Title: Taylor v. Friedman

State: maryland

Issuer: Maryland Supreme Court

Document:

Larry G. Taylor v. Alvin E. Friedman et al., No. 2, September Term,
1996.
[Mortgage Loans - Statutory Construction.  Prohibition in
Commercial Law Article §§ 12-121 and 12-1027 against imposing a
lenderUs inspection fee in connection with a loan is not limited to
closing costs.]
Circuit Court for Anne Arundel 
County Case #C-9413957 FC
IN THE COURT OF APPEALS OF MARYLAND
No. 2
September Term, 1996
____________________________________
LARRY G. TAYLOR
v.
ALVIN E. FRIEDMAN
et al.
____________________________________
Bell, C.J.
Eldridge
Rodowsky
Chasanow
Karwacki
Raker
Murphy, Robert C.
 (retired, specially assigned),
JJ. 
____________________________________
Opinion by Rodowsky, J.
____________________________________
Filed:  February 13, 1997
This case arises on a counterclaim to the foreclosure of a
deed of trust.  The issue is whether Maryland Code (1975, 1990
Repl. Vol.), § 12-121 of the Commercial Law Article (CL) prohibits
a mortgagee from charging the mortgagor fees for post-default,
visual inspections of the mortgaged residenceUs exterior that are
made to ascertain the condition of the security.  Section 12-121
reads:
"LenderU
Us inspection fees.
"(a) Defined. -- In this section, the term UlenderUs
inspection feeU means a fee imposed by a lender to pay
for a visual inspection of real property.
"(b) Imposition. -- Except as provided in subsection
(c) of this section, a lender may not impose a lenderUs
inspection fee in connection with a loan secured by
residential real property.
"(c) When permitted. -- A lenderUs inspection fee
may be charged if the inspection is needed to ascertain
completion of:
"(1) Construction of a new home; or
"(2) Repairs, alterations, or other work required by
the lender.
"(d) Applicability of section to appraisals. -- This
section does not apply to an appraisal of the value of
real property by a lender or to fees imposed in
connection with an appraisal."
The deed of trust on the residence involved in this case was
executed on April 29, 1986.  Larry G. Taylor (Taylor), the
petitioner, acquired the property on October 30, 1987, and assumed
his grantorUs obligations under the deed of trust.  The respondents
are substitute trustees under the deed of trust who were designated
by Margaretten & Company, Inc., the holder of the note secured by
-2-
     Under CL § 12-122 a willful violation of § 12-121 carries a
1
fine not exceeding $500 or imprisonment not exceeding six months,
or both.
the deed of trust when the foreclosure was instituted.  Margaretten
& Company, Inc. subsequently was acquired by Bank of America,
F.S.B. and renamed BA Mortgage, a division of Bank of America,
F.S.B.  We shall refer to the entity that held the note at any
given time as "Lender."  The loan, which was originally for
$70,500, was insured under the National Housing Act.  
From time to time Taylor was delinquent in making the monthly
payments on the note.  When a delinquency continued for more than
forty-five days from the due date, Lender caused the property to be
inspected by an independent organization and charged TaylorUs
account $10.00 as an inspection fee on each such occasion.  Taylor
did not believe that the charges were part of his contract and
protested them, but Lender took the position that the charges were
lawful.  Then Taylor discovered CL § 12-121.  In April and July
1993 Taylor wrote to Lender, pointing out that the inspection
charges were illegal and carried criminal penalties,  and he
1
requested a refund of all such fees that he had paid.  When Lender
either did not respond, or did not respond to TaylorUs satisfaction,
he stopped making any payments on the loan.
Eventually Lender instituted foreclosure in the Circuit Court
for Anne Arundel County on July 5, 1994, after Taylor had failed to
make any payments following the September 1, 1993 payment.  This
-3-
default caused Lender to have the property inspected in December
1993 and in April, May, June, and July 1994.   The total of $50 for
these inspections was charged to Taylor in the statement of
mortgage debt filed with the foreclosure papers.  The parties
advised us at oral argument that, from the time when Taylor assumed
the deed of trust obligations, approximately $180 had been charged
against his account for inspection fees.
