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No.
In the Supreme Court of the United States
MIDLAND FUNDING, LLC, AND MIDLAND CREDIT
MANAGEMENT, INC., PETITIONERS
v.
SALIHA MADDEN
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
PETITION FOR A WRIT OF CERTIORARI
THOMAS A. LEGHORN
JOSEPH L. FRANCOEUR
WILSON ELSER MOSKOWITZ
EDELMAN & DICKER LLP
150 East 42nd Street
New York, NY 10017
KANNON K. SHANMUGAM
Counsel of Record
ALLISON B. JONES
MASHA G. HANSFORD
KATHERINE A. PETTI
WILLIAMS & CONNOLLY LLP
725 Twelfth Street, N.W.
Washington, DC 20005
(202) 434-5000
[email protected]
QUESTION PRESENTED
Whether the National Bank Act, which preempts
state usury laws regulating the interest a national bank
may charge on a loan, continues to have preemptive effect after the national bank has sold or otherwise assigned the loan to another entity.
(I)
CORPORATE DISCLOSURE STATEMENT
Petitioners Midland Funding, LLC, and Midland
Credit Management, Inc., are subsidiaries of Encore
Capital Group, Inc., a publicly held company. Encore
Capital Group has no parent corporation, and no publicly
held company owns 10% or more of its stock.
(II)
TABLE OF CONTENTS
Page
Opinions below ................................................................................ 1
Jurisdiction ...................................................................................... 2
Statutory provisions involved ....................................................... 2
Statement ......................................................................................... 2
A. Background ........................................................................ 4
B. Facts and procedural history ........................................... 7
Reasons for granting the petition............................................... 11
A. The decision below creates a conflict among the
courts of appeals .............................................................. 11
B. The decision below is erroneous .................................... 14
C. The question presented is an important one that
urgently warrants the Court’s review .......................... 21
Conclusion ...................................................................................... 25
Appendix A .................................................................................... 1a
Appendix B .................................................................................. 19a
Appendix C .................................................................................. 21a
Appendix D .................................................................................. 49a
Appendix E .................................................................................. 51a
Appendix F .................................................................................. 56a
TABLE OF AUTHORITIES
Cases:
Astoria Federal Savings & Loan Association v.
Solimino, 501 U.S. 104 (1991) ......................................... 16
Barnett Bank of Marion County, N.A. v. Nelson,
517 U.S. 25 (1996) ..................................................... passim
Beneficial National Bank v. Anderson,
539 U.S. 1 (2003) ...................................................... 5, 17, 24
Davis v. Elmira Savings Bank, 161 U.S. 275 (1896) .......... 4
(III)
IV
Page
Cases—continued:
FDIC v. Lattimore Land Corp.,
656 F.2d 139 (5th Cir. Unit B Sept. 1981).................. 9, 13
Franklin National Bank of Franklin Square
v. New York, 347 U.S. 373 (1954) ...................................... 6
Gaither v. Farmers’ & Mechanics’ Bank of
Georgetown, 26 U.S. (1 Pet.) 37 (1828) ........................... 15
Krispin v. May Department Stores Co.,
218 F.3d 919 (8th Cir. 2000) ................................... 8, 12, 13
LFG National Capital, LLC v. Gary, Williams,
Finney, Lewis, Watson & Sperando P.L.,
874 F. Supp. 2d 108 (N.D.N.Y. 2012) ............................. 16
Marquette National Bank of Minneapolis
v. First of Omaha Service Corp.,
439 U.S. 299 (1978) .................................................... 4, 5, 15
Monroe Retail, Inc. v. RBS Citizens, N.A.,
589 F.3d 274 (6th Cir. 2009) ............................................... 6
Munoz v. Pipestone Financial, LLC,
513 F. Supp. 2d 1076 (D. Minn. 2007)............................. 13
Nichols v. Fearson, 32 U.S. (7 Pet.) 103 (1833)........ 9, 15, 16
Olvera v. Blitt & Gaines, P.C.,
431 F.3d 285 (7th Cir. 2005) ....................................... 16, 22
Phipps v. FDIC, 417 F.3d 1006 (8th Cir. 2005) ........ 8, 12, 13
Rowe v. New Hampshire Motor Transport
Association, 552 U.S. 364 (2008)............................... 18, 19
Smiley v. Citibank (South Dakota), N.A.,
517 U.S. 735 (1996) ........................................................ 4, 12
SPGGC, LLC v. Ayotte, 488 F.3d 525 (1st Cir. 2007),
cert. denied, 552 U.S. 1185 (2008) ................................... 14
Tate v. Wellings, 100 Eng. Rep. 716 (K.B. 1790) ............... 15
Tiffany v. National Bank of Missouri,
85 U.S. (18 Wall.) 409 (1874) ............................................ 25
Tuttle v. Clark, 4 Conn. 153 (1822) ...................................... 15
Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007) ........... 4
V
Page
Statutes and regulations:
Fair Debt Collection Practices Act,
15 U.S.C. 1692 et seq. .................................................... 7, 10
National Bank Act, 12 U.S.C. 1 et seq. ....................... passim
12 U.S.C. 24 (Seventh) ............................................. 5, 6, 17
12 U.S.C. 25b(b)(1) ............................................ 6, 15, 17, 20
