Maryland Legal Alert for Financial Services

In This Issue:

DIVISION OF DELAWARE LIMITED LIABILITY COMPANIES

REMOTE DEPOSIT CAPTURE LITIGATION

LARGE OVERDRAFT CLASS ACTION SETTLEMENT

11TH CIRCUIT HOLDS THAT ARBITRATOR CAN DECIDE CLASS ARBITRATION AVAILABILITY WHEN CLEARLY DESIGNATED IN CONTRACT

PREVENT ENFORCEMENT OF SUPERSEDEAS BOND

Division of Delaware Limited Liability Companies

Under a new Section 18-217 of the Delaware Limited Liability Company Act, a single Delaware limited liability company (“DE LLC”) will be allowed to divide into two or more DE LLCs. As part of a division, the dividing DE LLC must adopt a plan of division setting forth the terms and conditions of the division, including the allocation of assets, property, and rights. The division plan will also control which resulting LLC will be liable for obligations such as the debts, liabilities, and duties of the dividing DE LLC. The LLC not assigned liability will only become liable for those obligations if the plan of division constitutes a fraudulent transfer under applicable law. Given the novelty of this type of reorganization, the new law provides that any terms of a written contract, indenture, or other agreement that restricts, conditions, or prohibits a DE LLC from consummating a merger, consolidation, or asset transfer will apply with equal force to a division only if (a) the DE LLC was formed prior to August 1, 2018, and (b) the DE LLC entered into such written contract, indenture, or other agreement prior to August 1, 2018. As such, when documenting a written agreement with a DE LLC, lenders and other companies should be proactive in protecting against a future division by that DE LLC. For more information concerning this topic, please contact Christopher Magette.

Contact Christopher Magette

Remote Deposit Capture Litigation

A large Texas-based automobile association was an early adopter of remote deposit capture (RDC) technology. The automobile association holds more than 50 patents related to RDC functionality that it began to acquire in 2006. Beginning in early 2017, financial institutions that offer RDC began receiving “invitations” from a law firm retained by the association to enter into licensing arrangements to compensate the association for portions of the RDC platform/functionality used by the targeted financial institutions. Most financial institutions use a third party service provider to provide RDC functionality, but the association directly approached the financial institutions that used the association’s RDC technology. The association filed its first related patent infringement lawsuit against a large national bank in the United States District Court for the Eastern District of Texas in June of 2018. In August of 2018, the national bank filed a counterclaim seeking: (a) a declaration that it had not infringed the association’s patents; (b) invalidation of the association’s patents; and (c) attorney’s fees and costs. Last month, the association filed a second complaint against the national bank that pulled in several new patents that the association had been granted in July of 2018. The bank uses a third party technology service provider to provide RDC Functionality and presumably the bank’s agreement with that technology service provider requires the service provider to indemnify the bank for any infringement claims related to use of the RDC platform. Financial institutions should review their RDC service provider agreements to determine if indemnification is provided for these types of claims. If you have received a letter related to RDC patents or you are concerned about RDC litigation exposure, please contact Christopher Rahl.

Contact Christopher Rahl

Large Overdraft Class Action Settlement

In October of 2018, a large credit union agreed to pay $24.5 million to settle a class action lawsuit that was filed in May of 2018. The lawsuit alleged that the credit union was not doing what its deposit account disclosures said concerning when overdraft fees would be assessed. The lawsuit was based on the allegation that when a credit union member initiated a debit card transaction, the credit union would authorize the transaction at that time if the member had sufficient available funds in his/her account at the time of the authorization. The lawsuit contended that the credit union’s process involved setting aside funds in the amount of the authorization for application once the requested debit card transaction was processed and posted to the member’s account. The lawsuit contended that the credit union frequently charged members an overdraft fee when the debit card transaction later posted, even though it had allegedly set aside funds for the requested debit card transaction. The lawsuit alleged that this practice was unfair, unconscionable, and a breach of the credit union’s deposit account agreement. Financial institutions should carefully review overdraft practices to ensure that system processing matches what is described in the financial institution’s deposit account agreement. For questions about this topic, please contact Christopher Rahl.

Contact Christopher Rahl

11th Circuit Holds That Arbitrator Can Decide Class Arbitration Availability When Clearly Designated in Contract

The Eleventh Circuit recently issued an opinion  that adds to the conflicting authority as to whether the permissibility of class arbitration is to be decided by a court as a threshold issue or by an arbitrator. The appellants in this case were consumers alleging that a financial services company overpriced the electronic money transfer services it provides to prisoners. The district court had ruled that the availability of class arbitration was a “gateway” issue that a trial court must resolve prior to arbitration. The Eleventh Circuit panel noted that the law in that circuit, and at least four other circuits, was that the availability of class arbitration was decided by the court. In this case, however, the court noted that the financial services company’s terms of service evidenced a “clear intent” to have an arbitrator decide whether class arbitration was available. The terms of service provided that the arbitrator was to decide the “ability to arbitrate the dispute” and that arbitration was to resolve “any and all” disputes. As a result, the court reversed the trial court’s ruling concerning class arbitration. Please contact Robert Gaumont for more information related to this topic.

Contact Robert Gaumont

Prevent Enforcement of Supersedeas Bond

Under the court rules of Maryland and other states, a supersedeas bond can be given by a judgment debtor in a lawsuit in order to prevent the judgment creditor from enforcing its judgment while an appeal is taken. Usually the bond must be in the amount of the judgment plus interest.

In a recent decision, the US Bankruptcy Court for the Northern District of Georgia considered whether a judgment creditor violated the automatic stay of the Bankruptcy Code when it acted to realize on a supersedeas bond after the debtor’s bankruptcy filing before the debtor’s appeal was finally decided. Under the facts, the judgment creditor prevailed on the appeal but not until after the debtor filed for bankruptcy. Without obtaining relief from the automatic stay, the creditor moved in state court to have the bond released to it before the decision on appeal became final. In response, the debtor moved in the bankruptcy court for an order sanctioning the creditor for having violated the automatic stay.

Critical to the bankruptcy court’s decision on the automatic stay claim was its determination of whether a bond posted to secure a judgment becomes property of the bankruptcy estate if the appeal is pending at the time bankruptcy is filed. If so, then the Bankruptcy Code automatically stays actions against property of a bankruptcy estate upon the filing of bankruptcy. After reviewing limited case law, the court held that a supersedeas bond becomes property of the estate if bankruptcy is filed when an appeal is pending. However, the court also found that the debtor’s interest in the bond is a contingent one that is divested when it loses the appeal thus dissolving the automatic stay at that time. As it found that the bond was property of the bankruptcy estate, the court further held that the stay was violated by the creditor. Nevertheless, the court declined to impose sanctions finding that the violation was not willful.

The issue of whether a judgment creditor violates the automatic stay by acting to realize on a supersedeas bond without first obtaining relief from the stay is open in the Fourth Circuit where Maryland is located. Until case law is further developed, if a debtor files for bankruptcy before its appeal of a judgment secured by a supersedeas bond is decided, a judgment creditor should consider obtaining relief from the automatic stay from the bankruptcy court as soon as the appeal is decided in the creditor’s favor. This should be done before taking any action to realize the bond. While this will result in a brief delay, obtaining the bankruptcy court’s permission to act on the bond could avoid an even greater delay that would result if the debtor challenges the creditor’s action claiming an automatic stay violation. For more on this topic, please contact Lawrence Coppel.

Contact Lawrence Coppel