Denial of usury damages and attorney's fees in claim based on unpaid usurious loans reversed by Texas Court of Appeals: Leteff v. Roberts (Tex.App.- Houston 2018)

Leteff v. Roberts d/b/a City Auto Sales, No. 01-17-00398-CV (Tex.App. - Houston [1st Dist.] May 22, 2018, no. pet.) (denial of relief under the Texas usury statute reversed and case remanded for further proceedings).

This is not a consumer credit case, but it is nevertheless interesting in that it illuminates the Texas usury statute, which provides for usury liability to be triggered by contracting for usurious interest also, in addition to charging and receiving it. Because of the use of disjunctive ("or") in the relevant section of the Texas Finance Code, the party asserting the usury claim against the creditor need not show that he actually paid any of the contracted-for usurious interest to be entitled to relief under the usury statute, and the available relief under that statute also includes attorney's fees.

Leteff v. Roberts (Tex.App. - Houston 2018) 

JOE LETEFF, Appellant,

v.
JIMMY ROBERTS, INDIVIDUALLY AND D/B/A CITY AUTO SALES, Appellee.

No. 01-17-00398-CV.

Court of Appeals of Texas, First District, Houston.

Opinion issued May 22, 2018.

Paul Houston Lavalle, for Jimmy Roberts, Individually and d/b/a City Auto Sales, Individually and d/b/a City Auto Sales, Appellee.

Daniel Kistler, for Joe Leteff, Appellant.

On Appeal from the 212th District Court, Galveston County, Texas, Trial Court Case No. 16-CV-0645.

Panel consists of Justices Bland, Lloyd, and Caughey.

OPINION

RUSSELL LLOYD, Justice.

A creditor made numerous cash loans to an obligor for the obligor's business. The obligor failed to repay many of the loans, and the creditor sued. After a bench trial, the trial court found the obligor liable in contract and the creditor liable for usury. The court awarded the obligor an offset equal to the usury damages he was owed on the four loans that he repaid but refused to award any usury damages on the 10 loans that he failed to repay. In part because of this, the obligor's contract liability exceeded the creditor's usury liability. The parties agreed to a reduced judgment of $1,094,047.04 in the creditor's favor, but the court noted that the obligor did not waive his right to appeal.

The obligor appeals the trial court's refusal to award him usury damages on the 10 loans that he failed to repay. He also appeals the court's refusal to award him attorneys' fees under the usury statutes. We reverse and remand.

Background

Joe Leteff met Jimmy Roberts through a mutual acquaintance. Leteff told the acquaintance that he was looking for financing for his business—providing manpower and equipment rentals to the oil-and-gas industry. The acquaintance called Roberts, who provided financing for the acquaintance's used-car dealership.

Leteff and Roberts, with Roberts's attorney present, met at the dealership to discuss a deal. Leteff proposed, and the parties reduced to writing, a transaction that specified that Roberts would "loan" Leteff $40,000 and that Leteff would repay in 45 days both the $40,000 and $20,000 as an "interest amount." Leteff and Roberts signed the agreement. The acquaintance looked on as Leteff and Roberts "did the transaction" at the dealership's table.

Leteff and Roberts entered into more similarly structured loans, some reduced to writing and others not. In all, Leteff and Roberts entered into 17 loans, each with a stated principal amount and an obligation that Leteff repay the principal. Fourteen of the loans called for a stated interest amount; the other three did not call for any interest. On at least one occasion, Leteff met Roberts and the acquaintance at Roberts's house for a loan of over half a million dollars. That amount was counted out in cash, and Leteff took the cash away in grocery bags.

Of the 14 loans that called for interest, Leteff repaid Roberts on only four. Leteff never repaid Roberts on the remaining 10 loans.

Roberts sued Leteff for breach of contract. Leteff counterclaimed for usury, under Texas Finance Code § 305.001, on the 14 loans that called for interest. The parties tried the case without a jury, and the trial court entered a judgment in Roberts's favor for $1,094,047.04.

The trial court, on request, entered findings of fact and conclusions of law. For each of the 17 loans, the trial court listed the date; principal amount; interest amount, if any; and period for repayment, if any was specified. The court also noted which loans were memorialized in a written agreement. For loans in which the parties failed to specify a period for repayment, the court applied a default period of one year.

The trial court entered a conclusion of law that it "will not award any interest in transactions to Leteff where Leteff fully defaulted on the repayment of" principal and interest. The court then applied Finance Code § 305.001(a-1), found that Roberts was liable for usury, and awarded Leteff an offset against the money he had not repaid for the usury damages on the four loans that he had repaid. The trial court did not award any usury damages or offset for the 10 loans not repaid.

The trial court's findings of fact establish the following about the 10 loans:

1. The March 13, 2014 loan, by written agreement, provided for $100,000 in principal, $40,000 in interest, and repayment in 60 days.

2. The April 9, 2014 loan provided for $60,000 in principal and $40,000 in interest.

3. The May 9, 2014 loan, by written agreement, provided for $52,750 in principal, $10,000 in interest, and repayment in seven days.

4. The July 10, 2014 loan, by written agreement, provided for $60,000 in principal, $10,000 in interest, and repayment in seven days.

5. The July 18, 2014 loan, by written agreement, provided for $553,720 in principal and $425,000 in interest.

6. The July 23, 2014 loan, by written agreement, provided for $285,000 in principal, $90,000 in interest, and repayment in 60 days.