12 U.S.C. 25b(f) ................................................................... 4
12 U.S.C. 85 .............................................................. passim
12 U.S.C. 86 ................................................................... 5, 17
12 U.S.C. 1463(g) .................................................................... 22
12 U.S.C. 1831d(a) .................................................................. 22
28 U.S.C. 1254(1) ...................................................................... 2
12 C.F.R. 7.4008(a) ......................................................... 5, 6, 17
12 C.F.R. 7.4008(d)............................................................. 5, 19
12 C.F.R. 34.3(a) ................................................................. 6, 17
Conn. Gen. Stat. § 37-8 .......................................................... 19
N.Y. Gen. Oblig. Law § 5-501 ................................................. 8
N.Y. Gen. Oblig. Law § 5-511 ........................................... 8, 19
N.Y. Penal Law § 190.40 ................................................... 8, 19
41 Pa. Cons. Stat. § 505 ......................................................... 19
Miscellaneous:
William Blackstone, Commentaries on the Laws of
England (18th London ed., W.E. Dean 1838) ............... 15
Nathan Bull et al., Second Circuit Holds
Application of State Usury Laws to Third-Party
Debt Purchasers Not Preempted by National
Bank Act, JD Supra Business Advisor (June 9,
2015) <tinyurl.com/jdsupraarticle> .............................. 21
Barkley Clark & Mike Lochmann, A Momentous
Court Decision May Hurt Bank Lending
Powers, BankDirector.com (July 22, 2015)
<tinyurl.com/clarklochmann> ....................................... 21
Congressional Review of OCC Preemption: Hearing
Before the Subcomm. on Oversight &
Investigations of the H. Comm. on Financial
Services, 108th Cong. (2004).......................... 18, 22, 23, 24
VI
Page
Miscellaneous—continued:
Consumer Financial Protection Bureau, High-Cost
Mortgage and Homeownership Counseling
Amendments to the Truth in Lending Act
(Regulation Z) and Homeownership Counseling
Amendments to the Real Estate Settlement
Procedures Act (Regulation X),
78 Fed. Reg. 6,856-01 (2013)............................................ 19
Department of the Treasury, Public Input on Expanding Access to Credit Through Online Marketplace Lending, 80 Fed. Reg. 42,866-01 (2015) .............. 23
Federal Deposit Insurance Corporation,
Interpretive Letter 93-27, 1993 WL 853492
(July 12, 1993) ............................................................... 5, 22
Rustom M. Irani et al., Loan Sales and Bank
Liquidity Risk Management: Evidence
from the Shared National Credit Program
(Aug. 1, 2014) <tinyurl.com/iraniarticle> .................... 23
Office of the Comptroller of the Currency,
Bulletin No. 2014-37, Risk Management
Guidance (Aug. 4, 2014) ..................................................... 6
Office of the Comptroller of the Currency,
Interpretive Letter 427, 1988 WL 1541148
(May 9, 1988) ....................................................................... 6
Office of the Comptroller of the Currency,
Preemption Determination and Order,
68 Fed. Reg. 46,264-02 (2003).......................................... 20
Review of the National Bank Preemption Rules:
Hearing Before the S. Comm. on Banking,
Housing, & Urban Affairs, 108th Cong. 55 (2004) ...... 20
Michael Tarkan et al., Compass Point Research &
Trading LLC, Lending Club Corp.: Will
Evolving Institutional Demand Prompt
Changes to the P2P Issuance Model? (2015) ................ 23
Colin Wilhelm, Madden Case Creating Uncertainty
for Securitized Loan Sales, Politico Pro
(Oct. 26, 2015) <tinyurl.com/maddenpolitico> ............ 22
In the Supreme Court of the United States
No.
MIDLAND FUNDING, LLC, AND MIDLAND CREDIT
MANAGEMENT, INC., PETITIONERS
v.
SALIHA MADDEN
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
PETITION FOR A WRIT OF CERTIORARI
Midland Funding, LLC, and Midland Credit Management, Inc., respectfully petition for a writ of certiorari to review the judgment of the United States Court of
Appeals for the Second Circuit in this case.
OPINIONS BELOW
The opinion of the court of appeals (App., infra, 1a18a) is reported at 786 F.3d 246. The oral ruling of the
district court on petitioners’ motion for summary judgment (App., infra, 21a-48a) is unreported.
(1)
2
JURISDICTION
The judgment of the court of appeals was entered on
May 22, 2015. A petition for rehearing was denied on
August 12, 2015 (App., infra, 19a-20a). The jurisdiction
of this Court is invoked under 28 U.S.C. 1254(1).
STATUTORY PROVISIONS INVOLVED
Relevant provisions of the National Bank Act, 12
U.S.C. 1 et seq., are reproduced in the appendix to this
petition (App., infra, 56a-58a).
STATEMENT
This case presents a question which is critical to the
operation of the national banking system and on which
the courts of appeals are in conflict. The National Bank
Act authorizes national banks to charge interest at particular rates on loans that they originate, and the Act has
long been held to preempt conflicting state usury laws.
The question presented here is whether, after a national
bank sells or otherwise assigns a loan with a permissible
interest rate to another entity, the Act continues to preempt the application of state usury laws to that loan. Put
differently, the question presented concerns the extent
to which a State may effectively regulate a national
bank’s ability to set interest rates by imposing limitations that are triggered as soon as a loan is sold or otherwise assigned.
