Maryland Legal Alert for Financial Services

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Maryland Legal Alert - March 2019

In This Issue:





Proposed Regulations for Maryland Mortgage Lenders, Brokers, and Servicers

On March 1, 2019, the Maryland Commissioner of Financial Regulation published proposed amendments to existing regulations for licensed residential mortgage loan lenders, brokers, and servicers. The proposed regulations can be found here. This is not the first time the Commissioner has tried to amend these regulations, which apply only to persons licensed (or who should be licensed) under Maryland’s Mortgage Lender law. Two years ago, similar proposed regulations were published (MD Register, January 20, 2017, Vol. 44, Issue 2, page 92) but those earlier proposals were never made final. This time certain particularly controversial mortgage loan servicing proposals were not included. Even so, these proposed regulations include changes that will impact mortgage lending, brokering, and servicing in Maryland. Comments on these proposed regulations must be submitted by April 1, 2019. We strongly recommend that licensees review these proposals and comment if there are suggestions to make these regulations better.

Contact Christopher R. Rahl

Joint Liability of Spouses for Fraudulent Transfer of Wages of One Spouse into Joint Bank Account

It is common for a married couple to maintain a bank account owned jointly into which wages paid to one or both of the spouses are deposited. Normally, a creditor of one spouse will not be permitted under the law to impose liability on the non-debtor spouse. The exception to this rule was the subject of a recent decision by the United States Court of Appeals for the Third Circuit. The Third Circuit considered an appeal of a judgment for fraudulent transfers entered in favor of a bankruptcy trustee against an attorney and his wife under the Pennsylvania Uniform Fraudulent Transfer Act (PUFTA), which is similar to Maryland’s fraudulent conveyance law.

A “multimillion” dollar judgment was entered against the attorney by a landlord. The attorney joined another law firm which thereafter deposited his wages into a bank account owned jointly by the attorney with his wife. The account, which also contained non-wage deposits, was used to pay necessary living expenses and expenses found not to be necessary. The judgment creditor sued the attorney and his wife claiming that the wages deposited into the joint account were fraudulent transfers under the PUFTA. After the attorney was forced into bankruptcy, the trustee took over the prosecution of the action. Under the PUFTA, a transfer made by an insolvent debtor without having received reasonably equivalent value may be avoided. The Bankruptcy Court entered judgment against the attorney and his wife.

The Third Circuit affirmed the judgment. First, the court concluded that the wages deposited into the joint bank account were a “transfer” of the attorney’s property under the PUFTA even though the deposits were made by his employer. Second, the court concluded that the attorney’s wife was personally liable as one of the two owners of the account. Third, the court found that the attorney was liable as both the transferor and transferee of the funds, though the court added that there could only be one recovery.

Having reached these conclusions the court next decided how the fraudulent transfer liability should be calculated. It initially noted that under the PUFTA wages that are deposited into an account owned jointly by spouses and used to pay reasonable and necessary household expenses are not fraudulent transfers. Thus, the amount of wages used for necessary expenses should be deducted from the amount to be awarded. However, the court noted that where funds in a joint account are commingled and used for necessary and non-necessary expenses, then the calculation of liability is uncertain. Although it affirmed the judgment, which was calculated under a different formula, the court stated that in future cases a “pro rata approach” should be used to calculate liability where there are commingled funds in the account and a tracing of deposited funds is not possible. Under the pro rata approach, the percentage of wage deposits to the total amount deposited in the joint account, multiplied by the amount of non-necessary expenses, should be the liability. For example, if total deposits amount to $2,000,000 and wages deposited by the insolvent debtor were $1,000,000 of that amount, and non-necessary expenditures were $1,000,000, then the amount of liability would be $500,000 (50% x $1,000,000).

Maryland’s fraudulent conveyance law is similar to Pennsylvania’s. The Third Circuit’s decision clarified the non-debtor spouse’s liability, and its pro rata approach to the calculation of liability should assist courts and parties in future cases involving similar facts.

Contact Christopher R. Rahl

Debt Buyer That Outsourced Collection Still Debt Collector Under FDCPA

The Third Circuit recently issued an opinion affirming a trial court’s denial of summary judgment of a claim alleging violation of the Fair Debt Collection Practices Act (FDCPA), which was presented to the appellate court as an interlocutory appeal. The FDCPA purports to apply to “debt collectors” which is defined, in the alternative, as those engaged “in any business the principal purpose of which is the collection of any debts” and also those who “regularly” collect debts “owed or due another.” The trial court had ruled that because the definition applies to any business whose “principal purpose” was the collection of debts, the FDCPA could apply to entities that engage in the debt acquisition business, even if the business outsources the collection activity to another company. The Third Circuit agreed, noting that the “principal purpose” definition of the FDCPA constituted an independent basis for FDCPA liability that was distinct from actually being an entity that “regularly collects” debts. A company could still have the “principal purpose” of collecting debts without regularly collecting debts itself, by outsourcing the collection to third parties. The Third Circuit finally noted that, on remand, liability was likely to be decided using principles of vicarious liability and that its precedents did not require that the principal actually control the agent’s activities, but merely have the ability to control those activities. Please contact Robert Gaumont for more information related to this topic.

Contact Robert Gaumont

Fourth Circuit Allows Creditor to Assert Unsecured Claim for Post-Petition Legal Fees

In bankruptcy cases, debtors often take the position that unless a creditor has an over-secured claim (i.e., a claim secured by collateral with a value exceeding the amount of the creditor’s claim), a creditor is not entitled to assert a claim for legal fees that are incurred after the debtor filed its bankruptcy petition. However, in a recent decision from the United States Court of Appeals for the Fourth Circuit, the Court held that the Bankruptcy Code permits a creditor to assert an unsecured claim for post-petition legal fees based on a pre-petition loan agreement.

In the Fourth Circuit case, the secured creditor had collateral valued at about $1.7 million and the loan documents provided that the lender was entitled to recover collection costs, including legal fees. The debtor’s chapter 11 plan gave the creditor an allowed secured claim of $1.7 million, covering principal, interest, and some post-petition legal fees owed to the lender. The plan further permitted the lender to file an unsecured claim with respect to its remaining legal fees not covered by the property’s value, and the lender later did so. The debtor objected to this unsecured claim for legal fees, arguing that claims are determined as of the filing date and the lender’s post-petition fees did not exist as of the petition filing date. The Circuit Court overruled the district court and the bankruptcy court, and held that the lender was authorized to assert an unsecured claim for post-petition legal fees. Building off of the Supreme Court’s decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007), the Circuit Court reasoned that claims that are enforceable under state law will be allowed in bankruptcy unless specifically disallowed under the Bankruptcy Code. The Circuit Court further reasoned that Sections 502(b) and 506(b) of the Bankruptcy Code do not specifically disallow unsecured claims for post-petition legal fees. Instead, Section 502(c) authorizes claims that are unliquidated or contingent as of the petition date. The Circuit Court held that the prepetition loan agreement conferred upon the lender a contingent right to repayment of its legal fees before the debtor filed his bankruptcy petition and, thus, the lender could assert an unsecured claim for its post-petition legal fees.

Though unsecured creditors recover pennies on the dollar in most bankruptcy cases, this case is nonetheless a positive development for creditors, especially where a debtor has significant assets available for distribution to unsecured creditors. Going forward, creditors should (1) consider incorporating contract provisions that create a contingent right to legal fees repayment and (2) be mindful of their ability to assert an unsecured claim for post-petition legal fees that they are entitled to pursuant to contract or statute. Please contact Bryan Mull with any questions concerning this topic.

Contact Bryan Mull