7. The July 26, 2014 loan provided for $100,000 in principal and $75,000 in interest.

8. The August 12, 2014 loan provided for $35,000 in principal and $8,000 in interest.

9. The April 21, 2015 loan provided for $200,000 in principal and $80,000 in interest.^[1]

10. One of the two August 14, 2015 loans—the only one in which the parties contracted for interest—provided for $50,000 in principal and $30,000 in interest.

The trial court then computed its judgment. It noted that the amount it computed for Roberts's contract damages for the money not repaid, after applying the usury offset, "was reduced by agreement of the parties to $1,094,047.04." Despite this agreement, Leteff "did not waive his right to appeal" the judgment.

The trial court also noted that the parties stipulated that reasonable attorneys' fees for either party were $19,000.00 and that litigation costs other than taxable costs were $1,000.00. However, the trial court refused to award attorneys' fees to either party.

Leteff appealed. In his appeal, he challenges only two of the trial court's conclusions—(1) that he should not be awarded usury damages for any of the 10 loans that he did not repay and (2) that he should not be awarded attorneys' fees or costs. He does not challenge any of the trial court's other findings of fact or conclusions of law.

Roberts responded. His response brief does not raise any cross-points or challenge any finding of fact or conclusion of law. He prays only that the trial court's judgment be affirmed.

Usury Damages for Loans that Leteff Did Not Repay

A. Standard of Review and Applicable Law

In an appeal from a bench trial, the trial court's findings of fact carry the same weight as a jury verdict. Nguyen v. Yovan, 317 S.W.3d 261, 269-70 (Tex. App.-Houston [1st Dist.] 2009, pet. denied). "We defer to unchallenged findings of fact that are supported by some evidence." Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, 437 S.W.3d 518, 523 (Tex. 2014). Unchallenged findings of fact do not bind us when "the contrary is established as a matter of law, or if there is no evidence to support the finding." Meehl v. Wise, 285 S.W.3d 561, 565 (Tex. App.-Houston [14th Dist.] 2009, no pet.).

A trial court has no discretion in determining the law or applying it to the facts. Tenaska Energy, 437 S.W.3d at 523. So we review questions of law de novo. See BSG-Spencer Highway Joint Venture, G.P. v. Muniba Enters., Inc., No. 01-15-01109-CV, 2017 WL 3261365, at *5 (Tex. App.-Houston [1st Dist.] Aug. 1, 2017, no pet.) (mem. op.); Nipp v. Broumley, 285 S.W.3d 552, 555-56 (Tex. App.-Waco 2009, no pet.).

A creditor who contracts with an obligor for interest that is greater than the maximum interest allowable by law is liable to the obligor for usury. See TEX. FIN. CODE ANN. § 305.001(a-1) (West 2016). The creditor then owes the obligor a statutory penalty, which is computed by subtracting the amount of maximum allowable interest from the amount of interest actually contracted for and then trebling that result. See id.

Interest need not be expressed as a rate or percentage to be considered usurious. If the creditor agrees to "any compensation that constitutes interest, the obligor is considered to have agreed on the rate produced by the amount of that interest, regardless of whether that rate is stated in the agreement." Id. § 302.002. "`Interest' means compensation for the use, forbearance, or detention of money." Id. § 301.002(a)(4). "`Usurious interest' means interest that exceeds the applicable maximum amount allowed by law." Id. § 301.002(a)(17).

A default maximum allowable interest rate of 10 percent per annum generally applies unless a statutory optional rate ceiling applies. See id. §§ 302.001(b), 303.001-.009. If an optional rate ceiling applies but is less than 18 percent per annum, then the maximum allowable interest rate is 18 percent per annum. Id. § 303.009(a).

B. Roberts is liable for usury on all loans in which he contracted for usurious interest.

1. The unambiguous text of Finance Code § 305.001(a-1) requires that Roberts be held liable.

Leteff contends that the trial court erred by refusing to award usury damages on loans that he did not repay even though the parties had contracted for usurious interest on those loans.

The unambiguous text of Finance Code § 305.001(a-1) provides that a creditor is liable for usury when the creditor merely contracts for usurious interest on a loan and notwithstanding the obligor's failure to repay that loan.

The statute says:

A creditor who contracts for or receives interest that is greater than the amount authorized by this subtitle in connection with a commercial transaction is liable to the obligor for an amount that is equal to three times the amount computed by subtracting the amount of interest allowed by law from the total amount of interest contracted for or received.

Id. § 305.001(a-1) (emphasis added).

The key is the disjunctive "or." Either of the two acts connected by the "or"—(1) contracting for usurious interest or (2) receiving usurious interest—by itself is sufficient to trigger liability. Rahmani v. Banet, No. 02-14-00240-CV, 2015 WL 2169765, at *2 (Tex. App.-Fort Worth July 9, 2015, pet. denied) (mem. op.) (quoting Smart v. Tower Land & Inv. Co., 597 S.W.2d 333, 340 (Tex. 1980)); accord Sturm v. Muens, 224 S.W.3d 758, 764 & n.11 (Tex. App.-Houston [14th Dist.] 2007, no pet.) (construing similarly disjunctive Finance Code § 305.001(a) and reasoning that "it is not necessary that a demand be made for the payment of usurious interest because merely contracting for it is a violation of the usury statutes"). Even if Roberts did not receive any usurious interest on the loans that Leteff did not repay, the statute requires that Roberts be held liable because he contracted for usurious interest.

