The Second Circuit recently issued a National Bank Act preemption decision with significant implications for purchasers of loans and other debt from national banks. See Madden v. Midland Funding, LLC, --- F.3d ---, 2015 WL 2435657 (2d Cir. May 22, 2015). The court held that a debt collector, which had bought a national bank’s charged-off accounts, could not rely on federal National Bank Act (“NBA”) preemption to avoid liability under state usury laws because the debt collector was not a national bank, a subsidiary or agent of a national bank, or “otherwise acting on behalf of a national bank.” Id. at *1. The court concluded that application of state usury laws to such a debt collector “would not significantly interfere with any national bank’s ability to exercise its powers under the NBA.” Id. at *1, 4-5.
Federal law permits a national bank to “take, receive, reserve, and charge” interest at the rate allowed by the state where the bank is located. See 12 U.S.C. § 85. “It also provides the exclusive cause of action for usury claims against national banks, and therefore completely preempts analogous state-law usury claims.” Madden, 2015 WL 2435657, at *3 (quoting Beneficial Nat’l Bank v. Anderson, 539 U.S. 1, 11 (2003), and Sullivan v. Am. Airlines, Inc., 424 F.3d 267, 275 (2d Cir. 2005)) (internal alternations and quotations omitted); see also Pacific Capital Bank, N.A. v. Connecticut, 542 F.3d 341, 352 (2d Cir. 2008) (“[A] state in which a national bank makes a loan may not permissibly require the bank to charge an interest rate lower than that allowed by its home state.”).
The plaintiff, a New York resident, opened a credit card account with a national bank. Subsequently, the purchaser national bank amended the credit card agreement to permit the bank to charge an interest rate that, while permissible under the law of the bank’s home state of Delaware, exceeded the limit set by New York law. After the plaintiff defaulted, the purchaser national bank charged off plaintiff’s $5,000 remaining balance as bad debt and sold the account to the defendant Midland Funding, LLC (“Midland”), which is not a national bank. Midland subsequently sent a letter to the plaintiff seeking to collect on her debt and applying an interest rate that allegedly ran afoul of New York usury law.
The plaintiff filed a putative class action alleging that Midland had violated the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq. (“FDCPA”) and New York law by charging a usurious interest rate. Midland responded that the NBA preempted the plaintiff’s claim because a national bank had originated the debt. Agreeing with Midland, the district court entered a stipulated judgment in favor of Midland and denied the plaintiff’s request to certify a class.
On appeal, the Second Circuit reversed. The court recognized that the Supreme Court and lower courts had held that NBA preemption may extend to operating subsidiaries and agents of national banks when the non-national bank entities effectively exercise the powers of the national bank.  The court ruled, however, that such authority did not extend to Midland. The record evidence reflected that when attempting to collect the subject debt, Midland, as a third-party debt buyer, was acting solely on its own behalf and not as a subsidiary or agent of the originating national bank. Moreover, the court concluded that applying state usury laws to debt buyers, which had no relationship to a national bank other than having purchased debt from such a bank, would not “significantly interfere with a national bank’s ability to exercise its powers under the NBA.”
Thus, although NBA preemption applies to claims against certain entities arising out of alleged violations of state usury laws, Midland was not entitled to rely upon such preemption simply because it had purchased debt that a national bank had originated. The Second Circuit reasoned that applying NBA preemption to encompass Midland under the circumstances presented “would create an end-run around usury laws for non-national bank entities that are not acting on behalf of a national bank.” Because Midland could not avoid liability by means of NBA preemption for the FDCPA or state usury law claims, the Second Circuit vacated the judgment for Midland.
The Second Circuit 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 national bank’s receivables, the bank had retained ownership of the accounts and thus remained the real party in interest. Madden, 2015 WL 2435657, at *6 (citing Krispin, 218 F.3d at 924). Thus, it appears that purchasers of receivables or participation interests in account or loans would not be covered by the court’s decision in Madden. 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. Madden, 2015 WL 2435657, at *6 (citing Phipps, 417 F.3d at 1013).
In addition, the Second Circuit vacated the district court’s denial of class certification as being “entwined” with the district court’s decision regarding preemption. The district court had ruled that it would have to conduct a case-by-case review of each putative class member’s claim to determine whether the debt was validly assigned to Midland and thus preempted by the NBA, and denied class certification, in part, on that ruling. It appears, however, that other bases for the district court’s denial remain viable, including the individualized questions of whether an account holder had expressly or implicitly agreed to the choice of law provision in the account agreement and whether the applicable law permits the holder of the debt to charge the subject interest rate. In its opinion, the Second Circuit did not reach the question of whether the Delaware choice-of-law provision in the plaintiff’s account agreement might preclude her claims.
The Second Circuit remanded the matter for further proceedings consistent with its opinion.
In conclusion, entities that purchase debt or other financial assets—whether performing or non-performing—on the secondary market should take care to ensure they are properly factoring in whether they can continue to enforce the validly originated interest rate and the risk of liability when valuing a prospective asset, including evaluating whether or not NBA or other source preemption may exist as a defense to various types of claims. Moreover, given the important federal question involved, the decision may be a candidate for a petition for rehearing en banc by the Second Circuit or for a writ of certiorari to the U.S. Supreme Court.
Notes: The Dodd-Frank Act overturned this aspect of the holdings in these decisions. See 12 U.S.C. § 24b(h)(2) (“No provision of [the NBA] shall be construed as preempting, annulling, or affecting the applicability of State law to any subsidiary, affiliate, or agent of a national bank[.]” Because the Second Circuit distinguished these decisions, however, the impact of the Dodd-Frank Act in this manner was not relevant to the outcome of the case.
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