When The Shoes Don’t Fit: The Maryland Court of Appeals Limits Assignee Liability of A Loan Purchaser For Statutory Violations Committed By The Lender at Closing
Gerry Gaeng and James Crossan
The SMLL strictly regulates the making of certain second-mortgage loans. Like a number of Maryland lending laws, it provides that a lender who violates the act is limited to collecting only the principal amount of the loan and is not entitled to collect any interest or other charges. If the violation is “knowing,” the borrower can recover a form of treble damages.
In Thompkins v. Mountaineer Investment, LLC,2 the plaintiffs alleged that the lender on their second-mortgage loan charged closing fees in excess of those permitted under the SMLL. After the loan was paid off, the borrowers sued both the originating lender and the assignee who had purchased the loan. Plaintiffs sought statutory penalties for the lender’s violations, including the forfeiture of all interest and fees collected during the life of the loan. The trial court rejected the plaintiffs’ contention that the assignee could be liable under these circumstances, and Maryland’s highest court agreed.3
The Court of Appeals recognized at the outset that the terms of the SMLL, unlike some other lending statutes, do not purport to create assignee liability for closing costs collected by the assignor lender.
The Court next rejected plaintiffs’ theory that the Uniform Commercial Code (UCC) provisions governing negotiable instruments create assignee liability under these circumstances. While Maryland UCC Section 3-305 creates a claim of recoupment in favor of a borrower against an assignee who has knowledge of the assignor’s wrongs, the claim of recoupment against the assignee is limited to reducing amounts still owing on the instrument at the time the claim is brought. In Thompkins, the loan was paid off before the suit was filed, so there could be no claim in recoupment under UCC Section 3-305.
Finally, the Court of Appeals rejected plaintiffs’ argument that under the common law of Maryland, an assignee “stands in the shoes” of its assignor and is always subject to claims that could be raised by the borrower against the lender. The Court held that there is no basis to conclude that an assignment of a second-mortgage loan necessarily or presumptively involves the assignment of the original lender’s liability for violations of the SMLL. Because the assignee did not expressly assume the original lender’s liability, the assignee could not be derivatively liable under the common law for a violation of the SMLL by the lender.
RMG’s Gerry Gaeng and Andy Baida were the principal drafters in Thompkins of the Brief of Amici Curiae filed in the Court of Appeals on behalf of the Maryland Bankers Association and a group of national and regional financial institutions arguing against plaintiffs’ theories of assignee liability. Gerry was also a lead defense counsel in a group of prior consolidated federal cases in which the federal court reached the same conclusion about assignee liability as the Maryland Court of Appeals reached in Thompkins.4
Gerard J. Gaeng is the Chair of the Litigation Group at Rosenberg Martin Greenberg, LLP, and has handled successfully some of the region's largest and most complex litigation matters, in both state and federal trial and appellate courts. He concentrates in complex business and government litigation, including class-action defense, financial institution litigation, administrative law, higher education law, and real estate and construction litigation.
James E. Crossan is a business lawyer and general civil litigator at Rosenberg Martin Greenberg, LLP who works directly with individual and corporate clients in a wide range of commercial transactions including banking and finance, automotive sales, event planning, commercial property leases, equipment leases, electricity and natural gas supply agreements, title insurance coverage, real estate development and construction contracts.
1 Md. Code Ann., Comm Law § 12-401, et seq.
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