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Commissioner of Financial Regulation v. Brown, Brown, & Brown, P.C.

Court of Appeals of Maryland

August 19, 2016

Commissioner of Financial Regulation
Brown, Brown, & Brown, P.C., et al.

          Argument: June 2, 2016

         Circuit Court for Baltimore City Case No. 24-C-13-002529

          Barbera, C.J. Greene Adkins McDonald Watts Hotten Battaglia, Lynne A. (Retired, Specially Assigned), JJ.


          MCDONALD, J.

         Maryland law places various restrictions on those who purport to assist consumers in obtaining credit - restrictions that include certain licensing, bonding, and disclosure requirements. These requirements are set forth in the Maryland Credit Services Businesses Act ("MCSBA"), codified at Maryland Code, Commercial Law Article ("CL"), §14-1901 et seq. Under the rubric "credit services business, " the MCSBA applies to those who offer, in return for the payment of money, to assist a homeowner in default on a mortgage loan to fend off foreclosure by obtaining a modification of that loan from the lender. In an accommodation to other regulatory regimes, the statute exempts from its requirements certain entities and professions that are regulated by other bodies. Among those exemptions is one for Maryland lawyers acting within the scope of their legal practice, so long as they do not engage in activities that constitute a "credit services business" on a "regular and continuing basis."

         In this case, Respondent Brown, Brown & Brown, P.C. ("BB&B"), a small Virginia law firm, consulted with hundreds of Maryland homeowners facing foreclosure, and entered into more than 50 agreements with homeowners over a nine-month period in 2008 and 2009. The firm's managing partner, Respondent Christopher E. Brown, oversaw this aspect of the firm's business and signed many of the agreements. Under these agreements, in return for an advance payment of money by the homeowner, BB&B promised to attempt to renegotiate the mortgage loan so that the homeowner could avoid foreclosure. BB&B ultimately did not obtain loan modifications for any of those homeowners.

         After receiving a complaint about BB&B from a family that had entered into such an agreement, Petitioner Commissioner of Financial Regulation ("Commissioner"), who has primary responsibility for enforcing the MCSBA, initiated the administrative proceedings that resulted in this case. Following an evidentiary hearing, an administrative law judge ("ALJ") of the Office of Administrative Hearings concluded that Mr. Brown and his firm had violated the MCSBA in several respects and recommended that the Commissioner issue a permanent cease and desist order, impose a substantial civil monetary penalty, and direct BB&B and Mr. Brown to pay treble damages to the Maryland homeowners with whom they had agreements. The Commissioner accepted the ALJ's recommendations and issued an order imposing that relief.

         Respondents sought judicial review. The Circuit Court reversed the agency decision on the ground that the agreements with the Maryland homeowners were for legal services rather than credit services and that the MCSBA did not apply to BB&B and Mr. Brown. The Court of Special Appeals affirmed in an unreported opinion. We granted certiorari.

         We hold that the agency decision accurately construed the MCSBA and was supported by substantial evidence. There is substantial evidence in the administrative record that BB&B and Mr. Brown represented that, in return for the payment of money, they would undertake to obtain a loan modification for the homeowners with whom they had agreements. Those activities fell within the definition of "credit services business" under the statute, unless BB&B and Mr. Brown qualified for an exemption.

         There is also substantial evidence in the record to support the conclusion that BB&B and Mr. Brown did not qualify for the attorney exemption in the MCSBA. While BB&B employed at least one Maryland attorney during the relevant period, Mr. Brown and another non-Maryland attorney at the firm executed many of the agreements. More importantly, the evidence revealed that the firm engaged in these activities on a "regular and continuing basis" during the relevant period of time and therefore did not qualify for the exemption.



