Maryland Legal Alert for Financial Services

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Maryland Legal Alert - August 2007

2007 MARYLAND LAWS UPDATE AVAILABLE

The Maryland General Assembly was active during its 2007 session and Gordon Feinblatt's annual summary of Maryland Legislation Affecting Financial Services Providers explains how several new laws present challenges and opportunities for financial services providers. If you have questions about any of the new Maryland laws, please contact any member of Gordon Feinblatt's Financial Services Practice Group.

MORTGAGE BROKERS GET ADVICE ON HOW TO SURVIVE A MARYLAND AUDIT

On July 26, 2007, Margie Corwin moderated a repeat presentation sponsored by the Maryland Association of Mortgage Brokers entitled “How to Survive a State Audit.” Janet C. Erickson, Examiner Supervisor from the Maryland Division of Financial Regulation, was the principal speaker. Richard Younger and Craig Reiben, Lead Examiners, accompanied Ms. Erickson. The Division's handout materials describe “Top 10” violations found by examiners when auditing mortgage brokers. The Division also distributed an advisory about Maryland broker agreements and a checklist of documents examiners expect to see during an audit. The session prompted many questions, primarily focused on Maryland requirements for broker agreements and financing agreements, the Division's views on when those documents must be provided and what must be done if the information changes, and the types and amounts of permissible broker fees. Margie has prepared unique Maryland broker forms acceptable to the Division and these forms, along with copies of applicable Maryland laws, are sold by the MAMB. For more information, please contact Chris Rahl.

MARYLAND GOVERNMENT OFFICIALS INVESTIGATE LENDING, FORECLOSURE ISSUES

The recent problems encountered in the sub-prime lending market and the increase in foreclosures has triggered far-ranging inquiries into practices in Maryland. Governor Martin O'Malley created the Homeownership Preservation Task Force, which is jointly chaired by the Maryland secretaries of the Department of Labor, Licensing and Regulation and the Department of Housing and Community Development. The task force had its first meeting last month and will make recommendations prior to the 2008 General Assembly session. Likewise, Maryland Attorney General Douglas F. Gansler convened the Attorney General's Working Group on Lending Practices, which also met last month and will, no doubt, be making recommendations for changes in Maryland law.

In addition, the standing committees of the Maryland General Assembly that deal with lending and foreclosure will be conducting briefings, with a first briefing in the Senate Finance Committee on August 29, 2007, to deal with lending practices and steps that may be taken to prevent foreclosure. Without question, significant legislation in this area will be introduced in Maryland in 2008. If you would like more information, please e-mail D. Robert Enten.

GUARANTOR'S PAYMENT CAN'T BE APPLIED TO INTEREST ACCRUING AFTER BANKRUPTCY

The U.S. Fourth Circuit Court of Appeals in National Energy & Gas Transmission, Inc., et al. v. Liberty Electric Power, LLC held that a creditor could not allocate a contract payment made by a non-debtor guarantor first to interest accruing after the date of the debtor's bankruptcy filing and then to principal, followed by an attempt to collect the remaining principal from the debtor. To hold otherwise, the court reasoned, effectively would permit the creditor to collect post-petition interest on a pre-bankruptcy claim contrary to 11 U.S.C. § 502(b)(2).

On the bankruptcy filing date, one of several affiliated debtors was a party to an energy tolling agreement, which was secured by two guarantees, including one by a non-debtor. During the bankruptcy case, the debtor rejected the agreement and the amount of the creditor's claim was determined in arbitration proceedings to consist, inter alia, of a termination payment of $140 million plus interest accruing from the date of rejection. Meanwhile, the non-debtor guarantor was sold and $140 million of the sale proceeds was held in escrow to secure payment of any liability under the guaranty. When the proceeds of the escrow were paid to the creditor, it applied the payment first to $17 million of accrued interest from and after the rejection date and then to principal. The creditor then sought to collect the remaining unpaid balance from the other debtors.

Reversing the U.S. District Court for the District of Maryland, which had affirmed the Bankruptcy Court, the Fourth Circuit observed that § 502(b)(2) provided a claim shall not be allowed “to the extent that . . . [it] is for unmatured interest.” Guided by principles of equity and fairness, the court found that the debtor's debt was “capped at $140 million [and] the debt was increased only by the accrual of interest pursuant to the arbitration award. . . .” As a result, the creditor's application of the $140 million payment by a non-debtor guarantor could not affect “the reality of the transaction for purposes of the bankruptcy proceeding.” For more information, please contact Chris Rahl.

FOR THOSE INTERESTED IN MORTGAGE ISSUES ...

Many interested in Maryland mortgage issues also are interested in Virginia mortgage issues. For this reason, we bring your attention to Chapters 590/269 of the 2007 Virginia Acts, which amend and expand the law applicable to notaries. Of particular note is a new requirement, found in Va. Code §47.1-15 (effective July 1, 2007), that the notarial certificate must be on the same page as the signature being notarized. Also of interest is Chapter 451 of the 2007 Virginia Acts, which places responsibility for certain existing recordation requirements on the attorney or party who prepares a document for recordation and imposes new recordation requirements, including that the social security number be removed from the document prior to recordation.