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Cardholders Seek to Capital-ize on Madden

Last week, three Capital One cardholders filed a putative class action in the Eastern District of New York, Cohen v. Capital One Funding, LLC,1 alleging that the rates of interest they paid to a securitization trust unlawfully exceed the sixteen percent threshold in New York’s usury statutes.  The Plaintiffs seek to recoup the allegedly excessive interest payments and an injunction to cap the interest rates going forward.

The Plaintiffs seek to leverage the Second Circuit’s decision in Madden v. Midland Funding, LLC.2  There are factual differences between the current lawsuit and Madden.  In Madden, the loan in question was a nonperforming credit card account that Bank of America’s Delaware-based credit card bank had assigned to Midland Funding, which sought to enforce the past-due loan.  In Cohen, the loans involve credit card receivables from otherwise performing loans that have been deposited into securitization trusts.  Another distinction is that Cohen, unlike Madden, is a putative class action.  The legal theory in both cases, however, is the same:  the Plaintiffs argue that the holders—here, securitization vehicles—do not have the originating national bank’s right to collect interest at rates above the limits of New York’s usury laws.  And any usurious interest collected, the Plaintiffs argue, must be disgorged.

As we discussed in our prior C&F Memorandum, “It’s a Mad, Mad, Madden World” (June 29, 2016), the Second Circuit’s Madden ruling is unsound.  Under the Second Circuit’s Madden theory, the usury rate applicable to a given loan—and thus its enforceability—turns on the identity of the loan’s holder.  The notion that the enforceability of a loan originated by a national bank turns on who holds the loan from time-to-time conflicts with the well-settled valid-when-made doctrine—a doctrine that provides that whether a loan is usurious is determined at the loan’s inception.   This approach was abandoned in Madden.  As a result, under Madden, bank-originated consumer loans can be less valuable if sold, thus devaluing the loans on the books of the originating bank.  Banks, then, are discouraged from originating such loans or, once originated, from selling them.  The net result is—at least in theory—a tightened consumer credit market.

In many corners, Madden is viewed to be “bad law.”  Even so, the Office of the Comptroller of the Currency recommended against petitioning the Supreme Court for a writ of certiorari in Madden.  Nor did Congress produce a legislative fix, despite such a bill being introduced in 2018.  Both the OCC and Congress faced political headwinds over the practice by some marketplace and payday lenders that originate high-rate consumer loans through banks under the so-called bank origination model; the concern was that reversing Madden could enshrine such practices and could be potentially harmful to consumers.  (For a discussion of the bank origination model, see our prior C&F Memorandum, “Marketplace Lending Update:  Who’s My Lender?” (Mar. 14, 2018).)  But that concern is not present in Cohen, where the Plaintiffs rely on Madden to attack traditional, currently performing credit card receivables that were originated by a national bank—a structure unrelated to the bank-origination model used by some marketplace lenders.

Cohen is the second Madden-related lawsuit brought against securitization trusts; the first is proceeding in Colorado against marketplace-lending receivables originated by Avant and Marlette.  See “Marketplace Lending #5:  The Very Long Arm of Colorado Law” (Apr. 24, 2019).  Until Madden is reversed, we continue to recommend that clients exercise caution when acquiring, securitizing, or accepting as collateral consumer loans (or asset-backed securities backed by such loans), when the loans were originated to residents of a state in the Second Circuit (New York, Connecticut, and Vermont) and carry a rate above the applicable general usury rate (generally, sixteen percent in New York, twelve percent in Connecticut, and eighteen percent in Vermont).

1   No. 1:19-cv-03479-KAM-RLM (E.D.N.Y. filed June 12, 2019), https://www.cadwalader.com/uploads/media/CapitalOneCase.pdf.

2   786 F.3d 246 (2d Cir. 2015), cert. denied, __ U.S. __, 136 S. Ct. 2505, 195 L. Ed. 2d 839 (2016).

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Scott Cammarn Financial Law Attorney Cadwalader Law Firm
Partner

Scott Cammarn has 28 years of experience in the banking industry and his legal career has spanned all areas of banking compliance and finance law. His practice focuses on regulatory matters, mergers & acquisitions, legislation, transactions, and training. He represents a number of national and international financial institutions and has practiced before the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and numerous state banking departments.

