Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S. Ct. 2505 (2016) (nonbank assignee not entitled to NBA preemption simply by virtue of the loan having been originated by a national bank.)
MUCH ADO ABOUT THE IMPACT OF MADDEN V MIDLAND
Why should Midland Funding LLC, a purchaser of charged-off debt be entitled to federal preemption benefits enjoyed by national banks when it is not chartered and subject to regulation as a national bank?
Much of the financial-industry criticism of the Second Circuit’s decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015) is conceptually flawed. A recent law review article titled “Madden V. Midland Funding LLC: Uprooting the National Bank Act’s Power of Preemption“ provides another example. It lumps distinct categories of secondary loan market participants together (“hedge funds, securitization vehicles, buyers of defaulted debt, purchasers of whole loans, and other purchasers of loans originated by national banks”) and fails to analyze the implications of the holding in Madden separately. As a result, it reaches far more sweeping and alarmist conclusions than are warranted.
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| Andrew Silvia, Madden V. Midland Funding LLC: Uprooting the National Bank Act’s Power of Preemption, 92 Chi.-Kent. L. Rev. 653 (2017). Available at: http://scholarship.kentlaw.iit.edu/cklawreview/vol92/iss2/12 |
Midland Funding LLC and similar nonbank debt buyers acquire charged-off debt at pennies on the dollar and therefore do not provide a means for the originating bank to “liquify their debts” and make capital available for further lending. They merely mitigate the loss already sustained to a very slight degree. For that reason alone, any diminution of the resale value of the bad loans attributable to restrictions on the interest rate nonbank debt buyers of charged-off debt may legally charge cannot possibly have a substantial impact on the originating bank, its lending practices, or its financial performance. The analysis may be different in the securitization context, but that was not the scenario present in Madden.
Even if all existing and potentials purchasers of charged-off debt (Midland and its ilk) exited the market and even if the entire secondary market for charged-off consumer debt ceased to exist, the maximum incremental loss to the lenders (as owners of the charge-off debt) would be capped at the sale price (percent of nominal value) previously realized by lenders as seller of portfolios of charged-off accounts. And since all lenders entitled to the benefits of federal preemption would be affected equally, none would suffer a competitive disadvantage relative to the others from not being able to sell charged-off accounts at all, or having to sell them at an even greater discount: say 2.3% of nominal value, rather than 3.3%.
Midland Funding LLC routinely redacts the price paid for portfolios of charged-off accounts when it files copies of bills of sale in debt collection suits. In a 2013 state AG enforcement action against Midland for illegal debt collection practices, its servicer, and its parent company, the Texas Attorney General averred that the price Midland pays is 3.3% of the face value of the debt.
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| Excerpt from State's Amended Original Petition in Cause No, 2011-40626 - STATE OF TEXAS (ACTING BY AND THROUGH ATTORNEY GEN vs. MIDLAND FUNDING LLC 165th District Court, Harris County, Texas |
Second, since the feared inability (or reduced ability) to sell charged-off debt to debt buyers would be systemic, the deterioration in loan/account resale proceeds could be compensated for by a higher interest rate at the front end that the original lenders could be able to implement without incurring a competitive disadvantage. Thanks to federal preemption, the lenders are permitted to legally charge their customers regardless of whether or not secondary market participants may or may not do so. And Madden does not change that.
Finally, even if nonbank debt buyers are not (or no longer) at liberty to exact the same (otherwise usurious) interest rates as national banks because they would incur state usury liability without the benefit of federal preemption under the NBA, the same would not be true of the federal banks as originators. Even if the U.S. Supreme Court were to embrace the holding in Madden v Midland and establish it as nationwide precedent, it would not subject national banks to state usury laws that they were previously exempt from. Nor does anyone force these lenders to make risky loans with higher incidence of subsequent delinquency and default. And the decision to sell such bad debt is the banks’ decision likewise. Banks have plenty of wiggle-room to adjust their business practices to changing regulatory realities.
