Maryland Laws Update for Financial Services

The 2004 session of the Maryland General Assembly adjourned on April 12. The budget deficit, taxes and slots occupied time and emotions, but the General Assembly also addressed many other issues of interest to financial service providers. Some new laws are effective now, and others generally are effective on October 1, 2004. Some of these new laws may affect your procedures or forms, and some offer new business opportunities. This year's Update also highlights recent noteworthy Maryland cases. Please call any member of our Financial Services and Government Relations Group if you would like to discuss these new laws and their effect on your business.

HB 294 - Chapter 72, SB 186 - Chapter 73 (effective October 1, 2004)
These laws are part of a wide-ranging reform of the Maryland Voluntary Cleanup Program undertaken by the Ehrlich Administration. In addition to these changes, the Administration has taken many actions to streamline approval of cleanup plans and speed "no action" determinations. The Administration estimates that the cumulative impact of the changes will result in 35% more properties participating in the program.

One of the most important changes for financial institutions is the change in the definition of "inculpable person." This category is used to determine which owners of property are eligible for tax incentives, low interest loans and grants in connection with property remediation. Previously, the incentives only were available to persons who had not yet acquired an interest in property. So, for example, a bank that foreclosed on property would lose eligibility for incentives when the foreclosure occurred. The bank, of course, would have had no reason to seek incentives prior to foreclosure.

Under the new definition, a foreclosing bank (or a purchaser) would be an "inculpable person" and qualify for incentives as long as the bank or purchaser fit within one of the standard exemptions from State superfund liability. In the case of a financial institution, that generally requires that the foreclosing entity had no prior ownership of the property and did not contribute to the pollution.

A bank that forecloses on a potential brownfields property will now have the option to undertake a cleanup itself and seek incentives to reduce the associated costs.

Another significant change is an expansion of the Brownfields program to include properties that are subject to outstanding remediation orders. Unlike prior law, an unrelated purchaser now may acquire and clean up a contaminated property even if the current owner is in default of an environmental order. This may open some additional development opportunities.

A third change deals with properties that are subject to restrictions on future use. Currently, many properties are remediated to a commercial or industrial level that would not be acceptable for residential use. Deed restrictions are then placed on the property to make sure that the use conforms to the cleanup level. Previous law had considerable ambiguity about the liability of a seller if a subsequent purchaser violated the deed restriction and permitted an inconsistent use. The new law makes it clear that the seller retains protection from liability. This change may encourage large companies to return "warehoused" properties to the market.

Action Alert: This law provides additional options for financial institutions with an interest in potentially contaminated property and should also result in more industrial property being placed on the market.

Corporations

HB 737 - Chapter 516 (effective June 1, 2004)

Chapter 516 makes some corporate transactions easier. Boards of publicly-traded companies and registered investment companies (with post-transaction notice to stockholders) may approve one reverse stock split per year without stockholder approval, unless the corporation's charter provides otherwise. This change is limited to reverse stock splits of less than 10 to 1. In addition, informal stockholder action is made less burdensome by permitting corporations to do away with unanimous consent. Now, if the corporation's charter authorizes this method of voting, common stockholder action can be taken by consent (either in writing or electronically) so long as the corporation receives the minimum number of consents that would be necessary to authorize or take the action by vote at a stockholders' meeting and gives notice of the action to all common stockholders within 10 days after its effective date. The law also changes the rules that apply to directors who are winding up the affairs of a corporation.

Action Alert: To take advantage of some of these changes, most corporations will need to amend their charters, which generally requires stockholder approval. Corporations should consider the value of the ability of common stockholders to take action without a meeting and without the consent of all common stockholders. Reasonable procedures to govern the delivery of stockholder consents should be added by the bylaws.

To take advantage of some of these changes, most corporations will need to amend their charters, which generally requires stockholder approval. Corporations should consider the value of the ability of common stockholders to take action without a meeting and without the consent of all common stockholders. Reasonable procedures to govern the delivery of stockholder consents should be added by the bylaws.

To take advantage of some of these changes, most corporations will need to amend their charters, which generally requires stockholder approval. Corporations should consider the value of the ability of common stockholders to take action without a meeting and without the consent of all common stockholders. Reasonable procedures to govern the delivery of stockholder consents should be added by the bylaws.
To take advantage of some of these changes, most corporations will need to amend their charters, which generally requires stockholder approval. Corporations should consider the value of the ability of common stockholders to take action without a meeting and without the consent of all common stockholders. Reasonable procedures to govern the delivery of stockholder consents should be added by the bylaws.

Courts

Court Fees and Costs - Civil Cases

SB 316 - Chapter 448 (effective June 1, 2004)

Surcharges are imposed on all civil case filings in Maryland Circuit Court and District Court. These surcharges are deposited into the Maryland Legal Services Corporation, which is used to finance civil legal services to indigents. Effective June 1, 2004, the surcharges are increased from $10 to $25 in Circuit Court and from $2 to $10 in District Court, except that summary ejectment cases in District Court will have a $5 surcharge.

