Maryland Legal Alert for Financial Services
Maryland Legal Alert - July 2023
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FDIC Changes Deposit Insurance Requirements for Trust Accounts
SBA Changes to PPP FAQs
Supreme Court: District Court Proceeding Must be Stayed Pending Appeal Over Denial of Motion to Compel Arbitration
FDIC Changes Deposit Insurance Requirements for Trust Accounts
On January 21, 2022, the Federal Deposit Insurance Corporation (FDIC) adopted a new rule concerning how deposit insurance would be provided to accounts maintained by trusts. The new rule becomes effective on April 1, 2024. Under existing law, trust accounts are insured differently based on the type of trust and the number of distinct beneficiaries. Trust accounts are currently insured based on one of three trust types: informal revocable trusts (POD accounts), formal revocable trusts, or irrevocable trusts. Separate FDIC insurance coverage is provided to revocable trust accounts with distinct beneficiaries and irrevocable trust accounts with non-contingent beneficiaries. The current FDIC insurance rules for trusts are complicated and the FDIC enacted the new rule in an effort to simplify deposit insurance coverage determinations for trust accounts.
The new rule no longer distinguishes between the type of trust to create separate deposit insurance coverage, and instead provides up to $250,000 of FDIC insurance for each trust owner per eligible primary beneficiary, up to a maximum of 5 distinct beneficiaries (for a maximum coverage amount of $1,250,000 per account owner, per insured depository institution). Under the new rule, only primary (not contingent) beneficiaries are measured to determine insurance coverage. The new rule may result in lower overall deposit insurance coverage for some accounts where multiple accounts are maintained at a single depository institution.
One example is the situation where an informal trust account is maintained with a POD beneficiary who is the same as a beneficiary under another trust type (e.g., irrevocable trust). Under current FDIC rules, the two trust types are insured separately, but under the new rule, the two account balances will be aggregated for deposit insurance coverage purposes.
Practice Pointer: Financial institutions should examine their procedures in advance of the 2024 changes to ensure that FDIC insurance brochures are updated, staff are aware of the coming changes, and internal policies concerning how deposit insurance coverage is discussed with account holders are appropriately adjusted.
For more information concerning this topic, please contact:
Christopher R. Rahl
410-576-4222 • crahl@gfrlaw.com
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SBA Changes to PPP FAQs
On June 13, 2023, the Small Business Administration (SBA) released updated guidance concerning loan forgiveness for federal Paycheck Protection Program (PPP) loans for borrowers who outsourced employee functions to a professional employer organization (PEO). The SBA added new FAQ 72 that provides a “yes” answer to the question: “[a]re the amounts paid by a borrower to a third-party payer for the third-party payer’s employees to operate the borrower considered eligible payroll expenses for the purpose of calculating the maximum loan amount?”
The SBA released the updated FAQ to supplement existing FAQ 10 after an administrative law judge issued a decision in an SBA Office of Hearings and Appeals case in September of 2022 that appeared to provide conflicting interpretations of FAQ 10. Current FAQ 10 states that an eligible PPP borrower that uses a PEO can use payroll documentation provided by the PEO as acceptable PPP loan payroll documentation, so long as the PEO’s documentation indicates the amount of wages and payroll taxes reported to the IRS by the PEO for the borrower’s employees.
New FAQ 72 re-enforces FAQ 10 and explicitly answers the forgiveness question for borrowers that use a PEO with a “yes” so long as the PEO has not also received a PPP loan and used the payroll expenses for employees allocated to the borrower to justify the PEO’s PPP loan. Borrowers who used a PEO and who have not obtained forgiveness or have obtained forgiveness inconsistent with the SBA’s new FAQ 72, should consult with counsel to determine applicable recourse.
Practice Pointer: It appears that, in the CFPB’s view, the only response that an institution can take if it receives a debit or deposit after account closure is to decline the transaction. While some institutions’ account agreements may authorize this practice, the circular views these agreements as unenforceable “take it or leave it” contracts. Depository institutions should review their current practices for account closure and post-closure transaction processing in light of this guidance.
Christopher R. Rahl
410-576-4222 • crahl@gfrlaw.com
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Supreme Court: District Court Proceeding Must be Stayed Pending Appeal Over Denial of Motion to Compel Arbitration
In a recent decision, the U.S. Supreme Court resolved a split among the circuit courts that should give a degree of comfort to companies seeking to compel arbitration. Specifically, the Court held that a federal district court must stay its proceedings during the pendency of an appeal as to the denial of a motion to compel arbitration under the Federal Arbitration Act (FAA).
Generally, parties to litigation cannot appeal interlocutory orders, i.e., decisions prior to final judgment. The FAA creates an exception, permitting a party to file an interlocutory appeal when a federal district court denies a party’s motion to compel arbitration. Often, the appealing party will then seek an order staying the district court proceedings pending the resolution of the appeal on the issue of arbitrability. While most circuit courts had held that a stay of the district court proceeding was mandatory during the appeal, a minority of circuits (including the U.S. Court of Appeals for the Ninth Circuit) held that such a stay was discretionary.
In this case, a user of a popular cryptocurrency exchange filed a putative class action in California federal court, alleging that the exchange failed to return funds fraudulently taken from his and other users’ accounts. Citing to a mandatory arbitration provision in the User Agreement between the exchange and the user, the exchange filed a motion to compel arbitration. The district court denied the motion to compel, and the exchange filed an interlocutory appeal. The exchange then filed a motion to stay the district court proceeds pending resolution of the arbitrability issue on appeal, but the district court and the Ninth Circuit declined the stay request, prompting the exchange’s appeal to the Supreme Court.
The Supreme Court overruled the Ninth Circuit in a 5-4 decision, siding with the majority of circuit courts that have addressed this issue (including the Fourth Circuit). The majority opinion rooted its decision in existing Supreme Court precedent, in which the Court previously held that an appeal divests the district court of its control over those aspects of the case involved in the appeal. Here, the Court reasoned that when a party appeals the denial of a motion to compel arbitration, the court of appeals is asked to decide whether the litigation may proceed in the district court at all. Thus, an appeal over the arbitrability of a claim covers the entirety of the claim and a stay of the district court proceeding should be mandatory.
The Court further reasoned that a mandatory stay protects the asserted benefits of arbitration (efficiency, reduced costs, etc.) that may otherwise be trampled if the appealing party was forced to litigate the claim while the arbitrability appeal was pending. Moreover, the Court emphasized that a mandatory stay of district court proceedings protects precious judicial resources that may be otherwise wasted if the proceeding were to proceed in the district court, only to move to arbitration following a successful appeal.
Practice Pointer: In a dissenting opinion, Justice Jackson expressed concern that this ruling, though expressly limited to arbitrability appeals, could be applied to a broader class of appeals, such as those concerning proper venue, forum selection clauses, personal jurisdiction, and nearly any issue that could be resolved in a pretrial dismissal motion. Based on this opinion, we are likely to see litigants push the Court’s expansion of this basis for a mandatory stay into similar classes of appeals. We will continue to monitor these developments moving forward.
Bryan M. Mull
410-576-4227 • bmull@gfrlaw.com
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