $2,500 if any violation has been shown. For awards above that amount, we review for abuse of discretion."

 

The Eleventh Circuit buttressed its conclusion by noting that Congress included "cumulative damages in the criminal section of the DPPA, § 2723, … [and] '[i]t is well settled that where Congress includes particular language in one section of a statute but omits in in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion of exclusion.'" Thus, Congress could have, but presumably chose not to, "include language that permits cumulative damages in the civil section…."

 

The Court pointed out that while the deputy's "conduct here was unmistakably wrong and police officers should not be allowed to take advantage of their position of power to access private information, [since] the statute specifically provides for punitive damages to deter this conduct[,] … [r]eading 'per violation' into the statute's liquidated damages clause to mandate cumulative damages would enable unharmed plaintiffs to abuse this provision." Accordingly, the trial court's award of $2,500 in liquidated damages was affirmed.

 

Turning to the issue of attorney's fees and the trial court's award of compensation for only "48 hours of work" when the plaintiff asked for "481 hours of attorney time", the Court reasoned that "[t]he starting point for determining the amount of a reasonable fee is the number of hours reasonable expended on the litigation multiplied by a reasonable hourly rate. … This number is called the lodestar and 'there is a strong presumption' that the lodestar is the reasonable sum the attorneys deserve. … In determining whether the lodestar is reasonable, 'the district court is to consider the 12 factors enumerated in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974). … If the lodestar is reasonable, a downward adjustment 'is merited only if the prevailing party was partially successful in its efforts. … A district court must determine what counts as partial success on a case-by-case basis."

 

The Eleventh Circuit that the trial court mistakenly "did not start its analysis with the lodestar and erred in its approach to the Johnson factors[,]" giving too much weight to the "eighth … factor, the amount involved and the results obtained. While those are certainly relevant considerations, especially for determining an appropriate downward adjustment, under the circumstances of this case we find that the district court went too far by reducing the requested fees by 90%."

 

The Court disagreed with the trial court's reasoning that the case was similar "to one in which a party 'recovers only nominal damages because of his failure to prove an essential element of his claim for monetary relief,' where 'the only reasonable fee is usually no fee at all.'" 

 

The Eleventh Circuit held that a plaintiff "need not prove actual damages to recover the other types of remedies listed in § 2724,' which includes attorney's fees." It also distinguished between liquidated and actual damages. "Liquidated damages are '[a]n amount … stipulated as a reasonable estimation of actual damages.' … Liquidated damages are a pre-fixed amount, set here by Congress. Nominal damages are 'a judicial declaration that the plaintiff's right has been violated."  Because Congress set a fixed amount of liquidated damages, the Court concluded it "should defer to Congress's judgment."

 

Accordingly, the trial court's judgment was affirmed as to damages, and reversed as to attorney's fees, and the matter was remanded for recalculation of the fees.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
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Mobile:  (312) 493-0874
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FYI: 5th Cir Holds Threat of Lawsuit to Collect Partially Time-Barred Real Estate Secured Debt Did Not Violate FDCPA

The U.S. Court of Appeals for the Fifth Circuit recently held that a debt collector did not violate the federal Fair Debt Collection Practices Act (FDCPA) by threatening non-judicial foreclosure on debt that was partially but not fully time barred.

 

A copy of the opinion is available at:  Link to Opinion  

 

The plaintiffs owned a condominium in Houston, Texas. They sued the condominium ownership, its management company and its collection lawyers concerning their efforts to collect assessments and other charges under the association's declaration and related documents.

 

At the trial court level, the plaintiffs alleged common law claims of breach of contract, wrongful foreclosure, negligent misrepresentation, breach of fiduciary duty and violations of the FDCPA, the Texas Fair Debt Collection Practices Act and the Texas Deceptive Trade Practices Act. The trial court granted the defendants' motion for summary judgment and the plaintiffs appealed.  The Fifth Circuit affirmed the lower court ruling.

 

By way of background, the assessments stretched back several years. Arguably, some but not all of the debt was beyond the Texas four-year statute of limitations.