And as for debt-buyers, they already have to adjust their collection activities state-by-state to comply with different statutes of limitations and differences in state-enacted fair debt collection laws, in addition to having to abide by state-specific licensing and bond requirements. Having to adjust claims of accrued interest above and beyond the charge-off balance acquired from the original creditor (or a prior assignee of the lender) to comply with state-specific interest rate limitations would not be all that different or particularly burdensome. The inability to add on as much interest as they would otherwise add if they were allowed to "inherit" preemption protection might marginally affect the price these debt buyers are willing to pay. But the proposition that they cease buying charge-off bank debt altogether is not plausible, especially when the collection of charged-off consumer debt is their sole line of business and the very reason for their existence.
MORE COMMENTARY OF THE DANGER-GLOOM-IF-NOT-DOOM
GENRE
GENRE
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| INTEREST EXPORTATION AND PREEMPTION: "MADDEN'S" IMPACT ON NATIONAL BANKS, THE SECONDARY CREDIT MARKET, AND P2P LENDING Michael Marvin Columbia Law Review Vol. 116, No. 7 (NOVEMBER 2016), pp. 1807-1848 |
U.S. SUPREME COURT ORDERS IN MIDLAND VS. MADDEN
MIDLAND FUNDING, LLC, et al., petitioners,
v.
Saliha MADDEN.
Supreme Court of United States.
Petition for writ of certiorari to the United States Court of Appeals for the Second Circuit denied.
MIDLAND FUNDING, LLC, et al., petitioners,
v.
Saliha MADDEN.
Supreme Court of United States.
The Solicitor General is invited to file a brief in this case expressing the views of the United States.
SECOND CIRCUIT OPINION IN MADDEN V MIDLAND FUNDING LLC
Saliha MADDEN, on behalf of herself and all others similarly situated, Plaintiff-Appellant,
v.
MIDLAND FUNDING, LLC, Midland Credit Management, Inc., Defendants-Appellees.
United States Court of Appeals, Second Circuit.
247Daniel Adam Schlanger, Schlanger & Schlanger LLP, Pleasantville, N.Y. (Peter Thomas Lane, Schlanger & Schlanger LLP, Pleasantville, N.Y.; Owen Randolph Bragg, Horwitz, Horwitz & Associates, Chicago, IL, on the brief), for Saliha Madden.
Thomas Arthur Leghorn (Joseph L. Francoeur, on the brief), Wilson Elser Moskowitz Edelman & Dicker LLP, New York, N.Y., for Midland Funding, LLC and Midland Credit Management, Inc.
Before: LEVAL, STRAUB and DRONEY, Circuit Judges.
STRAUB, Circuit Judge:
This putative class action alleges violations of the Fair Debt Collection Practices Act ("FDCPA") and New York's usury law. The proposed class representative, Saliha Madden, alleges that the defendants violated the FDCPA by charging and attempting to collect interest at a rate higher than that permitted under the law of her home state, which is New York. The defendants contend that Madden's claims fail as a matter of law for two reasons: (1) state-law usury claims and FDCPA claims predicated on state-law violations against a national bank's assignees, such as the defendants here, are preempted by the National Bank Act ("NBA"), and (2) the agreement governing Madden's debt requires the application of Delaware law, under which the interest charged is permissible.
The District Court entered judgment for the defendants. Because neither defendant is a national bank nor a subsidiary or agent of a national bank, or is otherwise acting on behalf of a national bank, and because application of the state law on which Madden's claims rely would not significantly interfere with any national bank's ability to exercise its powers under the NBA, we reverse the District Court's holding that the NBA preempts Madden's claims and accordingly vacate the judgment of the District Court. We leave to the District Court to address in the first instance whether the Delaware choice-of-law clause precludes Madden's claims.
The District Court also denied Madden's motion for class certification, holding that potential NBA preemption required individualized factual inquiries incompatible with proceeding as a class. Because this conclusion rested upon the same erroneous preemption analysis, we also vacate the District Court's denial of class certification.
BACKGROUND
A. Madden's Credit Card Debt, the Sale of Her Account, and the Defendants' Collection Efforts
In 2005, Saliha Madden, a resident of New York, opened a Bank of America ("BoA") credit card account. BoA is a national bank.[1] The account was governed 248*248 by a document she received from BoA titled "Cardholder Agreement." The following year, BoA's credit card program was consolidated into another national bank, FIA Card Services, N.A. ("FIA"). Contemporaneously with the transfer to FIA, the account's terms and conditions were amended upon receipt by Madden of a document titled "Change In Terms," which contained a Delaware choice-of-law clause.
