Maryland Legal Alert for Financial Services

In This Issue:

Using Full Debtor Name Crucial in UCC Filings

Limitations on Borrower Cure Rights in Foreclosure Situations

Delaware Law Permits Reverse Veil Piercing by Judgment Creditors

Maryland Bankruptcy Court Issues FDCPA Decision

Does Your Institution Need to Pay Interest on Escrow Accounts?

Be on the Look Out for Required Deed of Trust Affidavits

Using Full Debtor Name Crucial in UCC Filings

Section 9-503(a)(4) of the Maryland Uniform Commercial Code (MUCC) requires that a financing statement for collateral owned by an individual who has been issued a driver’s license or identification card by the state be filed in “the name of the individual indicated on the driver’s license or identification card.”  In a recent case, the Bankruptcy Court for the Southern District of Georgia considered whether a lender properly perfected a security interest by filing a financing statement using the first and last name of a debtor where the debtor’s state-issued license used the debtor’s middle name and the debtor signed the license using only his first and last name.  The Georgia UCC version of §9-503(a)(4) is substantially similar to Maryland’s.  The lender argued that its financing statement satisfied §9-503(a)(4) because it was filed in the signed name of the debtor on the license and that, in any event, any error made in the financing statement was not “seriously misleading” within the meaning of the UCC §9-506(a) “safe harbor” provision.  The court rejected the signed name argument ruling that “limiting the meaning of ‘indicated on the driver’s license’ to the debtor’s printed name ensures simplicity and predictability” consistent with the Official Comment to §9-503.  Further, the court noted that instructions on the financing statement form require use of the debtor’s “exact, full name” and not to “omit, modify or abbreviate any part of the Debtor’s name.”  The court also overruled the lender’s safe harbor argument.  Having ruled that the printed name on the driver’s license governs, the court pointed to §9-506(b) which provides that “except as provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with §9-503(a) is seriously misleading.”  The court further ruled that §9-506(c) did not apply because a search of the Georgia financing records under the debtor’s first and last name did not disclose the correct name and a search of the financing records under the debtor’s full name did not disclose the financing statement at all.  Therefore, the lender’s security interest was held to be unperfected and avoidable by the debtor in bankruptcy.

Practice Tip: Maryland courts have not decided the issue decided by the court in the Georgia case. To avoid the issue, a lender that has been granted a security interest by an individual who has been issued a Maryland driver’s license (or identification card) should always use the debtor’s printed name on the license (or card) on the financing statement that is going to be filed to perfect the lender’s interest.  If the license or card is signed with a name that is different (even slightly different) from the printed name, the lender should add the signed name as an additional debtor so that the financing statement can be filed under both names.  Note that if the debtor has not been issued a driver’s license or identification card, MUCC §9-503(a)(5) states that the financing statement must provide “the individual name of the debtor or the surname and first personal name of the debtor.” 

Contact Christopher R. Rahl

Limitations on Borrower Cure Rights in Foreclosure Situations

A recent decision from the United States District Court for the District of Maryland reinforces well-established Maryland law regarding limitations on a borrower’s right to cure defaults and reinstate a deed of trust with respect to residential property.  In this case, the borrower tried to manipulate certain plan provisions under Chapter 13 of the Bankruptcy Code to extend the deadline for the borrower to redeem the borrower’s residence from foreclosure proceedings. After the borrower defaulted on a loan secured by a deed of trust on the borrower’s residence, substitute trustees commenced a foreclosure action in Baltimore City.  Approximately 30 minutes after the foreclosure auction occurred, the borrower filed a Chapter 7 bankruptcy petition.  Later, the borrower converted the case from Chapter 7 to Chapter 13.  Thereafter, the Bankruptcy Court granted the lender’s motion for relief from the automatic stay to continue with the foreclosure proceedings, including seeking ratification of the sale.  The borrower appealed, arguing that, under Section 1322 of the Bankruptcy Code, the borrower still had a right of redemption with respect to the borrower’s residence.  Under Section 1322, a Chapter 13 plan may propose to cure defaults and reinstate a loan with respect to a lien on the debtor’s principal residence until the residence is sold at a foreclosure sale that is conducted in accordance with applicable non-bankruptcy law.  The borrower argued that since the foreclosure sale had not yet been ratified, the borrower was entitled to redeem the residence under Section 1322.  The District Court rejected this argument, noting that under applicable non-bankruptcy law, a borrower has until one business day before the foreclosure sale occurs to cure all deficiencies and reinstate the loan.  The Court further reasoned that under Maryland law, all rights of redemption are divested upon the occurrence of the foreclosure sale.  The Court also distinguished this case from its decision inOcwen Loan Servicing, LLC v. Kameni, where the court determined that the bankruptcy court could enter an order invalidating a foreclosure sale that occurred after the debtor filed a bankruptcy petition and an emergency motion for automatic stay but before the court could hold a hearing on the debtor’s motion.  The Court emphasized that unlike in Kameni, the borrower filed his bankruptcy petition after the sale occurred and, thus, he had lost any right of redemption.  Please contact Bryan Mull with any questions concerning this topic.