 

The Fifth Circuit was not swayed by the collection law firm's argument that it was exempt from liability under section 1692f(6) of the FDCPA because it was merely enforcing security interests. The Court relied on its earlier decision in Kaltenbach v. Richards, which held that once a party satisfies the general definition of debt collector, it satisfies the definition for all purposes even when attempting to foreclose on security interests. Here, the Court concluded, there was "no serious contention" that the law firm was not a debt collector.

 

Turning to the 1692g claim, the collection law firm had sent a two-page letter referencing the debt. The plaintiffs claimed the validation letter "overshadowed" their FDCPA rights because it demanded that the defendants "needed to pay 'on or before the expiration of thirty (30) days from and after" the date of the letter "or nonjudicial foreclosure would occur."  However, section 1692g provides that a debtor has 30 days from receipt of a validation letter to make a written dispute which freezes collection activity until the debt collector provides verification. The plaintiffs alleged that the law firm's demand for payment within 30 days of the date of the verification letter "overshadowed" the longer period provided by section 1692g, which is focused on the date the debtor receives the validation letter.

 

The Fifth Circuit disagreed, concluding that a "fair interpretation" of the letter demonstrates the plaintiffs were not deprived of their validation rights because the longer 30-day validation language was listed not once, but three times, and in bold type.

 

Next, the Court addressed the plaintiffs' claim that the law firm threatened a lawsuit on time-barred debt.  Examining the Texas Property Code, the Court found that condominium assessments were "covenants running with the land" and that the unpaid assessments and other charges constituted a real property lien. The Court noted there was no Texas case law to answer what limitations period covered such real property liens, but assumed, to resolve this case, that the four-year general statute would bar a small portion of the overall debt.

 

Whether the letter violated the FDCPA for threatening a suit on a time-barred debt provided a more compelling argument. Just last year in Daugherty v. Convergent Outsourcing, Inc., the Fifth Circuit ruled the FDCPA was violated when a letter merely offered to "settle" a time-barred debt, but did not otherwise threaten a lawsuit.

 

The Fifth Circuit found the facts here contained important distinctions from Daugherty. First, unlike Daugherty, only a portion of the debt was alleged to be time-barred, less than 25 percent. Second, in Daugherty there was no dispute that the limitations period applicable to the entire debt had expired, but here it was uncertain whether the limitations period had run.

 

Finally, because the letter in Daugherty did not disclose that a payment made after the debt was time barred could restart the limitations period, the letter arguably would mislead consumers in taking an action adverse to their interests.  Here, however, the Court noted that the plaintiffs were not misled because the condominium was ultimately foreclosed for the amount that was demanded.

 

In reaching its conclusion, the Fifth Circuit went to great lengths to stress the nature of the debt (i.e. real estate debt) and hinted that it might not rule favorably if the debt were of another type, like a credit card or other non-real estate secured debt.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 11th Cir Holds Def's FCRA Interpretation Was Objectively Reasonable, Affirms Dismissal

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed the dismissal of a complaint filed by a consumer who was only an authorized user of a credit card account against two credit reporting agencies ("CRAs") alleging willful violations of the federal Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. ("FCRA") for supposedly inaccurately reporting the account as delinquent on her credit reports.

 

In so ruling, the Court concluded that the CRAs did not willfully violate the FCRA because their interpretation of the "maximum possible accuracy" requirement under FCRA subsection 1681e(b) to require only that it report information that is technically accurate was an objectively reasonable interpretation of the FCRA.

 

A copy of the opinion is available at:  Link to Opinion

 

A consumer was designated as an authorized user on her parents' credit card account after her parents became ill.  She alleged that, as an authorized user, "she never assumed and had no financial responsibility for any debts on that card."

 

After her parents died, the account went into default.  As a result, the consumer's credit scores with two CRAs fell drastically. 

 

The creditor agreed to remove the consumer from the account, but one of the CRAs did not remove the account from her credit report, instead notating that the account relationship was terminated.  The creditor eventually requested that the account be deleted from the consumer's credit reports, and the CRAs complied, returning the consumer's credit score to her alleged "prior excellent level."

 

The consumer filed suit against the CRAs alleging a willful violation of the subsection 1681e(b) by failing to "follow reasonable procedures to assure maximum possible accuracy" of the credit reports of authorized users of credit card accounts.  15 U.S.C. §§ 1681e(b), 1681n.  More specifically, the consumer alleged that listing the account on her credit report inaccurately implied that she was liable on the account when she was not, thereby causing her credit report and score to be inaccurate.

