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Update on Madden v. Midland: Cert. Decision Expected Soon

Client Alert

Authors: Richard P. Eckman, M. Duncan Grant and Ashleigh Reibach Huggett

Update on Madden v. Midland: Cert. Decision Expected Soon

The certiorari petition asks the court to address whether the National Bank Act continues to have preemptive effect after the national bank has sold or otherwise assigned a loan to another entity.

In a petition for a writ of certiorari filed on November 10, 2015, the U.S. Supreme Court has been asked to accept for review the U.S. Court of Appeals for the Second Circuit’s controversial opinion in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015). Pepper discussed the Madden decision in a June 24, 2015 client alert; rehearing en banc was subsequently denied by the Second Circuit. The Madden ruling, which is inconsistent with longstanding court of appeals precedent, held that the National Bank Act does not preempt the application of state usury laws to third-party, non-bank assignees.

Petition for a Writ of Certiorari

In its petition for a writ of certiorari, the petitioner, Midland Funding, urged the Supreme Court to address the following question: “Whether the National Bank Act, which preempts state usury laws regulating the interest a national bank may charge on a loan, continues to have preemptive effect after the national bank has sold or otherwise assigned the loan to another entity.” Petition for Writ of Certiorari, Midland Funding, LLC v. Madden, No. 15-610.

The petitioner set forth three main arguments in an effort to persuade the Justices to address that critical question. First, the petitioner explained that the Second Circuit’s opinion creates a conflict with case law in the Fifth and Eighth Circuits because those courts have continuously upheld the prevailing view that whether the National Bank Act preempts the application of state usury laws depends on which entity originated the loan at issue. Next, the petitioner described the Second Circuit’s decision in Madden as “deeply flawed” because it cannot be reconciled with section 85 of the National Bank Act, which “incorporates the principle that an interest rate set by an originating bank cannot be invalidated by a subsequent assignment of the loan.” Astoria Fed. Sav. & Loan Ass’n v. Solimino, 501 U.S. 104, 108 (1991). According to the petitioner, the Second Circuit’s focus on the fact that the assignees of the loan were not subsidiaries or agents of the originating bank directly conflicts with the longstanding valid-at-inception rule. Finally, the petitioner emphasized that the Second Circuit’s decision will have unintended consequences for the American financial services industry and particularly for secondary market transactions. The question presented is urgent, because the Second Circuit’s opinion casts uncertainty on the applicability of the National Bank Act to national banks and their assignees when a loan is subsequently assigned.

What’s Next?

If the Supreme Court does not grant the petition for a writ of certiorari, or grants it but does not decide the issue in favor of the petitioner, the precedent established by Madden will continue to complicate interest rate exportation authority for any non-bank party that purchases loans from a bank, including those involved in peer-to-peer or marketplace lending platforms. Further, third-party, non-bank entities would be at risk of losing the exportation advantage that an FDIC-insured bank has, and they may be subject to substantial penalties, including voiding of loans, for violating a borrower’s state usury laws.

Although the respondent waived the right to file a response to the petition, on December 13, 2015, the Supreme Court requested that the respondent file a response. The response is due on February 12, 2016, and the Supreme Court’s decision on whether to grant certiorari is expected to be issued by the end of March 2016. The issue presented by Madden is of great importance to the financial services industry, in particular marketplace lenders. The level of interest in the issues is demonstrated by the fact that four amicus curiae briefs have already been filed by Clearing House Association LLC, ACA International, The Structured Finance Industry Group, Inc. and American Bankers Association. Although the Supreme Court grants review in fewer than 1 percent of the cases in which it is sought, the Court’s request that the respondent file a response to the petition suggests a level of interest in the case within the Court. Whether that signifies support from at least four of the Justices, which is required to grant a certiorari petition, remains to be seen. We will soon find out.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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