Maryland Legal Alert for Financial Services

Hero Image for page

Maryland Legal Alert - August 2018

In This Issue:

Foreclosing Lender Does Not Have Successor Liability for Unpaid Severance

Do Severance Payments Constitute Wages? In One Case, Three Words Made the Difference

BCFP Title Loan Enforcement Action

California Consumer Privacy Act

Foreign Statutory Trusts That Own Mortgage Loans Are Not Maryland Collection Agencies

Foreclosing Lender Does Not Have Successor Liability for Unpaid Severance

A recent decision  of the U.S. District Court for the District of Maryland should provide comfort to lenders who purchase their collateral at a foreclosure sale and continue business operations of their borrower. The court dismissed a complaint filed by former executives of a business who were seeking to recover unpaid severance from a lender that foreclosed on the operating assets of the business and purchased them at the sale. Under the alleged facts, an affiliate of the lender purchased the borrower’s assets at the foreclosure sale, hired the borrower’s employees and continued to operate the same business. The former executives used a theory of successor liability to claim that the lender’s affiliate was liable for their unpaid severance under Maryland’s Wage Payment and Collection Act (WPC Act) because the affiliate continued to operate the same business with the same management and employees. The court rejected this claim and held that the complaint failed to state a claim for which relief could be granted. The court discussed in its opinion what must be shown in order to establish successor liability under Maryland law and concluded that the complaint fell short of alleging facts necessary to establish such a claim. First, the court noted that facts were not alleged to establish a claim for fraud or a fraudulent conveyance. Second, the alleged facts did not show that the affiliate was a mere continuation of the borrower’s business. As to the continuity element, the court noted that while the plaintiffs had alleged facts showing a “continuity of business enterprise,” they did not allege facts “showing a continuity of corporate entity.” Instead, the alleged facts showed that not only did the borrower continue to operate after the sale with assets that were not purchased by the affiliate, but also there was no continuity of ownership since the officers, directors and shareholders of the affiliate and the borrower were not the same. As a result, the elements for establishing successor liability under Maryland law were not present and there was therefore no WPC Act liability.

A lender may find that it is in its interest to foreclose on a defaulted loan that is secured by operating assets and to buy the assets at the sale in order to continue operations with the goal of realizing value at a later time. Even if the lender buys in the assets and continues business operations with the same workforce of the borrower, it should not have successor liability to any of the borrower’s other creditors under Maryland law so long as ownership, officers and directors are different. Please contact Lawrence Coppel for more information on this topic.

Contact Lawrence Coppel

Do Severance Payments Constitute Wages? In One Case, Three Words Made the Difference

Many employers include non-competition and non-solicitation covenants in employment and separation agreements, and these agreements frequently call for the payment to employees of severance or other remuneration following termination of employment. The Maryland Court of Special Appeals recently ruled  in favor of an employer who objected to its former employee’s characterization of such payments as “wages” within the meaning of the Maryland Wage Payment and Collection Act (WPC Act). Among other things, the WPC Act requires an employer to timely pay all wages earned by its employees. An aggrieved employee may bring an action to recover unpaid wages, and, if the employee is successful, the WPC Act authorizes a court to award the employee an amount up to three times the unpaid wages plus reasonable attorneys’ fees. In this case, the court had to determine whether an employment contract established that the employer agreed to make post-termination payments in exchange for (not wages) or in spite of (wages) the employee’s agreement to be subject to a non-competition covenant for a period of time after his employment ended. The court had to contend with contract provisions that created some ambiguity with respect to the parties’ overall intentions and forced the case outside of some bright lines established in prior decisions. However, the court ultimately rested its conclusion that the payments were not wages on the fact that the payment provision of the contract expressly stated that the payments were “in exchange for” the post-termination non-competition covenant. Had the payment provision not contained those three words, it is quite possible, given the other provisions of the contract, that the court would have decided this case differently and ruled in favor of the employee. The moral of this story is that the words – even the little ones – of your contracts matter. Please contact Andy Bulgin if you would like information about strategies for drafting these types of agreements.