Lender caused the inspections to be made in order to comply
with the "Protection and Preservation Fee Schedule" promulgated by
Region III of the United States Department of Housing and Urban
Development (HUD).  The schedule effective January 15, 1993, (the
Schedule) states that "[m]ortgagees are expected to exercise the
same level of diligence and prudence in protecting and preserving
vacant FHA insured properties that would be provided if they could
look only to the security for recovery."  Schedule at 1.  The
inspections of the type ordered by the Lender in this case are
addressed in the Schedule as follows:
"When a mortgage is in default and a payment is not
received within 45 days of the due date, and efforts to
reach the mortgagor by telephone or other means within
that period have proven unsuccessful, the mortgagee shall
make a visual inspection of the property to determine
occupancy status.
....
"If the property is occupied, the mortgagee should
continue to try to make contact with the mortgagor or
occupant 
each 
month 
by 
telephone 
or 
through
correspondence.  If the mortgagee is unable to contact
the mortgagor or occupant by any other means, the
property should be reinspected within 30 days of the last
-4-
     In the instant matter, LenderUs representative testified that
2
the December 1993 report indicated "that the property was occupied
by the mortgagor according to the mailbox," while the reports in
the spring and summer of 1994 stated that the occupant was unknown,
per visual inspection.  
inspection or last documented contact with the mortgagor
or occupant."
Schedule at 2-3.  
Fifteen dollars is the "maximum fee for all inspections
(initial, vacant and occupied) ... for a single family property
...."  Schedule at 14.  Inspection fees, up to the maximum
allowable, are reimbursable to the mortgagee by HUD if the
inspection is necessary, i.e., when it cannot be established by
other means whether the property is occupied.  The Schedule
provides that "[t]he mortgagee must inspect a vacant or abandoned
property every 30 days when a loan is in default to determine
whether protection and preservation action is necessary."2
Schedule at 3.
Taylor, acting pro se, intervened in the foreclosure
proceeding and filed a counterclaim, asserting, inter alia, that
Lender had breached the loan contract by unlawfully assessing
inspection fees in violation of CL § 12-121.  At the same time
Taylor paid into the registry of the court $7,241.70 which he
calculated to be the full amount owed to Lender with the exception
of the disputed inspection fees.  Taylor also petitioned for, and
obtained, an injunction against the foreclosure.  In August 1994
-5-
     CL § 12-1027 (1996 Cum. Supp.) reads as follows:
3
"(a) Definition. -- In this section, UlenderUs
inspection feeU means a fee imposed by a credit grantor
to pay for a visual inspection of residential real
property.
(b)
Not 
imposed. 
-- 
Except 
as 
provided 
in
subsection (c) of this section, a credit grantor may not
impose a lenderUs inspection fee in connection with a
loan made to a consumer borrower that is secured by
residential real property.
(c)
Imposed. -- A lenderUs inspection fee may be
imposed on a consumer borrower if the inspection is
needed to ascertain completion of:
(1)
Construction of a new home; or
(2)
Repairs, alterations, or other work required by
the credit grantor.
(d)
Appraisals. -- This section does not apply to
an appraisal of the value of real property by a credit
grantor or to fees imposed in connection with an
appraisal."
Lender drew down the funds paid into court, with accumulated
interest, and, on December 14, 1994, trial was had on TaylorUs
counterclaim, 
resulting 
in 
judgment 
for 
the 
counterclaim
defendants.  
The circuit court ruled that the prohibition of the statute
was limited to inspection fees that were assessed as part of
closing costs.  The statute on which the circuit court based its
ruling was CL § 12-1027 (1996 Cum. Supp.) that was enacted after
§ 12-121.   In Part I, infra, of this opinion we address how this
3
case 
veered 
off 
to 
CL 
§ 
12-1027, 
and 
we 
address 
the
interrelationship between that statute and CL § 12-121.  In
construing CL § 12-1027 the circuit court was persuaded by the
-6-
     The circuit court had alternatively ruled, based on TaylorUs
4
testimony that he no longer lived in the house but had rented it to
a tenant, that Taylor had no standing to invoke CL § 12-1027.
