By Chris Bruce
March 21 — The U.S. Supreme Court March 21 asked the Solicitor General for advice on whether to review a federal appeals court ruling that eases state-law claims on certain loans assigned by or purchased from national banks.
Midland Funding, a unit of Encore Capital, in November asked the court to review a May ruling by the U.S. Court of Appeals for the Second Circuit, which said the National Bank Act doesn't preempt state-law usury claims. Saliha Madden brought a putative class case that said Midland Funding violated the Fair Debt Collection Practices Act by trying to collect on a loan with rates illegal under New York law .
The case is being closely watched because of its implications for credit markets, national bank preemption, debt collection, and its impact on marketplace lenders, some of which already are moving to restructure their businesses to avoid similar claims .
H. Rodgin Cohen, senior chairman of Sullivan & Cromwell, March 21 said the request for the Solicitor General's views shows that the justices are concerned about the case both from the standpoint of legal issues and the potential impact on markets.
Cohen, who co-authored a brief on behalf of the Clearing House Association and other groups urging the court to hear the case, called the invitation to the Solicitor General a “positive” for banks, saying it shows the court is giving the case serious consideration.
Midland Funding purchased Madden's loan from a national bank, then handed the account to an affiliate for collection.
When Madden sued, Midland Funding said the National Bank Act preempted her state claims.
The district court agreed, but the Second Circuit reversed. The Second Circuit said Midland Funding isn't a national bank, wasn't acting on behalf of one, and that Madden's claims wouldn't “significantly interfere” with the exercise of national bank powers.
“We hold that non-national bank entities are not entitled to protection under the National Bank Act from state law usury claims merely because they are assignees of a national bank,” the court said.
The Second Circuit refused to rehear the case in August .
Banks, though not directly involved in the underlying case, say it matters to them. They argue the Second Circuit's ruling raises questions about whether loans that had valid interest rates when originated by national banks will be exposed to later challenges.
“Accordingly, for over a hundred and fifty years, the multi-trillion dollar U.S. credit markets have functioned on the understanding that a loan originated by a national bank under the NBA is subject only to the usury law applicable at origination, regardless of whether and to whom it is subsequently sold or assigned,” the Clearing House amicus brief said.
Walter E. Zalenski, a partner with BuckleySandler in Washington, D.C., March 21 said one effect of the court's invitation to hear the Solicitor General's views is to highlight the role of the Office of the Comptroller of the Currency, the agency that charters and regulates national banks.
So far, the OCC, which in past years has aggressively defended national bank preemption, has remained silent about the case, according to Zalenski.
“In the district court, the Second Circuit appeal, the petition for rehearing, and in the Supreme Court briefing, one voice has been noticeably absent from the Madden debate,” Zalenski told Bloomberg BNA March 21. “Specifically, the Office of the Comptroller of the Currency has thus remained entirely on the sidelines and declined to file a single amicus brief. This silence contrasts starkly with the OCC’s historic involvement and advocacy in connection with preemption-related litigation and policymaking,” he said.
The court's March 21 action tees up the question for the OCC yet again, this time with perhaps longer-term implications, according to Zalenski.
“If the invitation fails to elicit a pro-preemption position, it suggests that the OCC can no longer be counted on as a reliable advocate on behalf of preemption and national bank powers,” he said.
The OCC did not follow up on a March 21 request for comment.
The justices did not set a deadline for the Solicitor General's response, and normally there is none, analysts said.
One question is whether the Solicitor General could file a brief fairly soon, before the court recesses for the summer, or whether the brief is filed later on, such as in August.
“In either case, the filing would leave the justices with enough time to hear and decide this case before the December holidays if they opt to accept the appeal,” Jaret Seiberg of Guggenheim Partners said in March 21 market commentary.
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The Supreme Court's March 21 orders list is at http://src.bna.com/drY.
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