Maryland Legal Alert for Financial Services

In This Issue:

FCC PROPOSES CHANGES TO CALL-BLOCKING

BE SMART WHEN TAKING INTELLECTUAL PROPERTY AS COLLATERAL

FOURTH CIRCUIT REVERSES ITS OWN PRECEDENT TO AUTHORIZE "STRIP DOWN" OF CERTAIN UNDERWATER MORTGAGES IN CHAPTER 13 PLAN

U.S. SUPREME COURT CLARIFIES STANDARD FOR HOLDING A CREDITOR IN CONTEMPT FOR VIOLATION OF BANKRUPTCY DISCHARGE INJUNCTION

FCC Proposes Changes to Call-Blocking

On June 6, 2019, the Federal Communications Commission (FCC) approved a rule that permits phone service providers (such as AT&T, Verizon, etc.) to automatically block certain calls based on the provider’s internal algorithms, unless a subscribing consumer opts-out of the blocking service. The FCC proposed the action (through a notice of proposed rulemaking) in an effort to stop illegal robocalls. The new rule allows providers, by default, to block certain calls based on the provider’s internal analytics that identify “unwanted calls” (so long as a subscribing consumer has not opted-out). The rule also allows providers to offer subscribing consumers the option to block any calls that do not appear on a pre-supplied “white list” of the consumer’s permitted contacts, on an opt-in basis. Additionally, providers will be able to automatically block any calls for which caller ID authentication fails. There is industry concern that providers may automatically block some calls from financial institutions to their customers. Please contact Christopher Rahl for more details about this topic.

Contact Christopher Rahl

Be Smart When Taking Intellectual Property as Collateral

When a lender takes a security interest in intellectual property (IP), loan documentation should consider different ways that IP can exist. Taking a security interest only in IP applications and registrations does not encumber all IP. While patents exist only when registered, both trademark and copyrights can be registered and can also exist even if not registered. Trade secrets are never registered. A detailed listing of IP on a financing schedule or other loan document should include both registered and unregistered IP. Using the term “General Intangibles” covers it all. Grants of a security interest in trademarks must also include accompanying goodwill and assets, such as licenses, that support the goodwill.

Perfecting security interests in IP is also tricky, but the best practice is to file with the applicable registry and also file Uniform Commercial Code financing statements (UCC filings) for all IP other than registered copyrights. Registered copyrights are perfected at the US Copyright Office. Patents are perfected at the US Patent and Trademark Office as against subsequent bona fide purchasers. UCC filings cover anything else, including patents (as against subsequent lienholders), unregistered copyrights, all trademarks, and trade secrets. Domain names should be listed on the UCC filing, but they are likely deemed contract rights, not general intangibles. When a login and password is the only way to “possess” an asset like social media, lenders should arrange to gain access upon default. For registered and applied-for copyrights and patents (and trademarks), it is wise to have a borrower affirmatively covenant to file in the appropriate registry fresh documents to perfect new registrations it receives.

Please contact Ned Himmelrich to discuss taking and protecting intellectual property as collateral.

Contact Ned Himmelrich

Fourth Circuit Reverses Its Own Precedent to Authorize "Strip Down" of Certain Underwater Mortgages in Chapter 13 Plan

In a recent decision, the United States Court of Appeals for the Fourth Circuit overruled its own 22-year precedent to address the extent to which debtors may “strip down” certain mortgages pursuant to a chapter 13 plan.