Madden owed approximately $5,000 on her credit card account and in 2008, FIA "charged-off" her account (i.e., wrote off her debt as uncollectable). FIA then sold Madden's debt to Defendant-Appellee Midland Funding, LLC ("Midland Funding"), a debt purchaser. Midland Credit Management, Inc. ("Midland Credit"), the other defendant in this case, is an affiliate of Midland Funding that services Midland Funding's consumer debt accounts. Neither defendant is a national bank. Upon Midland Funding's acquisition of Madden's debt, neither FIA nor BoA possessed any further interest in the account.
In November 2010, Midland Credit sent Madden a letter seeking to collect payment on her debt and stating that an interest rate of 27% per year applied.
B. Procedural History
A year later, Madden filed suit against the defendants—on behalf of herself and a putative class—alleging that they had engaged in abusive and unfair debt collection practices in violation of the FDCPA, 15 U.S.C. §§ 1692e, 1692f, and had charged a usurious rate of interest in violation of New York law, N.Y. Gen. Bus. Law § 349; N.Y. Gen. Oblig. Law § 5-501; N.Y. Penal Law § 190.40 (proscribing interest from being charged at a rate exceeding 25% per year).
On September 30, 2013, the District Court denied the defendants' motion for summary judgment and Madden's motion for class certification. In ruling on the motion for summary judgment, the District Court concluded that genuine issues of material fact remained as to whether Madden had received the Cardholder Agreement and Change In Terms, and as to whether FIA had actually assigned her debt to Midland Funding. However, the court stated that if, at trial, the defendants were able to prove that Madden had received the Cardholder Agreement and Change In Terms, and that FIA had assigned her debt to Midland Funding, her claims would fail as a matter of law because the NBA would preempt any state-law usury claim against the defendants. The District Court also found that if the Cardholder Agreement and Change In Terms were binding upon Madden, any FDCPA claim of false representation or unfair practice would be defeated because the agreement permitted the interest rate applied by the defendants.
In ruling on Madden's motion for class certification, the District Court held that because "assignees are entitled to the protection of the NBA if the originating bank was entitled to the protection of the NBA... the class action device in my view is not appropriate here." App'x at 120. The District Court concluded that the proposed class failed to satisfy Rule 23(a)'s commonality and typicality requirements because "[t]he claims of each member of the class will turn on whether the class member agreed to Delaware interest rates" and "whether the class member's debt was validly assigned to the Defendants," id. at 249*249 127-28, both of which were disputed with respect to Madden. Similarly, the court held that the requirements of Rule 23(b)(2) (relief sought appropriate to class as a whole) and (b)(3) (common questions of law or fact predominate) were not satisfied "because there is no showing that the circumstances of each proposed class member are like those of Plaintiff, and because the resolution will turn on individual determinations as to cardholder agreements and assignments of debt." Id. at 128.
On May 30, 2014, the parties entered into a "Stipulation for Entry of Judgment for Defendants for Purpose of Appeal." Id. at 135. The parties stipulated that FIA had assigned Madden's account to the defendants and that Madden had received the Cardholder Agreement and Change In Terms. This stipulation disposed of the two genuine disputes of material fact identified by the District Court, and provided that "a final, appealable judgment in favor of Defendants is appropriate." Id. at 138. The District Court "so ordered" the Stipulation for Entry of Judgment.
This timely appeal followed.
DISCUSSION
Madden argues on appeal that the District Court erred in holding that NBA preemption bars her state-law usury claims. We agree. Because neither defendant is a national bank nor a subsidiary or agent of a national bank, or is otherwise acting on behalf of a national bank, and because application of the state law on which Madden's claims rely would not significantly interfere with any national bank's ability to exercise its powers under the NBA, we reverse the District Court's holding that the NBA preempts Madden's claims and accordingly vacate the judgment of the District Court. We also vacate the District Court's judgment as to Madden's FDCPA claim and the denial of class certification because those rulings were predicated on the same flawed preemption analysis.
The defendants contend that even if we find that Madden's claims are not preempted by the NBA, we must affirm because Delaware law—rather than New York law—applies and the interest charged by the defendants is permissible under Delaware law. Because the District Court did not reach this issue, we leave it to the District Court to address in the first instance on remand.