Petitioners Midland Funding, LLC, and Midland
Credit Management, Inc., are a debt purchaser and debt
servicer, respectively. Petitioner Midland Funding purchased the loan at issue in this case from a national bank,
and petitioner Midland Credit Management attempted
to collect interest at the rate set by the terms of that
loan—a rate that was undisputedly permissible when it
was charged by the national bank that originated the
3
loan. Respondent, the borrower, sued petitioners; as is
relevant here, she alleged that, by attempting to collect
interest at the stated rate, petitioners had violated the
New York criminal and civil usury laws, and, as a result,
the debt should be declared void. The district court held
that the National Bank Act preempted state-law claims
against the assignee of a national bank and, on that basis, entered judgment in favor of petitioners. App., infra, 26a-29a, 51a-55a.
The Second Circuit vacated the judgment, holding
that the National Bank Act ceased to have preemptive
effect once the national bank had assigned the loan to
another entity. App., infra, 1a-18a. In so holding, the
Second Circuit created a square conflict with the Eighth
Circuit, and its reasoning is irreconcilable with that of
the Fifth Circuit. The Second Circuit also rode roughshod over decisions of this Court that provide broad protection both for a national bank’s power to set interest
rates and for its freedom from indirect regulation. And
it cast aside the cardinal rule of usury, dating back centuries, that a loan which is valid when made cannot become usurious by virtue of a subsequent transaction.
The Second Circuit, of course, is home to much of the
American financial-services industry. And if the Second
Circuit’s decision is allowed to stand, it threatens to inflict catastrophic consequences on secondary markets
that are essential to the operation of the national banking system and the availability of consumer credit. The
markets have long functioned on the understanding that
buyers may freely purchase loans from originators without fear that the loans will become invalid, an understanding uprooted by the Second Circuit’s decision in
this case. It is no exaggeration to say that, in light of
these practical consequences, this case presents one of
the most significant legal issues currently facing the fi-
4
nancial-services industry. Because the Second Circuit’s
decision creates a conflict on such a vitally important
question of federal law, and because there is an urgent
need to resolve that conflict, the petition for a writ of certiorari should be granted.
A. Background
1. As this Court has explained, “[n]ational banks are
instrumentalities of the federal government, created for
a public purpose, and as such necessarily subject to the
paramount authority of the United States.” Davis v.
Elmira Savings Bank, 161 U.S. 275, 283 (1896). Enacted
in 1864, the National Bank Act established the system of
national banking that remains in place today, and it vests
national banks with a variety of enumerated and incidental powers. See Watters v. Wachovia Bank, N.A.,
550 U.S. 1, 10-11 (2007).
2. Primary among the enumerated powers of national banks is the power to set interest rates. The interest rates that national banks may charge on loans
they originate are “governed by federal law.” Marquette
National Bank of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299, 308 (1978). The National Bank
Act specifically authorizes a national bank to “charge on
any loan * * * interest at the rate allowed by the laws
of the State * * * where the bank is located.” 12
U.S.C. 85; see 12 U.S.C. 25b(f) (providing that no other
provision of the National Bank Act shall be construed to
limit the power to set interest rates). Accordingly, a national bank is entitled to “export” rates permitted by its
home State when dealing with customers from other
States, even when those rates are higher than the laws of
the customers’ States would permit. See, e.g., Smiley v.
5
Citibank (South Dakota), N.A., 517 U.S. 735, 737 (1996);
Marquette National Bank, 439 U.S. at 314-315.1
The “impairment” of state usury laws “has always
been implicit in the structure of the National Bank Act.”
Marquette National Bank, 439 U.S. at 318. In fact, this
Court has held that Section 85, along with Section 86,2
completely preempts a state-law usury claim against a
national bank—a form of preemption so extraordinary
that a suit asserting such a claim is automatically removable to federal court. See Beneficial National Bank v.
Anderson, 539 U.S. 1, 11 (2003).
Consistent with Section 85, regulations promulgated
by the Comptroller of the Currency provide that a “national bank may make, sell, * * * or otherwise deal in
loans” not secured by real estate, “subject to such terms
* * * prescribed by * * * Federal law.” 12 C.F.R.
7.4008(a). The regulations specifically provide that a national bank is entitled to make such loans “without regard to state law limitations concerning * * * [r]ates
of interest.” 12 C.F.R. 7.4008(d).
3. Beyond the enumerated power to set interest
rates, the National Bank Act authorizes national banks
to exercise “all such incidental powers as shall be necessary to carry on the business of banking.” 12 U.S.C. 24
(Seventh). The origination and sale of loans are unquestionably among the powers of a national bank under the
1
Federal law provides similar protection for loans originated by
state-chartered federally insured banks. See Federal Deposit Insurance Corporation, Interpretive Letter 93-27, 1993 WL 853492, at
*1 (July 12, 1993) (FDIC Letter).
2
Section 86 prohibits the charging of interest greater than is
permitted by Section 85 and provides a cause of action for those who
are charged excessive interest.
6
Act. See 12 U.S.C. 24 (Seventh); 12 C.F.R. 7.4008(a),
34.3(a). A national bank also has the incidental power to
participate in the secondary markets for loans, see 12
C.F.R. 7.4008(a); Office of the Comptroller of the Currency, Interpretive Letter 427, 1988 WL 1541148,
¶ 85,651 (May 9, 1988), as well as the power to “pursue
collection of delinquent accounts” by “selling the debt to
debt buyers for a fee,” Office of the Comptroller of the
Currency, Bulletin No. 2014-37, Risk Management
Guidance (Aug. 4, 2014).