District Court - Small Claims Action - Member or Employee of Limited Liability Company

SB 70 - Chapter 89 (effective October 1, 2004)

Currently, Maryland law prohibits individuals who are not admitted to the bar from representing clients in court. Certain persons are exempt from the bar admission requirement when appearing in District Court civil actions where the amount claimed does not exceed $5,000, exclusive of interest, costs and attorney's fees. Effective October 1, 2004, this exemption is expanded to authorize a member of a limited liability corporation, or an employee designated by a member, to appear in court on behalf of the LLC.

Crimes

Theft Through Interactive Computer Service

HB 194 - Chapter 157 (effective October 1, 2004)

To keep up with electronic developments, Chapter 157 expands the crime of theft to include theft through the use of an interactive computer service. The law defines an interactive computer service as an information service, system or access software provider that provides computer access by multiple users to a computer server, including a service that provides access to the Internet. Anyone who commits a theft through the use of this service may be prosecuted in any county in which the victim resides or in which the electronic communication originated or terminated.

Criminal Procedure - Identity Theft - Venue for Prosecution

SB 257 - Chapter 109 (effective October 1, 2004)

This law amends the existing identity theft statute by authorizing both a State's Attorney and the Attorney General to investigate and prosecute identity theft. Venue for the prosecution of this crime is any county in which any element of the crime occurred or in which the victim resides.

Counterfeiting and Possession of Counterfeit Check, Letter of Credit or Negotiable Instrument

SB 837 - Chapter 484 (effective October 1, 2004)

This law creates a new misdemeanor and expands a current felony law relating to counterfeiting checks and other private instruments and documents. Under the State law against counterfeiting private instruments and documents (a felony), this chapter adds a check, a letter of credit, a negotiable instrument and the endorsement or assignment of a check to the list of items a person, with an intent to defraud, may not counterfeit. The law also prohibits a person from knowingly, willfully and with fraudulent intent possessing a counterfeit of any of the enumerated items in the counterfeiting prohibition.

Criminal Law - Theft, Bad Checks and Credit Card Crimes - District Court Offenses

SB 513 - Chapter 130 (effective October 1, 2004)

The primary thrust of Chapter 130 is to create a new petty theft sentencing category for existing theft, bad checks and credit card offenses in which the value of the goods, services or other property involved in the offense is less than $100. A violator is guilty of a misdemeanor and subject to maximum penalties of 90 days' imprisonment and/or a $500 fine. It is not a defense to this crime that the value of the property or services obtained was greater than $100. The law also provides that, unless specifically charged by the State, this crime may not be considered a lesser included offense of another crime.

Escheat

SB 276 - Chapter 110 (effective July 1, 2004)

Under current law, within one year after taking custody of unclaimed abandoned personal property, the Maryland Comptroller must sell the property at auction. A person who claims a legal interest in the property must file a claim to the property or to the proceeds from its sale. If the Comptroller allows the claim, the Comptroller must pay the claimant an amount equal to the sales price of the property plus interest for the period that the Comptroller held the property, up to 5 years. Chapter 110 repeals the requirement for the Comptroller to pay interest. Also see discussion of the Budget Reconciliation and Financing Act of 2004 (under Taxes in this Update) which requires delivery of abandoned property to Maryland at least 6 months earlier than in prior years.

Exemptions

SB 515 - Chapter 463 (effective October 1, 2004)

A person against whom a judgment has been executed, or who has filed a bankruptcy petition in Maryland, is allowed to retain certain items that are not subject to the judgment or creditor claims. Chapter 463 doubles the current level of exemption for the following items:

• exemption for items necessary for the practice of any trade or profession, except those kept for sale, lease or barter, increases from $2,500 to $5,000
  
  


• exemption for items held primarily for personal, family or household use, increases from $500 to $1,000
  
  


• exemption for cash or property increases from $3,000, if within 30 days from the date of attachment or levy, the debtor elects to exempt cash or selected items of property in an amount not to exceed a cumulative value of $6,000
  
  


• In any bankruptcy proceeding brought pursuant to federal law, a debtor domiciled in Maryland may exempt the debtor's aggregate interest in real or personal property, not to exceed $5,000, increased from $2,500.
  
