Maryland Legal Alert for Financial Services

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Maryland Legal Alert - April 2017

In this issue:

Arbitration Waived by Bringing Small Claims Collection Lawsuit 

A recent ruling by the Court of Appeals of Maryland could impair the ability of creditors to enforce arbitration agreements.  In its March 24, 2017 decision, Maryland's highest court held that a debt buyer waived its right to arbitrate a consumer's putative class action for unlawful collection practices because the consumer's claims were related to the debt buyer's earlier small claims collection lawsuit.  The case involved a credit card account and the related credit card agreement which contained an arbitration provision.  After the consumer defaulted, the original creditor sold the account to a debt buyer and the debt buyer filed a collection lawsuit against the consumer in the District Court of Maryland for Baltimore City (small claims court).  In August 2009, the debt buyer obtained a default judgment against the consumer.  The debt buyer was not licensed in Maryland as a collection agency at the time it obtained the judgment.  Nearly four years later, on June 28, 2013, the Court of Special Appeals, Maryland's intermediate appellate court, issued an opinion allowing debtors to collaterally attack judgments by unlicensed collection agencies.  The consumer immediately filed a putative class action complaint in the Circuit Court for Baltimore City against the debt buyer for allegedly unlawful collection practices.  The debt buyer moved to compel arbitration and the consumer objected asserting, among other arguments, that the debt buyer waived its right to arbitration when it brought the small claims collection lawsuit.  The credit card agreement arbitration provision included language providing that "Claims filed in a small claims court are not subject to arbitration, so long as the matter remains in such court and advances only an individual (non-class, non-representative) Claim."  The Circuit Court rejected the consumer's arguments and granted the debt buyer's motion to compel arbitration.  In an unreported decision, the Court of Special Appeals affirmed.  The Court of Appeals, however, reversed in a 5-2 decision.  Under Maryland law, participation as a party in a judicial proceeding constitutes a waiver of the right to arbitrate issues raised or decided in that proceeding; however, such a waiver does not extend to other unrelated issues.  The Court of Appeals emphasized that the consumer's claims in the putative class action were related to the judgment in the small claims collection lawsuit.  The Court rejected the debt buyer's argument that language in the arbitration agreement (quoted above) required it to litigate claims falling under the jurisdiction of a small claims court and, therefore, could not constitute a waiver.  In the Court's view, the arbitration provision makes a collection action subject to either arbitration or litigation until the claim is filed in a small claims court.  Therefore, the debt buyer acted inconsistently with the arbitration provision by filing the collection lawsuit and, according to the Court, waived its right to arbitrate the related putative class action filed by the consumer.  This decision should inform future recovery efforts in Maryland by creditors and debt buyers.  It may prompt revising arbitration language to clarify that seeking relief in a small claims court does not waive arbitration rights for other claims or it may prompt changes in recovery efforts.  Please contact Robert Gaumont, Bryan Mull, or Marjorie Corwin with questions about this topic.

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CFPB Obtains Rehearing in PHH Case

As we reported in our November 2016 Maryland Legal Alert and December 2016 Maryland Legal Alert, the Court of Appeals for the District of Columbia held the single director structure of the Consumer Financial Protection Bureau (CFPB) unconstitutional, because it lacked the presidential control or "substitute check" required by Article II of the United States Constitution.  The D.C. Circuit also rejected the CFPB's argument that statutes of limitation do not apply to CFPB administrative enforcement actions and held that the CFPB violated PHH's due process rights by retroactively applying a new RESPA interpretation to PHH's prior conduct.  The CFPB filed a petition for rehearing before an en banc panel of the D.C. Circuit and that petition was granted on February 16, 2017.  The D.C. Circuit vacated the Court's October 2016 judgment and set a hearing date for May 24, 2017.  We will continue to closely monitor this case.  In the interim, please contact Christopher Rahl with any questions concerning this topic.

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Garnished Wages Can Be Avoided as Preferences

Most creditors are aware that payments made to them by debtors on their debts within the bankruptcy preference period (normally 90 days) may be avoided (i.e., clawed back) by the bankruptcy trustee as preferences.   In a recent decision, the United States Court of Appeals for the Fifth Circuit considered whether a "transfer" for preference purposes under the Bankruptcy Code occurs when a garnishment is served on the debtor's employer or when the wages are actually paid.  Under the facts of the case, the garnishment was served outside of the preference period and the trustee sued to avoid wage payments made within the preference period.  The creditor argued that since, under state law, its garnishment lien extended to future wage payments, a "transfer" for preference purposes occurred outside of the preference period, and, thus, the payments made during the period could not be recovered.  The Fifth Circuit rejected the creditor's argument and ruled in favor of the trustee.  In doing so, the Court relied upon Section 547(e)(3) of the Bankruptcy Code which provides that "a transfer is not made until the debtor has acquired rights in the property transferred."  Since a debtor is not entitled to wages until after they are earned, the court reasoned that the debtor did not acquire rights to the wages at issue until they were earned during the preference period.  The Fifth Circuit noted that its holding is contrary to decisions of three other appellate courts.  The United States Court of Appeals for the Fourth Circuit, in which Maryland is located, has not ruled on the issue.  However, in a reported decision, the Maryland Bankruptcy Court has ruled in favor of a trustee on a preference claim under similar facts.  For questions concerning this topic, please contact Lawrence Coppel.

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OCC Releases Materials for FinTech Charter

We reported in our March 2017 Maryland Legal Alert about plans by the Office of the Comptroller of the Currency (OCC) to issue special purpose national bank charters (Special Purpose Charters) through a supplement to its Licensing Manual.  On March 15, 2017, the OCC released its draft supplement: Evaluating Charter Applications From Financial Technology Companies.  The supplement explains that the OCC expects applicants for a Special Purpose Charter to be more bank than FinTech firms.  Applicants will need to have a robust compliance management system and will need to include adequate evidence that they have: organizers and management with appropriate skills/experience; adequate capital to support the projected volume and type of business/risk profile; and a business plan that articulates a clear path/timeline to profitability.  The supplement also makes clear that the OCC will be looking for applicants to demonstrate a commitment to financial inclusion and include in a Special Purpose Charter application a "financial inclusion plan" to explain how the applicant will provide fair access to financial services and promote fair treatment of customers.  FinTech firms that wish to pursue a Special Purpose Charter should be mindful that the OCC will be looking for applicants that want to become a bank that uses technology rather than a technology company that is seeking banking authority.  For more information concerning this topic, please contact Christopher Rahl.

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Supreme Court Chips Away at New York "No Surcharge" Law

The United States Supreme Court, on First Amendment grounds, issued a decision that could mean the demise of state laws that ban credit card surcharges.  The decision involved a challenge to a New York law that prohibits merchants from charging a surcharge when a customer pays with a credit card rather than cash.  The United States District Court for the Southern District of New York held that the "no surcharge" law violates the First Amendment by prohibiting "surcharges" for consumers who pay with a credit card, but permitting merchants to give a "discount" to customers who pay with cash.  The United States Court of Appeals for the Second Circuit disagreed, reasoning that the "no surcharge" law only regulates economic conduct and does not impact speech.  The Supreme Court disagreed with the Second Circuit and found that New York surcharge law regulated speech.  The Supreme Court vacated the judgement of the Second Circuit and remanded the case with instructions that the Second Circuit determine if the New York surcharge law impermissibly regulates commercial speech.  Including New York, there are currently ten states with "no surcharge" laws.  The other states that could be impacted by this decision are California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma, and Texas.  Please contact Christopher Rahl with questions about credit card surcharges, credit card association rules, or similar issues.

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