By Chris Bruce
June 27 — The Supreme Court June 27 turned away a petition by Midland Funding LLC that sought review of a federal appeals court ruling in a major preemption and interest-rate battle ( Midland Funding LLC v. Madden, U.S. , No. 15-cv-00610, cert. denied 6/27/16 ).
The justices left standing 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 a proposed class plaintiff.
The court's decision not to grant the petition limits the direct impact of that ruling to New York, Vermont and Connecticut, but perhaps with lesser persuasive force elsewhere because of a recent brief by U.S. Solicitor General Donald B. Verrilli, Jr., that criticized the case.
Even so, risks will remain for marketplace lenders and others that could face claims like those allowed by the Second Circuit's decision, attorneys and analysts said, adding that more such cases could arise.
“The decision by the Supreme Court preserves the status quo for the moment until there is another decision on this issue,” said Richard P. Eckman, a partner with Pepper Hamilton in Wilmington, Del.
That's especially likely if another federal appeals court upholds preemption in a similar dispute, FBR Capital Markets said in a June 27 research note.
“At that point, the Supreme Court would likely step in as there would be a conflict across jurisdictions,” the note said.
The petition arose after Midland Funding, a debt-buying unit of San Diego-based Encore Capital Group, appealed a trial court ruling that allowed state-law usury claims by Saliha Madden.
Madden's proposed class case said Midland Funding violated the Fair Debt Collection Practices Act (FDCPA).
The case now goes back to the district court. Among other questions, the district court will also consider whether a Delaware choice-of-law clause bars Madden's claims.
Odds for a hearing by the Supreme Court dropped in May, when the Solicitor General's brief said review was “not warranted.” The brief said there's no split among the circuits, that the lower courts didn't address all of the issues, and that Midland Funding could still prevail on remand.
But the SG's brief affirmed the valid-when-made rule, saying national banks may convey the right to enforce interest rates that were legal at origination.
“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.
LendingClub and other marketplace lenders that partner with issuing banks have restructured their businesses to minimize the risk posed by the Second Circuit ruling. Some platforms already have stopped underwriting loans that exceed rate caps in certain states, and the June 27 order means more may follow, according to Isaac Boltansky of Compass Point Research & Trading.
“While some marketplace lenders such as Lending Club have altered their agreements with their originating banks to differentiate marketplace loans from those in the Madden case, we expect demand in the secondary market for marketplace loans above state interest rate caps in the Second Circuit will remain modest given potential legal risks,” Boltansky said in a June 27 note.
Also affected are debt collectors, especially since the case arose in the context of a FDCPA claim, and banks, which may have to re-price loans for sale in New York Vermont, and Connecticut.
Credit card securitizations will feel the impact, as well, according to FBR Capital Markets. “This case will also likely create a level of uncertainty regarding the ability of financial firms to securitize credit card balances as they operate similarly,” the note said.
Going forward, the brief by the SG and the Office of the Comptroller of the Currency could take on more importance. Walter E. Zalenski, a partner with BuckleySandler in Washington, who represents financial institutions, said it should help limit the effect of the case to the Second Circuit.
“The brief was a withering critique of the Second Circuit decision,” Zalenski told Bloomberg BNA June 27.
Pepper Hamilton's Eckman agreed. “The strong SG brief and the strong position taken by the OCC in it that Madden was wrong should give the players some comfort that this case is an outlier and should be confined to its facts,” he said.
In other action, the court denied a petition that sought rehearing in an Equal Credit Opportunity Act (ECOA) case ( Hawkins v. Comm. Bank of Raymore, U.S., No. 14-cv-00520, rehearing denied 6/27/16 ). In March, the court by a 4-4 vote upheld a 2014 Eighth Circuit decision that said a loan guarantor is not an “applicant” for purposes of marital-status discrimination under ECOA.
Meanwhile, the justices took no action on separate but related petitions by Bank of America and Wells Fargo that asked the court to clarify standing under the Fair Housing Act ( Bank of Am. v. Miami, U.S., No. 15-cv-01111, 6/27/16 ); ( Wells Fargo & Co. v. Miami, U.S., No. 15-cv-01112, 6/27/16 ).
Any orders on those petitions could affect a host of active Fair Housing Act lawsuits brought against financial institutions by cities and local governments.
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