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Madden Uncertainty Remains for Secondary Loan Market

Madden Uncertainty Remains for Secondary Loan Market

The US Supreme Court last week delivered another blow to the unsteady secondary loan market industry by denying a request for certiorari in an important case for banks and buyers and sellers of loans and other debt obligations.1 The petition for certiorari at issue was filed by Midland Funding, LLC, one of the nation's largest delinquent debt purchasers, and its affiliates (collectively, "Midland") on November 10, 2015, asking the court to review the Second Circuit Court of Appeal's decision in Madden v. Midland Funding, LLC (hereinafter "Madden").2

The Second Circuit's decision in Madden held that an assignee of consumer (credit card) loans originated by a national bank could not invoke federal preemption pursuant to the National Bank Act to defend a state law usury claim asserted against it, reversing the ruling of the US District Court for the Southern District of New York on the matter. The Second Circuit decision also ignored the "valid-when-made" principle, a relatively well-established body of law that stipulates that loan assignees step into the shoes of the lender (assignor) and are entitled to enforce the rights of the lender pursuant to the terms of agreement at the time the loan is made.

When the Second Circuit's decision in Madden was issued in May 2015, it created significant uncertainty regarding the issue of whether a bank-originated loan that is non-usurious at inception can become usurious in the hands of a non-bank assignee.

The implications of the Second Circuit decision raised a number of issues impacting a variety of financial institutions, including banks and other participants in the secondary loan market. As a result, participants in the secondary loan market closely followed developments in the case and filed amici briefs in support of Midland’s petition for certiorari which set forth compelling reasons regarding the need for the Supreme Court’s review and guidance.3

The importance of the Madden decision was further highlighted by the Supreme Court's request for views of the Solicitor General in considering Midland's petition for certiorari.4 Specifically, in considering whether to grant or deny the request for certiorari, the Supreme Court requested the Solicitor General to submit a brief providing the views of the United States on whether certiorari should be granted.5 With the support of the Office of the Comptroller of the Currency ("OCC") (the regulator of national banks), the Solicitor General responded with a brief on May 24, 2016, arguing that the preemptive effect of the National Bank Act extends to loan assignees of national banks but nevertheless recommending that the Court deny certiorari.6 Given that the Court almost always follows the Solicitor General’s recommendation on whether review should be granted,7 the Court's decision to deny certiorari was anticipated by Court and industry observers.

Notwithstanding that the Court denied certiorari, negating the possibility that the Madden decision would be overturned in 2016, the Solicitor General's brief to the Court should provide some comfort to banks and loan assignees that the Second Circuit’s ruling in Madden will not become the law of the land and will present significant challenges for any other court seeking to rely on the Second Circuit's decision as precedent. In particular, the Solicitor General, joined by the OCC, strongly disavowed the Second Circuit's holding, stating that the "court of appeals' decision [in Madden] is incorrect."8 The Solicitor General further affirmed that loan assignees of national banks are allowed to charge the same rate of interest previously agreed upon by the borrower and the national bank by reason of the federal preemption standard articulated in Barnett Bank of Marion County v. Nelson,9 the preemption standard affirmed by the Dodd-Frank Act.10

Thus, given that the United States is of the view that the National Bank Act preempts the application of state usury laws that would prohibit a non-bank loan assignee from enforcing a loan at the same rate of interest that the national bank loan assignor was permitted to charge, there is a considerable basis for doubting that future courts will reach the same conclusion as the Second Circuit going forward. Nonetheless, in failing to provide nationwide, binding precedent to settle the issue once and for all, the Court's decision to deny Midland's petition perpetuates the continuing uncertainty for marketplace lenders and other buyers and sellers of bank loans and other debt.

 

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1 Midland Funding, LLC v. Madden, 579 US__, No. 15-610 (order dated June 27, 2016).
2 786 F.3d 246 (2nd Cir. 2015).
3 A month after Midland’s petition for certiorari was filed, various banking and financial institution associations filed amicus curiae briefs urging the Supreme Court to review the Second Circuit’s ruling in support of Midland's petition. See Brief for ACA Int’l as Amicus Curiae Supporting Petitioner, Midland Funding, LLC v. Madden, No. 15-610 (US Dec. 10, 2015); Brief for Am. Bankers Ass'n, et al. as Amici Curiae Supporting Petitioner, Midland Funding, LLC v. Madden, No. 15-610 (US Dec. 10, 2015); Brief for Clearing House Ass’n, et al. as Amici Curiae Supporting Petitioner, Midland Funding, LLC v. Madden, No. 15-610 (US Dec. 10, 2015).
4 In March, the Court invited the Solicitor General to submit an opinion on Midland’s petition for certiorari. Midland Funding, LLC v. Madden, 577 US __,No. 15-610 (Mar. 21, 2016). A vote of at least four Justices is required before the Court will request the views of the Solicitor General, suggesting that several of the Justices were interested in reviewing Madden and believed the issue(s) presented to be significant. The views of the Solicitor General are requested in only about a dozen cases per term, whereas upwards of 8,000 petitions for writ of certiorari are filed per term. David C. Thompson & Melanie F. Wachtell, An Empirical Analysis of Supreme Court Certiorari Petition Procedures: The Call for Response and the Call for the Views of the Solicitor General, 16 GEO. MASON L. REV. 237, 242 & n.22 (2008-2009).
5 Midland Funding, LLC v. Madden, 577 US __, No. 15-610 (Mar. 21, 2016).
6 Brief for the United States as Amicus Curiae, Midland Funding, LLC v. Madden, No. 15-610 (US May 24, 2016).
7 For terms commencing October 1998 through October 2004, the Court followed the Solicitor General’s recommendation to deny certiorari in about 80% of cases. David C. Thompson & Melanie F. Wachtell, An Empirical Analysis of Supreme Court Certiorari Petition Procedures: The Call for Response and the Call for the Views of the Solicitor General, 16 GEO. MASON L. REV. 274–76 (2008-2009).
8 Brief for the United States as Amicus Curiae at 6, Midland Funding, LLC v. Madden, No. 15-610 (US May 24, 2016).
9 517 US 25 (1996).
10 Pub. L. No. 111-203, § 1044(a), 124 Stat. 2017 (codified at 12 USC. 25b(b)(1)(B)).

 

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