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Jonathan Watkins, Charlotte, North Carolina, Cadwalader, partner, antitrust litigation, class action, white collar, global, merger, acquisition, New York
Partner

Jonathan Watkins represents public and private businesses and financial institutions in complex litigation and white-collar investigations. His practice covers securities, derivative, and other shareholder actions, M&A-related litigation, suits alleging breaches of fiduciary duties by corporate directors, disputes involving complex financial benchmarks and instruments, litigation arising out of commercial contracts and transactions, antitrust and other competition-related litigation, and government and internal investigations. Jonathan has represented clients at trial in federal and state courts across the country and before several federal and state appellate courts.

Jonathan’s white-collar practice focuses on representing financial institutions and other corporate clients in investigations by regulators, prosecutors, and enforcement agencies, including the Department of Justice and United States Attorneys’ offices, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency, and the Federal Reserve. He recently represented a financial institution in government inquiries into the alleged manipulation of an interest-rate benchmark.

Jonathan graduated magna cum laude from Fordham University School of Law, where he earned the Fordham Law School Prize, served as a Member of the Fordham Law Review, and was elected to the Order of the Coif. He received his undergraduate degree in Chemical Engineering from Lehigh University. Jonathan began his career with Cravath, Swaine & Moore LLP.

Jonathan’s securities, shareholder, and M&A-related litigation experience includes:

  • Defending Credit Suisse from Section 10(b) claims arising from the collapse of Enron, including the $40 billion lead securities class action, Newby v. Enron Corp., Cons. Action No. H-01-3624, MDL No. 1446 (S.D. Tex.), and the several coordinated and consolidated cases.

  • Representing Credit Suisse and Deutsche Bank in Texas and New York in litigation over the failed Hexion-Huntsman merger, including in Hexion Specialty Chemicals, Inc. v. Credit Suisse, Cayman Islands Branch, Index No.114552/08 (N.Y. Sup. Ct.), where Hexion sought specific performance of $15.4 billion of financing commitments, and at jury trial in Huntsman Corp. v. Credit Suisse Securities (USA) LLC, No. 08-09-09258 (9th Dist. Tex.), where Huntsman sought $4.65 billion in compensatory tort damages.

  • Representing The Fresh Market and its directors in several shareholder class actions targeting Apollo Global Management’s $1.36 billion acquisition of The Fresh Market.

  • Representing certain independent directors of Reynolds American before the North Carolina Business Court and the North Carolina Court of Appeals in shareholder class actions challenging Reynolds American’s $27.4 billion acquisition of Lorillard.

  • Representing Merrill Lynch’s independent directors in the Southern District of New York, New York Supreme Court, and Delaware Chancery Court in shareholder litigation over the Bank of America-Merrill Lynch merger.

 

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Mark Chorazak, Cadwalader Law Firm, New York, Corporate and Finance Law Attorney
Partner

Mark Chorazak is a partner in the Financial Services Group. Mark represents financial institutions on a wide range of bank regulatory, transactional and compliance matters. He regularly counsels banks, thrifts, investors and other financial services firms on strategic matters and compliance issues arising under the Bank Holding Company Act, the Dodd-Frank Act and other key U.S. banking laws. Among other areas, his practice encompasses Volcker Rule compliance, fintech and financial innovation issues, authority and control matters, anti-money laundering counseling,...

212-504-6565
Aaron Lang Litigation Attorney Cadwalader
Special Counsel

Aaron Lang is a special counsel in Cadwalader’s Global Litigation Group. He concentrates his practice on litigation and investigations for banks, investment firms and corporate clients. He has experience with securities, M&A, corporate governance, AML and other complex commercial matters.

Prior to joining Cadwalader, Aaron was counsel at Moore & Van Allen in Charlotte, and an associate in the Financial Institutions Disputes Group in the New York office of Freshfields Bruckhaus Deringer.  Aaron also has worked at HSBC and RBC on...

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