By Whitney Pakalka

On January 11, 2016, the Fourth Circuit issued a published opinion in the civil case of Askew v. Hampton Roads Finance Company. The District Court for the District of Maryland granted Hampton Roads Finance Company (“HRFC”) summary judgment on all of Dante Askew’s borrower-creditor claims. The Fourth Circuit affirmed the grant of summary judgment as to Askew’s claims that HRFC violated the Maryland Credit Grantor Closed End Credit Provisions (“CLEC”) and was in breach of contract for failing to properly notify him that the interest rate exceeded the statutory maximum within sixty days of when it “should have” known of the error. However, the Court found that genuine issues of material fact existed as to Askew’s claim that HRFC violated the Maryland Consumer Debt Collection Act (“MCDCA”), and reversed and remanded the district court’s grant of summary judgment as to that claim.

The Used Car Contract and Dispute Between Askew and HRFC

 In 2008, Askew entered into a contract with a car dealership for financing to purchase a used car. The dealership assigned the contract to HRFC, which discovered in August 2010 that the contract’s interest rate of 26.99% exceeded CLEC’s maximum allowable rate of 24%. The next month, HRFC sent Askew a letter informing him that the interest rate was “not correct” and credited his account $845.40. However, the letter did not specify the new interest rate, which was set at 23.99%.

After receiving the letter, Askew fell behind on his payments and HRFC took steps to collect on the account. Over a period of seventeen months, HRFC contacted Askew five times by letter or telephone to seek repayment. Askew alleged that HRFC made false and threatening statements, including that it had reported him to state authorities for fraud for failing to insure his car and attempting to conceal it from repossession agents, that a replevin warrant had been prepared, and that his complaint in this case had been dismissed.

Askew filed the present suit in state court, alleging violations of CLEC, the MCDCA, and breach of contract based on the alleged failure to comply with CLEC. After HRFC removed the case to federal court, the district court granted HRFC’s motion for summary judgment on all claims.

Askew’s Claim that HRFC Violated CLEC and Accordingly Was in Breach of Contract

Under Maryland’s CLEC, credit grantors can elect to make a loan governed by CLEC that sets a maximum interest rate of 24%, which “must be expressed in the agreement as a simple interest rate.” Md. Code § 12-1013.1. If a creditor violates this provision, it may generally only collect the principal of the loan, but not interest, costs, fees, or other charges. Md. Code § 12-1018(a)(2). However, CLEC, also has two safe harbor provisions. One allows creditors to avoid liability “for any failure to comply with CLEC” through self correction “if, within 60 days after discovering an error . . . the credit grantor notifies the borrower of the error and makes whatever adjustments are necessary to correct the error.” Md. Code § 12-1020. The second safe harbor offers protection from liability where a creditor “unintentionally and in good faith” failed to comply with CLEC. Md. Code § 12-1018(a)(3).

Askew argued that HRFC violated CLEC by failing to expressly disclose in the contract an interest rate below the statutory maximum. The district court rejected the argument, finding that CLEC’s disclosure requirement only mandated that the interest rate be expressed as a simple interest rate. The Fourth Circuit agreed, stating that Askew’s interpretation would create a “meaningless technical requirement while doing little to protect consumers.”

Askew further argued that the “discovery rule” usually applicable in the statute of limitations context should apply to CLEC’s 12-1020 safe harbor, which would mean that HRFC “should have” known of the error when it took assignment of the contract because parties to a contract are presumed to have read and understood its terms.   The meaning of “discovery” in § 12-1020 was an issue of first impression, and the Fourth Circuit determined that “discovering an error” means when the creditor actually uncovers the mistake that violated CLEC. The Court reasoned that this reading better comports with CLEC’s text and purpose, as well as public policy. The Fourth Circuit reasoned that Askew’s reading of the safe harbor would give creditors little incentive to self-correct their mistakes and would work “to exacerbate one of the harms CLEC seeks to avoid—the charging of usurious interest.” Because HRFC discovered its error and attempted to cure the mistake within sixty days of that discovery, the Fourth Circuit affirmed the district court’s finding that HRFC is not liable under CLEC.

The Fourth Circuit also rejected Askew’s contention that because the contract incorporated CLEC’s provisions, HRFC is liable for breach of contract for any deviation, regardless of whether HRFC properly cured the violation. The Court found that the contract incorporated all of CLEC’s provisions, safe harbors included, and that to find differently would lead to an anomalous result by nullifying the safe harbor provisions.

Askew’s MCDCA Claim that HRFC Attempted to Collect Debt Through Improper Threats and Harrassment

 MCDCA § 14-202(6) provides that a debt collector may not “[c]ommunicate with the debtor or a person related to him . . . in any other manner as reasonably can be expected to abuse or harass the debtor.” Askew contended that HRFC violated the MCDCA by making false representations about legal action it had not actually taken by falsely suggesting it had obtained a replevin warrant, reported a notice of complaint to the Maryland Motor Vehicle Administration fraud division for failure to insure his vehicle and hiding the car from the lien holder, and that the present case had been dismissed when it was still pending.

The Court made a distinction between “truthful or future threats of appropriate legal action,” which would not violate MCDCA, and “false representations that legal action has already been taken.” Based on Askew’s allegations, the Fourth Circuit concluded that a reasonable jury could find that HRFC had engaged in conduct reasonably expected to abuse or harass. Accordingly, The Fourth Circuit reversed and remanded the district court’s grant of summary judgment on Askew’s MCDCA claims.

The Fourth Circuit Affirmed in Part and Reversed and Remanded in Part 

Because the Fourth Circuit found that the correct meaning of “discovering an error” in the context of Maryland’s CLEC means when the credit grantor in fact realizes a mistake has been made, the Court affirmed the district court’s grant of summary judgment as to Askew’s claims that HRFC violated CLEC. Similarly, the Court rejected Askew’s breach of contract claim, because to subject a credit grantor to liability for violating CLEC when its conduct falls within a safe harbor of CLEC would be anomalous. However, the Fourth Circuit found that a reasonable jury could find that HRFC engaged in abusive and harassing conduct in violation of MCDCA, and reversed and remanded for further proceedings on that count alone.