Aside from specifically preempting state laws concerning interest rates, the National Bank Act more generally preempts any consumer financial state law that
“prevents or significantly interferes with the exercise by
[a] national bank of its powers.” 12 U.S.C. 25b(b)(1).
That provision codifies the rule of Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996), where
this Court explained that “grants of both enumerated
and incidental ‘powers’ to national banks [are] grants of
authority not normally limited by, but rather ordinarily
pre-empting, contrary state law.” Id. at 32. Under the
Barnett Bank rule, a state law may significantly interfere with a national bank’s exercise of its powers even if
it does so only indirectly. Cf. Franklin National Bank
of Franklin Square v. New York, 347 U.S. 373, 377-378
(1954) (holding preempted a New York law that would
have prohibited national banks from advertising their
lawful business in a particular manner). Courts have
consistently noted that the level of interference that
gives rise to preemption is “not very high.” Monroe Retail, Inc. v. RBS Citizens, N.A., 589 F.3d 274, 283 (6th
Cir. 2009).
7
B. Facts And Procedural History
1. Respondent, a New York resident, opened a credit-card account with Bank of America, a national bank.
In so doing, respondent agreed to be bound by the terms
and conditions set out in the cardholder agreement. As
part of a corporate restructuring at Bank of America, the
bank’s credit-card portfolio was subsequently consolidated into a portfolio operated by FIA Card Services
(FIA), also a national bank. FIA is located in Delaware,
with the result that FIA was authorized to charge interest as permitted by Delaware law. Respondent was informed of the consolidation and consented to the resulting amendment of her cardholder agreement by continuing to use her credit card. App., infra, 3a-5a, 24a-25a,
36a-37a, 54a; C.A. App. 46.
Respondent later defaulted. In 2010, FIA sold respondent’s debt to petitioner Midland Funding; the debt
was serviced by petitioner Midland Credit Management.
Both entities are headquartered in California. Consistent with the terms of the cardholder agreement, petitioner Midland Credit Management sent respondent a
letter seeking to collect payment on her debt at the applicable rate of 27%. App., infra, 3a-4a, 25a, 54a.
2. On November 10, 2011, respondent filed a class
action on behalf of approximately 50,000 New York residents against petitioners in the United States District
Court for the Southern District of New York. Respondent alleged that, by attempting to collect interest from
her at the stated rate, petitioners had violated the New
York criminal and civil usury laws, and, as a result, her
debt (and the debts of others similarly situated) should
be declared void. Respondent also alleged that petitioners had engaged in improper debt-collection practices in
violation of the federal Fair Debt Collection Practices
Act (FDCPA); that claim was predicated on the claims
8
that petitioners had violated the New York usury laws.
App., infra, 4a, 16a-17a, 25a, 33a; C.A. App. 25-28; see
N.Y. Gen. Oblig. Law §§ 5-501, 5-511; N.Y. Penal Law
§ 190.40.
3. Petitioners moved for summary judgment, arguing that respondent’s state-law claims were preempted
by the National Bank Act (and that respondent’s federal
claim, which was predicated on the state-law claims, thus
also failed).
The district court entered judgment for petitioners;
in an oral ruling on petitioners’ motion for summary
judgment, the court held that, because a national bank
had originated the loan at issue, the National Bank Act
preempted state-law usury claims against an assignee of
the bank. App., infra, 21a-48a.3 In so holding, the district court relied on two decisions from the Eighth Circuit holding that, where a national bank has assigned a
loan to another entity, “[c]ourts must look at ‘the originating entity (the bank), and not the ongoing assignee
* * * , in determining whether the [National Bank Act]
applies.’ ” Phipps v. FDIC, 417 F.3d 1006, 1013 (2005)
(quoting Krispin v. May Department Stores Co., 218
F.3d 919, 924 (2000)); see App., infra, 27a. The court also relied on a decision from the Fifth Circuit similarly
holding that the applicable law is determined by looking
at the loan’s originator. App., infra, 27a-28a (discussing
3
The district court initially denied petitioners’ motion for summary judgment on the ground that there were outstanding issues of
fact concerning whether respondent had received the cardholder
agreement and amendment and whether the debt had validly been
assigned to petitioners. See App., infra, 31a-32a, 37a. After the
parties executed a joint stipulation resolving those factual issues in
petitioners’ favor, the district court entered judgment for petitioners. See id. at 51a-55a.
9
FDIC v. Lattimore Land Corp., 656 F.2d 139, 148-149
(Unit B Sept. 1981)). In addition, the district court invoked the “cardinal rule of usury” that the non-usurious
character of a loan does not change by virtue of a subsequent transaction involving the loan. Id. at 28a (citing
Nichols v. Fearson, 32 U.S. (7 Pet.) 103, 109 (1833)).
The district court added that it “s[aw] no reason why
a national bank’s assignees should not be afforded the
same protections as those given to the bank itself with
regard to charging a particular interest rate.” App., infra, 29a. “In this scenario,” the court reasoned, “the assignee is merely attempting to collect what [the borrower] originally and legitimately owed, no more.” Ibid.
The court observed that, under a contrary rule, borrowers would have a “perverse incentive to avoid their obligations long enough to ensure that their debt was
charged-off and assigned to a debt collector required to
charge a lower interest rate.” Ibid.
4. The court of appeals vacated the judgment and
remanded, holding, as is relevant here, that the National
Bank Act did not preempt respondent’s state-law usury
claims. App., infra, 1a-18a.