The Supreme Court of Texas interpreted a previous version of the relevant Finance Code language (and the same use of the disjunctive in its Revised Civil Statutes predecessor)^[2] in similar fashion to the Rahmani court's interpretation of current subsection (a-1)'s use of the disjunctive: any one of the acts connected by the "or," on its own, is sufficient to trigger liability. See Danziger v. San Jacinto Sav. Ass'n, 732 S.W.2d 300, 304 (Tex. 1987); Smart, 597 S.W.2d at 340; Windhorst v. Adcock Pipe & Supply,547 S.W.2d 260, 261 (Tex. 1977) (per curiam) ("By describing the conditions precedent to recovery of penalties in the disjunctive, the Legislature made it clear that only one such condition need occur to trigger penalties; either a contract for, a charge of or receipt of usurious interest.").

The law awards an obligor usury damages as "a boon or a windfall which he is allowed to receive as a punishment to the usurious lender. . . . A successful claim of usury may allow the borrower to avoid a debt he might otherwise owe." Steves Sash & Door Co. v. Ceco Corp., 751 S.W.2d 473, 476-77 (Tex. 1988). The usury law therefore punishes Roberts for contracting for usurious loans, even if the result is a windfall for Leteff.

2. Roberts's counterarguments are unavailing.

Roberts responds with four contentions. First, he contends that the 17 transactions were investments and were not loans. Generally, investments are not subject to usury law because the law applies to transactions in which the obligor has an absolute obligation to repay the principal. See Anglo-Dutch Petrol. Int'l, Inc. v. Haskell, 193 S.W.3d 87, 96-97 (Tex. App.-Houston [1st Dist.] 2006, pet. denied); Bray v. McNeely, 682 S.W.2d 615, 619-20 (Tex. App.-Houston [1st Dist.] 1984, no writ). However, this does not benefit Roberts because the trial court entered findings of fact and conclusions of law that each of the 17 transactions was a loan. Roberts has not raised any challenge to the factual or legal sufficiency of the trial court's findings or conclusions. "We defer to unchallenged findings of fact that are supported by some evidence." Tenaska Energy, 437 S.W.3d at 523. Further, there is some evidence to support the trial court's findings and conclusions—the parties' written agreements' language that the principal amounts "will be paid back," the agreements' use of the word "loan," and Roberts's use of the word "loan" to describe the parties' written and unwritten transactions in his trial testimony. We therefore defer to the trial court's unchallenged findings and conclusions.

Second, Roberts contends that he should not be liable for usurious contract terms that Leteff suggested be included in the loan agreements. But "the test for alleged usury is not concerned with which party might have originated the usurious provisions." First State Bank of Bedford v. Miller, 563 S.W.2d 572, 575 (Tex. 1978); accord Sturm, 224 S.W.3d at 764 n.11; Dunnam v. Burns, 901 S.W.2d 628, 631-32 (Tex. App.-El Paso 1995, no writ). This principle extends to the parties' unwritten loan agreements. See Dunnam, 901 S.W.2d at 631-32 & n.2 (applying principle to contract that creditor had not signed).

Third, Roberts suggests that Leteff erroneously seeks the application of Finance Code § 305.001(a), which concerns only transactions that are "for personal, family, or household use." To the contrary, Leteff has argued, in this court and in the trial court, for the application of Finance Code § 305.001(a-1), which specifically addresses commercial transactions.

Fourth, Roberts contends that equitable doctrines like unclean hands or unjust enrichment should bar the usury recovery that Leteff seeks. Leteff's action for usury is not subject to these equitable doctrines. See Greever v. Persky, 156 S.W.2d 566, 569 (Tex. Civ. App.-Fort Worth 1941) (holding unclean-hands defense inapplicable to usury action because action was not equitable proceeding), aff'd, 165 S.W.2d 709 (Tex. 1942); see also Furr v. Hall, 553 S.W.2d 666, 672 (Tex. Civ. App.-Amarillo 1977, writ ref'd n.r.e.) (citing Greever for proposition that unclean hands "is strictly an equitable doctrine not applicable outside equitable proceedings").

3. We remand for further proceedings.

Ordinarily when reversing a trial court's judgment after a bench trial solely on a question of law, we are to render the judgment that the trial court should have rendered. See TEX. R. APP. P. 43.3; Tex. Utils. Elec. Co. v. City of Waco, 919 S.W.2d 436, 440 (Tex. App.-Waco 1995, writ denied). However, a remand is sometimes necessary for further proceedings or when the interests of justice require. TEX. R. APP. P. 43.3(a), (b). We remand when "there is a probability that a case has for any reason not been fully developed. . . ." Bayway Servs., Inc. v. Ameri-Build Constr., L.C., 106 S.W.3d 156, 161 (Tex. App.-Houston [1st Dist.] 2003, no pet.). Or when there may be "outstanding issues in light of this court's opinion." Elbar Invs., Inc. v. Garden Oaks Maint. Org., 500 S.W.3d 1, 5 (Tex. App.-Houston [1st Dist.] 2016, pet. denied).

We remand this case to the trial court because two issues appear not to be fully developed in the record before us. See Elbar Invs., 500 S.W.3d at 5; Bayway Servs.,106 S.W.3d at 161.

First, the trial court should calculate the usury damages Leteff is entitled to for the 10 loans that are the subject of this appeal. See, e.g., Strasburger Enters., Inc. v. TDGT Ltd. P'ship, 110 S.W.3d 566, 579-80 (Tex. App.-Austin 2003, no pet.) (remanding for new calculation of usury award); Perez v. Hernandez, 658 S.W.2d 697, 702 (Tex. App.-Corpus Christi 1983, no writ) (remanding for calculation of attorneys' fees owed on successful usury claim).