  

Ground Rents

Baltimore City - Extinguishment of Ground Rents

SB 748 - Chapter 480 (effective October 1, 2004)

The Mayor and City Council of Baltimore are authorized to extinguish an irredeemable ground rent (technically a lease) by condemning the property subject to the lease, becoming the tenant of the ground rent, and, after giving the landlord notice, applying to the State Department of Assessments and Taxation (SDAT). Upon receiving up to 3 years' back rent and the required affidavit from the City, SDAT must issue a ground rent extinguishment certificate. Extinguishment vests fee simple title in the City when the certificate is recorded in the land records. A landlord whose ground rent has been extinguished may file a claim with the Baltimore City Director of Finance to collect an amount equal to the annual rent reserved multiplied by 16.66 (capitalization at 6%). In the event of a dispute as to the calculation of the extinguishing amount, the landlord may refuse payment from the City and file an appeal regarding the valuation in the Circuit Court for Baltimore City.

Hurricane Isabel

Hurricane Isabel Disaster Relief Act

SB 415 - Chapter 7, HB 3 - Chapter 8 (various effective dates)

This law creates a program to fill the gap not covered by insurance or other financial resources for homeowners affected by the hurricane who may not qualify for other State programs. The fiscal 2005 budget allocates $3 million to support the Hurricane Isabel Housing Rehabilitation and Renovation Program, and directs the Department of Housing and Community Development (DHCD) to use $3.1 million of its other appropriations for this program, for a total of $6.1 million. Almost 4,000 homeowners are expected to be eligible for program assistance.

The law provides low-interest loans for mortgages to rehabilitate or renovate primary residences. The law also provides a credit enhancement or guarantee for a portion (80 to 115 percent of the fair market value of the property after rehabilitations, renovation or replacement ) of privately obtained loans with similar requirements. An interest rate buy down program also is authorized by this law. The extension of financial assistance under the law terminates at the end of May 31, 2005.

Action Alert: Financial institutions interested in participating in this program should contact the Hurricane Isabel Rehabilitation, Renovation and Replacement Housing Program at 1-886-227-2497.

Landlords

Interest on Security Deposits

HB 723 - Chapter 369 (effective October 1, 2004)

Generally, a residential landlord must pay 4 percent simple interest, accruing at 6 month intervals, on a tenant's security deposit. This law reduces the required interest rate to 3 percent per year. In addition, while the security deposit plus interest generally must be returned to the tenant within 45 days, this law eliminates this obligation for a tenant who has been evicted or who has abandoned the premises. The law establishes a procedure for such tenants to demand return of the security deposit.

Late Fees

SB 172 - Chapter 98 (effective October 1, 2004)

After the United Cable case invalidated late charges in non-credit contracts several years ago, the Maryland General Assembly enacted a law to validate late charges. Caps were placed on late charges that could be imposed on consumers, and the authorization to impose late charges on consumers was to sunset in 2005. This law repeals the October 1, 2005 sunset.

Mortgage Loans

Grants to Homebuyers Under the Maryland Mortgage Program

SB 66 - Chapter 88 (effective October 1, 2004)

Borrowers who receive loans under the Maryland Mortgage Program are eligible for a grant from the Community Development Administration for closing cost assistance in exchange for a higher interest rate on their mortgage loans.

Mortgages and Deeds of Trust - Flood Insurance

HB 1447 - Chapter 421 (effective October 1, 2004)

Lenders may not require a borrower, as a condition to receiving or maintaining a loan secured by a first mortgage or first deed of trust, to purchase flood insurance coverage in an amount that exceeds the replacement value of the improvements on the real property. Federal law already imposes a similar limitation.

Recordation of Deeds and Other Instruments of Writing

HB 180 - Chapter 40 (effective July 1, 2005)

This law, which has a delayed effective date, streamlines the recordation process by repealing the requirement that instruments transferring ownership (e.g., deeds) be presented at the local assessment office prior to recordation. This "extra" step in the recordation process currently is required only in 11 counties: Allegany, Anne Arundel, Calvert, Caroline, Frederick, Garrett, Kent, Prince George's, Queen Anne's, Somerset, and Wicomico. Under the new process, which is now used in all other Maryland counties, an instrument presented for recording in the land records must be endorsed with the certificate of the county tax collector and accompanied by an intake sheet, after which the clerk of the circuit court sends a copy of the instrument and the intake sheet to the assessment office.

Good News: This change should speed up recordation and effectiveness of purchase money liens in the 11 affected counties.

New Disclosure Required for Real Property Sales Contracts - Chesapeake Bay Critical Area

HB 1030 - Chapter 396 (effective October 1, 2004)

This law requires that a contract for the sale of real property, whether commercial or residential, must contain in conspicuous type a new disclosure advising the buyer of the possibility that the property may fall within the Chesapeake and Atlantic Coastal Bays Critical Area. A property within a Critical Area will be subject to limitations based on the local jurisdiction's critical area program, for example limits on forest clearing, impervious surfaces, setbacks, and housing densities. A contract of sale is not rendered invalid by the omission of this disclosure.