Contact Andy Bulgin

BCFP Title Loan Enforcement Action

The Bureau of Consumer Financial Protection (BCFP, previously known as the CFPB) recently announced a settlement  with a small-dollar title lender concerning the disclosure of finance charges. The title lender made loans secured by motor vehicle titles that were to be repaid in relatively short periods. A typical loan transaction for $2,500 was structured with a 30-day repayment term, but also with an accompanying ten-month repayment agreement. This arrangement resulted in applicable Truth-in-Lending Act (TILA) disclosures including only a 30-day finance charge amount, while the transaction was really designed to be repaid over ten months (resulting in a typical finance charge significantly greater than what was initially disclosed). The BCFP alleged violations of TILA and its implementing Regulation Z, as well as alleged that the practices constituted deceptive acts or practices in violation of the Consumer Financial Protection Act of 2010. The title lender entered into a consent order agreeing to pay a civil penalty of just over $1.5 million and adjust how it discloses finance charges in the future. For more information concerning actions that the BCFP considers unfair, deceptive, and/or abusive, please contact Christopher Rahl.

Contact Christopher Rahl

California Consumer Privacy Act

The California Consumer Privacy Act  (CaCPA) is a new, comprehensive privacy legislation. The law goes into effect January 1, 2020 and brings privacy protections similar to those in the European Union General Data Privacy Regulation (GDPR)  directly to the U.S. As we discussed in the May  2018 and June  2018 editions of the Maryland Legal Alert, the GDPR has broad extra-territorial application that may implicate U.S. businesses. Similarly, CaCPA potentially applies to many businesses, including financial institutions, that otherwise have only minor connections to California. For example, CaCPA applies to any for-profit business that “does business” in California (potentially by having a single customer in California), collects personal information on California residents (such as via a website collecting common marketing information from all visitors, including California residents) and has gross revenues annually in excess of $25 million.

Like GDPR, CaCPA includes a definition of protected information that is significantly broader than typical U.S. privacy laws. For example, under CaCPA, “personal information” includes information such as IP addresses, geolocation data, biometric data and information regarding interaction with an Internet web site, application or advertisement. Also, similar to GDPR, CaCPA applies privacy obligations not typically seen in U.S. privacy laws. For example, CaCPA requires businesses to stop selling personal information upon request from a consumer and to delete all personal information upon request from the consumer.

There is significant controversy over the potential impact of CaCPA, and it may be extensively amended before it goes into effect. A technical corrections bill  is currently pending in the California legislature. We will continue to monitor CaCPA and its implications for Maryland financial institutions. For more information on this topic, please contact Andrew Wichmann.

Contact Andrew Wichmann

Foreign Statutory Trusts That Own Mortgage Loans Are Not Maryland Collection Agencies

There is good news for the mortgage loan industry. On August 2, 2018, the Maryland Court of Appeals issued a long awaited decision  addressing the applicability of Maryland’s Collection Agency Licensing Act (MCALA) to statutory trusts. This issue was considered by the Court of Appeals as a consolidation of four separate decisions by three different Maryland circuit courts. Those trial courts concluded that a foreclosure action could not be brought if a foreign statutory trust acquired the underlying mortgage loan after the loan was in default and the statutory trust did not maintain a Maryland collection agency license. The Court of Appeals narrowly framed the question presented:  Did the Maryland General Assembly intend to require foreign statutory trusts, one of the entities in the mortgage industry, to obtain a collection agency license pursuant to MCALA before pursuing an in rem foreclosure proceeding?  The Court, after conducting extensive statutory interpretation, answered this question in the negative, concluding that foreign statutory trusts are outside the scope of the collection agency industry that is regulated by and required to be licensed under MCALA.  The Court further determined that the amendments to MCALA in 2007 (which expanded MCALA to cover persons collecting debts they own if the debts were already in default when acquired) were intended to close a loophole and only apply to a certain group of actors within the collection agency industry that purchased delinquent consumer debt in exchange for a contingency fee. The Court concluded that foreign statutory trusts that purchase mortgage loans are not within the purview of the collection agency industry the General Assembly intended to license. This is very good news for the secondary mortgage market and securitizations. It also is instructive, but not conclusive, as to the need for collection agency licensing for purchasers of other types of loans (i.e., non-real property secured loans) or non-mortgage loan servicers. Please contact Margie Corwin if you would like to discuss in greater detail.

Contact Marjorie Corwin