Recent Supreme Court Action Creates Uncertainty in Financial Industry: Madden v. Midland Funding
On June 27, 2016, the U.S. Supreme Court declined to review a Second Circuit Court of Appeals decision in the case of Madden v. Midland Funding, LLC. The High Court's decision will allow a consumer class action against Midland Funding LLC and Midland Credit Management Inc. to proceed on claims that Midland was violating New York's usury law because the interest rates on credit card debt Midland was seeking to collect were higher than New York's usury limit.
Although Madden only applies in the Second Circuit, which includes Vermont, New York and Connecticut, by allowing the state-law usury claims to proceed, the Supreme Court's decision to not accept review jeopardizes uniform enforcement of the National Bank Act and creates a number of issues for banks and financial firms nationwide.
Madden concerns the claims of credit-card holder Saliha Madden, who opened a Bank of America credit card in 2005. Bank of America consolidated its credit card program into a program run by FIA Card Services NA, a national bank governed by the National Bank Act. By 2008, Madden owed more than $5,000, so FIA wrote off the debt as uncollectible and sold it to Midland. Madden then sued Midland, alleging, among other claims, that Midland was violating New York's state usury laws because the rate on the debt was higher than allowed under state law.
The district court dismissed Madden's state-law usury claims as preempted by the National Bank Act. In May 2015, however, the Second Circuit reversed the district court and revived Madden's state-law usury claims. The Second Circuit held that the National Bank Act did not preempt Madden's claims because neither defendant was a national bank or acting on behalf of a national bank and because applying state usury law to debt buyers would not interfere with the originating national bank's ability to sell its debts.
Ramifications of Supreme Court's Decision
Midland sought certiorari on the grounds that the Second Circuit had ignored the "valid when made" rule. According to Midland's petition for certiorari, that rule states that "a loan which is valid when made cannot become usurious by virtue of a subsequent transaction."
Midland was joined by a number of amici in the financial and banking industries in asking for Supreme Court review. Midland and supporting amici contended that the secondary debt market relies on the notion that credit agreements are valid when made to enforce those agreements pursuant to the terms agreed upon between the original creditor and borrower. They further argued that by ignoring the valid when made rule, the Second Circuit decision would inject uncertainty into a once-settled body of law that credit markets have long relied on to ensure uniformity and enforceability in their transactions.
In a somewhat unusual move, the Supreme Court invited the U.S. Solicitor General to file a brief expressing the government's view on the issue. Many in the financial industry viewed the invitation as a sign of interest by the Court, but the Solicitor General, while agreeing that the Second Circuit decision was probably incorrect, argued the case was not ripe for review because there was no circuit split to resolve. Monday's decision by the Supreme Court to decline further review indicates that the Court agreed with the Solicitor General and the Office of the Comptroller of the Currency, who joined the Solicitor General in suggesting that the case was not ripe for review.
The Court's decision deals a blow to the defense of National Bank Act preemption and it will create unfortunate uncertainty for lenders and other financial industry firms that rely on securitizations and bundling of debt to do business.
For example, usury rates for loans can no longer be determined predictably by the circumstances at origination of the debt. Rather, the usury rates that may apply could now turn on the state in which the borrower resides, the state in which the loan purchaser resides, the law chosen to govern the agreement or the circuit in which the borrower files suit. And if a debt passes through the Second Circuit at any point in its lifespan, there is a claim to be made that Madden applies. These issues are especially acute for secondary market participants and those that rely on securitization or bundling of debt or loans since multiple usury rates may now apply to the same securitized bundle.