Mortgage Lender Licensees - Elimination of Experience Requirement for Some Applicants

SB 643 - Chapter 473 (effective October 1, 2004)

This law authorizes the Commissioner of Financial Regulation to issue a mortgage lender license to certain sole proprietors who do not meet the normal 3-year experience requirement. The exemption from the 3-year experience requirement will be available if, among other conditions, the sole proprietor applicant is a Maryland licensed insurance producer for an insurer that controls, is controlled by, or is under common control with a depository institution exempt from mortgage lender licensing. In addition to other requirements, the applicant must broker loans only to its affiliated depository institution and must successfully pass an exam after completing at least 20 hours of classroom instruction in residential mortgage lending. The depository institution must sign the license application and must supervise the applicant. Moreover, the depository institution will be jointly and severally liable for claims arising out of the applicant's mortgage brokering activities. The sole proprietor whose license is issued under this exemption may not act as a lender and may not be compensated based on the loan amount, interest rate, fees, or other terms of the brokered loan nor may the broker receive any fee from the borrower for brokering a loan.

Action Alert: This law was crafted with a specific arrangement in mind - State Farm Group, which has both insurers and a depository institution within its corporate structure. This law should provide opportunities to other companies as well.

2020 Rural Maryland - Agricultural and Resource-Based Industry Development Act

SB 589 - Chapter 467 (effective July 1, 2004)

This law creates the Maryland Agricultural and Resource Based Industry Development Corporation (MARBIDCO) as a public corporation and instrumentality of the State of Maryland to develop agricultural industries, such as aquaculture, farming, horticulture, and timber. MARBIDCO may issue revenue bonds to finance agricultural processes and may guarantee loans provided by lending institutions. Unfortunately, MARBIDCO will not be funded until the State's structural deficit and fiscal crisis are resolved, so its promise is deferred.

Motor Vehicles

Motor Homes and Travel Trailers - Vehicle Excise Tax - Extension of Sunset

HB 1332 - Chapter 545 (effective June 1, 2004)

In 2001, the General Assembly created special definitions of "fair market value" and "total purchase price" as they relate to the excise tax imposed on new and used motor homes and travel trailers sold by licensed dealers. The general effect of these definitions is to exclude from the calculation of tax the value of any trade-in motor home or trailer. Under current law, these special definitions are automatically repealed on June 30, 2004. Chapter 545 extends this sunset to June 30, 2007 and requires the Department of Transportation to track (and report by October 1, 2006) the value of these trade-ins to determine the impact on vehicle excise tax revenues.

Premium Finance

Insurance Premium Financing - Electronic Payment Fee

HB 941 - Chapter 211 (effective October 1, 2004)

Chapter 211 provides that, as long as the insurance premium finance agreement permits, an insurance premium finance company may charge a customer who elects to pay electronically up to $8 to cover the company's actual expenses in permitting electronic payment. The law defines "electronic payment" to include payments by credit card and debit card.

Action Alert: To charge this fee, insurance premium finance companies will need to review their current agreements and make the necessary changes.
To charge this fee, insurance premium finance companies will need to review their current agreements and make the necessary changes.

Real Estate Brokers

Trust Funds

SB 366 - Chapter 267 (effective October 1, 2004)

An individual involved in a real estate transaction may entrust a deposit to a real estate broker to hold. If the owner of the trust money fails to complete the real estate transaction, this law gives the broker sole discretion to distribute the money in accordance with specified provisions of law and protects the broker against liability to the owner for a good faith decision to distribute or not to distribute the trust money.

Savings Banks

HB 423 - Chapter 342 (effective June 1, 2004)

Under current law, a Maryland chartered savings bank may be acquired through a consolidation, merger, or transfer of assets, by a Maryland banking institution, any other bank with branches in Maryland, or any Maryland or federal savings and loan association located in Maryland, if the Commissioner of Financial Regulation gives written consent. This law authorizes a Maryland chartered savings bank to acquire another financial institution if the Commissioner gives written consent. The law also reduces the proportion of stock of a subsidiary savings bank that a parent mutual holding company must hold from 100 percent to a majority. Both changes make the Maryland savings bank charter more attractive.

Spam

Spam Deterrence Act

SB 604 - Chapter 470 (effective October 1, 2004)

This law prohibits several deceptive email practices, including using another's computer to relay multiple commercial email messages with the intent to deceive or mislead recipients as to the message's origin, materially falsifying header information in multiple commercial email messages, and registering, using false information, multiple email accounts, online user accounts or two or more domain names and intentionally initiating the transmission of multiple commercial email messages. Criminal penalties are provided, including forfeiture of profits and computer equipment. The federal CAN-SPAM Act preempts many state laws, but not those that prohibit false or deceptive emails. This new Maryland law is not likely preempted by federal law.

