Maryland Legal Alert for Financial Services

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Maryland Legal Alert - July 2020

IN THIS ISSUE:

2020 MARYLAND LAWS AFFECTING FINANCIAL SERVICES PROVIDERS

LITIGATION CONTINUES TO TARGET COLLECTION OF PPP AGENT FEES

DATE OF RECORDING FOREIGN JUDGMENT DETERMINES ELIGIBILITY FOR EXEMPTION FROM GARNISHMENT FOR SPOUSAL ACCOUNTS

PPP LOANS AND BANKRUPTCY — UPDATE

2020 Maryland Laws Affecting Financial Services Providers

Our annual Maryland Laws Update for Financial Services is now available on our website. A number of these laws are already effective, but most will become effective October 1, 2020, with a few having even later effective dates. Copies of the laws can be obtained through the Maryland General Assembly website. Contact any of the attorneys on our Financial Services Team if you want additional analysis or to discuss how to implement the new laws.

Litigation Continues to Target Collection of PPP Agent Fees

Under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Small Business Administration (SBA) authorized payment of specified fees to agents that assisted borrowers in obtaining Paycheck Protection Program (PPP) loans. The relevant SBA lender fact sheet describes a mechanism under which accountants, attorneys, consultants and others could receive fees up to 1% of PPP loan amounts. The SBA fact sheet points to PPP lenders paying agents directly for the assistance provided to PPP borrowers in obtaining PPP loans.

In late April of this year, agents began filing lawsuits against PPP lenders, alleging that agents were wrongfully denied PPP agent fees. A wave of similar lawsuits has been sweeping the country and efforts are underway to consolidate a number of class actions in various jurisdictions. The lawsuits allege that agents provided extensive assistance to PPP borrowers and then were not paid or not paid all they were due for performing such services. The lawsuits generally seek declaratory relief confirming that agents are entitled to fees for services provided to PPP borrowers.

The lawsuits also seek damages from PPP lenders under unjust enrichment, conversion and state law unfair and/or deceptive practices provisions. The agents argue that the CARES Act requires lenders to pay agents directly for work performed in helping PPP borrowers obtain PPP loans and PPP lenders benefited from the work performed by agents without paying for it. Banks have argued that they had no knowledge that PPP borrowers were working with agents before PPP loans were made. Banks have also argued that there is no effective way to verify (after the fact) that agents performed any or adequate services for completion of what are standardized and relatively short PPP loan documents.

Given the large PPP loan volume and potentially large agent fee amounts, it is recommended that all PPP lenders review the SBA agent fee requirements and develop a standard response template to respond to similar fee demands.

Please contact Christopher R. Rahl with questions concerning PPP lending.

Contact Christopher R. Rahl | 410-576-4222

Date of Recording Foreign Judgment Determines Eligibility for Exemption from Garnishment for Spousal Accounts

Under Maryland law, a garnishment against a bank account held jointly by spouses is not valid unless both spouses are judgment debtors. This exemption does not apply unless the spouses established the joint account before the “date of entry” of the judgment that gives rise to the garnishment. In a recent decision, the Maryland Court of Special Appeals addressed for the first time what constitutes the date of entry when a Maryland garnishment arises from a judgment that originated in another state.

In this case, a Florida state court entered a default judgment against a loan guarantor in 2009. In 2013 and 2016, the guarantor and his wife opened joint accounts at a Maryland bank. In 2017, the judgment creditor recorded the Florida judgment in Maryland pursuant to Maryland’s version of the Uniform Enforcement of Foreign Judgments Act (UEFJA). Thereafter, the judgment creditor sought to garnish the guarantor’s accounts at the Maryland bank. The guarantor moved to dismiss the garnishment, arguing that the joint accounts were exempt, since the judgment was recorded in Maryland after the joint accounts were established. The creditor disagreed, arguing that the date of the original foreign judgment controlled whether the debtor could claim the spousal account exemption. The trial court sided with the creditor and the guarantor appealed.

The Court of Special Appeals reversed the trial court, holding that the domestication date for a foreign judgment constitutes the date of entry of a judgment when determining whether a spousal account is exempt from garnishment. The court analyzed UEFJA and determined that because a foreign judgment does not become enforceable until a creditor records the foreign judgment in Maryland, the domestication date constitutes the date of entry of the judgment for the purpose of Maryland spousal account exemption. The court reasoned that this interpretation aligns with federal practice and other relevant state laws and rules concerning the entry of domestic and foreign judgments.

Practice Point: Notably, the court distinguished this case from a case it decided last year. In the 2019 case, the court held that a Maryland federal court judgment that is later recorded in a Maryland state court only constitutes a lien in the state court (as opposed to a new judgment), such that it does not start a new clock for judgment expiration purposes. The court reasoned that its 2019 decision did not address the effective date of a judgment or the spousal exemption and, thus, did not apply to the instant case.

Please contact Bryan M. Mull with any questions concerning this topic.

Contact Bryan M. Mull | 410-576-4227

PPP Loans and Bankruptcy — Update

Last month, we reported on continuing developments with the interim final rule issued by the Small Business Administration (SBA) regarding the Paycheck Protection Program (PPP) loans authorized under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act. Among other things, the rule provides that businesses that are debtors in bankruptcy proceedings are not eligible to receive PPP loan funds even if those businesses would otherwise be eligible to receive a PPP loan.

Recently, the U.S. Court of Appeals for the Fifth Circuit overruled a Texas bankruptcy court ruling that granted a preliminary injunction against the SBA and directed the SBA to process the debtor’s PPP loan application without reference to its status as a bankruptcy debtor. Much of the litigation over this rule has centered on Section 525 of the Bankruptcy Code, which prohibits the government from denying “a license, permit, charter, franchise, or other similar grant” solely because someone is or has been bankrupt. The Fifth Circuit, however, sidestepped this issue and held that the SBA is not subject to an injunction order in the first place.

In Maryland, recent decisions from the District Court and the Bankruptcy Court addressed the Section 525 argument directly, but both courts ruled in favor of the SBA. In these cases, the debtors sought injunctions to prevent the SBA from enforcing its interim rule because, among other arguments, a PPP loan is in the nature of a grant and the rule therefore runs afoul of Section 525. The courts disagreed, reasoning that a PPP loan is not akin to a “license, permit, charter, franchise” and, thus, Section 525 does not apply.

Practice Point: While the application window for new PPP loans has been extended through August 8, 2020, some commentators have suggested that debtors may begin to bring damages claims (as opposed to claims for injunctive relief) against the SBA for their losses associated with the SBA’s rule. Locally, however, the recent decisions suggest that such an approach may be an uphill battle for debtors.

Please contact Bryan M. Mull with any questions concerning this topic.

Contact Bryan M. Mull | 410-576-4227