         A. Statutory Framework

         Credit Services Business

         The MCSBA defines a "credit services business" as "any person who, with respect to the extension of credit by others, sells, provides, or performs, or represents that such person can or will sell, provide, or perform" any of certain enumerated services "in return for the payment of money or other valuable consideration." CL §14-1901(e)(1) (emphasis added).[1] The term "person" is defined to include not only individuals, but also various types of entities, as well as "any other legal or commercial entity." CL §14-1901(g). The enumerated services that qualify a person as a "credit services business" are: "(i) Improving a consumer's credit record, history, or rating or establishing a new credit file or record; (ii) Obtaining an extension of credit for a consumer; or (iii) Providing advice or assistance to a consumer with regard to either [of the first two services]." CL §14-1901(e)(1) (emphasis added). An "extension of credit" is defined as "the right to defer payment of debt, or to incur debt and defer its payment, offered or granted primarily for personal, family, or household purposes." CL §14-1901(f).

         Thus, an individual or entity that, in return for the payment of money, offers to assist a consumer in obtaining an extension of credit - such as the deferral of a debt that was incurred for household purposes - falls within the general definition of "credit services business."

         Attorney Exemption

         Notwithstanding the breadth of the general definition of "credit services business" in the statute, there are 10 categories of individuals and entities excluded from that definition. CL §14-1901(e)(3). Each of those categories relates to individuals or entities whose activities are regulated by other authorities. Pertinent to this case, one such category encompasses "[a]n individual admitted to the Bar of the Court of Appeals of Maryland when the individual renders services within the course and scope of practice by the individual as a lawyer and does not engage in the credit services business on a regular and continuing basis." CL §14-1901(e)(3)(vi). We will refer to this provision as the "attorney exemption."[2] A person who claims the benefit of an exemption, such as the attorney exemption, has the burden of establishing entitlement to the exemption. CL §14-1907(d).

         Regulation of Credit Services Businesses

         The MCSBA applies to any contract with a Maryland resident involving credit services. CL §14-1903(a). It regulates the activities of a credit services business in a number of ways. Among other things, a credit services business may not "[c]harge or receive any money or other valuable consideration prior to full and complete performance of the services that [it] has agreed to perform for or on behalf of the consumer, " must be licensed by the Commissioner, must provide the consumer with certain specified information before "either the execution of a contract or agreement between a consumer and a credit services business or the receipt by the credit services business of any money or other valuable consideration, " must use contracts meeting certain requirements, and must obtain a surety bond. CL §§14-1902(6), 14-1903, 14-1904, 14-1906, and 14-1908. A contract for credit services that fails to comply with the MCSBA is void and unenforceable. CL §14-1907(b).

         The provisions of the MCSBA are primarily enforced by the Commissioner of Financial Regulation, who may issue cease and desist orders and initiate administrative enforcement proceedings. CL §§14-1911 through 14-1913.[3] One who negligently fails to comply with the statute is liable for any actual damages sustained by consumers, as well as attorney's fees and the costs of the proceeding. CL §14-1912(b). One who "willfully" violates the MCSBA is liable for any actual damages suffered by the consumer, a monetary award of treble damages of the total amount collected from the consumer, as ordered by the Commissioner, and any punitive damages that a court awards, as well as costs and attorney's fees. CL §14-1912(a). The Commissioner also has authority, under the general enforcement authority of that office, to impose a civil monetary penalty of up to $1, 000 for a first violation and up to $5, 000 for each subsequent violation. Maryland Code, Financial Institutions Article ("FI"), §2-115(b)(3).

         B. Facts

         The Firm

         The following facts were found by the ALJ who conducted the hearing and were accepted by the Commissioner, or are undisputed. During the relevant period, BB&B was a law firm located in Alexandria, Virginia, that employed no more than four attorneys at any one time.[4] Mr. Brown, an attorney licensed to practice law in Virginia and the District of Columbia, served as the managing partner of BB&B and was its sole shareholder. Mr. Brown was not licensed to practice law in Maryland.

         During the time period relevant to this case, BB&B employed a Maryland lawyer to meet with Maryland clients and work on their matters. Specifically, Bradley Deutchman, a lawyer licensed in Maryland, worked for BB&B during 2008, but left in January 2009. After Mr. Deutchman left the firm, it employed Adam Polsky, who was also licensed in Maryland, for three or four months at the beginning of 2009. If a Maryland lawyer was not available to meet with a Maryland client of BB&B, Mr. Brown or Michael Miller, a lawyer licensed in the District of Columbia, would meet with the Maryland client instead.