 

The trial court dismissed the complaint, holding that the consumer failed to state a cause of action because it was not unreasonable for the consumer reporting agencies to read subsection 1681e(b) to permit them to report information about accounts for which the consumer is an authorized user.  See Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 69 (2007).

 

The consumer appealed the lower court's ruling to the Eleventh Circuit, but first requested that the Appellate Court dismiss her appeal as to the CRA who removed the account from her report without further request from the creditor.  The Eleventh Circuit complied.

 

On appeal, the remaining CRA argued that the consumer lacked standing to the jurisdiction of the federal courts under Article III of the Constitution of the United States, because she failed to prove that she suffered an injury in fact.  As you may recall, "[a]n injury sufficient for standing purposes is 'an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical." Common Cause/Ga. v. Billups, 554 F.3d 1340, 1350 (11th Cir. 2009) (quoting Lujan, 504 U.S. at 560). A concrete injury "must actually exist," meaning it must be "real and not abstract." Spokeo, Inc. v. Robbins, 136 S. Ct. 1540, 1548 (2016) (citations and internal quotation marks omitted). An intangible injury, like a violation of the right to free speech, can be concrete. Id. at 1549.

 

Here, the Eleventh Circuit  concluded that the consumer alleged an injury in fact and had standing to pursue her complaint because (i) the harm caused by the alleged FCRA violation is closely related to the harm caused by publication of defamatory information; (ii) she alleged that she "lost time.. attempting to resolve the credit inaccuracies" and; (iii) her alleged injuries affected her personally by dropping her score 100 points.  See, e.g., Restatement (First) of Torts § 569 cmt. g (Am. Law Inst. 1938) (explaining that it is "actionable per se" to publish a false statement that another has "refus[ed] to pay his debts"); Cf. Palm Beach Golf Center-Boca, Inc. v. John G. Sarris, D.D.S., P.A., 781 F.3d 1245, 1252–53 (11th Cir. 2015) (explaining that the occupation of a fax machine during the transmission of an unwanted fax constituted a concrete injury).

 

Next, the Eleventh Circuit examined whether or not the consumer's complaint stated a cause of action under the FCRA.

 

To establish a willful violation with section 1681e(b), a consumer must establish that the reporting agency either knowingly or recklessly violated that section.  Levine v. World Fin. Network Nat'l Bank, 554 F.3d 1314, 1318 (11th Cir. 2009); see also Safeco, 551 U.S. at 56–57. A defendant recklessly violates the FCRA if it takes an action that "is not only a violation under a reasonable reading of the statute's terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless." Safeco, 551 U.S. at 69.  A defendant that adopts an objectively reasonable reading of the FCRA does not knowingly violate the FCRA. Id. at 70 n.20.

 

Courts have offered two definitions of "maximum possible accuracy" under subsection 1681e(b).  Some have ruled that the standard requires only that the information reported is "technically accurate" and not false.  See Heupel v. Trans Union LLC, 193 F. Supp. 2d 1234, 1240 (N.D. Ala. 2002); see Grant v. TRW, Inc., 789 F. Supp. 690, 692 (D. Md. 1992); accord McPhee v. Chilton Corp., 468 F. Supp. 494, 497–98 (D. Conn. 1978). Other courts interpreted the "maximum possible accuracy" requirement to require CRAs to report information that is both "technically accurate" and not misleading or incomplete.  See Dalton v. Capital Associated Indus., Inc., 257 F.3d 409, 415 (4th Cir. 2001); Pinner v. Schmidt, 805 F.2d 1258, 1261, 1263 (5th Cir. 1986); Koropoulos v. Credit Bureau, Inc., 734 F.2d 37, 40 (D.C. Cir. 1984).

 

Although the Eleventh Circuit preferred the interpretation requiring credit reports be both accurate and not misleading, it could not conclude that reading subsection 1681e(b) to require only technical accuracy was objectionably unreasonable. 

 

Because the CRA adopted an interpretation of the FCRA that was not objectively unreasonable, the Eleventh Court determined that the CRA's reporting did not willfully violate the FRCA's requirement "follow reasonable procedures to assure the maximum possible accuracy of reported information" under subsection 1681e(b).

