Maryland Legal Alert for Financial Services

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Maryland Legal Alert - May 2020

IN THIS ISSUE:

MARYLAND ORDER PROTECTS STIMULUS PAYMENTS

DISPUTED PROCEEDS OF CASHIER’S CHECK ARE ESTATE PROPERTY

PPP LOANS AND BANKRUPTCY

STAY CURRENT ON THE LATEST TECH AND IP LAW DEVELOPMENTS

COVID-19 INFORMATION HUB

Maryland Order Protects Stimulus Payments

On April 29, 2020, Governor Lawrence Hogan issued an order prohibiting financial institutions from holding federal stimulus rebates — issued under the federal Coronavirus Aid, Relief, and Economic Security Act — in connection with private creditor garnishments. The order also prohibits Maryland banks and credit unions from exercising a right of setoff to the extent that funds are traceable to a federal stimulus rebate. This order remains in effect until Governor Hogan terminates the COVID-19 state of emergency and does not apply to child support-related garnishments. The order left financial institutions with questions concerning: (1) how to identify stimulus rebates when they are coded as tax refunds; (2) what does a financial institution need to do if a stimulus rebate had already been paid to a third-party judgment creditor; and (3) is the application of a stimulus rebate to a negative account balance a prohibited setoff under the order.

In response to the order, on April 30, 2020, the Maryland Office of the Commissioner of Financial Regulation issued guidance for depository institutions. If an institution froze stimulus rebate funds or paid them to a third-party judgment creditor prior to the order, the commissioner will not consider the institution to have violated the governor’s order. Notably, however, the commissioner’s guidance directs institutions who did freeze or disburse stimulus rebate funds to “endeavor” to release or retrieve those funds. It is unclear how a financial institution could retrieve funds already paid to a third-party judgment creditor.

As a followup to the commissioner’s guidance, on May 4, 2002, the Maryland Office of Legal Counsel issued interpretive guidance concerning the governor’s order. The interpretive guidance provides that enforcement action will not be recommended for financial institutions that, prior to receiving notice of the governor’s order, either paid stimulus rebate funds to a third-party judgment creditor or held such funds pursuant to a garnishment order (if the funds still on hold are released).

The interpretive guidance also clarified that enforcement action will not be recommended for financial institutions that, after receiving notice of the governor’s order and due to “bona fide” operational limitations, failed to identify a stimulus rebate (and therefore subjected it to a hold), return stimulus rebate funds on hold and make “all reasonable efforts to eliminate, or develop work-arounds” for the operational limitations that prevented compliance with the governor’s order. Finally, the interpretive guidance clarified that when stimulus rebate funds are deposited into a deposit account with a negative account balance, the application of such stimulus rebate funds to the negative balance is not a setoff under the governor’s order — and is permissible.

Please contact Christopher R. Rahl with any questions concerning the treatment of deposits, garnishments and the recent order and guidance.

Contact Christopher R. Rahl | 410-576-4222

Disputed Proceeds of Cashier’s Check Are Estate Property

A recent decision from the Bankruptcy Court for the Western District of Oklahoma addressed a matter of first impression, namely, whether cashier’s checks are treated the same as ordinary checks when determining whether the underlying proceeds constitute estate property.

In this case, the Chapter 7 trustee sought a turnover order against a bank holding approximately $118,000 in a suspense account. The funds were the subject of an ongoing dispute between the debtor’s principals. The minority principal opened up an account at the bank in the debtor’s name, purchased the cashier’s check and deposited the disputed funds into her personal account at another bank. The majority principal convinced the bank that issued the cashier’s check to place a stop payment order on the check. The bank has held the disputed funds since 2011.

The bankruptcy court reasoned that under the Uniform Commercial Code and established U.S. Supreme Court precedent, this issue is easily resolved for ordinary checks. That is, if the check is not cashed or honored, the underlying funds are not transferred and, thus, remain the property of the party that wrote the check. The bankruptcy court reasoned that while cashier’s checks present a different scenario — a two-step transaction in which the debtor withdraws funds to pay for the cashier’s check that is payable to the payee — the result is the same. In this case, the funds underlying the cashier’s check were not ultimately transferred to the minority principal payee. The court determined that the bank that issued the cashier’s check was acting as a mere conduit and did not have ownership over the funds. Thus, the court determined that the funds remained the property of the debtor’s bankruptcy estate and were subject to turnover to the trustee.

Please contact Bryan M. Mull with any questions concerning these topics.

Contact Bryan M. Mull | 410-576-4227

PPP Loans and Bankruptcy 

The Paycheck Protection Program (PPP) loans authorized under the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) have garnered tremendous interest from distressed businesses. Many such businesses, if they have not done so, are contemplating a bankruptcy filing. Recently, however, the U.S. Small Business Administration (SBA) issued an interim final rule, which provides that businesses that are debtors in bankruptcy proceedings are not eligible to receive PPP loans even if those businesses would otherwise be eligible to receive a PPP loan. In response to this rule, some businesses have held off on filing their bankruptcy petitions until after they receive PPP loans.

However, other businesses have challenged the SBA’s interim rule. In several recent decisions, bankruptcy courts in Texas, New Mexico and Maine have issued rulings enjoining the SBA from enforcing its interim final rule. The courts have based these rulings primarily 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. Though loans do not apply to Section 525, these courts have reasoned that PPP loans are in the nature of grants since they may be forgiven if borrowers meet certain criteria. The courts deciding against the SBA rule have also stressed that the CARES Act does not restrict bankruptcy debtors from receiving PPP loans.

Some bankruptcy courts have enforced the SBA’s interim final rule. The Delaware Bankruptcy Court declined to issue a temporary restraining order enjoining the SBA from enforcing its interim rule, citing an unwillingness to dictate how the SBA administers PPP loans. A Kentucky Bankruptcy Court declined a debtor’s attempt to compel its lender to disburse PPP loans in connection with a pre-petition application.

Absent further direction from controlling authorities, businesses contemplating a bankruptcy filing while awaiting PPP loans should carefully consider the timing of such filing.

Please contact Bryan M. Mull or Lawrence D. Coppel with any questions concerning these topics.

Contact Bryan M. Mull | 410-576-4227

Contact Lawrence D. Coppel | 410-576-4238

 

Stay Current on the Latest Tech and IP Law Developments

Financial services businesses, like all businesses, must keep pace with the ever-changing developments in the technology and intellectual property space. Our colleagues in the Intellectual Property and Technology Group provide a great resource to stay current on such issues with weekly IP Tech Knowledgy posts.

One article that may be of interest to financial services providers concerns a recent decision in Maryland addressing whether a company’s general business insurance policy covered damages resulting from a ransomware attack.

Please contact Ned T. Himmelrich with any questions related to intellectual property and technology.

Contact Ned T. Himmelrich | 410-576-4171

COVID-19 Information Hub

Coronavirus has spawned a constant stream of business and legal developments. New developments arise on a daily basis. The flood of news can be overwhelming.

We value your time and, to that end, want to make the critical content we provide easy for you to find. For our most up-to-date analysis of the changing coronavirus landscape, please visit Gordon Feinblatt’s COVID-19 Information Hub where you can find links to our articles and other resources.