Capitalizing on the government's position in its brief to the U.S. Supreme Court, Midland Funding filed a supplemental brief in support of its quest to have the justices overturn a Second Circuit Court of Appeals opinion presenting significant problems for financial institutions.

What happened

Last May, a three-judge panel refused to find that the National Bank Act (NBA) preempted state law usury claims against an assignee of a national bank in Madden v. Midland Funding LLC.

New York resident Saliha Madden originally opened a credit card account with a national bank, Bank of America. In 2006, the credit card program was consolidated into another national bank that later sold Madden's $5,000 debt on the account to Midland Funding, LLC, a debt purchaser. Affiliate Midland Credit Management handled collection efforts and sent Madden a letter in November 2010 seeking to collect payment on her debt and stating that an interest rate of 27 percent per year applied.

Madden filed a putative class action suit alleging that Midland Funding had engaged in abusive and unfair debt collection practices in violation of the Fair Debt Collection Practices Act (FDCPA) and charged a usurious rate of interest in violation of New York state law, which prohibits interest rates in excess of 25 percent per year.

The defendants responded with a motion for summary judgment, arguing that as an assignee of a national bank, the plaintiff's claims against them were preempted by the NBA, which permits a bank to charge interest at the rate of the state where it is located and provides the exclusive cause of action for usury claims against national banks. Delaware—where FIA is incorporated—allows banks to charge interest above 25 percent, so the defendants' rate was legal, they told the court.

A district court judge agreed that the NBA preempted any state law usury claims but the Second Circuit reversed.

"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 claim relies 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," the court wrote.

Midland filed a writ of certiorari to the U.S. Supreme Court. The justices invited the Solicitor General to weigh in on the petition, and the government advocated against taking the case. However, the government also told the Court the Second Circuit reached the incorrect conclusion, wrongly interpreting the NBA.

Responding with a supplemental brief to the justices, Midland argued that the government's stance actually confirmed the need for further judicial review. The Solicitor General's brief stated that the Second Circuit decision "is incorrect" and "reflects a misunderstanding of Section 85 [of the NBA] and of this Court's precedents," Midland noted.

Section 85 carries with it the power to assign loans to others, the government wrote, and applying state usury laws that prevent an assignee from charging certain rates would "significantly impair" this power. "In so concluding, the government reaffirms that the Section 85 power 'should be understood to incorporate the understandings that (a) sale of loans is an integral aspect of usual banking practice, and (b) a loan that was valid when made will not be rendered usurious by the transfer,'" Midland argued, quoting the government's brief. "The government's reading of Section 85 thus matches petitioners' reading to a T."

The Solicitor General further told the justices that nothing in the NBA suggests that Congress intended to limit the national banks' Section 85 power by authorizing states to regulate the terms on which loans originated by national banks could be assigned to other entities, and Midland added the "government thus agrees with petitioners that application of state usury laws 'would 'prevent or significantly interfere'' with the national banks' exercise of those powers and is preempted."

"Aside from the case caption, therefore, there is hardly any aspect of the Second Circuit's decision with which the government agrees," Midland wrote. The government also did not contest the broad implication of the decision below, which the petitioner said "has already begun to inflict severe consequences on secondary markets essential to the operation of the national banking system and to the availability of consumer credit."

Midland cited to a study published after the first round of briefing before the Court that the Second Circuit's decision has had a "significant impact" on the volume of loans issued to higher-risk borrowers in the three states that make up the Second Circuit. The study found that while loan volume has increased generally by 124 percent in other jurisdictions, it has fallen by 48 percent within the Second Circuit.

In recommending against certiorari, the Solicitor General made two arguments. First, the government questioned the depth of the circuit conflict on the question presented, distinguishing some of the cases relied upon by Midland. But the petitioner countered that "any concern about the shallowness of the conflict here is swamped by the sheer importance of the question presented and the fundamental errors in the Second Circuit's decision," with the contrary authority more than sufficient to trigger Supreme Court review.

The government also delineated vehicle problems with the case itself, but given the need to clarify the law, Midland told the justices there was no reason to let the issue pass by.

"This is the rare case where resolving the question presented is as straightforward as it is important," Midland concluded. "The government's unqualified recognition that the Second Circuit decision was incorrect only strengthens the case for further review. And the impact of the Second Circuit's decision on the national banking system and the availability of consumer credit can no longer seriously be disputed. Given the fundamental errors in the Second Circuit's approach, the significance of the question presented, and the circuit conflict on that question, this Court should grant the petition for certiorari."

To read Midland's supplemental brief in Midland Funding LLC v. Madden, click here.

Why it matters

In its supplemental brief, Midland noted that the Court routinely grants review where the government takes the position that the decision below was incorrect but nonetheless recommends a denial of certiorari, particularly where "there can be no serious doubt that this case is sufficiently important to warrant one of the scarce spots on the Court's docket, because it presents a question that is critical to the functioning of the national banking system and to the availability of consumer credit." The justices could weigh in on the cert petition before the term ends in June. In the meantime, marketplace lenders continue to face uncertainty in the Second Circuit.