In a widely anticipated brief requested by the U.S. Supreme Court, the Solicitor General and the Office of the Comptroller of the Currency (OCC) have expressed the view of the United States that the Court should deny the petition for certiorari filed by the defendants in Madden v. Midland Funding, LLC, despite their view that Madden was wrongly decided. The petition asked the Supreme Court to decide whether the preemption of state usury laws under Section 85 of the National Bank Act (NBA) continues to apply to loans made by a national bank after the bank has sold or otherwise transferred the loans to another entity.

In Madden, the U.S. Court of Appeals for the Second Circuit ruled that a purchaser of charged-off debts from a national bank was not entitled to the benefits of NBA preemption. The Second Circuit found that application of state usury laws to the loans in question would not "significantly interfere" with the national bank's exercise of its powers under the NBA, including the right to "take, receive, reserve, and charge" interest under Section 85 and the right to make and sell loans under Section 24 (Seventh).

The Solicitor General and OCC at some length took issue with the Madden decision, flatly stating that it was "incorrect," and asserting that the Second Circuit's holding of non-preemption constituted error in three principal respects:

  • The court's failure to recognize that a national bank's authority to charge interest on a loan up to the maximum permitted by its home state includes the right to "assign to others the right to charge the same rates;"

  • The court's "misconceived" view that because the bank retained no interest in the debt, application of the New York usury law would only limit the assignee's activities, and not those of the bank itself; and

  • The court's reliance "on an unduly narrow conception of conflict preemption."

They concluded that, "Respondent's state-law usury claim is preempted by Section 85 because it directly interferes with a national bank's authority to make and transfer loans at the permitted rate of interest."

Despite this acknowledgement, the Solicitor General and OCC asserted that Supreme Court review of the ruling "is not warranted at the present time," and/or that the case would constitute "a poor vehicle for resolution of the question presented” for three reasons:

  • There is no split in the circuits on the question presented because the questions presented in the Fifth and Eighth Circuit decisions cited by the defendants to demonstrate a conflict "were significantly different from the question presented here."

  • The parties did not present key aspects of the preemption analysis to the courts below. For example, the Solicitor General asserts that the parties' district court briefs "did not distinguish between different types of preemption" and their Second Circuit briefs suffered from a "lack of clarity" regarding the preemption arguments.

  • The Second Circuit's decision is interlocutory and the defendants could still prevail on remand if the district court were to apply the Delaware choice-of-law provision in the defendants' loan agreements or determine that New York law applied but find that New York usury law incorporates the "valid-when-made" principle.

The case has significant implications not only for purchasers of charged-off debt from national banks, but also for a wide variety of other lending programs and arrangements that rely on the originating bank's preemptive authority under federal law to charge interest rates and fees greater than those permitted under otherwise applicable state law, such as marketplace lenders utilizing "bank model" programs and the entities which purchase the loans generated by such structures. As the defendants asserted in their certiorari petition, in the absence of Supreme Court review, the threat will continue for the Second Circuit's decision to "wreak havoc on the national banking system and the Nation’s credit markets by eviscerating a national bank's core prerogative to set interest rates unfettered by state regulation."

In urging the Supreme Court to deny the certiorari petition despite the Second Circuit's incorrect analysis, the Solicitor General and OCC seemingly ignore both the exceptional importance of the question presented in Madden and the Court's ability to consider such importance as a reason for granting a petition even in the absence of a circuit split. The Supreme Court's rules specifically permit the Court, in reviewing a certiorari petition, to consider whether "a state court or a United States court of appeals has decided an important question of federal law that has not been, but should be, settled by this Court." While ordinarily a recommendation from the Solicitor General strongly influences the Supreme Court in deciding whether to grant or deny a petition for certiorari, the outcome here may very well be different because of the obvious importance of the issue and the fact that the Solicitor General and OCC opined that the Second Circuit is flat-out wrong. In any event, the fact that the Solicitor General and the OCC have published their view that Madden was wrongly decided may provide some reassurance to investors and banks, who have been spooked by the decision and other recent regulatory developments in the marketplace lending space.

Ballard Spahr's Marketplace Lending Task Force is nationally recognized for counseling marketplace lending businesses in both the peer-to-peer and small business spaces. We offer soup-to-nuts guidance, working with startup alternative lenders, long-established market leaders, institutional investors, and others. We document and advise on the structure and strategy of bank, platform, and investor relationships, assist in concluding account servicing arrangements, and provide extensive consumer regulatory advice and state licensing guidance.


Copyright © 2016 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.