Maryland Legal Alert for Financial Services

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Maryland Legal Alert - February 2020

IN THIS ISSUE:

STUDENT LOAN DEBT DISCHARGED IN BANKRUPTCY 

REMOTE DEPOSIT CAPTURE LITIGATION

CFPB ISSUES GUIDANCE ON ABUSIVENESS STANDARD

Student Loan Debt Discharged in Bankruptcy

In a highly publicized decision, a New York bankruptcy court ruled that a debtor’s $221,385 student loan debt could be discharged in his Chapter 7 bankruptcy case under Section 523(a)(8) of the Bankruptcy Code. Under that section, most student loan debts cannot be discharged unless the debtor proves that payment of the loan imposes an “undue hardship.”

To establish undue hardship, the debtor is required to meet the Brunner test, which the U.S. Court of Appeals for the Second Circuit established in 1987. Under the Brunner test, the debtor must demonstrate the following standards:

(1) That the debtor is unable to meet, based on the debtor’s current income and expenses, a “minimal standard of living” for the debtor and dependents if forced to repay the loan;

(2) That the debtor likely will be unable to repay the loan for a significant portion of the repayment period; and

(3) That the debtor has made a good faith effort to repay the loan.

The U.S. Court of Appeals for the Fourth Circuit, which covers Maryland, has adopted the Brunner test.

In the New York case, the debtor received a law degree in 2004 but was not practicing law at the time of his bankruptcy. Prior to law school, the debtor served in the military for five years. The original principal amount of his student loan was $116,475 and the debtor had a history of making payments on the loan. At the time of bankruptcy, the debtor’s income was $37,635 and he had a monthly net income of a negative $1,549. The student loan went into default and was accelerated before bankruptcy was filed.

While acknowledging that the Brunner test was binding, the judge noted that some have criticized Brunner for creating “too high a burden” for a debtor to meet and that the courts’ application of the test has produced “harsh results.” She attributed this trend to the courts’ misapplication of the test and stated that she would not “participate in perpetuating these myths.”

Her ruling based on the Brunner test is as follows:

(1) As to the test’s first prong, the court found that the debtor would not be able to pay the accelerated amount of $221,385 from his current income and maintain a minimal standard of living.

(2) As to its second prong, the court rejected the lender’s argument that the test cannot be met by a debtor who created his financial condition by choice. Rather, this prong only requires a court to determine if the debtor’s current state is likely to continue for a significant portion of the payment period of the loan. Since the loan had been accelerated and was due immediately, the court found that the second prong was met.

(3) As to its third prong, the court found that the debtor’s payment history showed that he had made “good faith efforts” to repay the loan.

Practice Pointer: This decision has been appealed. Ironically, the lender’s prebankruptcy acceleration of the loan appears to have helped the debtor. It is unknown whether other courts will similarly reward a debtor whose loan was accelerated before bankruptcy. While the problem of mounting student loan debt has received a great deal of attention in the media and political arena, courts remain limited in their ability to discharge a student loan by the “undue hardship” standard of Section 523(a)(8), regardless of how it is interpreted.

Please contact Lawrence D. Coppel for further information concerning this topic.

Contact Lawrence D. Coppel | 410-576-4238

Remote Deposit Capture Litigation

We wrote in our November 2018 Maryland Legal Alert about patent infringement litigation concerning the use of remote deposit capture technology.

A large Texas-based automobile association holds a number of patents covering remote deposit capture (RDC) technology. Beginning in 2017, the association began sending financial institutions notices of potential infringement and licensing demands.

The association filed two test cases in 2018 against a large national bank based on the bank’s use of RDC technology that allegedly infringed upon several of the association’s patents.

In November 2019, a Texas jury awarded the association $200 million in one of its infringement cases. This was followed in early January 2020 with a separate $102 million judgment against the same bank. It is likely that the association will now expand its list of financial institutions who will be targeted to enter into RDC license agreements.

Practice Pointer: Given the size of the judgments and the related litigation expenses, financial institutions should carefully review their RDC service provider agreements to determine if indemnification is provided for these claims and to verify that RDC service providers maintain sufficient insurance to back up the size of potential claims like these.

If you have received a letter related to RDC patents or you are concerned about RDC litigation exposure, please contact Christopher Rahl if you have any questions about this topic.

Contact Christopher Rahl | 410-576-4222

CFPB Issues Guidance on Abusiveness Standard

The Dodd-Frank Act prohibits, among other things, abusive acts or practices in connection with the provision of consumer financial products or services. In an effort to address the longstanding uncertainty regarding the scope and meaning of the “abusiveness standard,” the Consumer Financial Protection Bureau (CFPB) recently issued a policy statement regarding how it intends to apply the abusiveness standard in its supervision and enforcement matters going forward.

Effective January 24, 2020, the CFPB intends to apply the following principles to its enforcement and supervision efforts:

(1) The CFPB will cite or challenge conduct as abusive in its supervision and enforcement efforts only if it determines that the harm to consumers from the conduct outweighs its benefits to consumers.

(2) The CFPB will try to avoid the vexing issue of “dual pleading” in abusiveness violations and unfair or deceptive violations arising from the same set of facts. Whether alleged as a standalone violation or alleged together with an unfair or deceptive violation, the CFPB intends to allege the abusiveness violation with sufficient detail to set the bounds of the abusiveness claim apart from other allegations.

(3) The CFPB will only seek monetary relief for violations of the abusiveness standard when the company failed to make a good faith attempt to comply with the law. The CFPB will still seek restitution for injured consumers even if the company acted in good faith.

Practice Pointer: This policy statement is the CFPB’s first effort to offer meaningful guidance on how it intends to apply the abusiveness standard in its enforcement and supervision efforts. Notably, however, the CFPB does not offer guidance as to an actual definition of what may constitute abusive conduct. The CFPB further noted that the policy statement does not prevent it from engaging in future rulemaking on the subject. For a more in-depth analysis of recent activities identified as unfair, deceptive or abusive practices under the Dodd-Frank Act, please see our 2019 survey.

Please contact Bryan Mull for more information concerning this topic.

Contact Bryan Mull | 410-576-4227