Second, the trial court's findings of fact and conclusions of law refer to an agreement between the parties that reduced the judgment in Roberts's favor, even after applying Leteff's usury offset, to $1,094,047.04. None of the terms of this agreement are before us. We cannot determine if or how the parties' agreement would affect the outcome in the trial court once the court enters judgment in accordance with this opinion.

Attorneys' Fees

Leteff also contends that the trial court erred by refusing to award him attorneys' fees and costs under Finance Code § 305.005. "A creditor who is liable under Section 305.001 or 305.003 is also liable to the obligor for reasonable attorney's fees set by the court." TEX. FIN. CODE ANN. § 305.005 (West 2016). The availability of attorneys' fees under a statute is a question of law. Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 94 (Tex. 1999) (per curiam).

The trial court entered a conclusion of law that "No attorney fees were awarded." Leteff and Roberts "stipulated that reasonable attorney's fees for each party are $19,000.00, and costs of litigation, other than taxable costs, are $1,000.00.. . ." Therefore, if Leteff should be awarded both reasonable attorneys' fees and costs under Finance Code § 305.005, he would be owed $20,000.00.

Under the statute's plain language, the only requirement for awarding an obligor reasonable attorneys' fees is that the creditor be found liable for usury under Finance Code § 305.001 or § 305.003. See Robinson & Harrison Poultry Co. v. Galvan, 323 S.W.3d 236, 247 (Tex. App.-Corpus Christi 2010, pet. granted, judgm't vacated w.r.m.). The trial court found Roberts liable for usury under Finance Code § 305.001. Therefore, the trial court should have awarded Leteff the $19,000.00 that the parties stipulated to for attorneys' fees.

Costs are different. Generally, attorneys' fees and costs are mutually exclusive. See In re Nalle Plastics Family Ltd. P'ship, 406 S.W.3d 168, 175 (Tex. 2013) (orig. proceeding). For example, Civil Practice and Remedies Code chapter 38 "differentiates between attorney's fees and costs." Id. (citing TEX. CIV. PRAC. & REM. CODE § 38.001). The Legislature has chosen to make costs recoverable elsewhere, but not in Finance Code § 305.005. Compare TEX. FIN. CODE ANN. § 396.351(b) (West 2016) (expressly making both "costs" and "attorney's fees" recoverable to certain parties), TEX. CIV. PRAC. & REM. CODE ANN. § 27.009(a)(1) (West 2015) (same), and TEX. CIV. PRAC. & REM. CODE ANN. § 38.001 (West 2015) (same), with TEX. FIN. CODE ANN. § 305.005 (West 2016) (omitting "costs"). The Legislature omitted "costs" from Finance Code § 305.005, and we presume that it was "excluded for a purpose." See Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 540 (Tex. 1981). We therefore hold that the trial court did not err by refusing to award the stipulated $1,000.

Conclusion

We reverse the judgment of the trial court insofar as it (i) failed to award Leteff damages for the 10 usurious loans that he did not repay and (ii) failed to award Leteff $19,000.00 for attorneys' fees. We remand the case for further proceedings consistent with this opinion.

[1] The trial court's findings of fact and conclusions of law say of this loan that "Roberts loaned Leteff $280,000.00. . . ." To the extent the court found that the principal for this loan was $280,000 and not $200,000, we do not defer to this finding because it is not supported by any evidence and because the evidence establishes as a matter of law a contrary principal amount. See Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, 437 S.W.3d 518, 523 (Tex. 2014); Meehl v. Wise, 285 S.W.3d 561, 565 (Tex. App.-Houston [14th Dist.] 2009, no pet.). Both Roberts and Leteff testified about this unwritten loan's terms, and their testimony establishes that the loan's principal amount was only $200,000 and that Leteff was to repay $280,000 on the loan.

[2] See Act of May 26, 1997, 75th Leg., R.S., ch. 1008, §§ 1, 6, 7, sec. 305.001, 1997 Tex. Gen. Laws 3091, 3437, 3602, 3603 (amended 1999, 2005) (current version at TEX. FIN. CODE § 305.001(a), (a-1)) (codifying at then-Finance Code § 305.001(a) a nonsubstantive revision of former Revised Civil Statutes article 5069-1.06). 

Show me the Note, not to mention the Valid-when-made Doctrine. The curious case of Madden Madness and its Spread beyond Midland

Why is the financial sector going so mad over Madden when only Midland Funding and Midland Credit Management are afflicted and in need of Congressional intervention? --  Recent article no help answering that question. Hype continues. 

Show me the Promissory Note that Saliha Madden made to Bank of America, and show me the Valid-when-made Doctrine. 

Madden v Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136, S. Ct. 2505 (2016). 

The last blog post on Madden v Midland Funding discussed a fresh-minted law review article advocating that other circuits embrace the Second Circuit’s holding that assignees of national banks do not “inherit” National Bank Act protection so as to allow them to collect interest at a rate that was not usurious when charged by the bank that owned the account (thanks to federal preemption protection), but exceeded the usury limits in the state in which Midland Funding, LLC, the purchaser of the charged-off credit card account sought to collect it through its affiliate, Midland Credit Management, Inc..

Today’s post will discuss a scholarly piece that advocates the opposite: the containment of Madden and how to prevent the spread of the infection to the jurisprudence of other circuits.

CURIOSITY WITH OR WITHOUT PROBABLE CAUSE?

