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LVNV Funding LLC v. Finch

Court of Appeals of Maryland

April 22, 2019

LVNV FUNDING LLC
v.
LARRY FINCH, et al.

          Argued: January 31, 2019

          Circuit Court for Baltimore City Case No. 24-C-11-007101

          Barbera, C.J. Greene McDonald Hotten Getty Adkins, Sally D. (Senior Judge, Specially Assigned) Wilner, Alan M. (Senior Judge, Specially Assigned)

          OPINION

          WILNER, J.

         This is a class action lawsuit filed in the Circuit Court for Baltimore City against petitioner LVNV Funding LLC (LVNV) that resulted in (1) money judgments against LVNV in favor of two of the named representative plaintiffs, and (2) after a remittitur ordered by the court, a separate money judgment against LVNV in the amount of $25 million in favor of the class. In an unreported Opinion, the Court of Special Appeals affirmed the Circuit Court's rulings with respect to LVNV's liability under the Maryland Consumer Debt Collection Act (Md. Code, Title 14, Subtitle 2 of the Commercial Law Article) but remanded the case for retrial on the issue of damages.

         Neither side is entirely happy with the appellate decision, and we granted cross-petitions for certiorari to review it. There are four principal issues before us, each encompassing sub-issues. To put it all in context, some background is necessary - the corporate structure within which LVNV operates, the nature of the business that LVNV conducts, how LVNV conducts its business, regulation of that business by the State of Maryland, and the procedural history of what is now before us.

         LVNV AND ITS AFFILIATES

         LVNV is a limited liability company that was organized in Delaware in 2005, is headquartered in Las Vegas, Nevada, and appears to be managed from South Carolina. It claims to have no employees of its own. Its only business is to purchase consumer debts that are in default, mostly from affiliated entities that purchased the debts from others, and attempt to collect those debts through litigation. As determined by the Maryland Commissioner of Financial Regulation in a 2011 enforcement action (and not contested by LVNV in this appeal), LVNV is part of an integrated conglomeration of affiliated entities that include:

• Sherman Capital, LLC and Meeting Street Partners II, Inc., which own and operate Sherman Financial Group (SFG) and Sherman Capital Markets (SCM). SCM provides management services for SFG, which the Commissioner of Financial Regulation found to be "an integrated financial services company engaged in purchasing and servicing portfolios of consumer debt that it acquires at a large discount." [1]
• Sherman Originator LLC (Originator), which is a wholly-owned subsidiary of SFG. Originator is headquartered in South Carolina. LVNV is a wholly owned subsidiary of Originator. LVNV's Board of Managers, which has day-to-day supervision over LVNV, also is based in South Carolina.
• Sherman Acquisition Limited Partnership (SALP), Sherman Acquisition II Limited Partnership (SAIILP), Sherman Acquisition II General Partner LLC (SAIIGPLLC), and Sherman Acquisition LLC (SALLC), which also are subsidiaries of SFG. The first two are debt purchasers. SALLC is involved with the management of LVNV; SALP and SAIILP have traded as LVNV; and
• Resurgent Capital Services Limited Partnership, a/k/a Resurgent Capital Services LP, f/k/a Alegis Group Limited Partnership (Resurgent), which acts as the master servicer for charged-off consumer debt owned by LVNV and is headquartered in South Carolina. Resurgent is a limited partnership in which Alegis is the general partner that owns one percent, and SFG, which is a limited partner that owns 99 percent. Both Resurgent and Alegis are subsidiaries of SFG. Id. Though only a one percent owner, Alegis is responsible for the management of Resurgent.[2]

         What the Federal Trade Commission (FTC) referred to as "Sherman Financial" (presumably SFG) was the largest buyer of charged-off credit card debt directly from credit card issuers from 2005 to 2011, except for 2010, when it was the second largest buyer. See The Structure and Practices of the Debt Buying Industry, Federal Trade Commission, January 2013, at 16 and Table 5 (hereafter 2013 FTC Report). During an overlapping period, LVNV played an active role in Maryland with respect to some of those accounts. In the LVNV Enforcement Action, the Commissioner found that between 1996 and 2011, LVNV was the named plaintiff in nearly 26, 000 actions in the District Court of Maryland seeking affidavit judgments.[3] In the great majority of those cases, no response was filed by the defendant, no trial was held, and judgments were entered on LVNV's affidavit.

         THE DEBT-BUYING INDUSTRY

         Traditionally, when a borrower or customer failed to pay a debt on time, the creditor would do what was needed to collect the debt either by engaging with the debtor directly or by employing an attorney or outside debt collector to do so. That still occurs, of course, but a new business model that first developed in the late 1980s has become predominant in the debt collection universe, largely because (1) so much of the debt arrearage in the United States, and in Maryland, is credit card debt, and (2) Federal banking regulations require credit card companies that are bank-related to charge off credit card debt that has been delinquent for six months.[4]

         The new model, for those companies, and others, is to sell their delinquent accounts to debt buyers for pennies on the dollar - normally between four and five cents but less for older accounts - and thereby recoup at least something without having to bear the expense of further collection efforts. The sales are in bulk. A three-year study by FTC revealed the sale of more than 5, 000 "portfolios" containing nearly 90 million consumer accounts with a face value of $143 billion at a cost of $6.5 billion. 2013 FTC Report at ii, 8, and Table 2.