 

Accordingly, dismissal of the consumer's complaint was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 1st Cir Rejects Borrower's Loan Mod Fraud Allegations as Untimely

The U.S. Court of Appeals for the First Circuit recently held that a borrower cannot invoke the discovery rule to assert an otherwise untimely Massachusetts UDAAP claim (Chapter 93A) relating to a loan modification agreement, because the alleged harm was not "inherently unknowable" at the time of its occurrence.

 

In so ruling, the Court determined that the borrower knew he was required to make monthly payments when he signed the loan modification agreement.  Therefore, the statute of limitations began to run when the borrower stopped making payments, not when the creditor provided notice of the default. 

 

A copy of the opinion is available at:  Link to Opinion

 

In August 2005, the borrower ("Borrower") obtained two loans to refinance his mortgage loan.  Borrower executed mortgages identifying Mortgage Electronic Registration Systems, Inc. ("MERS") as the mortgagee "solely as nominee" for lender and its successors and assigns. 

 

In June 2010, MERS assigned one of the mortgages to a bank as trustee for securitized trust ("Trustee").

 

Borrower obtained a loan modification in March 2010.  But, he did not receive any statements for the modified loan until September 2010.  Borrower made payments from September 2010 through June or July 2013, at which time defendant servicer ("Servicer") returned his latest payment and informed him that the loan was in default. 

 

Borrower sued Servicer and Trustee (collectively, "Defendants") to stop the foreclosure.  The trial court granted the Defendants' motion for judgment on the pleadings under Fed. R. Civ. P. 12(c) and dismissed all six counts of Borrower's complaint.

 

On appeal, Borrower argued that the trial court's entry of judgment was premature and challenged the court's findings that: (1) he lacked standing to raise a quiet title claim, and (2) his claim under Massachusetts's consumer-protection law ("Chapter 93A claim") was time barred.

 

Initially, the Court found that Defendants' Rule 12(c) motion was timely filed on January 25, 2016, and the motion was not heard until May 25, 2016.  The Court noted that Borrower had ample time to seek leave to amend his complaint, but he chose not to do so.  Because Borrower failed to plead any set of facts that would entitle him to relief, the Court agreed with the trial court's assessment that Defendants were entitled to judgment on the pleadings.

 

The First Circuit then turned to the issue of Borrower's standing to quiet title.

 

As you may recall, under Massachusetts law, a mortgagor lacks standing to bring a quiet title action as long as the mortgage remains in effect.  See, e.g., Oum v. Wells Fargo, N.A., 842 F. Supp. 2d 407, 412 (D. Mass. 2012), abrogated on different grounds by Culhane v. Aurora Loan Servs. of Nebraska, 708 F.3d 282 (1st Cir. 2013).

 

Borrower argued that Defendants were responsible for his default.  However, the Court rejected the argument because "what matters is the existence of a mortgage, not whether the underlying loan is in default."

 

Borrower then argued that MERS's assignment of the mortgage to Trustee was void because MERS failed to seek permission from the bankruptcy court to assign the mortgage after the original lender had filed for bankruptcy.  However, the Court held that Borrower waived this argument by failing to cite to any authority whatsoever in support of his conclusory assertion.

 

Moreover, the First Circuit also held that Borrower lacked standing to challenge a mortgage assignment based upon an alleged deviation from the trust agreement. 

 

In addition, the Court determined that the trial court correctly found that the Chapter 93A claim was time-barred.

 

Borrower alleged that the delay caused by Defendants' failure to provide him monthly statements between March and September 2010 was "unfair and deceptive practice."  But, in the First Circuit's view, this meant that the claim accrued by September 2010 and expired by September 2014 – well before Borrower brought suit in June 2015.  See Mass. Gen. Laws ch. 260, § 5A (setting a four-year statute of limitations).

 

Borrower argued that the "trigger" for his claim was Defendants' notifying him in June 2013 that he was in default, but the Court found that the predicate harm was Defendants' failure to timely send statements to Borrower in 2010.  The Court rejected Borrower's use of the discovery rule "to salvage his untimely claims" because, as the trial court noted, the alleged harm was not "inherently unknowable at the time of [its] occurrence."  Latson v. Plaza Home Mortg., Inc., 708 F.3d 324, 327 (1st Cir. 2013).