The article, penned by lawyers at Morgan, Lewis & Bockius LLP, finds it curious that the courts in Madden didn’t resurrect and apply the VALID-WHEN-MADE doctrine, which even the authors admit has a scant grounding in recent caselaw.
  

But there is a fix. And it does not even require Congress to legislate one. Here it is, violà: The valid-when-made doctrine has been so omnipresent all along that it did not need overt acknowledgment. Hence the dearth of published authority. It’s been lingering in the collective consciousness of the industry for at least a century. All too well understood by those in the know. If only the courts proclaimed so, now that the industry has found it necessary to bring it up, beleaguered and under the threat of impending collapse. 

CONTAINING THE SPREAD OF MADDEN BEYOND MIDLAND

The lawyer-led line of argument culminates in blaming other lawyers, Midland’s lawyers, for losing the case on account of lousy briefing. It purports to offer sage advice to financial industry peers on how to improve their game so as to make sure that other Circuits don’t catch the Madden infection.
  

Curious indeed.

Since the article blames Midland’s lawyers for their subpar performance (without naming them, of course (see Google Scholar version of the Madden opinion, if interested in their identity), and since it unabashedly promotes the vested interests of the banks and financial industry in maximizing extraction of money at high rates of interest from people that have fallen on hard times and cannot pay their debts, it seems only appropriate – in the interest of fairness and balance – to subject this industry advocacy masterpiece of legal scholarship to a no-holds-barred -- or at least rigorous - critical analysis as to soundness of reasoning and evidentary support. 
   

GETTING THE FACTS WRONG AB INITIO

By way of first salvo, the Curious authors get the facts wrong about the case, and not exactly on a nontrivial matter. 
  

The account at issue in Madden v Midland involved an open-end credit card plan (aka credit card account) and the account was not sold by Bank of America to an unaffiliated national bank, contrary representation by the Curious authors notwithstanding. The account ended up being owned by FIA Card Services, a wholly owned subsidiary of Bank of America Corporation, and the transfer transaction was in the nature of a merger, not an asset sale to a third-party national bank.

BANK OF AMERICA - FIA CARD SERVICES N.A.
MERGER HISTORY

While the sale to Midland Funding, LLC was an asset sale (portfolio sale), the transfer of the credit card account to FIA was not, at least not to an unrelated third-party. In fact, FIA was created by Bank of America (holding company) to consolidate its credit card operations in a Delaware-located national bank. Presumably to take advantage of the usury-friendly regulatory climate there. Or credit-access friendly, as the industry would have the gullible press and public believe.

From OCC's 2010 Evaluation of FIA Card Services N.A. 

under the Community Reinvestment Act 

A second subsidiary was also gobbled up along the way: a Bank of America subsidiary that actually went by that name, with (USA) in its name, located a bit further down South, in the dessert: Arizona. And the credit card account at issue in Madden was presumably one of those, because the 2d Circuit opinion in Madden v Midland mentions a notice-of-change-in-terms that changed the choice-of-law state to Delaware, FIA's home state.

Exemplar of Bank of America N.A.(USA) Cardmember
Agreement (C 2008) with Arizona choice-of-law clause (see highlight in 2nd column)

If a presumably vetted scholarly article cannot even get facts straight that are a matter of public record, it sheds doubt on whether it should even have been published. And any conclusions drawn from an argumentation that is predicated on false factual premises should not only be taken with a grain of salt or two, but should be deemed dubious at best, if not outright unworthy of serious consideration until the factual premises are corrected and accurately stated.

THE JOURNEY OF MADDEN’S CREDIT CARD DEBT

The bone of contention in Madden centered on what happens when a debt is transferred from a national bank to a nonbank, in that case Midland Funding LLC, a debt buyer. Even if the error regarding the ownership history of the account prior to charge-off and sale to Midland Funding is not relevant in the narrow issue of federal preemption in the case (more on that later), there is a second fundamental flaw that the Curious authors fudge in inexcusable fashion even though they otherwise offer very astute observations: it involves the distinction between notes and closed-end credit as one category, and open-end credit on the other.

As the PR-amenable moniker implies, the VALID-WHEN-MADE doctrine is all about the validity of a loan contract at the point of origination. That presumes that the debt subject to transfer does, in fact, stem from a loan, and that the loan contract or a note is actually executed on a definite date at a definite place. Or, alternatively, that a loan was made as a factual matter, since the "making" in the "when-made" component could either refer to executing a promissory as "maker" (action by the borrower) or "making" the loan by disbursing funds pursuant to a loan agreement (action by the lender, or by a disbursement agent, in the rent-a-charter scenario). 

But the debt in Madden neither involved a promissory note (never mind a negotiable one), nor even  a signed loan contract in any other shape or form. The vast majority of credit card accounts do not involve signed contracts and debt incurred such an account cannot be characterized as “a loan” (singular) because such accounts involve repeat transactions, or at least allows for them. The account at issue in Madden was an open-end extension of credit governed by Delaware law. It would, of course, be based on a written “agreement” because TILA requires cost-of-credit terms to be in writing, and because Delaware banking law requires a written agreement for open-end credit plans, but the terms of that agreement would only become a contract, and give rise to an obligation to repay debt, upon use of the credit card or some other manner of credit utilization, such as a cash withdrawal, charge authorization that does not involve use of the card, or use of a check drawn on the credit account.

The implications of this are rather obvious. Assuming the valid-when-made theory even applies, it would kick in each time a charge authorization is made, not just at the point in time when the account is opened, and not just the first time the issued card is used to make a purchase and thereby cause a debit to the account. 