At the outset, the court of appeals acknowledged that
Section 85 of the National Bank Act “expressly permits”
national banks to charge interest at the rates allowed by
the States in which they are located and “completely preempts analogous state-law usury claims” against the
banks themselves. App., infra, 7a (alteration and citation omitted). The court also acknowledged that the Act
more generally preempts state laws that significantly
interfere with a national bank’s exercise of its powers.
Id. at 8a. And the court of appeals further acknowledged
that this Court “has suggested that * * * [National
Bank Act] preemption may extend to entities beyond a
national bank itself.” Ibid.
10
The court of appeals nevertheless concluded, without
elaboration, that, although “usury laws might decrease
the amount a national bank could charge for its consumer debt in certain [S]tates,” such an effect “would not
‘significantly interfere’ with the exercise of a national
bank power.” App., infra, 11a. It reached that conclusion without analyzing the impact the application of state
usury laws would have on a national bank’s ability to
originate or sell loans. Rather, according to the court,
preemption did not extend to assignees such as petitioners for the simple reason that they are “non-national
bank entities that are not acting on behalf of a national
bank.” Ibid. Because petitioners were not “act[ing] on
behalf of [Bank of America] or FIA in attempting to collect on [respondent’s] debt,” the court concluded that respondent’s state-law claims against petitioners were not
preempted. Id. at 9a, 17a-18a.
In so concluding, the court of appeals brushed off the
two Eighth Circuit cases on which the district court had
relied, noting that “neither [Bank of America] nor FIA
has retained an interest in [respondent’s] account” and
“[respondent] objects only to the interest charged after
her account was sold by FIA to [petitioners].” App., infra, 11a-14a. The court of appeals did not cite the Fifth
Circuit decision on which the district court relied, nor did
it address the “cardinal rule of usury” which the district
court recognized. See ibid.4
4
Because the district court’s entry of judgment on respondent’s
FDCPA claim was “predicated on [its] erroneous holding that [petitioners] receive the same protections under the [National Bank Act]
as do national banks,” the court of appeals vacated the district
court’s judgment in its entirety. App., infra, 16a. Similarly, the
court of appeals vacated the district court’s order denying respondent’s motion for class certification, reasoning that the district court’s
11
5. The court of appeals subsequently denied rehearing. App., infra, 19a-20a.
REASONS FOR GRANTING THE PETITION
The Second Circuit’s decision in this case creates a
circuit conflict on a question of federal law at the heart of
the National Bank Act. The decision below upends centuries of settled doctrine and threatens to wreak havoc
on the national banking system and the Nation’s credit
markets by eviscerating a national bank’s core prerogative to set interest rates unfettered by state regulation.
Moreover, the question presented is unquestionably of
substantial importance, and the Court’s review is urgently required in light of the dramatic consequences of the
Second Circuit’s decision for the American financialservices industry. Because this case readily satisfies the
criteria for further review, the petition for certiorari
should be granted.
A. The Decision Below Creates A Conflict Among The
Courts Of Appeals
Before the Second Circuit’s decision in this case, the
prevailing view among the courts of appeals was that the
applicability of National Bank Act preemption turned on
the identity of a loan’s originator. In holding that National Bank Act preemption does not apply after a national bank has assigned a loan to another entity, the Second Circuit created a square conflict with the Eighth
Circuit, and its reasoning is irreconcilable with that of
the Fifth Circuit. This Court’s review is necessary in order to resolve the conflict and to restore the preexisting
ruling on class certification was “entwined with its erroneous holding that [petitioners] receive the same protections under the [National Bank Act] as do national banks.” Id. at 17a.
12
understanding that the act of assigning a loan does not
terminate the National Bank Act’s protections.
1. The Second Circuit’s decision in this case squarely conflicts with the Eighth Circuit’s decision in Krispin
v. May Department Stores Co., 218 F.3d 919 (2000). In
Krispin, a national bank extended credit on credit cards
issued by a department store to its customers. Id. at
921. Under the applicable credit agreements, the bank
charged delinquent borrowers late fees of $15, which
qualified as “interest” under the National Bank Act. Id.
at 922-923 (citing Smiley, 517 U.S. at 744-747). The bank
sold its receivables (including any late fees or other “interest”) to the department store; delinquent borrowers
then sued the store, alleging that the late fees were usurious under state law. Id. at 922, 923.
The Eighth Circuit held that the National Bank Act
preempted the borrowers’ state-law usury claims, on the
ground that a court must “look to the originating entity
(the bank), and not the ongoing assignee (the store), in
determining whether the [Act] applies.” Krispin, 218
F.3d at 924. The court explained that, for purposes of
deciding the legality of the interest rate, the “real party
in interest” was the bank that originated the loans, which
“issue[d] credit” and “set[] such terms as interest and
late fees.” Ibid. While the bank continued to service the
accounts in certain respects, the critical fact was that
“the store’s purchase of the bank’s receivables” did not
alter the preemption analysis as to the terms of those
receivables. Ibid.
Subsequent cases in the Eighth Circuit have confirmed the breadth of the Krispin rule. For example, in
Phipps v. FDIC, 417 F.3d 1006 (2005), the Eighth Circuit
affirmed the dismissal of state-law claims brought
against both a national bank and its non-national-bank
assignee. See id. at 1014. In so doing, the Eighth Cir-
13
cuit reiterated the principle that “[c]ourts must look at
‘the originating entity (the bank), and not the ongoing
assignee * * * in determining whether the [National
Bank Act] applies.’ ” Id. at 1013 (quoting Krispin, 218
F.3d at 924). And at least one district court in the circuit
has applied that principle in circumstances identical to
those presented here, citing Krispin and Phipps in holding that state-law usury claims against the purchaser of
credit-card debt from a national bank are preempted.
