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.”
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 firstname.lastname@example.org
To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)