May 26, 2016
Government's Brief Argues that the Second Circuit Erred
in Finding No Preemption, but Supreme Court Consideration is Not
In its decision last year in Madden v. Midland
Funding, LLC, the Second Circuit held that, after a national
bank sells its loans to a third party, the National Bank Act no
longer preempts state usury laws that would otherwise apply to the
interest rates on those loans. The decision has caused
considerable uncertainty among banks, debt buyers, and the
securitization industry, among others. Various industry groups
filed amicus briefs in support of the defendants' petition for
Supreme Court review.
On May 24, 2016, the Solicitor General-joined by attorneys from
the Office of the Comptroller of the Currency, which administers
the National Bank Act-filed an amicus brief at the Supreme Court's
invitation. While the brief argues that the Second Circuit erred
in its preemption holding, the brief nevertheless recommends that
the Supreme Court deny review because there is no circuit split and
the case is not a good vehicle for considering the issue
The government's mixed brief adds to the complexity that already
surrounds whether the eight-member Court will take up the case.
While the Supreme Court generally gives weight to the Solicitor
General's recommendation on whether to grant review, it is likely
that the Court will find the government's views on the merits of
the preemption issue of most interest. By contrast, the nature of
the circuit split and the potential "vehicle" issues were more or
less apparent, and the government's brief does not meaningfully
address, one way or the other, the practical consequences of
allowing the Second Circuit decision to stand. Given the
government's view on the preemption issue, and in light of the
broad concern about the decision's effects on the financial
services sector in New York, it remains possible that the Court
will decide to hear the case.
Section 85 of the National Bank Act (NBA) permits a national
bank to charge interest on loans at the rate permitted by the
bank's home state and preempts the usury laws of other states. In
this case, defendant Midland Funding purchased charged-off credit
card debt from a national bank and attempted to charge interest at
the credit card agreement's 27% interest rate. The debtor
sued, arguing that this attempt to enforce a 27% interest rate
violated New York's civil and criminal usury laws. The
Second Circuit rejected the defendants' argument that the NBA
preempted the application of New York's usury law, reasoning that
defendants were neither a national bank nor the agents of a
national bank. The court further reasoned that applying state usury
laws to a third-party debt purchaser would not "significantly
interfere" with the exercise of a national bank's power to make
loans because national banks could still sell those loans to third
parties, although for a lesser price.
The United States' Amicus Brief
Preemption analysis. The Solicitor
General's brief argues that the Second Circuit erred in its
preemption holding. According to the government, a national bank's
right under the NBA to originate loans that charge interest up to
the rate allowed in the bank's home state would be "significantly
impaired" if the bank's assignee could not continue to charge that
rate. For this proposition, the brief cites the "long-established
'valid-when-made rule,'" which says that if the bank's original
interest rate was not usurious, the loan does not become usurious
upon assignment, "and so the assignee may lawfully charge interest
at the original rate." The Second Circuit "failed to appreciate the
significance of that principle in this case." The brief also states
that, in the aggregate, the value of a national bank's loan
portfolio could be "significantly diminished" if the bank could not
transfer to assignees the right to charge the original rate of
The government also maintains that the Second Circuit's analysis
reflects an "unduly crabbed" concept of NBA preemption and of
implied-conflict preemption generally. The brief explains that a
state law that precludes a national bank from "fully exercising"
its power under the NBA-which includes conveying to an assignee the
right to charge the original interest rate-is preempted. Preemption
does not require a showing that usury laws would reduce the price
that a national bank could command for its loans, "let alone a
showing that state law would 'prevent consumer debt sales by
national banks to third parties.'"
Recommendation against review. Despite
its conclusion that the Second Circuit erred, the Solicitor
General's brief argues that Supreme Court review is not warranted
at this time. The brief states that there is no circuit split on
the issue presented and that the cases identified by the defendants
as creating a circuit split are all distinguishable.
The brief also asserts that the case would be a "poor vehicle"
for resolving the question presented. First, the parties failed to
present the full range of preemption arguments in the courts below,
including a failure clearly to make a conflict-preemption argument
and a lack of emphasis on the valid-when-made rule. The second
vehicle issue is that the Second Circuit's decision is
interlocutory and resolving the question presented might not affect
the outcome of the case. For instance, the brief points out that
the Second Circuit remanded for consideration of the Delaware
choice-of-law provision in the credit card agreement. The brief
states that the parties "appear to agree" that the interest rate
charged would be permissible under Delaware law.
In addition, the defendants could prevail on remand if the
courts below determine that New York usury law incorporates the
valid-when-made rule. On this issue, the brief goes on to say that
the "practical importance of the preemption issue presented in this
case depends significantly on the extent to which individual States
decline to incorporate the valid-when-made rule into their own
usury laws," and that the defendants "have made no effort" to
demonstrate that state-law departures from this rule have been
In the near term, companies will continue to have great
uncertainty as to how to structure financial transactions in light
of the Second Circuit's Madden decision. For example, the
decision impacts national banks' ability to sell loans to third
parties who may securitize loans on the secondary market. One
amici curiae brief cites a large market of securitized
loans that could potentially be affected: $178 billion in
automobile loan securitizations, $135 billion in credit card
securitizations, $216 billion in student loan securitizations and
$136 billion in other consumer loan securitizations.
Excluding loans that could be subject to usury laws in
various states from securitization vehicles may be infeasible or
could damage the value of the securitization.
It is unclear how the Solicitor General's brief will affect the
Supreme Court's decision to grant review. The government's
criticism of the Second Circuit's preemption analysis was cogently
made, and the Court may be concerned about the practical effects of
allowing the Second Circuit's decision to stand. The Court does
sometimes grant review over the Solicitor's General's contrary
A copy of the Solicitor General's amicus brief is available here.
Madden v. Midland Funding, LLC, 786 F.3d
246 (2d Cir. 2015).
Brief for the United States as Amici Curiae, Midland
Funding, LLC v. Madden, (No. 15-610), 2016 WL
The other defendant is Midland Credit Management, Inc., which
services Midland Funding's accounts.
A 27% interest rate is permitted by Delaware, which was the
home state of the originating national bank, but is usurious under
New York law.
Brief for the Structured Fin. Indus. Grp., Inc., and the Sec.
Indus. and Fin. Markets Ass'n as Amici Curiae Supporting
Petitioners, Midland Funding, LLC v. Madden, (No.
15-610), 2015 WL 9184796.
See, e.g., Bank Markazi v.
Peterson, 136 S.Ct. 1310 (2016).