Maryland Legal Alert for Financial Services

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Maryland Legal Alert September 2016

In this issue:

Concerns For Asset-Based Lenders and Factors
Filing Proof Of Claim On Time-Barred Debt Not FDCPA Violation
Private Utility Company Lien Priority Concerns
Another Credit Services Business Decision
Military Lending Act - Down To The Wire On Implementation

Concerns For Asset-Based Lenders and Factors
In a decision of importance to asset-based lenders and factors, the U.S. Court of Appeals for the Fourth Circuit held in an unpublished opinion that UCC Sections 9-406 and 9-607 do not provide a secured creditor with a right of action against a borrower's account debtor that fails to remit funds of the borrower to a creditor despite the creditor having notified the account debtor to do so.  Under the facts of the case, the account debtor of the borrower received proper notice from a factor to remit funds to the factor that were owed by the account debtor to the borrower.  The account debtor initially made certain payments to the factor but then resumed remitting funds to the borrower in disregard of the factor's notice.  After the borrower filed for bankruptcy, the factor sued the account debtor for the misdirected funds under UCC Sections 9-406 and 9-607 and for common law conversion.  Section 9-406(a) provides that when an account debtor receives notice that the amount due has been assigned, the account debtor may discharge its obligation by payment to the assignee and may not discharge the obligation by payment to the assignor.  Section 9-607(a) provides that after a assignor's default, a secured party may notify an account debtor to make payment to the secured party.  The trial court held against the factor.  On appeal, the Fourth Circuit upheld the trial court and found that these UCC provisions do not provide a secured creditor with a private right of action against an account debtor.  In addition, the Fourth Circuit affirmed dismissal of the creditor's common law conversion claim on the basis that under Maryland law, a general intangible (the account) is not subject to conversion.  The Court rejected the factor's argument that it was left without a remedy and indicated, in dicta, that the factor may have been able to assert a breach of contract claim against the account debtor.  The Fourth Circuit's opinion is unpublished and thus does not have precedential value.  However, unless the Fourth Circuit reverses itself in a published opinion, creditors holding liens in a borrower's accounts would be well advised to proceed with non-UCC actions against an account debtor that wrongfully fails to remit payments to the creditor after receiving notice to do so.  Please contact  Lawrence Coppel for more information concerning this topic.

Filing Proof Of Claim On Time-Based Debt Not FDCPA Violtion 

The U.S. Court of Appeals for the Fourth Circuit recently held that it is not a violation of the Fair Debt Collection Practices Act (FDCPA) to file a proof of claim in a bankruptcy proceeding in connection with a debt for which the applicable state statute of limitations has expired.  The facts of the case involved unsecured debts for which the Maryland three-year statute of limitations had run.  A debt buyer that acquired the debts filed proofs of claim in connection with the debts after the borrowers filed chapter 13 bankruptcy proceedings.  The borrowers brought adversary complaints alleging that filing proofs of claim under these circumstances constituted a violation of the FDCPA's prohibition against using any false, deceptive, or misleading representation and/or unfair or unconscionable means in connection with the collection of a debt.  Federal courts have consistently held that a debt collector violates these provisions of the FDCPA by filing a lawsuit or threatening to file a lawsuit to collect a time-barred debt.  The borrowers in this case alleged that filing a proof of claim constituted a debt collection activity and was the equivalent of filing a lawsuit in connection with a time-barred debt.  The Fourth Circuit agreed that filing a proof of claim in bankruptcy constituted debt collection activity, but the Court concluded that such action does not violate the FDCPA.  The Court held that the Maryland three-year statute of limitations does not extinguish a debt, but only bars the remedy of filing a lawsuit to recover on the debt.  The Court noted that the bankruptcy code broadly defines "claim" for which a proof of claim may be filed and that a proof of claim for a debt for which the applicable statute of limitations has expired may be disallowed by the bankruptcy trustee.  The Court viewed such debts as "contingent" or "unmatured" but still as claims under the bankruptcy code, just not claims that may be enforceable through court action.  This holding is at odds with contrary holdings in other circuits (see March 2015 Legal Alert).  Given the split in authority on this topic, debt buyers must carefully evaluate whether to file a proof of claim in connection with a debt where the applicable statute of limitations has run.  Please contact Christopher Rahl for more information concerning this topic.

Private Utility Company Lien Priority Concerns 

A recent case from the Court of Special Appeals of Maryland raises concerns for lenders that make real estate-secured loans.  Under the facts of the case, a property developer filed a declaration of deferred water and sewer charges in favor of the utility that would construct the water and sewer infrastructure connecting the proposed development to public utilities.  The declaration provided that owners of properties within the development were obligated to pay annual water and sewer charges to the named utility.  The Court held that the property developer's declaration constituted a lien on each of the developed properties and the lien could be enforced under the terms of the declaration, without resort to the Maryland Contract Lien Act.  The Court also held that the lien created by the declaration had priority over a later recorded refinance deed of trust secured by one of the impacted properties.  Our Real Estate practice group will be publishing a detailed summary of the case, but in the interim, please contact William Shaughnessy, Jr. with any questions concerning this topic. 

Another Credit Services Business Decision 

On August 19, 2016, the Court of Appeals of Maryland issued a decision that provides some guidance as to when a law firm's credit counseling practice could qualify as a "credit services business" under the Maryland Credit Services Businesses Act (MCSBA).  The MCSBA regulates businesses that either attempt to improve a consumer's credit, obtain extensions of credit for consumers, or provide advice or education related to credit extended to consumers.  The MCSBA includes an exception for attorneys that are Maryland barred, that provide services of a legal nature, and that do not engage in the credit services business "on a regular and continuing basis." In this case, the Court of Appeals considered an appeal filed by the Commissioner of Financial Regulation of an order by the Baltimore City Circuit Court which had reversed an administrative decision that a law firm was a "credit services business" under the MCSBA. The law firm had, in the course of a nine-month period, entered into 57 agreements with clients to negotiate loan modifications on the clients' behalves, and this accounted for most of the work performed by the law firm's one Maryland licensed attorney.  While noting that "[a] Maryland attorney who counsels an individual client facing foreclosure and attempts to negotiate a mortgage loan modification would ordinarily be exempt from the MCSBA," the Court found that the depth and pervasiveness of this law firm's credit counseling and negotiation practice was so substantial that it resulted in the practice of the credit services business "on a regular and continuing basis."  As a result, the Court found that Baltimore City Circuit Court erred in finding the "attorney exception" to the MCSBA applied.  Please contact Robert Gaumont for more information related to this topic. 

Military Lending Act - Down To The Wire On Implementation 

Clients have been calling with questions concerning system and process changes needed to meet the approaching October 3, 2016 effective date for the Military Lending Act (MLA).  The Department of Defense (DOD) released an interpretive ruling on August 26, 2016 with some helpful MLA guidance.  We have been following MLA developments closely and have helped many clients navigate MLA complexities.  Please contact John MortonChristopher Rahl, or Marjorie Corwin if you have MLA questions.