Under Section 506(a) of the Bankruptcy Code (the Code), when a secured creditor has an undersecured claim (i.e., its claim exceeds the value of its collateral), the creditor’s claim is bifurcated into a secured claim to the extent of the value of the collateral and an unsecured claim to the extent the claim exceeds the value of the collateral. Under Section 1325(a)(5), a chapter 13 plan may be confirmed over a secured creditor’s objection if the plan provides for payment totaling the present value of the allowed secured claim over the plan’s 3 or 5 year term. Taken together, these two provisions enable a chapter 13 debtor to “strip down” an undersecured claim, effectively reducing the secured claim to the value of the collateral. Generally, however, since a chapter 13 plan may not modify the rights of a holder of a claim secured only by a lien in the debtor’s residence, chapter 13 debtors may not strip down an undersecured homestead mortgage. One exception to this anti-modification provision under chapter 13 applies when a homestead mortgage’s final payment is scheduled to occur before the last payment under the debtor’s chapter 13 plan. For these short term homestead mortgages, Section 1322(c)(2) of the Code authorizes a chapter 13 plan to provide for payment of the claim “as modified pursuant to section 1325(a)(5)” of the Code. Since its prior decision in 1997, the Fourth Circuit has interpreted Section 1322(c)(2) to authorize the modification of the payment schedule of the short term homestead mortgage, but not to strip down the undersecured claim thereby modifying the amount of the secured claim.

This recent case concerns a debtor who filed a chapter 13 petition to halt a foreclosure after he failed to satisfy the mortgage on his residence at the loan’s maturity. The debtor’s chapter 13 plan bifurcated the mortgage lender’s claim into a secured claim based on the value of the residence (less a small tax lien) and an unsecured claim for the remaining balance of the loan. The plan proposed to pay the mortgage lender’s secured claim over the life of the plan and the unsecured claim would not receive any plan payments. The lender objected to confirmation, arguing that the plan constituted an improper modification. Following the 1997 decision of the Fourth Circuit, the bankruptcy court sustained the objection and the district court and Fourth Circuit affirmed. After a rehearing en banc, the Fourth Circuit reversed, overruling its earlier decision and holding that the plain text of Section 1322(c)(2) authorizes a chapter 13 plan to strip down a short term homestead mortgage to the value of the residence, not simply to modify the payment schedule under the loan. The court held that its initial interpretation of Section 1322(c)(2) ran contrary to accepted standards of statutory construction and was later criticized by commentators and other courts.

Though such a reversal of established court precedent is significant, the scope of this decision remains limited. Section 1322(c)(2) only applies to homestead mortgages set to mature before the completion of the debtor’s 3 to 5 year chapter 13 plan payments. However, this decision does enable a limited class of chapter 13 debtors to significantly alter their homestead mortgage obligations. Lenders holding distressed homestead mortgages set to mature in the short term should be mindful of this decision. Please contact Bryan Mull with any questions regarding the topic.

Contact Bryan Mull

U.S. Supreme Court Clarifies Standard for Holding a Creditor in Contempt for Violation of Bankruptcy Discharge Injunction

Under Section 524(a)(2) of the Bankruptcy Code (Code), the discharge of an individual debtor triggers an injunction against any action by a creditor to collect a pre-bankruptcy debt that is discharged. In a unanimous decision that resolved a split among the courts, the United States Supreme Court clarified the standard to be applied whenever a creditor is accused of violating the discharge injunction. On June 3, 2019, the Court held that a creditor may be held in contempt for violation of the discharge injunction “if there is no fair ground of doubt” as to whether the injunction barred the creditor’s action. The Court’s ruling reversed a decision of the United States Court of Appeals for the Ninth Circuit, which held that a creditor may not be held in contempt for violating the discharge injunction if the creditor has a subjective good faith belief that its action does not violate the injunction. The Supreme Court also rejected an argument by the debtor that a strict liability standard should be applied.

The Court declined to rule in its decision as to whether its standard for violation of the discharge injunction should be applied to a violation of the automatic stay under Code Section 362(a), which is triggered when a bankruptcy case is filed. Under Code Section 362(k), an action may be brought by an individual debtor against a creditor for damages for any “willful” violation of the automatic stay. The Court stated that it would not decide whether the “willful” requirement imposes a different standard for determining whether a creditor should be held liable for a violation of the automatic stay.

For further information, please contact Lawrence D. Coppel.

Contact Lawrence D. Coppel