A CREDIT CARD ACCOUNT IS NOT A PROMISSORY NOTE AND IS NOT TRANSFERRED BY NEGOTIATION, BUT IN BULK BY BILL OF SALE  

Assuming, for starters, that the valid-when-made proposition makes any sense at all in this context, it would have to be applied iteratively to each instance of card utilization and “freeze” the interest rate in effect at that time of the transactions under the “when made” element. But this cannot be done after as little as a single billing cycle because it is in the nature of most credit card schemes to add the charges associated with new transactions to the revolving balance, if any, and to subject the aggregate balance to the applicable interest rate then in effect (in the vast majority of accounts, a variable APR or its daily equivalent). This makes it well-neigh impossible to apply the valid-when-made concept to any particular component of the revolving balance except when a single transaction, such as a promotional cash advance made by means of a check, is tracked separately in the accounting system (and periodic billing statements), i.e. as a distinct balance type to which a special interest rate is applied.

Industry advocates might argue that the valid-when-made “principle” should be applied to the charge-off balance and the interest rate then in effect. Conceptually, this proposition violates logic because a loan is obviously not “made” when the borrower has already been in default for 180 days, which is the ordinary period of time before the account balance is charged off.  

As a practical matter, of course, the industry could simply take the position that whatever the interest rate was at that time of charge-off (which is a definite point in time) should be the interest rate that the national bank should be able to bequeath to the purchaser on occasion of the subsequent portfolio sale. In a similar vein, they might argue that the national bank should be able to “freeze” the interest rate too, in cases where the default rate is a variable APR based on prime.

Converting a variable APR to a fixed APR would simplify matters for the purchaser because the latter would not have to track changes in prime and recalculate the charge-off balance accordingly. The same advantage would hold true if the debt buyer were to calculate additional interest separately as TSI does in National Collegiate Student Loan Trust collection cases, albeit based on LIBOR, rather than U.S. Prime Rate. See exemplar of a standard Exhibit E from TSI below:

Because a fixed APR would simplify the accounting and reduce the overhead for the purchaser, it might enhance, at least slightly, the price the seller can command for the portfolio. The bank, as seller, would thus have an incentive to raise the APR to the highest rate, and then freeze it at that rate (as a static rate, rather than a variable one) before disposing of the account as a bad debt.  

Obviously, the rate in effect at the time of charge-off would not be the rate that was in effect at the time the credit card account was opened or when the charges resulting in the debt were incurred  (“when made”). It would predictably be higher because it is standard industry practice to apply a higher default interest rate, or penalty rate, to delinquent accounts.

The rate at the time of the portfolio sale to the non-bank entity would be the rate on the last account statement, or its electronic equivalent. Simple enough. But is that even a valid contract rate amenable to being bequeathed to a successor-in-interest?

WHERE IS THE AGREEMENT ON THE DEFAULT RATE?

The valid-when-made “doctrine” advocated by the financial industry post-Madden -- whether contrived, discovered, or merely resurrected (a topic for future exploration) -- not only assumes a definite point in time when the loan contract as “made”, it also assumes that the interest rate was fixed at that time (fixed APR or margin plus Prime), and that such rate is evidenced by the written instrument, whether a promissory note or a loan contract.

Again, this assumption does not hold in the case of credit card accounts because there is typically no written and signed contract at all. And the initial TIL disclosures are just that: initial.
  

The interest rate and the other cost-of-credit terms are subject to unilateral amendment by the credit card issuer. How this is done may vary somewhat among the states that major card issuers call home (Delaware, South Dakota, North Carolina, Utah, Virginia), and is also regulated by the TILA, but the basic business model, and the chosen jurisdiction’s law, allows the card issuing bank to raise the interest rate to whatever is within the law in its home state, and the cardholder can then either suck it up or close the account and pay off the balance on the existing terms, assuming proper prior notice and grace period (at least post-Crash under the Card Act). The account in Madden is a rather old one, so it is not so clear which version of the TILA-required disclosures applied. 

When the cardholder resorts to self-help and stops making payments, the creditor will likely raise the rate to the default rate, which will likely be even higher than the rate “proposed” in the notice-of-change-in-terms notice.

If that rate then -- by operation of the bank’s automated accounting system -- ends up being 27.24%, can that rate be said to be the rate at inception ("when made")? Obviously not. It is the rate the bank applies at the back end, not the front end.

Exemplar of CHASE card statement for delinquent account
reflecting 27.24% APR and monthly late of fee of $39.00
(from a Midland Funding collection suit in Texas)

Exemplar of even higher rate of 29.99% APR on delinquent
Chase credit card account from 2011 Midland Funding collection suit in Texas 

And since the cardmember would not have consented to this highest-ever rate on his or her account by using the card (the account was, after all, already closed), he or she did not consent to it. At least not that way, i.e. by continued use of the account to make purchases as a manifestation of assent to the more expensive terms without a signature on a written amendment to the contract.

That leaves the argument that the cardholder consented to the 27.24% rate (or even higher) when she or he agreed to the standard terms of the account, which probably contain a provision stating what the penalty rate is, or a formula by which the delinquency rate is calculated (typically a higher margin percentage over Prime). -- But where is that agreement?

When American Express sues on delinquent accounts, it typically produces an account-specific Cardmember Agreement that is dated, contains the name of the cardholder, the type of card/account, and the ending digits of the credit card number. It also shows the account-specific interest rate(s) and other terms on Part 1 of 2.

But that has not been so for the vast majority of the FIA/Bank of America accounts, at least not those that ended up in litigation in Texas courts, not to mention cases brought by debt buyers. 

