Maryland Legal Alert for Financial Services

LENDERS WIN ON STATUTES OF LIMITATION, ARBITRATION

Lenders in Maryland scored two victories on August 25, 2006 when the Circuit Court of Baltimore City issued favorable rulings in two class actions involving alleged violations of Maryland law. In the first decision, centering on a statute of limitations defense, the court in Parham v. Numax Mortgage Corp.determined that Maryland’s general 3-year statute of limitations applied to claims of allegedly excessive fees charged to second mortgage loan borrowers. Although certain loan documents were signed under seal, the court refused to apply the 12-year statute of limitations for specialties because the claims were statutory. As a result, the plaintiffs’ claims, which accrued at loan closing, were timed-barred under the 3-year statute of limitations.

In an arbitration ruling the same day, the court in Randolph v. Dollar Mortgage Corp.recognized Maryland's strong public policy favoring arbitration and upheld a freestanding arbitration agreement that accompanied lenders' mortgage loan documents. The court instructed that the actual language in an arbitration agreement, including who may compel arbitration and whether arbitration may be maintained on a class action basis, is controlling. This decision offers yet another reminder that consumer arbitration agreements should be reviewed regularly to ensure their acceptability as this area of the law continues to evolve. For more information, please contact Chris Rahl.

MARYLANDUCC DOES NOT PRECLUDE NEGLIGENCE SUIT BY NON-CUSTOMER

In a case of first impression, the Maryland Court of Appeals in Chicago Title Insurance Company, et al. v. Allfirst Bank, et al., held that a depository bank may be liable for negligence to a non-customer check drawer. The court rejected arguments that a depository bank had no duty to a non-customer drawer and that Maryland's UCC prohibited a common law negligence action. The depository bank received from its customer a large check drawn by a settlement agent, a non-customer, which was intended to pay off the bank as secured creditor. Instead, the bank deposited the check into the customer’s deposit account. The court concluded that the check was properly payable because it had been endorsed by the bank as payee, and that the drawer’s loss was caused by events outside the check itself. As a result, the UCC conversion and loss allocation rules did not apply and the negligence suit could proceed because there was an “intimate nexus” between the bank and the drawer. For more information, please contact Chris Rahl.

MARYLAND PREPAYMENT PENALTY RESTRICTIONS PREEMPTED TWICE IN SAME WEEK

The U.S. Fourth Circuit Court of Appeals on August 10, 2006 ruled that the Maryland Commissioner of Financial Regulation cannot exercise visitorial powers to restrict a national bank operating subsidiary from charging prepayment penalties on adjustable rate mortgages. In National City Bank, et al. v. Turnbaugh, the court rejected the argument that extensive state regulation of non-bank, state-chartered mortgage subsidiaries creates a presumption against preemption. The court responded that the National Bank Act and the regulations issued by the Comptroller of the Currency clearly and properly define the scope of a national bank’s authority to conduct business through an operating subsidiary, including the ability to charge prepayment penalties. As a result, federal law preempts conflicting Maryland law.

On August 11, 2006, the federal district court in Maryland concluded that section 27 of the Federal Deposit Insurance Act preempts state usury claims against out-of-state, federally insured, state-chartered banks exporting interest into Maryland. As a case of first impression, the court in White v. Irwin Union Bank & Trust Co.recognized that, because prepayment penalties are treated as interest for purposes of exportation under the National Bank Act, such fees should be treated as interest under the identical provision in the FDIA. For more information, please contact Chris Rahl.