See Munoz v. Pipestone Financial, LLC, 513 F. Supp.
2d 1076, 1079 (D. Minn. 2007).
2. Beyond the square conflict with the Eighth Circuit’s decision in Krispin, the Second Circuit’s decision is
also inconsistent with a decision of the Fifth Circuit.
In FDIC v. Lattimore Land Corp., 656 F.2d 139
(Unit B Sept. 1981), the Fifth Circuit addressed an argument by delinquent borrowers that, under the National Bank Act, the interest rate charged on a loan was usurious. Id. at 146-147. That case was the flipside of this
one: a non-national-bank entity originated the debt and
then assigned it to a national bank. Ibid. The law of the
State governing the originator permitted a higher interest rate than the law governing the assignee. Ibid. The
Fifth Circuit held that courts should look to the originator of the debt, not the assignee, in determining the applicable law, and thus affirmed the district court’s conclusion that the assignee was entitled to charge interest
under the more generous state law governing the originator. Id. at 146-150. The Fifth Circuit reached that
conclusion by applying the overarching principle that
“[t]he non-usurious character of a note should not
change when the note changes hands,” id. at 148-149—a
14
principle that, in the context of the facts presented by
this case, compels preemption.5
3. Under the reasoning of the preceding decisions, a
loan validly originated by a national bank in accordance
with the law of the State where the bank is located cannot become subject to regulation by other States simply
because it is held by another entity. The Second Circuit’s decision stands alone in allowing a State to regulate the interest on a loan originated by a national bank
in the exercise of its National Bank Act powers as soon
as the loan passes into the hands of another entity. The
ensuing conflict, on an issue critical to the functioning of
national banks, warrants resolution by this Court.
B. The Decision Below Is Erroneous
Further review is also merited because the Second
Circuit’s decision regarding the preemptive scope of the
National Bank Act is deeply flawed. It is undisputed
that the national bank that originated respondent’s loan
was permitted to charge interest at the rate at issue. It
is also undisputed that, if the bank had not assigned the
loan to petitioners, any state-law claims against the bank
would be preempted. The question presented is whether
respondent may pursue the same state-law claims
against petitioners simply by virtue of the assignment by
the originating national bank.
In refusing to recognize preemption in these circumstances, the Second Circuit went astray in two funda5
The Second Circuit’s decision in this case also cannot be reconciled with a decision of the First Circuit, which recognized that the
National Bank Act preempts state laws that, although they purport
to regulate non-national-bank entities, actually “seek[] to prohibit
the sale of [a] bank product itself.” SPGGC, LLC v. Ayotte, 488 F.3d
525, 534 (2007), cert. denied, 552 U.S. 1185 (2008).
15
mental ways. First, the Second Circuit failed to acknowledge the preemptive force of Section 85 of the National Bank Act, with the result that it hollowed out a national bank’s fundamental power to set interest rates.
Second, the Second Circuit eviscerated the Barnett Bank
“significant interference” test, now codified in Section
25b(b)(1), by incorrectly concluding that state regulation
of banks’ assignees will not significantly interfere with
the banks’ exercise of their powers. Because the Second
Circuit’s decision cannot be reconciled with this Court’s
decisions regarding the preemptive scope of the National
Bank Act, further review is warranted.
1. To begin with, the Second Circuit’s decision allows state law to infringe the core enumerated power of
national banks to set interest rates at the level allowed
by their home States. As this Court has recognized, Section 85 preempts state laws that interfere with that power. See Marquette National Bank, 439 U.S. at 318-319.
It is a fundamental principle of usury law that “a contract, which, in its inception, is unaffected by usury, can
never be invalidated by any subsequent usurious transaction.” Nichols, 32 U.S. (7 Pet.) at 109. That principle—known as the “valid-when-made” principle—was
firmly established at common law well before 1864, when
Congress enacted the National Bank Act (including the
provision that is now Section 85). See, e.g., ibid.; Gaither
v. Farmers’ & Mechanics’ Bank of Georgetown, 26 U.S.
(1 Pet.) 37, 43 (1828); Tuttle v. Clark, 4 Conn. 153, 157
(1822); Tate v. Wellings, 100 Eng. Rep. 716, 721 (K.B.
1790); 1 William Blackstone, Commentaries on the Laws
of England 379 n.32 (18th London ed., W.E. Dean 1838)
(reciting the principle that “[t]he usury must be part of
the contract in its inception”). Because Congress legislated against that common-law backdrop, Section 85 incorporates the principle that an interest rate set by an
16
originating bank cannot be invalidated by a subsequent
assignment of the loan. See, e.g., Astoria Federal Savings & Loan Association v. Solimino, 501 U.S. 104, 108
(1991).
The “valid-when-made” principle is essential to a national bank’s ability to set interest rates. Courts, including this Court, have consistently recognized the dangers
of a rule that would allow a non-usurious loan to become
usurious after an assignment. See Nichols, 32 U.S. (7
Pet.) at 110 (noting that, under such a rule, a “contract,
wholly innocent in its origin, and binding and valid, upon
every legal principle, [would be] rendered, at least, valueless, in the hands of the otherwise legal holder”);
Olvera v. Blitt & Gaines, P.C., 431 F.3d 285, 287-288 (7th
Cir. 2005) (rejecting such a rule on the ground that it
would “produce[] a senseless result” that “would push
the debt buyers out of the debt collection market and
force the original creditors to do their own debt collection”); LFG National Capital, LLC v. Gary, Williams,
Finney, Lewis, Watson & Sperando P.L., 874 F. Supp.