Lender did not brief this ground in the Court of Special Appeals as
an alternative basis for supporting the judgment of the circuit
court, and the issue was not raised by Lender in a conditional
cross-petition for certiorari.  Accordingly, we intimate no opinion
on the construction of the statute implicit in the circuit courtUs
alternate ground of decision.
     It appears that there was no final judgment in the action
5
when Taylor noted his appeal to the Court of Special Appeals.  The
LenderUs foreclosure proceeding is considered as a claim and TaylorUs
counterclaim is a counterclaim in the same action.  Fairfax
Savings, F.S.B. v. Kris Jen Ltd. Partnership, 338 Md. 1, 21-22, 655
A.2d 1265, 1274-75 (1995).  Taylor appealed only the judgment on
the counterclaim at a time when the claim was still pending on the
docket.  On our own initiative, however, we enter a final judgment
on the counterclaim.  Maryland Rule 8-602(e)(1)(C).
short title, namely, "Housing--Real Property Closing Costs," of
Chapter 628 of the Acts of 1986 which enacted CL § 12-121, the
earlier of the two, substantially similar statutes. 
Taylor noted an appeal to the Court of Special Appeals from
the judgment denying his counterclaim.  In that court he briefed
the matter pro se.  The Court of Special Appeals, in an unreported
opinion, affirmed the circuit court, agreeing that CL § 12-1027,
construed in the light of its purpose, was limited to closing
costs.   We granted TaylorUs petition for certiorari that was
4
prepared by his present appellate counsel.
Approximately three months after the decision by the Court of
Special Appeals in the instant matter, Lender dismissed without
prejudice the foreclosure action against the property.  At oral
argument we were advised that Taylor had sold the property.   
5
-7-
     
It is today only of academic interest whether this
6
codification decision was prompted by the belief that the
provisions of CL § 12-121, for example, would also be applicable to
(continued...)
I
In his argument to the circuit court Taylor thought that
§ 12-121 had been amended and that it was "now called 12-1027."
His brief in this Court describes § 12-1027(b) to have been
"[p]reviously designated as" § 12-121(b).  Brief of Appellant at 2
n.1.  There are in fact two separate statutes dealing with the same
subject matter in substantially the same way.  
CL § 12-121 was initiated by the Report of the Task Force on
Real Property Closing Costs (the Commission) that had been created
by Governor Harry R. Hughes and that reported in January 1986.  The
bill proposing certain legislation recommended by that Commission
was enacted by Chapter 628 of the Acts of 1986.  
By Chapter 143 of the Acts of 1983 the General Assembly had
enacted the Credit Deregulation Act of 1983 (CDA).  Among its
provisions are CL Title 12, Subtitle 9, "Credit Grantor Revolving
Credit Provisions" (OPEC), dealing with open end credit, and CL
Title 12, Subtitle 10, "Credit Grantor Closed End Credit
Provisions" (CLEC), dealing with closed end credit.  When the
legislation proposed by the Commission was drafted, introduced, and
enacted, the various provisions were designated for codification
solely as part of Subtitle 1 of Title 12, without duplicating some
or all of the proposals in OPEC or in CLEC.6
-8-
     (...continued)
6
credit grantors who elected CLEC, because CLEC did not address
inspection fees one way or the other.  It seems clear in light of
subsequent developments that the General Assembly did not intend
credit grantors to be able to avoid the prohibitions of CL § 12-121
by electing to do business under CLEC.
In 1992 this CourtUs decision in Biggus v. Ford Motor Credit
Co., 328 Md. 188, 613 A.2d 986, analyzed the interrelationship
between CLEC and the Retail Installment Sales Act, CL Title 12,
Subtitle 6.  Biggus pointed out that, under the language of the
CDA, there could be provisions in CL Title 12, other than in OPEC
and CLEC, that could apply to credit grantors who elected coverage
under those subtitles.  
