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Maryland High Court Holds Private Litigants Cannot Bar AG or CFPB from Separately Suing on Same Claims

Maryland Consumer ProtectionThe Maryland Court of Appeals recently held that victims on whose behalf money is collected or property is recovered by the Maryland Consumer Protection Division of the Attorney General’s Office (CPD) or federal Consumer Financial Protection Bureau have no authority, through a private settlement, whether or not approved by a court, to preclude the CPD or CFPB from pursuing their own remedies.

A copy of the opinion in Crystal Linton, et al. v. Consumer Protection Division is available at:  Link to Opinion.

The Maryland Consumer Protection Division filed an enforcement action alleging a structured-settlement-factoring company (“SSFC”) engaged in unfair or deceptive trade practices in supposed violation of CL § 13-303. The CPD sought to enjoin SSFC from continuing their alleged misconduct, to restore to the assignors the future stream of structured settlement payments, and to compensate them, through restitution and disgorgement, for the value of the structured settlement payments that had been assigned and already paid to SSFC.

Two months later, a putative class action lawsuit (“private lawsuit”) was filed on behalf of the assignors alleging the same fraudulent conduct on the part of SSFC in the CPD matter.

Six months after that, the CFPB filed a similar action against SSFC, for the same misconduct and seeking essentially the same relief as the CPD.

The parties in the private lawsuit were able to negotiate a settlement while the CPD and CFPB actions still were pending, and filed a joint motion for preliminary approval of a class action settlement.

The stipulation of settlement took account of the pending CPD and CFPB actions and effectively precluded the settlement class plaintiffs from receiving any benefit from those actions, including requiring the class members to release all claims that may be obtained by the CPD or CFPB, enjoining class members from receiving any benefits from those claims, transferring to SSFC any benefits or recovery of those claims, and allowing SSFC to terminate the settlement if the CPD or CFPB “does not provide in writing, its agreement to dismiss its respective lawsuit with prejudice upon a Final Approval Order or either [CPD] or [CFPB] opposes the Court’s Final Approval.”

The CPD moved to intervene and stay the private lawsuit and argued that its case, through disgorgement and restitution, offered the plaintiffs a restoration of the full structured settlement benefits that, as the result of extrinsic fraud committed by agents of SSFC, the plaintiffs had assigned to SSFC.

Both sides in the private lawsuit opposed the CPD’s motion, denying that “CPD could achieve through restitution or disgorgement restoration of the structured settlement benefits on the allegation that the judgments approving the assignments were void.”

The court granted the CPD’s motion to intervene but denied its motion to stay noting the CPD’s argument went to the fairness of the settlement which was not before the court.

The CPD filed an opposition to certification of the settlement class and to the settlement agreement.  However, the court signed an order certifying the class and approving the settlement.

After approval of the settlement in the private lawsuit, SSFC moved for summary judgment in the CPD action, which the court granted based on its conclusion that the CPD’s claim for restitution was barred by res judicata. The court did allow the claims for injunctive relief and civil penalties to proceed.

The Court of Special Appeals affirmed in part and reversed in part the judgment of the trial court holding that the trial court “correctly allowed CPD to intervene in the [private lawsuit] and concluded that, overall, the settlement was procedurally fair. It did not rule on whether the settlement was substantively fair.”  The dispositive holding was that the settlement improperly interfered with the CPD’s and CFPB’s enforcement authority because the settlement effectively preempted a major portion of the claims of being pursued by the CPD and CFPB.

Both parties appealed.

The Maryland Court of Appeals addressed two questions: (1) may class members release and assign to others their right to receive money or property sought for their benefit by the CPD or CFPB through those agencies’ separate enforcement actions; (2) was the settlement procedurally and substantively fair?

The Court started by identifying the three options for enforcing the Maryland Consumer Protection Act:  (1) civil and criminal penalties against the “merchants;”  (2) victims bringing civil actions for damages (as happened in the private lawsuit); (3) remedies the CPD may pursue both to protect the public, directly or indirectly, and to provide relief to individual victims.

SSFC argued that victims should have the right to choose their remedy, all three remedies are essentially the same, and plaintiffs have no right to double recovery through multiple remedies.

The Maryland Court of Appeals noted that the Maryland Consumer Protection Act does not mention “disgorgement” nor does it define “restitution.”  The connection between those terms was supplied by the court in Consumer Protection v. Consumer Pub. in which the court first explored the purpose and meaning of the then relatively new Maryland Consumer Protection Act. The critical holding in Consumer Pub. is the distinction between civil damages and disgorgement/restitution. The purpose of civil damages is to compensate the defrauded party and the purpose of disgorgement/restitution is to not only restore the defrauded party but also deny the fraudulent party any benefits of its wrongful conduct.

While the Court found some merit in the “general proposition that a victim on whose behalf money is collected or property is recovered by CPD ordinarily has the right to disclaim any interest in it and that a double recovery of civil damages exceeding the loss suffered ordinarily is not permitted,” the Court held that “restitution through disgorgement is not in the nature of civil damages, and a plaintiff may recover more than his or her actual loss.”

“[B]ecause restitution through disgorgement has a punitive element to it, it partakes of a public remedy, not just a personal one, especially when pursued by a government agency authorized by statute to pursue it.”

Applying Consumer Pub. here, the Maryland Court of Appeals held that, although consumers have a right to disclaim any recovery on their behalf by the CPD, “they have no authority, through a private settlement, whether or not approved by a court, to preclude CPD from pursuing its own remedies” as that “would directly contravene the statutory authority of CPD to sanction Access for its wrongful conduct.”

The Court held this alone requires the trial court’s approval of the settlement to be reversed and remanded to the trial court for further proceedings finding the CPD’s cross appeal regarding the fairness of the current settlement moot.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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