2d 108, 125 (N.D.N.Y. 2012) (explaining that such a rule
“would in effect prohibit—make uneconomic—the assignment or sale by banks of their commercial property
to a secondary market,” which “would be disastrous in
terms of bank operations and not conformable to the
public policy exempting banks in the first instance” (internal quotation marks and citation omitted)). By ignoring the “valid-when-made” principle, the Second Circuit’s decision substantially vitiates the authority granted to national banks by Section 85.
The practical effect of the Second Circuit’s decision is
to authorize state interference in what had previously
been understood to be an exclusively federal regime.
Under that unprecedented decision, States are permitted to regulate a national bank’s loans when they come
17
into the hands of its counterparties, thereby effectively
restricting the bank’s power to set interest rates on loans
it might sell or otherwise assign. But as this Court has
previously noted, “the various provisions of [Sections] 85
and 86 form a system of regulations all the parts of which
are in harmony with each other and cover the entire subject, so that the State law would have no bearing whatever upon the case.” Beneficial National Bank, 539 U.S.
at 10 (alterations and internal quotation marks omitted).
The Second Circuit’s decision is patently incompatible
with the National Bank Act’s complete displacement of
state law regulating interest rates.
2. The Second Circuit further erred when it rejected
an additional (and distinct) source of preemption. The
National Bank Act more generally preempts any consumer financial state law—whether or not it concerns
interest—that “prevents or significantly interferes with
the exercise by [a] national bank of its powers.” 12
U.S.C. 25b(b)(1); accord Barnett Bank, 517 U.S. at 33.
That broader form of preemption applies to all of a national bank’s enumerated and incidental powers, including its powers to originate and sell loans. See 12 U.S.C.
24 (Seventh); 12 C.F.R. 7.4008(a), 34.3(a); pp. 5-6, supra.
The Second Circuit’s decision is inconsistent with the
Barnett Bank test, as codified in Section 25b(b)(1). Specifically, the Second Circuit’s decision fails to account for
the substantial impact the state regulation of assignees
would have on a national bank’s ability to sell on the secondary markets loans with rates greater than permitted
by some States’ usury laws (or otherwise to rely on counterparties for functions such as debt collection and secu-
18
ritization).6 The Second Circuit’s decision interferes
both with the power of a national bank to originate loans
in the first place and with the specific powers of a national bank to participate in the secondary markets for
loans and to pursue the collection of delinquent accounts.
In rejecting preemption under the Barnett Bank
test, the Second Circuit narrowly focused on the identity
of the regulated entities, noting that assignees lack a
structural connection with the banks: they are not subsidiaries, nor are they acting as banks’ agents when they
attempt to collect interest. See App., infra, 8a-9a. But
the crux of the preemption analysis is the “exercise of [a
national bank’s] powers.” Barnett Bank, 517 U.S. at 33;
see id. at 32-34. The proper focus under the Barnett
Bank test is thus on the effect of a state regulation on the
national bank—not on any formal feature of the state
law, such as the identity of the party that is the direct
object of the regulation.
In other contexts, this Court has rejected the proposition that a State can avoid preemption simply by regulating the counterparties of entities as to which preemption would otherwise apply. In Rowe v. New Hampshire
Motor Transport Association, 552 U.S. 364 (2008), the
Court held that a federal law preempting the regulation
of motor carriers also preempted the regulation of retailers in their use of motor carriers’ services. The Court
6
Securitizing loans—that is, packaging groups of loans and selling them to third parties in the form of asset-backed securities—
allows banks to create liquidity and make additional credit available.
See Congressional Review of OCC Preemption: Hearing Before the
Subcomm. on Oversight & Investigations of the H. Comm. on Financial Services, 108th Cong. 195, 205 (2004) (statement of Julie L.
Williams, First Senior Deputy Comptroller and Chief Counsel, Office of the Comptroller of the Currency).
19
explained that, even though a regulation that tells counterparties what services to use is “less ‘direct’ than it
might be,” such a regulation substantially alters the result that “the market might dictate” in its absence. Id. at
372. Consequently, “treating sales restrictions and purchase restrictions differently for pre-emption purposes
would make no sense.” Ibid. (citation omitted). So too
here, a state regulation that operates on assignees has
obvious effects on national banks themselves, effectively
restricting their ability to set interest rates on the front
end by imposing limitations on loans with those rates on
the back end.
The Second Circuit offered no support for its ipse
dixit conclusion that the state regulation of banks’ assignees will have no significant impact on the banks’ exercise of their powers. Nor could it. In fact, the impact
on national banks will be enormous. State usury laws
can void debts altogether, see, e.g., N.Y. Gen. Oblig. Law
§ 5-511; Conn. Gen. Stat. § 37-8, and they can even subject creditors to criminal sanctions, see, e.g., N.Y. Penal
Law § 190.40; 41 Pa. Cons. Stat. § 505. Under the Second Circuit’s rule, market participants must account for
the risk of invalidation of their loans, and even the additional risk of imposition of criminal sanctions, simply because the loans are made to consumers in the wrong
States. A national bank can hardly make non-real-estate
loans “without regard to state law limitations concerning
* * * [r]ates of interest,” 12 C.F.R. 7.4008(d), if those
loans would become worthless as soon as they come into
the hands of the bank’s counterparties.
