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US District Court Weighs In on Madden v. Midland Funding Remand

In the closely watched case of Madden v. Midland Funding, LLC, on which we have reported here and here, the US Second Circuit Court of Appeals ruled that federal preemption principles generally applicable to national banks under the National Bank Act did not extend to nonbank assignees of a bank loan where the bank no longer held an interest in the loan, and federal law therefore did not preempt New York state usury limitations. In turn, the Second Circuit declined to rehear the case, and the US Supreme Court declined to grant certiorari to review the case.

In its decision, the Second Circuit remanded the case to the US District Court for the Southern District of New York for the resolution of remaining state law questions, including whether Delaware law (which has no usury limitations) governed the account agreement. On February 27, 2017, the district court issued an opinion addressing these issues in response to the defendants’ motion for summary judgment and the plaintiff’s motion for class certification.

On the defendants’ summary judgment motion, the court found that where, as in the Madden case, the debt was in default, the plaintiff/borrower cannot assert violations of New York’s civil usury statute as a defense, but could assert violations of New York’s criminal usury statute as a defense. The court also held that the plaintiff did not have an affirmative claim for usury and dismissed her claims of civil and criminal usury, both of which formed the basis of her claim for relief that the debt was void and uncollectible. However, the district court found that the violation of criminal usury law could be used as predicate in support of the plaintiff’s claims under the Fair Debt Collection Practices Act (FDCPA) and New York General Business Law Section 349, both of which provide for statutory damages and actual damages. Consequently, the underlying loan remains valid, but attempts to collect interest rates that violate New York’s criminal usury statute serve as a predicate for FDCPA and New York law.

Moreover, on the choice-of-law issue, the court applied New York law rather than Delaware law because it found New York has a fundamental public policy to prevent criminal usury. As such, the court did not enforce the Delaware law set forth in the cardholder agreement.

The court granted the plaintiff’s motion for class certification, which, among other things, certified a “damages class comprising all persons residing in New York who were sent a letter by Defendants attempting to collect interest in excess of 25% per annum . . . whose cardholder agreements: (i) purport to be governed by the law of state that, like Delaware’s, provides for no usury cap; or (ii) select no law other than New York.”

The district court’s decision made no mention of the contractual doctrine of “valid when made,” which, as applied to lending agreements, provides that a loan that is valid at inception cannot become usurious upon its subsequent transfer to another person. Nor did the decision address any substantive issues regarding the nature and extent of national bank preemption in the loan transfer context, given the Second Circuit’s prior decision that preemption did not apply. Therefore, the district court’s opinion does not shed any further meaningful light on the application of “valid when made,” or national bank interest rate preemption, to loan sales and transfer activities.

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About this Author

Susan F. DiCicco, Securities Litigator, Morgan Lewis Law firm

Susan F. DiCicco litigates securities and complex commercial cases, principally representing financial institutions in cases throughout the country. She focuses on complex financial transactions, fixed-income products (particularly structured finance transactions), and derivatives. Susan regularly assists clients with trading issues and disputes, as well as assessing risks on new complex products and formulating strategies for existing transactions. Clients recognize Susan as a practical litigator who is fully versed in their businesses. Susan serves as the practice...

Charles Horn, financial services attorney, Morgan Lewis

Charles M. Horn is a partner in Morgan Lewis's Investment Management and Securities Industry Practice. Mr. Horn focuses his practice on regulatory and transactional matters, primarily in the areas of banking and financial services. He works on behalf of domestic and global financial institutions of all sizes on regulatory, supervisory, enforcement and compliance matters before all major federal financial institutions regulatory agencies, and leading state financial regulatory agencies.

Melissa R.H Hall, Financial services attorney, Morgan Lewis
Of counsel

Melissa R. H. Hall represents US and overseas banks, nonbank financial services companies, investors in financial services, and technology companies in regulatory and corporate matters. She advises them on a wide range of state and federal financial regulatory laws and regulations. She provides counsel on financial regulatory compliance and enforcement, including state and federal licensing requirements, consumer financial products and compliance, payment systems, corporate and transactional matters, financial institution investment and acquisition, and the development...