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Kansas Unlicensed Creditors Beware: Maryland Appellate Ruling’s Potential Impact on Creditors Enforcing Kansas Consumer Debts

Posted By USFN, Tuesday, March 13, 2018
Updated: Monday, March 12, 2018

March 13, 2018

by William H. Meyer
Martin Leigh, P.C. – USFN Member (Kansas)

In Kansas, creditors who originate, take assignments of, and enforce consumer obligations must be aware of — and comply with — the Kansas Uniform Consumer Credit Code (UCCC) and its supervision and licensing requirements. See K.S.A. 16a-2-301. A creditor’s failure to comply with these requirements could result in the creditor being unable to use the Kansas courts to enforce its debts, and can potentially put finalized judgments, including foreclosures, at risk. Clearly, creditors and creditors’ counsel need to be well informed of the Kansas UCCC and how the failure to follow it can short-circuit any, otherwise straightforward, lawsuit. Several states have adopted statutes similar to the Kansas UCCC and its regulatory scheme; one such state is Maryland.

Maryland Backdrop
A Maryland appellate decision found that a creditor’s failure to obtain proper licensure completely prevented it from foreclosing on mortgage loans. That appellate decision is styled Blackstone v. Sharma, 161 A.3d 718 (Md. Ct. Spec. App. 2017). [For convenient reference, also see “Maryland: Foreign Statutory Trust (which acquired a Loan Post-Default) is a ‘Collection Agency’ and Prohibited from Foreclosing without a Debt Collection License” (USFN e-Update, June 2017 ed.)].

Blackstone applies the Maryland Collection Agency Licensing Act. The Maryland case arises from mortgage loans that were assigned to an unlicensed creditor who sought to foreclose the deeds of trust that secured the mortgage loans. The borrowers challenged the foreclosures asserting that, without a license, any judgment that the creditor obtained against them would be void. The Maryland trial court and appellate court agreed with the borrowers and ruled that the creditor’s foreclosure actions were barred.

The Blackstone case has drawn national attention because it not only calls into question pending Maryland foreclosure cases, it also casts doubt over completed foreclosures that could be set aside as void. The Blackstone case is not over yet; Maryland’s highest court held oral argument in November 2017, and a decision is widely anticipated.

Kansas Context
The effect of Blackstone on Kansas foreclosures is not clear. As noted above, the Kansas UCCC requires that creditors enforcing consumer mortgages be licensed (like the Maryland statute). In 2013 the Kansas Court of Appeals looked at the licensing issue in Brand Investments, LLC v. Adams, 303 P.3d 727 (Kan. Ct. App. 2013) (Affirmed. Decision without published opinion).

Brand was a foreclosure action in which — over a year after the foreclosure judgment — the borrower challenged the creditor’s right to foreclose because the creditor was not licensed, as required by the Kansas UCCC. The borrower’s legal argument was that, because the creditor was unlicensed, the creditor lacked standing to bring the foreclosure action. Accordingly, the borrower contended that the Kansas trial court lacked subject matter jurisdiction to hear the case and, therefore, the foreclosure judgment was void as a matter of law. In a nuanced opinion, the Kansas Court of Appeals rejected the borrower’s argument.

The Kansas Court of Appeal’s opinion distinguished “standing” from the “capacity to sue.” The court described that a party’s standing to sue arises when a party suffers a cognizable injury and there is a causal connection between the injury and the challenged conduct. In slight contrast, the court described a party’s capacity to sue as the right to come to court for relief concerning the subject of the action. That subtle distinction is important because the lack of standing is jurisdictional and a challenge to a judgment entered by a court that lacks subject matter jurisdiction can be challenged and defeated at any time — i.e., there is no certainty or finality for a judgment entered with this defect. However, the lack of capacity to sue is an affirmative defense. If a borrower does not timely raise lack of capacity as an affirmative defense, then the defense is waived, and the foreclosure judgment is far harder to challenge after the fact —particularly if a year or more passes after the judgment is entered.

Based on this distinction, the Kansas Court of Appeals ruled that the creditor’s failure to obtain a license did not create a standing issue but, instead, only a lack-of-capacity-to-sue question. In this case, the borrower failed to timely assert an affirmative defense based upon the creditor not being licensed. Therefore, the issue was deemed to be waived and the creditor’s foreclosure judgment was affirmed.

In Closing
Although Brand was a victory for the creditor, it’s a cautionary tale. Creditors should be mindful of the UCCC licensing requirement in Kansas prior to purchasing loans or initiating collection in the state.

In short, Maryland’s Blackstone decision creates a wave of uncertainty regarding the legality of numerous completed and pending mortgage foreclosure actions in Maryland (and elsewhere with similar licensing requirements). However, the Kansas Court of Appeals decision in Brand suggests that if a borrower fails to timely raise the licensing issue (or at least within a year of the judgment being entered) then even an unlicensed creditor could successfully foreclose (in the absence of a timely challenge), and that judgment would be difficult to set aside later. As noted above, however, Brand is an unpublished Kansas appellate court decision and the law is subject to change.

Creditors (and attorneys representing them) seeking to acquire and enforce consumer debts in Kansas can obtain regulatory and licensing information from the State Bank Commissioner of Kansas at http://www.osbckansas.org/cml/applications.html.

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