         Referrals of Homeowners Facing Foreclosure

         During late 2008 and early 2009, Mortgage Analysis & Consulting LLC, a Virginia- based business that advertised in Spanish-language media and that accepted fees from homeowners to analyze their mortgage status, referred hundreds of Maryland homeowners to BB&B.[5] The ALJ found that Mortgage Analysis & Consulting was responsible for 90 per cent of the homeowners who consulted with the firm during that period.[6] Mr. Deutchman estimated that the firm actually entered into agreements with less than a quarter of those homeowners. Mr. Deutchman testified that, by the time he left the firm in early 2009, he spent the majority of his time dealing with the homeowners facing foreclosure. Between June 2008 and March 2009, at least 57 Maryland homeowners, most of whom were referred by Mortgage Analysis & Consulting, paid BB&B to help them with their mortgage debts. Most of the Maryland homeowners who entered into these agreements with BB&B were native Spanish-speakers and spoke little or no English. Most, if not all, of the homeowners were seeking a modification of their mortgage loans.

         Agreements with Homeowners

         The agreements between BB&B and Maryland homeowners were entitled either "Retainer Agreement" or "Fee Agreement." Although the agreements varied in their precise content and some contained parallel provisions in Spanish as well as English, certain provisions were common to the vast majority of the agreements. Under the agreements, homeowners paid BB&B amounts varying from $2, 500 to $7, 500 up front before receiving any services. The amount paid, according to the agreement, was deemed "earned upon receipt." An introductory paragraph of the agreement, which appears in several different iterations in the agreements, stated that BB&B would represent the homeowners in negotiations with the homeowner's lender, foreclosure defense, and possible litigation concerning the homeowner's property. The nature of the work, in relation to the amount paid, was elaborated in a paragraph entitled "BB&B's Obligations." That paragraph specified that, in consideration for the money paid by the homeowner, the firm would "engage the appropriate party in discussions to renegotiate the terms of your loan." If the renegotiation of the homeowner's mortgage loan proved unsuccessful, BB&B was to "assess the chances of success in state or federal court and the costs involved" to decide whether to do something more. In the event of such further action, the agreements provided that BB&B would receive an additional fee (usually stated as a 40% contingency fee, or any attorney's fee awarded by a court, whichever was greater).

         Only four of the agreements with Maryland homeowners were signed by the firm's Maryland lawyer on behalf of BB&B. Thirteen were signed by other BB&B lawyers, including Mr. Brown, on behalf of BB&B, while most of the agreements had no signature of any attorney on behalf of BB&B.

         BB&B apparently made little effort to actually renegotiate loans and did not obtain a loan modification for any of the Maryland homeowners with whom it had agreements. There was some evidence that it made other efforts that it referred to as "foreclosure defense." In particular, it would sometimes send what Mr. Deutchman referred to as "form letters" to lenders requesting documentation under certain federal statutes in the hope that the lender would fail to make a timely response and that BB&B might use that failure as leverage in future negotiations.[7]

         The Experience of Mr. and Mrs. Batres

         Testimony at the administrative hearing focused on the example of Miguel and Teresa Batres, who filed the complaint with the Commissioner that initiated this case. Ms. Batres, whose native language is Spanish and who does not read English, responded to a Spanish-language radio advertisement for Mortgage Analysis & Consulting. After paying $150 to that entity, she was referred to BB&B to help her obtain a loan modification. On July 23, 2008, she and her husband signed an agreement with BB&B and paid $1, 500 of the $3, 000 specified in the agreement.

         Approximately six months later, after receiving a notice initiating a foreclosure action as to their home, and a form notice of the Commissioner advising homeowners in foreclosure of potential remedies, the Batreses contacted the Commissioner's Office to lodge a complaint against BB&B. The Batreses alleged that BB&B had done nothing on their behalf and asked for their money back. The Batreses eventually lost their home to foreclosure.[8]

         Non-Compliance ...

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