By Chris Bruce
Feb. 16 — The Feb. 13 death of U.S. Supreme Court Justice Antonin Scalia may delay action on whether to hear a case with important implications for secondary credit, and perhaps even tilt the outcome in favor of the plaintiffs, lawyers and analysts said.
At issue is a petition by Midland Funding LLC, a debt-buying unit of San Diego-based Encore Capital Group. In November, Midland Funding asked the justices to review a May ruling by the U.S. Court of Appeals for the Second Circuit that said the National Bank Act (NBA) does not preempt state-law claims by borrowers on loans that Midland acquired from a national bank.
Walter E. Zalenski, a partner with BuckleySandler in Washington, D.C., who represents financial institutions, said Scalia often favored federal preemption when applied to the regulation of interstate commerce.
“His record is largely consistent with an early public statement he made advocating against a reflexive anti-preemption stance and instead urging a ‘two-front war’ against over-burdensome regulation at the state no less than the federal levels,” Zalenski told Bloomberg BNA Feb. 15. “Hence, I think that Justice Scalia’s death tilts in favor of the Plaintiff-Respondent in Madden.”
Although the case does not directly involve national banks, banking and other financial services trade groups in December urged the justices to hear it, saying the Second Circuit's decision exposes major financial institutions to risk on loans that were valid when made but that may be deemed to carry unlawful rates if sold or assigned.
The court has not yet decided whether to hear the case. Zalenksi added that Scalia’s death might not affect that decision, because only four justices are needed to grant the petition.
But Jaret Seiberg, an analyst at Guggenheim Securities, said Scalia’s death likely will delay action on Midland Funding’s petition.
“As a result, it is less likely that the justices decide whether to take the case at conferences scheduled for Feb. 19 and Feb. 26,” Seiberg said in Feb. 16 market commentary. “It is even unclear if those conferences will occur. We still believe the justices will accept the case for review. It just may now occur in March."
The latest action came Feb. 12, when lawyers for the plaintiff, Saliha Madden, said the court should not grant Midland Funding's petition, arguing that the Second Circuit made the right call in what the brief called a “narrow, factbound decision.”
“Neither this Court nor any circuit court has ever extended NBA preemption to debt collectors, or to any third-party entity that was not acting on behalf of a national bank,” said the brief by Daniel A. Schlanger, who heads the consumer protection practice at Kakalec & Schlanger in New York. “The Second Circuit applied settled preemption principles to the facts of this case and correctly rejected petitioners’ defense.”
Given the emphasis on National Bank Act preemption, one question going forward may be whether the Office of the Comptroller of the Currency (OCC) files a brief in the case, either at the petition stage or, if the court agrees to hear the dispute, on the merits.
The Feb. 12 brief by the plaintiffs noted that the OCC, which may make case-specific preemption determinations, did not do so here. Nor did the OCC, which charters and regulates national banks, brief the case in the Second Circuit.
“Here, the OCC made no such determination and did not even file an amicus brief supporting Midland below,” the Feb. 12 brief said. “The regulator’s silence is telling, as the OCC has not hesitated to urge preemption in other Second Circuit cases.”
A spokesman for the OCC did not immediately respond to a Feb. 16 request for comment on the brief.
The case involves a class lawsuit by Madden that said Midland Funding and an affiliate violated the Fair Debt Collection Practices Act (FDCPA) by trying to collect on loans with interest rates that are illegal in New York.
A district court held the National Bank Act preempted the state-law usury claims and the FDCPA claims, but the Second Circuit disagreed in May, and then in August denied a petition for rehearing.
Feb. 19 is the earliest opportunity for the court to act on the petition, as the justices are scheduled to return following a winter break. President Obama Feb. 13 said he will nominate a successor “in due time,” but until one is confirmed, the court will operate with eight justices, raising the prospect of 4-4 ties.
In a Feb. 15 note, Compass Point Research & Trading said the court might operate with eight justices court for more than a year, citing a political battle ahead. The note, which predicted a nomination in March, also said the justices might not act on Midland Funding's petition until late March.
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The Feb. 12 brief is at http://src.bna.com/cEH.
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