 

Specifically, the Court noted that Borrower knew he was required to make monthly payments when he signed the loan modification agreement in 2010.  Defendants' delay in issuing statements and Borrower's default were, in the Court's view, not "inherently unknowable" harms.  Id.

 

Accordingly, the First Circuit affirmed the trial court's judgment.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Maryland High Court Holds Utility Company Did Not Have Super Lien on Real Estate

The Court of Appeals of Maryland, the state's highest court, recently held that a real estate development company's recording of a declaration for utility infrastructure expenses did not create a lien on the referenced real estate, and instead it should have followed the Maryland Contract Lien Act procedures to create a lien and establish its priority for the delinquent assessments purportedly owed by a mortgagee.

 

A copy of the opinion is available at:  Link to Opinion

 

A real estate development company ("developer") purchased land for a 330-lot residential development and assumed responsibility for the construction of water and sewer facilities. The developer recorded a declaration stating that the expense of creating that infrastructure would be passed on to the future homeowners in the form of an annual assessment with the future homeowner's liability secured by a lien granted by the homeowner on the homeowner's property.

 

The homeowners were to pay the utility company for the expenses in 23 equal installments of $700 for each lot on the first of each year following conveyance of the lot to the homeowner. The declaration stated that by accepting a deed to a lot, the owner of the lot agreed to pay the annual expenses and granted the utility company a lien to secure the payment of those expenses, but the declaration did not state the value of the lien it sought to create.  The declaration further stated that the utility company could foreclose under the Maryland Contract Lien Act, Maryland Code, Real Property Article ("RP"), §14-201 et seq., if the lot owner failed to pay.

 

The developer and homebuilders were explicitly excluded from any obligation to pay the annual assessment while they owned the lots.  The developer recorded the declaration with a copy of the lots in the development but did not pay recordation and transfer taxes, which would have amounted to approximately $60,000.

 

The water and sewer infrastructure was installed and the developer contracted with a construction company to build homes on the lots. A copy of the declaration was attached to the lot purchase agreement and incorporated by reference and was disclosed to each home purchaser as part of the sales transaction.

 

A man purchased a lot with a home, and the recorded deed stated that it was made "subject to all easements, covenants, and restrictions of record." When the man failed to pay the assessments, the utility company recorded two statements of lien stating that the property was covered by the declaration and subject to a lien for the amount stated pursuant to the Maryland Contract Lien Act.

 

The man then sold the property to a woman who financed the purchase with a loan secured by a deed of trust. In the deed conveying the property to her, the man stated that he had not encumbered the property, but he failed to reference the declaration or the statements of lien and the deed did not state that it was "subject to all easements, covenants and restrictions of record" as the previous deed had. Thus, the property was sold with the statements of lien not being paid, cleared, or released.

 

The woman refinanced the loan on the property and the mortgage lender conducted a two-party title search that included only the woman and the man from whom she had purchased the property. Again, when the loan closed, the statements of lien were not paid, cleared, or released.  The new loan was secured by a new deed of trust in favor of the mortgage lender, who sold the loan to a bank that later sold it to the current mortgagee.

 

The statements of lien expired under RP § 14–204(c) (requiring foreclosure within 3 years from recordation) without being paid or foreclosed. Several years later, the utility company filed for foreclosure against the property for the unpaid water and sewer charges based on the declaration. The mortgagee filed a motion to dismiss the foreclosure and a declaratory judgment action. The utility voluntarily dismissed the foreclosure lawsuit.

 

In the declaratory judgment action, the trial court held that the declaration was a covenant running with the land and was a "super lien" in favor of the utility that had priority over the lender's deed of trust because it was recorded before the first homeowner purchased the lot. The trial court rejected the mortgagee's argument that the declaration would then be invalid under the rule against perpetuities, faulted the mortgagee for not discovering the declaration in a more comprehensive title search, and ruled that the failure to pay recordation and transfer taxes with the filing of the declaration did not affect its validity.  The trial court implicitly rejected the mortgagee's argument that the Maryland Contract Lien Act is the sole vehicle for enforcement of any lien created under the declaration. 

