Maryland Legal Alert for Financial Services

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Maryland Legal Alert July 2017

In this issue:

“INTRADAY OVERDRAFT” PAYMENTS ARE NOT AVOIDABLE IN BANKRUPTCY

In a case  of first impression, the United States Court of Appeals for the Eighth Circuit affirmed district and bankruptcy court decisions that rejected a bankruptcy trustee’s preference claim to recover pre-bankruptcy payments made by a bank depositor to satisfy “intraday overdrafts” in the depositor’s account.   Applying Iowa law, the appeals court defined an “intraday overdraft” as one that has occurred and is settled prior to the bank’s midnight deadline under Iowa’s version of the Uniform Commercial Code (UCC).  The court reasoned that since a payor bank is only acting as a “conduit” until an overdraft becomes final at the midnight deadline, the bank is not an “initial transferee” for preference avoidance purposes under the Bankruptcy Code. Although the court found for the bank as to the intraday overdraft payments, it also affirmed a decision in favor of the trustee as to payments made to satisfy “true overdrafts” (the time when a provisional settlement becomes final at the midnight deadline).  In doing so, the court rejected the bank’s “ordinary course of business defense” stating that the number of payments made on account of true overdrafts had increased during the 90 day preference period as compared to the pre-preference period.  The issue of whether payments on intraday or true overdrafts may be avoided as preferences has not been decided by the United States Court of Appeals for the Fourth Circuit or the district or bankruptcy courts in Maryland, but this case could be instructive for Maryland courts as the Iowa UCC sections cited by the Eighth Circuit are substantially similar to Maryland’s comparable UCC provisions.  For more information concerning this topic, please contact Lawrence Coppel.

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STATE ATTORNEYS GENERAL WRITE ABOUT CVV NUMBERS

A group of 15 state Attorneys General (including Maryland’s Attorney General) sent a letter to an online hosting company in response to that company’s online “frequently asked question” (FAQ) responses for online retailers.  The company’s FAQs advised retailers that no customer notification would be required in specified states for data breach situations where a credit card number was accessed unless the associated card verification value (CVV) number was accessed as well.  The letter, sent on behalf of all 15 state Attorneys General by the New York Attorney General’s office, pointed out that the data breach laws of New York and the other signatory states (including Maryland) require notice when there is unauthorized access to certain personal information of a consumer plus a credit card account number “in combination with any required security code” that would permit access to a consumer’s account.  The letter noted that, because some online retailers permit purchases using only a credit card number (without a CVV number), a CVV number is not “a required security code” under these states’ data breach laws, and a data breach of certain personal information plus credit card account number without a CVV number would still require breach notification in the specified 15 states.  Maryland’s data breach law (the Maryland Personal Information Protection Act) includes a definition of “personal information” that is substantially similar to the New York definition cited by the New York Attorney General, so Maryland businesses should be mindful of the Maryland Attorney General’s position concerning this issue.  We also note that the Maryland Personal Information Protection Act was recently amended to impose additional duties on Maryland businesses (see our Maryland Laws Update 2017), but there continues to be an exemption for businesses subject to and in compliance with Section 501(b) of the federal Gramm-Leach-Bliley Act and various identified federal guidelines and guidance (e.g., depository financial institutions and their affiliates), as well as businesses in compliance with requirements established by a primary or functional federal or Maryland regulator.  Please contact Christopher Rahl or Marjorie Corwin for questions concerning this topic.

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FUNDS AVAILABILITY REGULATION CC AMENDMENTS

The Board of Governors for the Federal Reserve System recently finalized long-awaited amendments to FRB Regulation CC’s Availability of Funds and Collection of Checks provisions to address the reality that most checks are presented, collected, and paid electronically.  The final rules  take effect on July 1, 2018.  The rules, among other things, add new liability provisions concerning remotely deposited checks and require each bank that accepts a remotely deposited check (remote deposit bank) to indemnify any other bank that takes the underlying original check for deposit.  The new indemnity obligation is not absolute.  If an underlying original check has a restrictive endorsement (such as “for remote deposit only”), the bank that accepts the original check cannot make an indemnity claim against the remote deposit bank.  Also, if a bank that accepts the underlying original check has acted negligently or in bad faith, the remote deposit bank’s indemnity obligation will be reduced proportionately to the extent of such negligence/bad faith.  Financial institutions that offer remote deposit services should (1) examine their remote deposit agreements to ensure that customers have a duty to add a restrictive “for remote deposit only” type endorsement to all remotely deposited checks; and (2) discuss with the provider of their remote deposit platform any tools that the provider may have to examine incoming remote deposits for the specified restrictive endorsements (and reject checks without a proper restrictive endorsement).  Please contact Christopher Rahl to discuss this topic or for help reviewing/updating your remote deposit agreements.

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MARYLAND COURT ADVISES WHEN CLAIMS AGAINST DEBT BUYERS COME TOO LATE

In Maryland, debt buyers are facing what feels like a tsunami of litigation.  In 2007, Maryland’s Collection Agency licensing law was amended  to apply to persons collecting a debt they actually own if, when the debt was acquired, the debt was already in default.  Since that time, debt buyers have been facing challenges.  In recent months alone, Maryland’s Court of Special Appeals, our intermediate appellate court, has decided no fewer than 3 cases relating to debt collection.  Many of the debt collection challenges involve a judgment debtor (individually or on behalf of an alleged class) claiming that the unlicensed status of the debt buyer should lead to relief for judgment debtors.  In a decision dated June 29, 2017, the Maryland Court of Special Appeals again addressed debt collection, this time providing guidance on when a claim against a debt buyer is brought too late (i.e., guidance on the effect of statutes of limitations or laches for various types of claims).  The Court explained that Maryland courts hear actions both in law (e.g., claims based on statute or common law and often asking for monetary damages) and in equity (e.g., claims based on concepts of fairness and asking for equitable relief).  The Court explained that actions in law are subject to statutes of limitations, often 3-years but, depending on applicable law, that could be longer or shorter.  The Court explained that claims asking purely for equitable remedies (e.g., injunctive relief) are not subject to a statute of limitations but may be subject to “laches.”  As described by the Court, “Laches is the limit equity places on stale claims....There is no firm time limit for laches: rather a judge sitting in equity considers plaintiff’s delay in asserting the claim and its causes and weighs that against the prejudice to the defendant caused by the late assertion of the equitable claim.”  Finally, the Court recognized that some claims, such as a declaratory judgment action, present a hybrid situation because the relief requested can be exclusively equitable or can be relief provided by statute or other law.  Therefore, the Court instructed that a court determine if the requested relief is at law or equity.  If the relief sought is of a type found at law, a statute of limitations will apply.  If the relief is of an equitable nature, the court should analyze whether the relief is barred by laches or is otherwise not subject to any time limit.  Debt buyers and judgment debtors alike will bring and defend claims guided by this recent decision.  Please contact Margie Corwin if you would like to discuss this case or debt collection in Maryland.

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