Maryland Legal Alert for Financial Services

IN THIS ISSUE:

COURT OF APPEALS APPROVES MARYLAND GARNISHMENT RULE CHANGES

MORE MADDEN ACTIVITY

BANKRUPTCY COURTS REMAIN INHOSPITABLE TO CANNABIS INDUSTRY

Court of Appeals Approves Maryland Garnishment Rule Changes

In September 2019, the Standing Committee on Rules of Practice and Procedure (the Committee) issued a notice of proposed rule changes in which the Committee proposed amendments to Maryland’s garnishment rules concerning the problem of stagnant garnishments (see our October 2019 Maryland Legal Alert). On November 19, 2019, the Court of Appeals approved the proposed rule changes, which will become effective January 1, 2020. 

Under existing Maryland garnishment rules, after a depository institution is served with a writ of garnishment, the garnishee must maintain a hold on the judgment debtor’s accounts until further order of court. The problem of stagnant garnishments arises when neither the judgment creditor nor the judgment debtor takes action to resolve a garnishment, leaving the garnishee depository institution holding accounts indefinitely.

The approved amendments to Rule 2-645 (covering circuit court garnishments) and Rule 3-645 (covering district court garnishments) now enable a garnishee to seek termination of a garnishment that has stagnated. Specifically, if a garnishee files an answer and no further filings are made in response within 120 days, the garnishee may serve a notice of intent to terminate the garnishment. The notice provides parties 30 days to object to the termination of the garnishment, failing which the garnishee may then file a termination of garnishment, which releases the garnishee from any further obligation to hold the judgment debtor’s funds.

Practice Pointer: These approved rule changes should prevent garnishees from suffering through indefinite account holds and provide relief from the burden of continued compliance with stagnant garnishments. Depository institutions should review their procedures to determine how to integrate this new termination mechanism into their existing process.

Please contact Bryan Mull for more information concerning this topic.

Contact Bryan Mull | (410) 576-4227

More Madden Activity

We reported in our July 2016 Maryland Legal Alert that the U.S. Supreme Court had declined to review the decision of the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC. The Madden decision sowed uncertainty and confusion among debt buying and bank-partnership model lending businesses, because of its holding that the purchaser of debt from a national bank (charged-off debt in the case of Madden) was not a beneficiary of the preemptive interest rate authority of the lender, a national bank, under Section 85 of the National Bank Act. Even though the loan was valid when made, a purchaser of the debt, unlike a national bank, could be subject to usury limitations under state law. The Office of the Comptroller of the Currency (OCC) recently issued a notice of proposed rulemaking to clarify that when a national bank sells, assigns or transfers a loan that was valid when made, interest permitted prior to the transfer continues to be permitted post-transfer. The Federal Deposit Insurance Corporation (FDIC) also issued a similar notice of proposed rulemaking. Comments for both proposed rules are due in late January.

Practice Pointer: There is likely to be opposition to both proposed rules from consumer advocacy groups, even though the proposals seek to restore certainty in the secondary loan market. It is unclear when the OCC and/or the FDIC will act after the conclusion of each comment period. We will continue to follow the proposed rules and provide updates as they become available. If you have any questions about this topic, please contact Christopher Rahl.

Contact Christopher Rahl | (410) 576-4222

Bankruptcy Courts Remain Inhospitable to Cannabis Industry

In our July 2019 Maryland Legal Alert, we reported on Garvin v. Cook Invs. NW, a decision from the United States Court of Appeals for the Ninth Circuit in which the court affirmed the confirmation of a Chapter 11 plan of reorganization over the U.S. Trustee’s objection, despite the fact that rental income from a cannabis business provided indirect support to the debtors’ plan. Many cannabis-related bankruptcies are terminated by similar motions to dismiss because the cultivation and sale of cannabis remains a federal crime.

Though this case may have appeared to clear a path for businesses with ties to the cannabis industry to seek bankruptcy protection, we noted that certain procedural quirks in the case likely limited the utility of this holding. Recent bankruptcy cases from Colorado and Michigan dismissing Chapter 11 petitions filed by businesses tied to the cannabis industry have cast doubt on the Garvin decision.

The Colorado case concerned debtors that sold indoor hydroponic and gardening-related supplies. The court denied confirmation and dismissed the debtors’ cases for cause, given that their business relies on the sale of supplies that would be used to grow cannabis. The court questioned the Garvin court’s focus on whether the plan was proposed by “means forbidden by law” (rather than review the plan’s terms for potential illegalities). The court instead held that dismissal was warranted, because a Chapter 11 debtor simply cannot propose a plan in good faith when the plan relies on profits from cannabis. 

Similarly, in the Michigan case, the court dismissed a Chapter 11 petition on bad faith grounds. The debtor’s sole shareholder filed the petition to avoid a lease with a cannabis dispensary so he could establish his own cannabis dispensary at the property. In so holding, the bankruptcy court questioned the Garvin decision as implicitly sanctioning violations of federal law. 

Chapter 13 consumer debtors with ties to the cannabis industry have similarly faced roadblocks to bankruptcy relief. In a recent Chapter 13 case from Colorado, the U.S. Trustee objected to the debtors’ plan, because the debtors had reduced the amount of their disposable income available to fund plan payments to account for their monthly medical cannabis expense. The court denied confirmation, reasoning that the debtors’ plan would have forced the court to authorize an activity that remains illegal under federal law.

Practice Pointer: The Garvin decision has proven to be more of an anomaly than a pathway for debtors with ties to the cannabis industry to seek relief under bankruptcy law. So long as cannabis remains a controlled substance under federal law, persons and businesses with ties to the cannabis industry will be hard-pressed to seek relief under the Bankruptcy Code.

Please contact Bryan Mull for more information concerning this topic.

Contact Bryan Mull | (410) 576-4227