The U.S. Supreme Court has denied certiorari to review the decision of the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC.

As previously reported, Madden involved a putative class action alleging that a debt buyer, which had purchased the plaintiff's charged-off credit card debt from a national bank, violated the Fair Debt Collection Practices Act (FDCPA) by falsely representing the amount of interest it was entitled to collect. In an unexpected outcome, the Second Circuit held that the purchaser of charged-off debt from a national bank does not inherit the preemptive interest rate authority of the national bank under Section 85 of the National Bank Act (NBA). Accordingly, the debt buyer could be subject to the usury limitations provided by state law.

The Second Circuit's decision was unexpected largely because of established precedent in the U.S. Courts of Appeals and the treatment of contract assignment at common law. In particular, the Eighth Circuit held in Krispin v. May Dep't Stores that 12 U.S.C. § 85, and not state law, applied to charges imposed by a nonbank after it acquired credit card receivables from its affiliated national bank. The Krispin decision accords with the common law of contracts, where an assignee typically steps into the shoes of its assignor with the same rights and obligations as the assignor. However, the Second Circuit concluded that the application of the state usury laws to debt buyers would not "significantly interfere" with the bank’s authority to "take, receive, reserve, and charge" interest under the NBA. Conspicuously absent from the Second Circuit’s decision was a discussion of whether the debt buyer would inherit the rights and obligations as an assignee at common law.

In its petition for certiorari, Midland argued that that the decision upended "centuries of settled doctrine and threatens 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. "A host of interested parties weighed in as amicus curiae in support of the grant. However, despite their view that Madden was wrongly decided, the Solicitor General and the Office of the Comptroller of the Currency opposed certiorari because they believed it was "a poor vehicle for resolution of the question presented."

The Supreme Court’s denial of certiorari will only increase the uncertainty injected into the lending markets by the Madden decision. While seemingly an aberration from the general understanding of NBA preemption and common law, the Madden decision affects a host of debt buying and bank-model lending programs. As one study has shown, the Madden decision has significantly impaired credit availability for riskier borrowers as lenders suspended programs previously thought to be of indisputable legality.

On August 16, 2016, Ballard Spahr attorneys will hold a webinar from 12 p.m. to 1 p.m. ET, "Bank Model Lending in the Aftermath of the Supreme Court's Refusal to Hear Madden." The webinar registration form is available here.

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 expertise.


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