As a direct result of Biggus, the General Assembly amended
OPEC and CLEC by Chapter 404 of the Acts of 1993.  These amendments
specifically provide that, under certain circumstances, provisions
of certain other subtitles of CL Title 12, including Subtitle 1, do
not apply to extensions of credit under OPEC and CLEC.  See CL
(1996 Cum. Supp.), §§ 12-913, 12-913.1, 12-1013, and 12-1013.1.
Before the General Assembly could shut the door on the
application of provisions in certain other subtitles of Title 12 to
credit grantors who elected OPEC or CLEC, it was necessary for the
General Assembly first to determine which provisions in those other
subtitles were intended to apply to credit grantors electing OPEC
or CLEC and then to add those provisions to OPEC and CLEC.  Falling
within this class was § 12-121Us prohibition against inspection
-9-
     HUD regulations, in 24 C.F.R. § 203.552 (1994), provide in
7
relevant part as follows:
"(a) The mortgagee may collect reasonable and
(continued...)
fees.  The substance of that statute was added in 1993 to CLEC by
Chapter 404 as § 12-1027.  
In the instant matter the deed of trust that Taylor assumed is
a preprinted form document that was apparently drafted in 1982,
prior to the enactment of the CDA.  We do not find any election of
CLEC in this deed of trust.  Nor has Lender undertaken to show that
the extension of credit to TaylorUs grantor was made pursuant to
CLEC.  Compare CL (1996 Cum. Supp.) § 12-1013.1(c).  Thus, the
applicable section in the instant case is § 12-121, and, in Part
II, infra, we shall recast the partiesU arguments in terms of
§ 12-121.  Nevertheless, because there is no substantial difference
between § 12-121 and § 12-1027 with respect to the issue before us,
our construction of the former is equally applicable to the latter.
II
The sole issue before us under the certiorari petition is the
construction of § 12-121.  Lender never contended in its brief on
direct appeal that the inspection fees are authorized to be imposed
on the borrower by federal law or that the Maryland statutes are
federally preempted as applied to the facts of this case.  Nor does
Lender argue that the Maryland statutes are to be construed to
avoid possible unconstitutionality under federal law.   
7
-10-
     (...continued)
7
customary fees and charges from the mortgagor after
insurance endorsement only as follows:
....
"(14) Property preservation expenses incurred
pursuant to § 203.377."
24 C.F.R. § 203.377 states in part as follows:
"The mortgagee, upon learning that a property
subject to a mortgage insured under this part is vacant
or abandoned, shall be responsible for the inspection of
such property at least monthly, if the loan thereon is in
default."
Assuming, arguendo, that HUD regulations are incorporated by law
into the agreements between lenders and borrowers on insured loans,
the circuit court never made any finding that the property was
"vacant or abandoned" within the meaning of the regulation.  In any
event, TaylorUs counterclaim also seeks a refund of inspection fees
paid or charged prior to the time when he was no longer personally
residing on the premises.
TaylorUs position, quite simply, is that the inspection fees
in this case fall within the plain language of § 12-121.  TaylorUs
position is reinforced by the rule of statutory construction
dealing with statutes that express a general rule, followed by one
or more specific exceptions to the general rule.  Under those
circumstances, a court ordinarily cannot add to the list of
exceptions.  See Gable v. Colonial Ins. Co., 313 Md. 701, 704, 548
A.2d 135, 137 (1988) ("[W]here the Legislature has required
specified coverages in a particular category of insurance, and has
provided for certain exceptions or exclusions to the required
coverages, additional exclusions are generally not permitted.");
-11-
Schmidt v. Beneficial Fin. Co., 285 Md. 148, 155, 400 A.2d 1124,
1127 (1979) (where "Secondary Mortgage Loan Law [did] not expressly
except loans meeting the criteria set out in the Consumer Loan
Law," the court would not read "such an exception into the law.").
Lender argues that the language in § 12-121, "in connection
with a loan," is ambiguous, in that it may deal only with the time
of loan closing, or its scope may be broader.  This effort to
establish an ambiguity is designed to open the door for legislative
history.  Alternatively, Lender contends that a statute must always
be construed in accordance with its purpose.  Lender cites Blaine
v. Blaine, 336 Md. 49, 64, 646 A.2d 413, 420 (1994), for the
proposition that "[e]ven where the language of a statute is plain
and unambiguous, [the Court] may look elsewhere to divine
legislative intent; the plain meaning rule is not rigid and does
not require [the Court] to read legislative provisions in rote
fashion and in isolation."  In accordance with the latter approach
to statutory construction, we now turn to the legislative purpose.