State Of Maryland Banking Services And Procedures

Banking Services for the State of Maryland

HB 690 - Chapter 366 (effective October 1, 2004)

Currently, the State may enter into agreements only with Maryland banks and trust companies. This law adds Maryland savings banks, national banks, out-of-state banks, and Maryland and federal savings and loan associations. If one of these institutions enters into an agreement with the State Treasurer, the Treasurer may authorize any State agency to open an account with that institution.

Action Alert: Depository institutions not already acting as a depository for the State now have the opportunity to do so.
Depository institutions not already acting as a depository for the State now have the opportunity to do so.

Task Force on Lending Equity within Financial Institutions Providing State Depository Services

SB 324 - Chapter 114, HB 415 - Chapter 115 (effective July 1, 2004)

As introduced, these bills would have required all financial institutions doing business in Maryland to submit annual reports to the Commissioner of Financial Regulation regarding higher education loans and loans to minority business enterprises. After much debate, the bills' purpose was changed and the law now simply creates a task force to study minority business enterprise access to credit and capital from financial institutions that provide depository services to the State. The task force will develop criteria and a strategy to implement a State lending equity policy, and link these criteria with the State's selection of depositories.

State Treasury - Deposits by Units of State Government

SB 291 - Chapter 261 (effective October 1, 2004)

This law repeals the requirement that units of the State government deposit all collections, fees, income, and other revenues into the State treasury on a monthly basis. Instead, units of State government will have to deposit these revenues into depositaries designated by the Treasurer in accordance with regulations and policies adopted by the Treasurer and the Comptroller.

State Treasury - Undeliverable Checks Fund

SB 431 - Chapter 274 (effective October 1, 2004)

When a check that the State Treasurer, the Chief Deputy Treasurer, or a deputy treasurer issues is returned to the Comptroller as undeliverable, the amount of the cancelled check is credited to the Undeliverable Checks Fund. This law changes the procedures for administering the Fund and clarifies that undeliverable check funds are not subject to the Maryland Uniform Disposition of Abandoned Property Act.

State Treasury - Unpresented Checks Fund

HB 688 - Chapter 365 (effective October 1, 2004)

At the end of each fiscal year, the State Treasurer must identify each check that has been issued against money of the State that has remained unpresented for 2 years, and request the Comptroller to credit the aggregate amount of the checks to the Unpresented Checks Fund. This law changes procedures for administering the Fund and clarifies that State-issued unpresented check funds are not subject to the Maryland Uniform Disposition of Abandoned Property Act.

Taxes

Income Tax Payments - Sale of Property by Nonresidents

HB 1277 - Chapter 410 (effective October 1, 2004)

This law clarifies issues that have arisen in implementing a law passed last year (Chapter 203 of 2003 Laws of Maryland). Last year's law requires that certain amounts be withheld for income taxes upon a change of ownership of real property by a nonresident. This year's law removes a requirement that the "total payment" for a sale of property be stated on the deed or on an affidavit accompanying the deed. Instead, the new law provides that "total payment" must be described in a new form, the substance of which will be established by the Comptroller. This year's law also provides for a new exemption from the withholding tax requirement for a deed that includes a required statement indicating that the consideration payable is zero. Further, this year's law defines and uses the terms "transfer pursuant to a deed in lieu of foreclosure" and "transfer pursuant to a foreclosure" to clarify when certain existing exemptions are applicable.

Good News: All of the changes made by this new law should assist lenders when making loans in connection with the transfer of Maryland real property owned by nonresidents.
All of the changes made by this new law should assist lenders when making loans in connection with the transfer of Maryland real property owned by nonresidents.

Recordation Tax on Refinancing Instrument

SB 76 - Chapter 248 (effective July 1, 2004)

This law expands the current exemption from recordation tax when certain mortgages or deeds of trust are refinanced. Under current law, a mortgage or deed of trust is not subject to recordation tax to the extent that it refinances an amount not greater than the existing unpaid principal amount at the time of refinancing of a homeowner's principal residence. However, the tax exemption is available only to an "original mortgagor." This new law makes the trustee of an inter vivos or living trust an "original mortgagor" as long as the property is used as the principal residence of the settlor of the trust and either the trustee or the settlor originally assumed or incurred the debt being refinanced.

Tax Compliance - Holding Companies

HB 297 - Chapter 556 (various effective dates) and
SB 187 - Chapter 557 (various effective dates)

Two laws (Chapter 556 and Chapter 557) relate to the use by corporations of "Delaware Holding Companies" (DHCs) to avoid Maryland income tax. House Bill 753 from the 2003 session, passed by the General Assembly, but vetoed by the Governor, restricted the ability of corporations operating in Maryland to shift income out of the State through the use of DHCs and related tax avoidance techniques. In the summer of 2003, the Court of Appeals issued a decision in two long-pending cases, Comptroller of the Treasury v. SYL, Inc., and Comptroller of the Treasury v. Crown Cork & Seal Company (Delaware), Inc., 375 Md. 78 (2003), ruling that two corporations doing business in Maryland could not use DHCs to shelter income earned in Maryland from the Maryland income tax.

