Maryland Legal Alert for Financial Services

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Maryland Legal Alert June 2015

In this issue:

BORROWER'S BANKRUPTCY DOES NOT RELIEVE GUARANTOR OF OBLIGATIONS
COURT RULES FEES IN AUTO FINANCING PERMITTED IN CLEC TRANSACTIONS
ANOTHER FDCPA WIN FOR DEBT BUYERS
FinCEN INCREASING BANK SECRECY ACT ENFORCEMENT ACTIONS

BORROWER'S BANKRUPTCY DOES NOT RELIEVE GUARANTOR OF OBLIGATIONS

In an unpublished case decided May 21, 2015, the United States Court of Appeals for the Fourth Circuit upheld a judgment against a guarantor of loans for an amount that was greater than the claim the Bankruptcy Court allowed the lender in the borrower's bankruptcy case. The loans at issue were secured by real estate that was worth less than the amount due on the loans. As a result, under § 502(b)(2) of the Bankruptcy Code, the lender was not permitted to add post-petition interest accruing under its loans. Instead, the lender was limited in the borrower's bankruptcy case to a secured claim equal to the property's value and an unsecured claim for the amount of the deficiency at the time of the bankruptcy petition. In defense of a separate action by the lender against the guarantor of the loans, the guarantor, who was not in bankruptcy, argued that he was not liable to the lender for an amount greater than the amount owed by the borrower. Affirming the lower court on this issue, the Fourth Circuit Court of Appeals held that a guarantor's liability for payment of a loan is to be determined under the terms of the guaranty, and that the Bankruptcy Code does not discharge a third party from liability. As a result, the guarantor was held liable for the actual amount owed to the lender including interest and fees accruing after the date of the borrower's bankruptcy petition. Please contact Larry Coppel if you would like to discuss this case.

COURT RULES FEES IN AUTO FINANCING PERMITTED IN CLEC TRANSACTIONS

On May 28, 2015, Maryland's Court of Special Appeals held that an automobile dealer does not violate Maryland's Credit Grantor Closed End Credit Provisions (CLEC) by retaining either an electronic titling fee or an excise tax allowance. The electronic titling fee is authorized by Maryland's Transportation Article §13-610, which allows certain dealers to issue permanent license plates to buyers by electronically transmitting registration information to Maryland's Motor Vehicle Administration. The excise tax allowance is authorized by Maryland's Transportation Article §13-812, which permits dealers to keep a portion of the excise tax it collects on behalf of the State. The buyer filed a class action in Baltimore County Circuit Court claiming these fees cannot be charged if the financing is governed by CLEC because CLEC does not specifically authorize the fees. The buyer argued that when CLEC is elected as the governing law, no other law that impacts the credit transaction will apply. The lower court agreed with the buyer, concluding that it is impermissible under CLEC (which governs the vast majority of auto financing contracts in Maryland) to charge these fees because they are not expressly permitted in CLEC. The lower court also ruled that its decision was a final judgment, so an immediate appeal would be permitted. On appeal, the Court of Special Appeals, Maryland's intermediate appellate court, agreed that an immediate appeal was appropriate. It then recognized that even though the two fees in question are not expressly permitted by CLEC, they are authorized by other Maryland statutes. The Court clarified that an express election of CLEC has no bearing on whether other, non-credit transaction statutes apply. It reversed the lower court decision and concluded that these two fees are permitted even when the credit transaction is governed by CLEC. We need to wait and see if this decision will be appealed to Maryland's highest court. In the meantime, this ruling clarifies that an election of CLEC as governing law does not limit the applicability of other, non-credit transaction statutes, even when those other statutes allow the credit grantor to collect fees from the borrower. Please contact Margie Corwin if you have questions or would like to discuss this case in greater detail.

ANOTHER FDCPA WIN FOR DEBT BUYERS

In our March 2015 Maryland Legal Alert, we pointed out a Bankruptcy Court decision from the 11th Circuit that held a debt buyer violated the federal Fair Debt Collection Practices Act (FDCPA) by filing a proof of claim for a debt where the underlying state statute of limitations period had expired (an "out of stat" debt). In our April 2015 Maryland Legal Alert, we highlighted a contrary holding in favor of the debt buyer from the 7th Circuit. The 3rd Circuit has now weighed in on the side of debt buyers and dismissed with prejudice a debtor's class action complaint. The debtor in the case had a charged-off account balance related to telephone service (the last activity in connection with the account was in 2004). When the debtor filed bankruptcy in 2013, the debt buyer filed a proof of claim even though the 4-year Pennsylvania statute of limitations period had expired. The debtor objected to the debt buyer's claim and the Bankruptcy Court disallowed the claim. The debtor then filed a class action complaint contending that the filing of a proof of claim violated the FDCPA as a false, deceptive, or misleading representation and/or as an unconscionable means to collect the debt. The Bankruptcy Court dismissed the debtor's complaint with prejudice and found that filing a proof of claim in a bankruptcy proceeding does not violate the FDCPA because: (1) the risk that a debtor will pay an "out of stat" debt is minimized in a bankruptcy proceeding (as evidenced by the Bankruptcy Court's disallowance of the claim); and (2) the Bankruptcy Code provides adequate remedies to address any creditor misconduct. Despite this win for debt buyers, there is still a split in authority and creditors should take steps to identify "out of stat" debts in their portfolios and exercise caution when considering whether to file a proof of claim in any debtor bankruptcy proceedings. For additional information about this topic, please contact Christopher Rahl.

FinCEN INCREASING BANK SECRECY ACT ENFORCEMENT ACTIONS It appears that FinCEN is increasing its enforcement actions under the Anti-Money Laundering provisions of the Bank Secrecy Act (BSA). It also seems to be broadening its focus. In each of 2012 and 2013, FinCEN resolved 2 public enforcement actions, respectively, all against depository institutions. In 2014, FinCEN resolved 8 public enforcement actions, only 2 of which were against depository institutions with the remaining actions against money services businesses and casinos. Now, not halfway through 2015, FinCEN already has resolved 7 public enforcement actions against depository institutions, money services businesses, casinos, and a securities business. Moreover, on May 6, 2015, FinCEN Director Jennifer Calvery's remarks at the West Coast AML Forum highlighted the agency's increased focus on money laundering activities in the real estate market, particularly on persons involved in real estate closings and settlements. As a reminder, since August 2012, every non-bank residential mortgage lender and broker has been obligated to implement a written, risk-based anti-money laundering program and to file suspicious activity reports when appropriate circumstances arise. Our article in the June 2012 Maryland Legal Alert provides background on this requirement. Please contact Margie Corwin if you want help with your BSA compliance.