 

The mortgagee appealed, and the Court of Special Appeals affirmed the trial court's ruling. The Maryland Court of Appeals granted the mortgagee's petition for certiorari.

 

The Maryland Court of Appeals rejected the developer's and utility's argument that simply recording the declaration established a lien, explaining that doing so was inconsistent with the language and legislative history of the Act. The Court explained that a lien could not be created on the property by the declaration without following the "coherent framework" and procedures established by the Maryland Contract Lien Act.

 

The Court of Appeals held that the declaration, as a covenant that runs with the land, fell within the statutory definition of "contract" under RP §14-201(b)(1) of the Maryland Contract Lien Act, but that the declaration did not itself create an enforceable lien without following the Maryland Contract Lien Act's procedures.

 

The Court held that, in order to create and enforce an actual lien under RP §14-202(a), the declaration should have expressly provided for the creation of a lien and expressly described the party in whose favor the lien was created and the property against which the lien was imposed. The developer and utility failed to follow those procedures.

 

Additionally, the Court noted, instead of paying the recordation or transfer taxes that would have established a lien, the developer and utility treated the declaration as a notice instrument that merely authorized the establishment of a lien pursuant to the Maryland Contract Lien Act.  

 

The failure to follow the Maryland Contract Lien Act's procedures continued when the utility pursued foreclosure. The Court of Appeals held that, in order to establish the lien under RP §14-203(a)-(b), written notice should have been given within two years of the breach of the declaration to the party whose property was subject to the lien and that notice should have included certain information specified in the statute. The Court also noted that the utility company, when seeking to enforce the lien, should have then foreclosed on it just as it would a deed of trust, as prescribed by RP § 14-204.

 

The Court of Appeals rejected both the developer's and utility's argument that Maryland common law and the Maryland Rules of foreclosure supported their separate theories that the declaration created a lien because they had misread both.  The Court also rejected the developer's and utility's analogizing of their responsibility for constructing the infrastructure to the responsibility of a governmental entity who does the same and receives lien priority because neither the developer nor the utility were governmental entities.

 

Accordingly, the judgment of the Court of Special Appeals was reversed, and the action was remanded with instructions to remand it to the trial court with instructions to vacate the declaratory judgment previously entered and enter a new declaratory judgment consistent with the opinion and assessing costs to be paid by the developer and utility.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Maryland High Court Holds Utility Company Did Not Have Super Lien on Real Estate

The Court of Appeals of Maryland, the state's highest court, recently held that a real estate development company's recording of a declaration for utility infrastructure expenses did not create a lien on the referenced real estate, and instead it should have followed the Maryland Contract Lien Act procedures to create a lien and establish its priority for the delinquent assessments purportedly owed by a mortgagee.

 

A copy of the opinion is available at:  Link to Opinion

 

A real estate development company ("developer") purchased land for a 330-lot residential development and assumed responsibility for the construction of water and sewer facilities. The developer recorded a declaration stating that the expense of creating that infrastructure would be passed on to the future homeowners in the form of an annual assessment with the future homeowner's liability secured by a lien granted by the homeowner on the homeowner's property.

 

The homeowners were to pay the utility company for the expenses in 23 equal installments of $700 for each lot on the first of each year following conveyance of the lot to the homeowner. The declaration stated that by accepting a deed to a lot, the owner of the lot agreed to pay the annual expenses and granted the utility company a lien to secure the payment of those expenses, but the declaration did not state the value of the lien it sought to create.  The declaration further stated that the utility company could foreclose under the Maryland Contract Lien Act, Maryland Code, Real Property Article ("RP"), §14-201 et seq., if the lot owner failed to pay.

 

The developer and homebuilders were explicitly excluded from any obligation to pay the annual assessment while they owned the lots.  The developer recorded the declaration with a copy of the lots in the development but did not pay recordation and transfer taxes, which would have amounted to approximately $60,000.

 

The water and sewer infrastructure was installed and the developer contracted with a construction company to build homes on the lots. A copy of the declaration was attached to the lot purchase agreement and incorporated by reference and was disclosed to each home purchaser as part of the sales transaction.

