Credit Cards and CashOn June 27, the United States Supreme Court declined to review the Second Circuit’s decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).  By denying Midland Funding, LLC’s petition for a writ of certiorari, the Court allowed the Second Circuit’s decision to stand. The Second Circuit held that the National Bank Act did not preempt state usury laws as applied to debt originated by a national bank and then assigned to a third party that is not a national bank.  Debt acquirers and servicers are now on notice that they may be subject to other state usury laws, even if the debts were purchased with the assumption that the National Bank Act would preempt any claim under those laws.

In Madden, the plaintiff brought a putative class action asserting claims under the Fair Debt Collection Practices Act (FDCPA) and New York’s usury law, claiming that the defendants unlawfully charged interest at a rate higher than that allowed by the State of New York.  The defendants opposed class certification, arguing that the claims were preempted by the National Bank Act (NBA) because the debts in questions were originated by a national banking association (meaning the debts would be governed by the NBA and not any other federal or state law), and that the defendants assumed the role of the national bank when they purchased the debts on the secondary market.  The district court adopted that reasoning and denied the plaintiff’s motion for class certification, holding that the claims were preempted by the NBA.

On appeal, the Second Circuit reversed.  Although the appellate court recognized that the NBA “provide[s] the exclusive cause of action’ for usury claims against national banks,’ Beneficial Nat’l Bank v. Anderson, 539 U.S. 1, 11 (2003), and ‘therefore completely preempt[s] analogous state-law usury claims,’ Sullivan v. Am. Airlines, Inc., 424 F.3d 267, 275 (2d Cir. 2005),” Madden, 786 F.3d at 250, the Second Circuit held that preemption did not apply to the subsequent owner of that same debt.  The court distinguished Krispin v. May Department Stores, 218 F.3d 919 (8th Cir. 2000), and Phipps v. FDIC, 417 F.3d 1006 (8th Cir. 2005), two cases on which the district court and Midland had relied.  The Second Circuit noted that in Krispin, while the defendant department store had purchased the right to collect the national bank’s receivables, the bank had retained ownership of the accounts and thus remained the real party in interest.  Madden, 786 F.3d at 252-53 (citing Krispin, 218 F.3d at 924).   In Phipps, the plaintiff challenged the interest charged by the national bank and thus the involvement of the third-party non-national bank entity was not pertinent to the decision.  Id. at 253(citing Phipps, 417 F.3d at 1013).

The Supreme Court’s refusal to review this decision creates a risk that other federal courts to adopt the Second Circuit decision as persuasive authority.  Technically speaking, denial of a petition for a writ of certiorari has no precedential effect.  Teague v. Lane, 489 U.S. 288, 296 (1989).  But as a practical matter, other federal courts will be free to adopt the second Circuit’s reasoning, and may even view the Court’s decision as tacit approval of the Second Circuit’s reasoning and may adopt the same position.

Moreover, the Madden decision may have implications beyond the NBA.  Section 27 of the Federal Deposit Insurance Act (FDIA) (codified at 12 U.S.C. § 1831d) provides the same preemption provisions as the NBA for state-chartered banks lending across state lines, preempting usury laws that are stricter than those of the state in which the bank is chartered.  While Madden did not address FDIA preemption, the rationale of its reasoning would extend to buyers of debt originated by state-chartered banks as well.

One of the ironies of the Second Circuit’s decision—which will almost certainly be explored as the litigation progresses on remand—is that the Court’s logic about preemption could prove fatal to the plaintiff’s FDCPA claim, under the reasoning recently adopted by the United States Court of Appeals for the Eleventh Circuit.  The Second Circuit reasoned that a debt still owned by a national bank and which a third party attempted to collect would be governed by the NBA, consistent with the Eighth Circuit’s decision in Krispin v. May Department Stores, 218 F.3d 919 (8th Cir. 2000).  But under the FDCPA, a defendant can only be liable as a “debt collector” if it attempts to collect a debt “owned by another.”  15 U.S.C. § 1692a(6).  As the Eleventh Circuit correctly reasoned in its recent decision in Davidson v. Capital One Bank (USA), N.A., 797 F.3d 1309, 1315 (11th Cir. 2015), that definition of “debt collector” indicates that a defendant cannot be held liable if it is the actual owner of the underlying debt in question.  Thus, under that reasoning, there are two possibilities for a defendant who acquired collection rights to argue that the FDCPA does not apply: (1) it bought the underlying debt, and is therefore not a “debt collector” subject to FDCPA liability, or (2) it is only servicing the defaulted debt, meaning that if the debt is still owned by the national bank, any FDCPA claim premised on the defendant’s alleged effort to collect more interest than allowed by state usury law is preempted.  Going forward, if Madden proves to be the law of the land, debt servicers should be quick to point out that they cannot be a “debt collector” subject to FDCPA liability for an alleged usury law violation if the debt in question is still owned by a national bank.

Another issue that will likely be litigated on remand in Madden is whether the choice-of-law provision in the plaintiff’s credit-card agreement mandates application of Delaware law, which would permit the interest rates at issue.  As pointed out in the Solicitor General Amicus Brief to the Supreme Court, the Second Circuit did not address that issue, which could serve as an alternative basis for ruling in favor of the defendants.  The Solicitor General also noted that the defendants may have an argument under New York’s possible adoption of the common law valid-when-made principle, which holds that loan legally valid when originated remains valid, even when other circumstances change so as to cause the terms of the loan to otherwise violate state law.

Still, even though it appears that many FDCPA claims based on state usury laws will remain toothless even after Madden, and even though the defendants in Madden may have additional arguments to raise on remand, that is a cold comfort to defendants now potentially facing state-law usury claims that were not expected at the time they acquired the defaulted debts.  Although Madden involved non-secured credit card debt, there is no readily apparent reason why its effect will be so confined: the same reasoning would apply to any sort of debt originated by a national bank, including mortgages on real estate, debts secured by chattel, and other forms of unsecured debt.  Entities acquiring any of those sorts of debt from national bank originators will have to factor in the cost of potential usury claims—and the policies needed to avoid them—on a going-forward basis. The banking and debt collection industries may want to consider urging Congress to address this issue legislatively.  National banks in particular may have reason to fear that their ability to market loans they originate is unduly impaired by the Second Circuit’s approach.