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By Chris Bruce
May 26 — The Solicitor General's recommendation for the U.S. Supreme Court to sidestep a much-followed preemption and interest-rate controversy is no guarantee that the justices won't take it anyway, lawyers said ( Midland Funding LLC v. Madden, U.S., No. 15-cv-00610, brief filed 5/24/16 ).
At issue is a petition by Midland Funding, a debt-buying unit of San Diego-based Encore Capital Group, seeking the court's review of a May 2015 ruling by the U.S. Court of Appeals for the Second Circuit that said the National Bank Act doesn't preempt state-law usury claims brought by Saliha Madden (100 BBD, 5/26/15).
The SG's office filed a highly anticipated brief May 24, saying the Second Circuit erred, but that there's no need for the justices to grant Midland Funding's petition.
“The court of appeals erred in holding that state usury laws may validly prohibit a national bank’s assignee from enforcing the interest-rate term of a debt agreement that was valid under the law of the State in which the national bank is located,” the SG's brief said. “But there is no circuit split on the question presented; the parties did not present key aspects of the preemption analysis to the courts below; and petitioners may still prevail on remand despite the error in the court of appeals’ interlocutory decision. For all of those reasons, further review is not warranted.”
Now the focus is shifting to the implications of the brief, the odds of a thumbs-up by the court despite the SG's recommendation, and a look ahead at what might happen if the Second Circuit's ruling remains intact.
Several took note of the role played by the Office of the Comptroller of the Currency (OCC), which co-signed the brief. One question in the wake of the Second Circuit's ruling has been whether the OCC might step into the case in some form, especially given the national bank regulatory agency's history of aggressively defending National Bank Act preemption.
Deepak Gupta, founding principal of Gupta Wessler in Washington, D.C., who specializes in U.S. Supreme Court and appellate litigation on constitutional law, class actions, access to the civil justice system, and consumers’ and workers’ rights, called the position taken by the OCC disappointing.
“The Financial Crisis Inquiry Commission found that the OCC's expansive approach to preemption — including the preemption of state predatory lending laws — was a significant contributing cause of the national foreclosure crisis that nearly crippled the U.S. economy,” he said, referring to the 10-member panel of independent experts that Congress established to examine the causes of the financial crisis. “Many observers thought that the OCC had since reformed its ways,” Gupta said.
Walter Zalenski, a partner with BuckleySandler in Washington, D.C., who represents financial institutions, said the SG's brief has plenty of good news for banks.
“The Solicitor General’s amicus brief, in which the OCC participated, is a resounding victory on the merits,” Zalenski told Bloomberg BNA May 24. “It concludes that Section 85 of the National Bank Act plainly encompasses the national bank’s power to convey to an assignee the right to enforce the interest rate set forth in the bank’s loan agreements. Moreover, the Solicitor offered a thorough and multifaceted — and frankly fairly devastating — critique of the Second Circuit’s decision in Madden,” he said.
Analysts Brian Gardner and Michael Michaud at Keefe, Bruyette & Woods said a decision by the court to grant Midland Funding's petition is still the best bet.
In a May 25 note, Gardner and Michaud said the justices likely will focus on the government's argument that the Second Circuit was incorrect. “Thus, despite the negative headline, we believe chances are good the Supreme Court will accept the appeal of the Madden case,” they said.
Zalenski, while not making a prediction, said the court has accepted cases in the past despite a recommendation by the SG not to. He cited a banking-related Fair Housing Act petition that the court accepted in 2013 (117 BBD, 6/18/13). That case, which involved the New Jersey township of Mount Holly, was later settled.
“While the Solicitor’s views are influential on the Supreme Court, they are not determinative,” Zalenski said.
Jaret Seiberg, a financial institutions analyst with Guggenheim Partners, said the odds that the court will take the case are small. He added that another aspect of the case — its impact on marketplace lenders and debt collection companies, and their vulnerability to claims like the one against Midland Funding — will now come into sharper focus.
“We would now expect many more lawsuits to be filed alleging similar violations of state usury laws,” Seiberg said in May 25 market commentary. “That is a negative for marketplace lenders and debt collectors, which will have to defend these suits beyond just New York.”
Isaac Boltansky of Compass Point Research & Trading also said the court likely will not accept Midland Funding's petition.
Unless the justices agree to hear the dispute, he said in a May 25 note on the case, the Second Circuit's decision will stand “for the foreseeable future” and preserve “the cloud of uncertainty hovering over the marketplace lending industry’s operational construct.”
Some marketplace lenders, such as LendingClub, have modified their arrangements with originating banks to minimize the legal risk (40 BBD, 3/1/16).
Even so, according to Boltansky, secondary market demand for marketplace loans above interest rate caps in the Second Circuit states of New York, Connecticut and Vermont “will remain modest given potential legal risks.”
Others also said question marks may remain in those states. “The Government’s brief should go a very long way in convincing other federal courts not to follow the Second Circuit,” Zalenski said. “Unfortunately, if the Solicitor’s advice is heeded, it leaves for the time being a legal and marketplace disruption in the Second Circuit states.”
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