Even in cases in which FIA itself appeared as Plaintiff, it would typically attach a generic cardmember agreement that was not expressly linked to the account, sometimes from Bank of America (USA) N.A. (Arizona) rather than Bank of America, N.A. or from FIA Card Services, N.A., or it would produce multiple generic cardmember agreements or a combination of cardmember agreement and change-in-terms notices.

Only recently has FIA's successor, BANA, started to support motions for summary judgment in collection suits with copies of cardmember agreements and subsequent change-of-terms notices with cardholder's name printed on them. See examples of penalty APR and late fee amendments below (names cropped).

Exemplars of change-in-terms notices regarding late fee (above)

and penalty APR (below) 

Generic cardmember agreements typically do no even contain the account-specific cost-of-credit terms that are printed on separate TIL disclosures statements called Schedule or Rate Table, or some similar label, depending on card issuer.

  

All of which makes it hard to determine -- even in the context of contested cases that allow for resort to discovery and force the Plaintiff to prove its case with summary judgment evidence or business records affidavit (rather than getting judgments by default) --- what cardmember agreement governs the claim asserted in litigation, not to mention what interest rates. The interest rates may, of course, have changed, not merely because they are often pegged to the prime rate, but because the issuing bank has exercised it right to unilaterally raise the rate, subject to tacit approval by the cardholder in the form of continued use of the credit card, as opposed to the cardholder closing the account and paying the balance off under the then-existing rates.

Industry advocates raise the specter of upsetting financial market by “uncertainty” as the whether a debt-buyer such as Midland Funding, LLC can assess post-chargeoff interest at the same rate as the original creditor. They are not engaging in overkill. They are shooting at a phantom.

Even when card issuers sue on their own accounts (rather than selling them to outfits such as Midland Funding, CACH, LLC, Credigy Receivables, Crown Asset Management, LVNV Funding LLC, Portfolio Recovery Associates LLC, Troy Capital LLC, etc.), they often do not produce complete documentation of what the contracted-for interested rate actually is, and the difference between charge-off balance with and without post-charge-off interest would not be very large in any event as long as the banks sue promptly, which nowadays they typically do. For a reason. People who default on a credit card often default on several. So the creditor that sues first is first in line to collect with the aid of the courts and their power to enforce judgments coercively. American Express is known to file suit promptly and produces account-specific Cardmember Agreements. BANA now appears to be following this model. To the extent other national banks go that route, the issue of whether debt buyers can enforce the terminal interest rate on charged-off accounts becomes altogether moot.

DEBT BUYER MIDLAND AND ITS COLLECTOR HAVE A BIG STAKE IN THE OUTCOME IN MADDEN, NATIONAL BANKS DO NOT
  

Midland’s bottom line is obviously affected, and the fact that Madden brought an FDCPA-based class action, rather than merely defending against post-charge-off interest as uncollectible in the context of a debt collection suit, gave Midland plenty of reason to put up a good fight all the way to the Supreme Court.

To apply NBA preemption to an action taken by a non-national bank entity, application of state law to that action must significantly interfere with a national bank's ability to exercise its power under the NBA. See Barnett Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25, 33, 116 S.Ct. 1103, 134 L.Ed.2d 237 (1996); Pac. Capital Bank, 542 F.3d at 353.

But the impact on the original creditors is minimal, and cannot possibly substantially interfere with their ability to extract the highest interest rate the market (i.e. the cardholders) will bear, i.e. their much-touted powers under the National Bank Act to force their customers in other states to pay the high rate of interest that is lawful in the state where they set up shop. And the big U.S. bank holding companies do have that choice. They can relocate their credit card subsidiary to Delaware or South Dakota. 

Why minimal? -- Because debt buyers such as Midland acquire the charged-off accounts at a very small fraction of the nominal balance, and that balance is itself already artificially inflated because it will generally include 6 months of interest at the highest possible rate (default/penalty rate) plus monthly late fees, neither of which the bank had any realistic expectation to collect. The interest was merely accrued on the books, and represents “phantom” earnings on uncollectible indebtedness. In effect, the additional interest assessed after default is not even a loss. The loss occurred when the debtor stopped making payments, and the bank stopped any further losses by cutting off the cardholder’s charging privileges. The accrual of "phantom" interest at high rates merely increased the charge-off balance and the associated tax benefits of writing it off as a bad debt. 

The Second Circuit's key holding in Madden v. Midland Funding 

NATIONAL BANKS CAN AND DO AVOID THE ADVERSE IMPACT FROM MADDEN, IF ANY, AND HAVE BEEN DOING SO EVEN BEFORE MADDEN WAS DECIDED

Even if there a non-trivial marginal impact in the form of a lower sale price of an already very low price realized in the (teritiary) debt buying markets for portfolios of unsecured charged-off consumer debt, national banks could avoid this effect by filing collection suits in their own names. Citibank, N.A. (and previously, Citibank (South Dakota) N.A.), have done that for years; American Express Bank, FSB, has done it for years; American Express Centurion Bank (a Utah industrial bank) has done it for years.

Bank of America, N.A. and – prior to that – FIA Card Services, N.A. – has also been filing credit card debt collection cases in its own name for years. That includes years prior to Madden and thus years prior to the doom and gloom propagated by the industry in Madden’s wake.

Where is the harm?

The latest installment in the campaign to promote the Valid-when-made "doctrine" to counter Madden still fails to show any.