Chapter 556 changes the corporate income tax law to prevent tax avoidance through the use of DHCs. Chapter 557 provides for a settlement period for past year issues relating to the Syl decision.

Chapter 556 includes several measures to prevent corporations from avoiding the Maryland corporate income tax. The law adopts reallocation provisions similar to I.R.C. _ 482, and specifically focuses on inter-company transactions involving intellectual property and loans. Inter-company loans between banks, bank subsidiaries and affiliates are exempt from the law's "interest add-back" provisions, provided the transaction did not have as its principal purpose the avoidance of tax. The law takes effect July 1, 2004, and applies to all taxable years beginning after December 31, 2003.

Chapter 557 requires the Comptroller to administer a settlement period to settle specified litigation from July 1, 2004 through November 1, 2004, applicable to State corporate income tax that has been or may be assessed by the Comptroller on the basis of issues that were ruled on in the SYL and Crown Cork & Seal case. A taxpayer who wants to take advantage of Chapter 557 may elect whether to have additional income tax calculated as though otherwise deductible payments were added back to the paying taxpayer's federal taxable income or as though the receiving taxpayer were subject to the State corporate income tax. The Maryland income tax may not be imposed more than once for the same transaction. The Comptroller must waive all penalties attributable to the taxes paid during the settlement period. The Comptroller may not assess interest on taxes paid during the settlement period at a rate exceeding 6.5 percent.

If all taxes and related interest described above are paid during the settlement period for the taxpayer's taxable years beginning on or after January 1, 1995, and ending on or before December 31, 2003, then no assessment for any taxable year beginning before January 1, 1995 may be enforced.

Action Alert: The Maryland Comptroller will be closely monitoring compliance with Chapter 556 and transactions between related entities will be closely scrutinized. Any company with potential tax liability under the Syl/Crown Cork & Seal case should carefully review Chapter 557 with tax counsel. The Maryland Comptroller has publicly stated that he will be aggressively pursuing corporations with related party transactions that have resulted in the avoidance of Maryland taxes.
The Maryland Comptroller will be closely monitoring compliance with Chapter 556 and transactions between related entities will be closely scrutinized. Any company with potential tax liability under the Syl/Crown Cork & Seal case should carefully review Chapter 557 with tax counsel. The Maryland Comptroller has publicly stated that he will be aggressively pursuing corporations with related party transactions that have resulted in the avoidance of Maryland taxes.

Maryland Heritage Structure Rehabilitation Tax Credit Program

HB 679 - Chapter 76 (effective June 1, 2004)

The Maryland Heritage Rehabilitation Tax Credit program entered its seventh year of operation in 2004 amid debate over how the program should continue. Although praised as a development tool that can revitalize communities and generate tax revenues and employment, increasing concerns have been raised over the program's mounting and uncertain impact on the State's revenues.

Chapter 76 increases the existing total commercial credit cap in calendar 2004 from $15 to $25 million, of which $10 million must be awarded on a competitive basis by the Maryland Historical Trust (MHT). To qualify for a tax credit for tax year 2004, a commercial rehabilitation project must have received approval from MHT of its proposed rehabilitation plan by June 30, 2004. The bill creates a reserve fund to which funds are to be appropriated each of fiscal 2006 through 2008 for proposed commercial projects to be preliminarily approved in each fiscal year. The amount of commercial credits approved in each fiscal year cannot exceed the amount of money budgeted to the reserve fund for that fiscal year. There is no aggregate cap or reserve fund for tax credits for residential rehabilitations.

Action Alert: Financial institutions participating in this program should carefully review this law. The law contains various limitations and time constraints that impact the use of these tax credits.
Financial institutions participating in this program should carefully review this law. The law contains various limitations and time constraints that impact the use of these tax credits.

Tax Liens - Reports by Financial Institutions

SB 773 - Chapter 137 (effective June 1, 2004)

Chapter 137 allows financial institutions that report child support information federally to report the same type of information (e.g., joint accounts) to the Comptroller for tax lien data match. This will allow institutions to avoid costly systems changes to comply with Maryland's tax lien data match program.

Action Alert: This law should be helpful to institutions operating in multiple states.

Budget Reconciliation and Financing Act of 2004

SB 508 - Chapter 430 (various effective dates)

Chapter 430 includes a variety of tax provisions to increase State revenues. One of the changes made in this 86-page bill deals with the payment or delivery of abandoned property to the State. Effective July 1, 2004, abandoned property must be paid over to the State at the same time the written report listing the property is filed with the State.

Action Alert: This law requires delivery of abandoned property to the State at least 6 months earlier than in prior years. Procedures regarding delivery of abandoned property to the State must be changed now to comply with this new law.
This law requires delivery of abandoned property to the State at least 6 months earlier than in prior years. Procedures regarding delivery of abandoned property to the State must be changed now to comply with this new law.

