The U.S. Supreme Court recently denied the petition for writ of certiorari to review the decision of the U.S. Court of Appeals of the Second Circuit in Madden v. Midland Funding, LLC (Madden). The Supreme Court’s denial of certiorari serves to create a level of uncertainty regarding whether certain non-national bank assignees of assets originated by national banks, such as consumer loans, can continue to rely on the well-established “valid-when-made” principle and enforce the rights of the lender pursuant to the terms of the agreement determined at the time the loan is made.
In Madden, Saliha Madden (Madden), a New York resident, opened a credit-card account with Bank of America (BoA), a national bank, and, in so doing, agreed to be bound by the cardholder agreement. BoA’s credit-card portfolio, including Madden’s account, was subsequently consolidated into a portfolio operated by FIA Card Services (FIA), also a national bank. FIA was authorized to charge interest as permitted by Delaware law. Madden subsequently defaulted. FIA then sold Madden’s debt to Midland Funding and the debt was serviced by Midland Credit Management (together, Midland), both of which are headquartered in California, and neither of which is a national bank. Consistent with the cardholder agreement, Midland sent Madden a letter seeking to collect payment on her debt at the applicable rate of 27%.
Madden, in response, filed a class action lawsuit in the U.S. District Court for the Southern District of New York alleging that, by attempting to collect interest from her at the stated rate, Midland violated New York criminal and civil usury laws and, as a result, her debt (and the debts of others similarly situated) should be declared void. Madden also alleged that Midland had engaged in improper debt-collection practices in violation of the federal Fair Debt Collection Practices Act, which claim was predicated on the claim that Midland had violated New York usury laws. Midland moved for summary judgment on the basis that Madden’s state-law claims were preempted by the NBA (and that the federal claim, which was predicated on the state-law claims, thus also failed). The District Court entered judgment in Midland’s favor, holding that because a national bank was the originating bank, the NBA preempted state-law usury claims against a non-national bank assignee of a national bank on the basis that assignees are entitled to the protection of the NBA if the originating bank was entitled to the protection of the NBA.
The Second Circuit, in vacating the District Court’s judgment, held that while NBA preemption can be extended to a non-national bank in certain circumstances, to do so, the entity must either be a subsidiary or agent of a national bank or otherwise be acting on behalf of a national bank, or the application of the state law must significantly interfere with a national bank’s ability to exercise its power under the NBA. Applying this analysis, the Second Circuit held that Midland was not entitled to rely on NBA preemption because Midland was not a national bank, was not a subsidiary or agent of a national bank or otherwise acting on behalf of a national bank (as, upon Midland’s acquisition of Madden’s debt, neither FIA nor BoA possessed any further interest in the account), and that the state law on which Madden’s claims relied did not significantly interfere with any national bank’s ability to exercise its powers under the NBA.
Midland subsequently filed a petition for a writ of certiorari in the U.S. Supreme Court asking the Court to review the question of whether the NBA, which preempts state usury laws regulating the interest a national bank may charge on a loan, continues to have preemptive effect after the national bank has sold or otherwise assigned the loan to another entity. In its petition, Midland argued that the Second Circuit’s decision upended “centuries of settled doctrine and threatens to wreak havoc on the national banking system and the Nation’s credit markets by eviscerating a national bank’s core prerogative to set interest rates unfettered by state regulation.” The petition was supported by amici curiae briefs of a number of interested parties. The Supreme Court also invited the U.S. Solicitor General to file a brief expressing the views of the United States. The Solicitor General, notwithstanding the position set forth in its brief that Madden was wrongly decided, opposed certiorari on the basis that the case was “a poor vehicle for resolution of the question presented.” The Supreme Court ultimately denied the petition on June 27, 2016.