MADDEN IS MARGINAL BECAUSE THE MARKET VALUE OF CHARGED-OFF CREDIT ACCOUNTS IS CLOSE TO DE MINIMIS

Madden does not stand for the proposition that loans originated by national banks that are not in default at the time of the transfer or securitization is not imbued with preemption protection. It is limited to charged-off accounts, which were worth no more than pennies on the dollar at that point, as reflected in the portfolio sale price. No big liquidity boost there, thanks to the off-loading. Not much in the way of capital recovery. The rationale for charge-off is, after all, the nonperformance of the loan in question. Sale of debt deemed uncollectible does not do much for the liquidity cycle.

And the interest charges complained of by Madden were the post-chargeoff interest charges assessed by Midland at the national bank’s default rate, rather than interest assessed by FIA or Bank of American that became part of the charge-off balance that Midland acquired. 

The Office of the Comptroller of the Currency ("OCC"), "a federal agency that charters, regulates, and supervises all national banks," Town of Babylon v. Fed. Hous. Fin. Agency, 699 F.3d 221, 224 n. 2 (2d Cir.2012), has made clear that third-party debt buyers are distinct from agents or subsidiaries of a national bank, see OCC Bulletin 2014-37, Risk Management Guidance (Aug. 4, 2014), available at http:// www.occ.gov/news-issuances/bulletins/2014/bulletin-2014-37.html

Finally, the case brought against Midland was a fair debt collection case. Midland had much as stake because it was brought as a class action on behalf of a class consisting of debtors of 49,780 accounts to which Midland Credit Management, Inc. had sent dunning letters asserting the disputed post-chargeoff interest rate.

National Banks are not even covered by the FDCPA. If they were adversely affected as a result of Midland and other debt buyers running afoul of fair debt collection laws in New York -- as the industry unconvincingly claims -- they could easily adjust by opting not to sell portfolios of New York accounts to debt buyers, and hire a law firm to do it in their own name instead.

That is what many credit card issuers have been doing in Texas in the regular course of business for years, among them, as mentioned, American Express (both banks), Citibank, N.A., Capital One, Discover, Wells Fargo, and last but not least, Bank of America.
   

Madden set off much hype and hyperventilation. It has not made the heavens fall. Nor should it make much rain, contrary hopes notwithstanding. 

THE ARGUMENT REGARDING MARKET EXPECTATIONS AS TO ENFORCEABILITY OF "THE NOTE"  IS COMPLETE NONSENSE IN THIS CONTEXT - THE SELLERS SELL TO DEBT BUYERS WITHOUT RECOURSE AND WITH DISCLAIMERS OF WARRANTIES AS TO ENFORCEABILITY 

Any exception to the "without recourse" nature of the sale of portfolios of bad debt by the national bank to the debt-buyer are addressed in the sale-purchase agreement, which surely also has an integration clause; hence no claim of reliance of purchaser as to "validity of debt when made." 

Exemplar of Bill of Sale with disclaimer of warranties as to
enforceability (Chase Bank USA, N.A. to Midland Funding LLC) 

TRANSFER OF CHARGED-OFF ACCOUNTS BY BILL OF SALE 

CITIBANK, N.A. TO MIDLAND FUNDING LLC 

BILL OF SALE AND ASSIGNMENT (above)

and attached excerpt from portfolio data file for the specific account (below) 

MIDLAND FUNDING AS ASSIGNEE #2 
FROM CITIBANK TO ASSET ACCEPTANCE, LLC
 TO MIDLAND FUNDING LLC 

Charged-off credit card debt is sold in bulk by bill of sale under terms of forward-flow or portfolio sale-purchase agreements that sets forth the terms of the sale. Here are two bills of sale, one each of the two steps in the transfer from original creditor (CITIBANK, N.A.) to Midland Funding LLC via an intermediary debt buyer. -- A far cry from transfer of a negotiable instrument. 

Exemplar of Midland Credit Management (MCM) Affidavit

Affiant Angela Miller testifies that no additional interest was added to the purchased balance. 

SOME SELLERS OF CHARGED-OFF CREDIT CARD ACCOUNTS 
 WILL EVEN DISCLAIM ANY AND ALL WARRANTIES IN THE BILL OF SALE ITSELF 

BILL OF SALE AND ASSIGNMENT WITHOUT RECOURSE
AND WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED,
BY US BANK, N.A. TO PRA

BILL OF SALE from Capital One Bank (USA) NA. to PRA
pursuant to Forward Flow Receivables Sale Agreement (2016)

ONE MORE BILL-OF-SALE DISCLAIMER: 
... TO THE EXTENT SELLER OWNS THE ASSETS 

BILL OF SALE from Synchrony Bank to PRA with disclaimers  

ONE MORE BOFA REORGANIZATION WITH ASSOCIATED CHANGE OF CHOICE OF LAW, THIS TIME FROM DELAWARE TO NORTH CAROLINA 

(effective Oct. 10, 2014).

Notice of change in terms on Bank of America credit card account
What law applies: North Carolina (previously Delaware). 

FIA NO MORE (bank profile info from the FDIC (Bankfind search) 

2015 Beth Ammons Affidavit with merger history facts regarding FIA and BANA

786 F.3d 246 (2015)

Saliha MADDEN, 

on behalf of herself and all others similarly situated, Plaintiff-Appellant,
v.
MIDLAND FUNDING, LLC, 

Midland Credit Management, Inc., Defendants-Appellees.

No. 14-2131-cv.

United States Court of Appeals, Second Circuit.

Argued: March 19, 2015. Decided: May 22, 2015.

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