Telemarketing

Maryland Telephone Consumer Protection Act - Do Not Call Registry

SB 88 - Chapter 437 (effective June 1, 2004)

Maryland law now prohibits violation of the federal Telemarketing and Consumer Fraud and Abuse Prevention Act, implemented by the FTC's Telemarketing Sales Rule, and the federal Telephone Consumer Protection Act, implemented by the FCC's telemarketing rules, including the National Do Not Call Registry. Violations of these federal laws, which under federal law can only result in administrative actions and penalties, are now violations of the Maryland Consumer Protection Act, which can result in private lawsuits for statutory penalties of $500 per call, as well as enforcement by the Maryland Attorney General's Office. The ante for violations of these federal laws is upped considerably by Chapter 437.

Action Alert: Because of Chapter 437's enhanced penalties, and the recent changes to the federal telemarketing laws, it is time to review compliance with these requirements. The federal Telemarketing Sales Rule now covers both outbound and certain inbound calls.
Because of Chapter 437's enhanced penalties, and the recent changes to the federal telemarketing laws, it is time to review compliance with these requirements. The federal Telemarketing Sales Rule now covers both outbound and certain inbound calls.

Trusts and Estates

Trusts - Termination by Corporate Fiduciary

SB 153 - Chapter 254 (effective June 1, 2004 and applies to all trusts existing on or after June 1, 2004, regardless of the effective date of the trust instrument)

This law increases the maximum amount of the fair market value of a trust that a corporate fiduciary may terminate without an Order of Court from $50,000 to $100,000 and makes other procedural changes.

Maryland Uniform Disclaimer of Property Interests Act

SB 541 - Chapter 465 (effective October 1, 2004)

Under federal and Maryland law, an individual may elect to disclaim (refuse to accept) property that would otherwise pass to the individual under a will, the laws of intestacy, or through the exercise of a testamentary power of appointment. The adoption of the Uniform Disclaimer Act changes and clarifies Maryland law relating to disclaimers. One important change is that a trustee or other fiduciary may disclaim an interest in property, provided that such disclaimer is not expressly restricted or limited by another state statute or by the instrument creating the fiduciary relationship. The disclaimer may be made even if the instrument contains a spendthrift provision or similar restriction upon transfer or the right to disclaim, or even if another instrument (other than the instrument under which the fiduciary relationship arises) restricts the right to disclaim.

Maryland Estate Tax - "Decoupling" from the Federal State Death Tax Credit

SB 508 - Chapter 430 (effective July 1, 2004, but applies retroactively to estates of decedents dying after December 31, 2003)

For many years the Maryland estate tax amount was the difference between the state death tax credit (attributable to the Maryland estate) allowed on the federal estate tax return and any Maryland inheritance tax. The federal state death tax credit is being phased out, and will be entirely eliminated in 2005. At that time, the computation of the federal estate tax will allow a deduction (not a credit) relative to the amount of state death taxes paid.

In response to the federal change, this new law changes how the Maryland estate tax is computed. Now, the Maryland estate tax will be based upon the federal state death tax credit in effect before its phase out and elimination, determined without regard to any deduction for state death taxes allowed for federal purposes, and will use a unified credit that does not exceed an amount corresponding to a $1 million federal estate tax exemption.

Estates that are based upon a traditional marital deduction/bypass trust structure or have a value falling between $1 million and the federal estate tax exemption amount, and owe no federal estate tax, will now owe Maryland estate tax, where no Maryland tax would have been owed before. In addition to increasing taxes, the new law imposes administrative burdens.

Action Alert: Wills and revocable trusts should be reviewed to determine the impact of this significant change in the computation of the Maryland estate tax, and whether any changes are needed.
Wills and revocable trusts should be reviewed to determine the impact of this significant change in the computation of the Maryland estate tax, and whether any changes are needed.

Uniform Commercial Code

Warehouse Receipts

SB 136 - Chapter 95 (effective October 1, 2004)

This law repeals current Title 7 to the Maryland Uniform Commercial Code concerning documents of title, including warehouse receipts and bills of lading, and adopts the revised Article 7 to the UCC, as recommended by NCCUSL.

Noteworthy Maryland Cases

Choice of Maryland Law - a Trap for the Unwary

Wells et al. v. Chevy Chase Banks, F.S.B. et al., 377 Md. 197, 832 A.2d 812 (2003) cert. denied 158 L. Ed. 2d 485, 124 S. Ct. 1875 (2004)

Subtitles 9 and 10 of the Maryland Credit Laws (Title 12 of the Commercial Law Article of the Maryland Annotated Code) do not apply unless these Subtitles are "elected" in the note. A federal thrift or national bank using or exporting the interest rates provided under Subtitles 9 or 10 must make this election. Generally, the governing law clause of a note provides that the note is governed by Subtitles 9 or 10, and applicable federal law.