         While beneficial to the initial creditor in light of the charge-off requirement and lucrative to the debt buyer, the manner in which this new model developed and debt buyers carried on their business created significant consumer protection issues. In its 2013 Report, based in part on a 2009 Study, FTC observed that it received "more consumer complaints about debt collectors, including debt buyers, than about any other single industry." 2013 FTC Report at i. See also Collecting Consumer Debts - The Challenges of Change, A Workshop Report. Federal Trade Commission, February 2009 (hereafter 2009 FTC Report).

         In its 2013 Report, FTC noted that, in its 2009 Report, it had expressed concern that debt buyers "may have insufficient or inaccurate information when they collect on debts, which may result in collectors seeking to recover from the wrong consumer or recover the wrong amount." 2013 FTC Report. The Commission found that, although debt buyers normally receive from the initial creditor the information needed to be disclosed to the debtor under the Federal Debt Collection Practices Act (15 U.S.C. § 1692g) they often do not receive data relating to disputes raised by the debtor or a breakdown of how much of the debt is for interest, fees, or penalties, and that they rarely disclose to the debtor other information, such as data indicating that collection may be barred by limitations, that may be relevant to whether the alleged debtor is the actual debtor or owes the money and, if so, how much. 2013 FTA Report at iii-iv.

         Those concerns, and others, were relayed to this Court by its Standing Committee on Rules of Practice and Procedure in the Committee's 171st Report dated July 1, 2011, which led the Court to adopt amendments to Md. Rules 3-306, 3-308, and 3-509 dealing with judgments entered on affidavit rather than trial. The Rules Committee noted that "[b]oth nationally and in Maryland, there have been a multitude of cases in which the ultimate owner of the account sues the person it believes to be the debtor, knowing from experience that the defendant often does not file a notice of intention to defend or appear for trial," that it had been well-documented that the plaintiff often has insufficient reliable information regarding the debt or the debtor, and "had the debtor challenged the action, he or she would have prevailed." 171st Report at 7. Indeed, the Committee added that "[i]n many instances, when a challenge is presented, the case is dismissed or judgment is denied. Id.

         STATUTORY REGULATION

         Three Maryland consumer protection statutes govern debt collection activity - the Maryland Collection Agency Licensing Act (MCALA) (Md. Code, Business Regulation Article (BR), §§ 7-101 through 7-502); the Maryland Consumer Debt Collection Act (MCDCA) (Md. Code, Commercial Law Article (CL), §§ 14-201 through 14-204); and the State Consumer Protection Act (CPA) (Md. Code, CL §§ 13-101 through 13-501).

         MCALA is the most direct. With two exceptions not relevant here, BR § 7-301(a) provides that "a person must have a license [issued by the State Collection Agency Licensing Board] whenever the person does business as a collection agency in the State." Section 7-401 adds that, except as provided in that title, "a person may not knowingly and willfully do business as a collection agency in the State unless the person has a license." Section 7-101(c) defines "collection agency" as including "collecting for, or soliciting from another, a consumer claim" and "collecting a consumer claim the person owns, if the claim was in default when the person acquired it." Although LVNV began its debt collecting activity upon its founding in 2005, it did not obtain a collection agency license until February 18, 2010.

         MCDCA also deals with consumer debt collection. CL § 14-202(8) provides that, in attempting to collect an alleged debt, a collector may not "[c]laim, attempt, or threaten to enforce a right with knowledge that the right does not exist." Section 14-203 provides that "a collector who violates any provision of this subtitle is liable for any damages proximately caused by the violation, including damages for emotional distress or mental anguish suffered with or without accompanying physical injury." Section 14-201(b) defines "collector" as "a person collecting or attempting to collect an alleged debt arising out of a consumer transaction."

         CL § 13-303, which is part of the CPA, prohibits a person from engaging in an "unfair or deceptive trade practice" in "the collection of consumer debts." Section 13-301 defines "unfair or deceptive trade practice" as including any violation of "Title 14, Subtitle 2 of this Article, the Maryland Consumer Debt Collection Act." Section 13-408 permits a person to bring an action to recover for injury or loss sustained as the result of a practice prohibited by CPA and, if the person prevails, to be awarded attorneys' fees.

         PROCEDURAL HISTORY OF THIS CASE

         This case was preceded by another class action suit filed against LVNV by Jason Hauk and Freddy Velazquez in the Circuit Court for Frederick County in October 2009. The gravamen of that action was largely the same as the one now before us, namely that LVNV, acting as an unlicensed debt collector, had pursued consumer debt collection actions against the defendants in the District Court of Maryland in violation of MCALA (BR § 7-301) and that it threatened or took action it had no right to take in violation of MCDCA and its Federal counterpart, the Federal Debt Collection Practices Act (15 U.S.C. § 1692). One difference was that LVNV never recovered a judgment against Hauk or Velazquez; the action against Hauk ended with a verdict for Hauk, and LVNV dismissed the action against Velazquez when he filed a notice of intent to defend.

         The Complaint contained four counts: for declaratory and injunctive relief ordering LVNV to disgorge all amounts it obtained while acting illegally as a collection agency (Count I); for money damages and attorneys' fees for violation of MCDCA (Count II); for money damages and attorneys' fees for violation of CPA; and for statutory damages under the Federal Debt Collection Practices Act (Count IV).

         The alleged class in that action included all persons in the State of Maryland who, within three years prior to the filing of the complaint, "were contacted by the Defendant in connection with any effort to collect a debt." That action was removed to Federal court by LVNV, where, after the court granted a motion to dismiss Count I but denied the motion to dismiss the State law claims in Counts II, III, and IV, it eventually was settled. See Hauk v. LVNV Funding, 749 F.Supp.2d 358 (D. Md. 2010). The settlement agreement narrowed the class to persons who, from October 1, 2007 through February 17, 2010, were ...


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