Encore’s Midland Funding Faces Renewed Interest Rate Suit

By Chris Bruce

A debt-buying unit of San Diego-based Encore Capital Group faces the renewed threat of class claims in a high-profile case that the U.S. Supreme Court rejected last year ( Madden v. Midland Funding LLC , S.D.N.Y., 11-cv-08149, 2/27/17 ).

The Feb. 27 ruling revives questions about whether loans sold to third parties may be repaid or collected upon at the contract rate—questions that have complicated matters for fintech companies, marketplace lenders and the secondary loan market.

Judge Cathy Seibel of the U.S. District Court for the Southern District of New York said Saliha Madden may press a class lawsuit against Midland Funding LLC. Madden says the company violated federal debt collection standards in trying to collect on loans with rates illegal under New York law.

Judge Seibel said at least one question in the case—whether New York’s criminal usury cap bars creditors from collecting interest above 25 percent on a defaulted debt—may have to be resolved by New York’s highest court.

It also means loan buyers may be subject to state claims that might otherwise be blocked by federal law, even though some will be resolved on a case-by-case basis, said Oliver Ireland, a partner with Morrison & Foerster in Washington.

“This appears to reinforce the importance of National Bank preemption and the problem of not extending it to loans purchased by third parties,” Ireland told Bloomberg BNA. “There still may be other arguments in different fact patterns.”

House Panel `Fix.’

The case also highlights the potential for what’s expected to be a new version of the Financial Choice Act, which the House Financial Services Committee approved in 2016.

A recently leaked memo by the committee revealed that an updated version of the legislation could include a “Madden v. Midland Funding fix.” That’s a reference to a May 2015 federal appeals court ruling in an earlier phase of this case that said Midland Funding was subject to Madden’s New York law claims. Midland Funding said the National Bank Act blocked the lawsuit because the loans at issue were acquired from a national bank, but the appeals court disagreed.

Midland Funding, joined by banking groups, then urged the U.S. Supreme Court to hear an appeal, saying the decision undermined the “valid when made” principle, which says that loans have continuing validity if they met legal standards when they were made.

The Supreme Court turned away the petition, refusing to hear the case and leaving the May 2015 federal appeals court ruling on the books. The force of that ruling has been called into question, however, because the Justice Department, in a Supreme Court brief, said it was wrongly decided.

Encore Capital Group’s Katie Lilley said Encore is weighing its next steps. “While we are disappointed in today’s decision and will continue to defend the case, we have long since changed our business practices to occupy a conservative, consumer-centric stance,” Lilley said in an e-mail to Bloomberg BNA. “We remain committed to following all of the laws that govern our industry, and are evaluating our options with respect to this historical issue.”

To contact the reporter on this story: Chris Bruce in Washington at cbruce@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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