The Supreme Court of the United States recently refused to review a Maryland Court of Appeals decision that arose as a class action lawsuit filed against Chevy Chase Bank, F.S.B. alleging the thrift violated Subtitle 9 when it amended its credit agreement without the notices required by that state law. The Maryland Court of Appeals held that the election of Subtitle 9 contractually bound Chevy Chase to comply with Subtitle 9, including Subtitle 9's amendment procedure, despite preemptive federal law. Thus, the Court found that although Subtitle 9 was preempted by federal law, it was specifically reincorporated into the note as a matter of contract.

Action Alert: All Maryland lenders should review the choice of law provisions contained in customer agreements. Federal preemptions are used not only by federally chartered thrifts, banks and credit unions, but also by state chartered institutions, first mortgage lenders, alternative mortgage transaction lenders, and others. The choice of law must clearly designate the applicable State usury statute and also clearly assert that applicable State and federal laws will govern the agreement for all other purposes.
All Maryland lenders should review the choice of law provisions contained in customer agreements. Federal preemptions are used not only by federally chartered thrifts, banks and credit unions, but also by state chartered institutions, first mortgage lenders, alternative mortgage transaction lenders, and others. The choice of law must clearly designate the applicable State usury statute and also clearly assert that applicable State and federal laws will govern the agreement for all other purposes.

No Private Right of Action for (Some) Violations of the Maryland Mortgage Lender Laws

Thrasher v. Homecomings Financial Network, Inc., 154 Md. App 77, 838 A.2d 392, cert. denied 380 Md. 619, 846 A.2d 402 (2003)

No private cause of action exists under the Maryland Mortgage Lender Law (MMLL) against a licensed mortgage lender that, in violation of the MMLL, allows secondary mortgage loan documents to be executed at a place for which the lender is not licensed to conduct business. The Maryland Court of Special Appeals upheld a circuit court opinion that the MMLL created a private cause of action only against lenders who fail to obtain licenses, and not against licensed lenders who violate the MMLL. Licensee violations may be enforced by the Maryland Commissioner of Financial Regulation.

Balloon Payments Disclosures for 2nd Mortgages

Drew v. First Guaranty Mortgage Corporation,379 Md. 318, 842 A.2d 1 (2003)

The Maryland Secondary Mortgage Loan Law permits lenders to schedule balloon payments only if the balloon payment is expressly disclosed to the borrower, agreed to by the borrower and lender in writing, and required to be postponed one time for 6 months at the borrower's request. The Maryland Court of Appeals held that lenders are not required to disclose the postponement requirement to borrowers, or even to state the requirement in the loan agreement, because there is no express disclosure requirement.

Practice Pointer: Subtitle 10 of the Maryland Credit Laws (Title 12 of the Commercial Law Article of the Maryland Annotated Code) has a similar postponement requirement and we believe the same result should apply to loans governed by Subtitle 10.
Subtitle 10 of the Maryland Credit Laws (Title 12 of the Commercial Law Article of the Maryland Annotated Code) has a similar postponement requirement and we believe the same result should apply to loans governed by Subtitle 10.

Don't Respond to a Subpoena for Financial Records Until It Is Due

Bond v. Slavin et al., 2004 Md. App. LEXIS 96 (filed June 18, 2004)

A bank produced deposit account records for a joint deposit account after receiving a subpoena certifying that one of the depositors (who was involved in a lawsuit) had been served with a copy of the subpoena, in compliance with the requirements of the Maryland Confidential Financial Records Act. Maryland's intermediate appellate court held that the joint owner, who otherwise was not involved in the lawsuit, has a right to a hearing on the issue of whether the court should enter a protective order prohibiting unauthorized disclosure of the subpoenaed financial records. The Court remanded the case to the lower court to allow the joint account holder his hearing "not inconsistent with this opinion."

Practice Pointer: While the bank in this case produced financial records in response to a validly issued subpoena, the Court was concerned that the bank had responded prior to the response date on the subpoena. In light of this case, depository institutions should not produce financial records earlier than or in a manner different from stated in a subpoena.

Legal Concern: The Court's decision may lead the lower court to conclude that a non-party, joint account holder who, under the Maryland Confidential Financial Records Act, would not normally be given notice of a subpoena for financial records, has a right to some notice that financial records relating to the joint account holder have been subpoenaed. Depository institutions should consult counsel for advice on what measures to take at this time in light of the Court's "guiding principles."

While the bank in this case produced financial records in response to a validly issued subpoena, the Court was concerned that the bank had responded prior to the response date on the subpoena. In light of this case, depository institutions should not produce financial records earlier than or in a manner different from stated in a subpoena.