There is no question but that the background for the creation
of the Commission was concern over real property closing costs.
Commission Report at 3.  The CommissionUs recommendations, however,
and the statutes that were based thereon, were not limited
exclusively to closing costs.  Chapter 628 of the Acts of 1986
enacted a prohibition against a LenderUs imposing "a collection fee
or service charge on the maintenance of an escrow account on a
-12-
first mortgage or first deed of trust."  1986 Md. Laws. at 2206,
currently, with amendments, CL § 12-109.2.  See also CL
§ 12-1026(e).
The prohibition against charging a service fee to maintain an
escrow account is a continuing prohibition, throughout the life of
the loan, and is not limited to closing costs.  In explaining this
recommendation the Commission in its report said, in part:
"Most lenders require a borrower to make monthly
payments into an escrow account in order to accumulate
sufficient funds to pay property taxes, hazard insurance
premiums and some other charges (e.g. ground rent) as
they become due.  ...
....
"... The Task Force is concerned, however, about
information that some lenders impose a collection fee or
service charge on the maintenance of required escrow
accounts.  Such additional fees, usually $30 to $50
annually, should be prohibited because funds are escrowed
as a requirement of, and for the convenience and security
of lenders."
Commission Report at 26-27.  In originally enacting CL § 12-109.2
the General Assembly had made no change from the statutory language
proposed by the Commission.
Further, proposed § 12-121(c)(2), as introduced, would have
permitted a fee for a lenderUs inspection to ascertain completion
of "repairs, alterations or other work required by the lender as a
condition to granting the loan."  1986 Md. Laws at 2208 (emphasis
added).  The italicized language indicates that the CommissionUs
focus may well have been on inspection fees associated with a loan
-13-
closing.  But the General Assembly struck the italicized language
from the bill in the course of passage.  
The effect of this amendment was to expand the exception to
the prohibition so that inspection fees could be charged for
ascertaining the completion of work that had nothing to do with
granting the loan.  For example, in the instant matter, Taylor
assumed the obligation in ¶ 5 of the deed of trust to "keep the
said premises in as good order and condition as they are now ...
reasonable wear and tear excepted."  If Taylor had violated that
covenant, and Lender and Taylor agreed that Lender would not treat
the breach as a default if Taylor caused repairs to be made within
a stated time, Lender would not be prohibited from charging an
inspection fee to determine if those repairs had been made.  In
terms of the issue before us, the amendment to the CommissionUs
proposed statute concerning inspection fees indicates that the
General Assembly did not consider that the prohibition against
inspection fees was limited to closing costs.  Otherwise, there
would have been no need to eliminate from the exception the
limitation to conditions of granting the loan.  In other words, an
exception for an inspection fee to determine if work had been done
that was a condition of the loan would have been entirely adequate
if the prohibition against inspection fees were limited to those
charged as part of closing costs.  It is the intent of the General
Assembly that we must discern, not that of the Commission.  
-14-
For the foregoing reasons we conclude that the legislative
history does not so clearly demonstrate a purpose to limit the
prohibition of § 12-121 to closing costs as to override the plain
language of the statute.  Accordingly, we shall reverse and remand
for further proceedings.
JUDGMENT OF THE COURT OF SPECIAL
APPEALS REVERSED.  CASE REMANDED TO
THAT COURT FOR THE ENTRY OF A
JUDGMENT REVERSING THE JUDGMENT OF
THE CIRCUIT COURT FOR ANNE ARUNDEL
COUNTY AND REMANDING THIS ACTION TO
THAT COURT FOR FURTHER PROCEEDINGS
CONSISTENT WITH THIS OPINION.  COSTS
IN THIS COURT AND IN THE COURT OF
SPECIAL APPEALS TO BE PAID BY THE
RESPONDENT, BANK OF AMERICA, F.S.B.