 

A man purchased a lot with a home, and the recorded deed stated that it was made "subject to all easements, covenants, and restrictions of record." When the man failed to pay the assessments, the utility company recorded two statements of lien stating that the property was covered by the declaration and subject to a lien for the amount stated pursuant to the Maryland Contract Lien Act.

 

The man then sold the property to a woman who financed the purchase with a loan secured by a deed of trust. In the deed conveying the property to her, the man stated that he had not encumbered the property, but he failed to reference the declaration or the statements of lien and the deed did not state that it was "subject to all easements, covenants and restrictions of record" as the previous deed had. Thus, the property was sold with the statements of lien not being paid, cleared, or released.

 

The woman refinanced the loan on the property and the mortgage lender conducted a two-party title search that included only the woman and the man from whom she had purchased the property. Again, when the loan closed, the statements of lien were not paid, cleared, or released.  The new loan was secured by a new deed of trust in favor of the mortgage lender, who sold the loan to a bank that later sold it to the current mortgagee.

 

The statements of lien expired under RP § 14–204(c) (requiring foreclosure within 3 years from recordation) without being paid or foreclosed. Several years later, the utility company filed for foreclosure against the property for the unpaid water and sewer charges based on the declaration. The mortgagee filed a motion to dismiss the foreclosure and a declaratory judgment action. The utility voluntarily dismissed the foreclosure lawsuit.

 

In the declaratory judgment action, the trial court held that the declaration was a covenant running with the land and was a "super lien" in favor of the utility that had priority over the lender's deed of trust because it was recorded before the first homeowner purchased the lot. The trial court rejected the mortgagee's argument that the declaration would then be invalid under the rule against perpetuities, faulted the mortgagee for not discovering the declaration in a more comprehensive title search, and ruled that the failure to pay recordation and transfer taxes with the filing of the declaration did not affect its validity.  The trial court implicitly rejected the mortgagee's argument that the Maryland Contract Lien Act is the sole vehicle for enforcement of any lien created under the declaration. 

 

The mortgagee appealed, and the Court of Special Appeals affirmed the trial court's ruling. The Maryland Court of Appeals granted the mortgagee's petition for certiorari.

 

The Maryland Court of Appeals rejected the developer's and utility's argument that simply recording the declaration established a lien, explaining that doing so was inconsistent with the language and legislative history of the Act. The Court explained that a lien could not be created on the property by the declaration without following the "coherent framework" and procedures established by the Maryland Contract Lien Act.

 

The Court of Appeals held that the declaration, as a covenant that runs with the land, fell within the statutory definition of "contract" under RP §14-201(b)(1) of the Maryland Contract Lien Act, but that the declaration did not itself create an enforceable lien without following the Maryland Contract Lien Act's procedures.

 

The Court held that, in order to create and enforce an actual lien under RP §14-202(a), the declaration should have expressly provided for the creation of a lien and expressly described the party in whose favor the lien was created and the property against which the lien was imposed. The developer and utility failed to follow those procedures.

 

Additionally, the Court noted, instead of paying the recordation or transfer taxes that would have established a lien, the developer and utility treated the declaration as a notice instrument that merely authorized the establishment of a lien pursuant to the Maryland Contract Lien Act.  

 

The failure to follow the Maryland Contract Lien Act's procedures continued when the utility pursued foreclosure. The Court of Appeals held that, in order to establish the lien under RP §14-203(a)-(b), written notice should have been given within two years of the breach of the declaration to the party whose property was subject to the lien and that notice should have included certain information specified in the statute. The Court also noted that the utility company, when seeking to enforce the lien, should have then foreclosed on it just as it would a deed of trust, as prescribed by RP § 14-204.

 

The Court of Appeals rejected both the developer's and utility's argument that Maryland common law and the Maryland Rules of foreclosure supported their separate theories that the declaration created a lien because they had misread both.  The Court also rejected the developer's and utility's analogizing of their responsibility for constructing the infrastructure to the responsibility of a governmental entity who does the same and receives lien priority because neither the developer nor the utility were governmental entities.

 

Accordingly, the judgment of the Court of Special Appeals was reversed, and the action was remanded with instructions to remand it to the trial court with instructions to vacate the declaratory judgment previously entered and enter a new declaratory judgment consistent with the opinion and assessing costs to be paid by the developer and utility.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   Michigan   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments