ANNAPOLIS, Md. (Legal Newsline) - A law firm in the business of collecting homeowner association and condominium dues isn’t a “lender” under the Maryland Consumer Loan Law, the state's highest court ruled, answering a central question in a class action in federal court by delinquent property owners.
The Maryland Court of Appeals, in an Aug. 11 opinion, found that the state statute regulating businesses that extend small amounts of credit to consumers doesn’t apply to Nagle & Zaller, P.C., a law firm that represents HOAs and condominium boards trying to collect overdue assessments from their residents. The homeowners challenged promissory notes they signed to pay overdue amounts over time, which included “confessed judgment clauses” that stripped them of the right to challenge their debts in court.
In February 2018, Jahmal E. Delegall and others filed a proposed class action against the firm and its clients, claiming they operated without a license as required under the MCLL, making the promissory notes void and uncollectable. The case was removed to federal court after the plaintiffs added claims based on federal lending laws, but the court sent the question of whether the MCLL applied back to state court because there were no appellate decisions on point.
The Maryland Court of Appeals ruled the MCLL doesn’t apply, over the dissent of one judge who said the law firm fit within the definition of “lender” because it issued promissory notes that included 15% legal fees and other costs that increased the amount homeowners owed.
The plaintiffs relied on a 2020 decision by the Court of Appeals that HOA promissory notes with confession-of-judgment clauses violated another law, the Maryland Consumer Protection Act. But the court said it was careful to sever those clauses from the rest of the note, otherwise homeowners could “obtain a windfall and escape responsibility” for paying.
The appeals court also cited the extensive regulations contained in laws governing HOAs and condominium associations, which require them to operate according to bylaws and limit the amount of fees they can charge on overdue assessments. It would be unreasonable to say law firms that engage in the common practice of writing up structured settlements to pay those dues over time are “lenders,” the court said.
“Reading the plain language of the statute—which regulates persons `in the business of making loans’—in the context of the legislative history and the purpose of the statute, leads us to the clear conclusion that the General Assembly intended the MCLL to regulate businesses engaged in consumer lending, and did not intend for it to apply to all lawyers or law firms that draft loan documents or engage in collection activity on behalf of clients,” the court concluded.
Judge Shirley Watts dissented, saying the law firm used the promissory notes to create entirely new debts,” including “unreasonable attorney’s fees that drove up the alleged principal amount owed.”
“To conclude that the Maryland Consumer Loan Law does not apply in this case is to essentially create a loophole allowing law firms, like Nagle & Zaller, to engage in the business of making loans, i.e., creating new extensions of credit with confessed judgment clauses,” the judge wrote.