Contact Bryan Mull

Delaware Law Permits Reverse Veil Piercing by Judgment Creditors

The United States Court of Appeals for the Fourth Circuit, applying Delaware law, recently held that a judgment creditor may collect a judgment by reaching the assets of a Delaware limited liability company that is the alter ego of the judgment debtor.  The court noted that this type of “reverse veil piercing” is to be contrasted with traditional veil piercing where a judgment creditor of a business entity is permitted to collect from the assets of someone who is found to be the entity’s alter ego.  Even though the creditor obtained its judgment in a Virginia federal court, Delaware law applied because the court concluded that the law of the state in which the entity was formed should govern the veil piercing issue as opposed to the law of the forum.  In reaching its decision, the court rejected the debtor’s argument that the sole remedy under Delaware law for the judgment creditor was to obtain a charging order against the debtor’s interest in the LLC.  Further, the court affirmed the lower court’s ruling that the LLC was the debtor’s alter ego based on evidence showing that the debtor failed to observe corporate formalities, did not maintain proper accounting records and had commingled his personal assets with those of his business entities.  Since many business entities are formed today in Delaware, the Fourth Circuit’s decision strengthens the rights of creditors who obtain judgments against debtors that own interests in Delaware formed business entities. 

Contact Christopher R. Rahl

Maryland Bankruptcy Court Issues FDCPA Decision

A recent decision of the United States Bankruptcy Court for the District of Maryland dismissed claims brought by a debtor against unlicensed debt collectors who filed claims in the debtor’s Chapter 13 case.  The debtor filed a three count complaint against the debt collectors.  The first two counts sought damages for violation of the Maryland Consumer Debt Collection Act and the Maryland Consumer Protection Act.  The third count sought to disallow the debt collectors’ claims on the basis of their unenforceability under Maryland law.  The court granted a motion to dismiss the first two counts on the basis that the Bankruptcy Code permits the filing of the claims and preempts state law to the extent state law prohibits the filing of the claims.  The court did not dismiss the third count as the claims are subject to the bankruptcy claims allowance process and can be disallowed if they are unenforceable under state law.  The decision is based in substantial part on the Supreme Court’s decision in Midland Funding, LLC v. Johnson (see our June 2017 Maryland Legal Alert), which held that creditors holding claims barred by limitations do not violate the federal Fair Debt Collection Practices Act by filing the claims in a bankruptcy case.  For questions concerning this topic, please contact Christopher Rahl.

Contact Christopher Rahl

Does Your Institution Need to Pay Interest on Escrow Accounts?

Does your institution make residential mortgage loans in Maryland?  It may be time for banks regulated by the Office of the Comptroller of the Currency (OCC) to reevaluate whether to comply with Maryland’s law that requires interest to be paid on escrow accounts established in connection with those mortgage loans.  Until enactment of the Dodd Frank Act, there was very clear authority supporting the conclusion that Maryland’s law requiring interest on escrow accounts was preempted by federal law for federal savings associations.  There also was authority for national banks – slightly less definitive – to this same effect.  The Dodd Frank Act changed the landscape for federal preemption of “consumer financial laws” (see earlier article from our Dodd Frank Survival Guide).  Even so, post-Dodd Frank Act OCC regulations support the conclusion that this Maryland law is preempted for national banks and federal savings associations.  On March 2, 2018, the United States Court of Appeals for the Ninth Circuit decided that, despite the OCC’s regulation expressly preempting state laws governing escrow accounts, the National Bank Act does not preempt California’s law that requires financial institutions to pay interest on escrow accounts maintained in connection with certain residential mortgage loans.  This decision is believed to be the first by a federal appeals court that analyzes the effect of Dodd Frank Act changes to the scope of federal preemption, rejects the OCC’s post-Dodd Frank Act determination on preemption and finds no preemption.  The bank defendant in this Ninth Circuit case has until April 13, 2018 to file a request for rehearing.  There also could be an opportunity for appeal to the Supreme Court.  Maryland is not in the Ninth Circuit, which means this decision has no direct impact on Maryland law.  Even so, it is a signal that relying on federal preemption may need some reevaluation. 

Contact Christopher R. Rahl

Be on the Look Out for Required Deed of Trust Affidavits

Effective October 1, 2017, Maryland eliminated the requirement that mortgages and deeds of trust contain a certification from the person who prepared the document (see “Mortgages and Deeds of Trust – Prerequisites to Recording” in our Maryland Laws Update 2017).  It has come to our attention that at least one major vendor removed from its form Maryland residential deed of trust not only the Maryland certification of preparation but also the Maryland acknowledgment containing affidavits of consideration and disbursement.  Maryland’s real property law provides that a deed of trust securing a non-commercial loan is invalid (except between the parties) unless there is contained in, endorsed on, or attached to it the secured party’s oath or affirmation that the consideration for the deed of trust is true and bona fide.  In addition, if the instrument is a purchase money deed of trust securing a non-commercial loan, it is invalid as to everyone unless it contains or has endorsed on or attached to it the secured party’s oath or affirmation that the actual sum of money advanced was disbursed by the secured party.  If you find that one or more deeds of trust were recorded without the affidavit of consideration and, if purchase money, affidavit of disbursement, you should consider with counsel the effect and possible correction of this deficiency.  If affidavits of consideration and disbursement are not included in a form deed of trust, the secured party can use a form of acknowledgment containing the required affidavits that is attached to the deed of trust.

Contact Christopher R. Rahl