Federal regulators have repeatedly recognized that
imposing liability on assignees, especially in circumstances with high uncertainty, can freeze secondary
markets. See, e.g., Consumer Financial Protection Bureau, High-Cost Mortgage and Homeownership Coun-
20
seling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments
to the Real Estate Settlement Procedures Act (Regulation X), 78 Fed. Reg. 6,856-01, 6,944-6,945 (2013) (noting
that assignee liability may result in the inability to sell a
particular type of loan); Review of the National Bank
Preemption Rules: Hearing Before the S. Comm. on
Banking, Housing, & Urban Affairs, 108th Cong. 55, 88
(2004) (statement of John D. Hawke, Jr., Comptroller of
the Currency) (observing that rating agencies generally
will not rate securities containing loans with unquantifiable assignee liability). Indeed, the Office of the Comptroller of the Currency—the federal agency with primary responsibility for national banks—concluded that a
state-law provision imposing assignee liability was preempted because it would “stand as an obstacle to the exercise of national banks’ real estate lending powers, including the power to sell real estate loans into the secondary market or to securitize these loans.” Office of the
Comptroller of the Currency, Preemption Determination and Order, 68 Fed. Reg. 46,264-02, 46,278-46,279
(2003).
The state regulation permitted by the Second Circuit
here would gravely interfere with the ability of national
banks to sell their loans, rely on counterparties for functions such as debt collection and securitization, and participate in the secondary markets more generally. The
resulting interference is plainly sufficient under the
Barnett Bank test for preemption, as codified in Section
25b(b)(1), to the extent that the state regulation is not
specifically preempted under Section 85. The Second
Circuit erred by permitting respondent’s state-law
claims (and derivative federal claim) to proceed, and this
Court should grant review and reverse the Second Circuit’s judgment.
21
C. The Question Presented Is An Important One That
Urgently Warrants The Court’s Review
The question presented in this case is one of exceptional importance to the national banking system and the
Nation’s credit markets. The Second Circuit’s decision
has upset settled expectations in the American financialservices industry, and, if allowed to stand, it threatens to
cause chaos in the secondary markets. Remarkably,
some ten industry associations filed amicus briefs in
support of petitioners’ petition for rehearing below, amply demonstrating both the importance of the question
presented and the urgent need for further review in this
case.
1. The practical implications of the Second Circuit’s
decision in this case are difficult to overstate. Indeed,
the decision has already “sent shockwaves through the
banking industry.” Barkley Clark & Mike Lochmann, A
Momentous Court Decision May Hurt Bank Lending
Powers, BankDirector.com (July 22, 2015) <tinyurl.com/
clarklochmann>. Commentators have observed that the
decision “may have far-reaching—and likely unintended—implications for national banks and their assignees”
by “upend[ing] a fundamental and longstanding premise
of lending law.” Nathan Bull et al., Second Circuit
Holds Application of State Usury Laws to Third-Party
Debt Purchasers Not Preempted by National Bank Act,
JD Supra Business Advisor (June 9, 2015) <tinyurl.com/
jdsupraarticle>.
If the Second Circuit’s decision is left undisturbed, a
State will have the power to regulate key terms set by a
national bank, on a loan it created, when that loan passes
22
out of the bank’s hands.7 It is beyond debate that
“[s]tate-based restrictions on loan terms substantially
affect the marketability of such loans.” Congressional
Review of OCC Preemption: Hearing Before the Subcomm. on Oversight & Investigations of the H. Comm.
on Financial Services, 108th Cong. 195, 205 (2004)
(statement of Julie L. Williams, First Senior Deputy
Comptroller and Chief Counsel, Office of the Comptroller of the Currency) (Congressional Review). Put differently, a bank’s ability to sell a loan will be thoroughly obstructed by a state law that makes the loan worthless
(or, worse yet, subjects a holder to criminal sanctions)
when the loan passes into the hands of the purchaser.
See, e.g., Olvera, 431 F.3d at 287-288. Little wonder,
then, that one commentator has observed that the Second Circuit’s decision is having a “great effect on the
secondary market and liquidity.” Colin Wilhelm, Madden Case Creating Uncertainty for Securitized Loan
Sales, Politico Pro (Oct. 26, 2015) <tinyurl.com/maddenpolitico> (internal quotation marks omitted).
In the wake of the Second Circuit’s decision, national
banks are left with few options. They could attempt to
alter the terms of their loans in order to satisfy the nu7
In fact, the Second Circuit’s decision will have even wider implications, because its reasoning applies equally to loans originated by
other entities, such as savings associations and state-chartered federally insured banks, whose interest rates are also governed by federal law. See 12 U.S.C. 1463(g), 1831d(a); FDIC Letter, at *1. Further compounding the impact, the new uncertainty surrounding the
“valid-when-made” principle applies to a yet broader group, because
that principle governs loans made by all lenders, including state
banks and non-banks. In light of the Second Circuit’s decision, no
purchaser of any loan can have assurance that such a loan remains
protected from more stringent state usury laws.
23
merous and “often unpredictable” state laws that could
conceivably apply, effectively succumbing to the standard set by the strictest State. Congressional Review
201. Or they could forgo selling their credit products on
the secondary markets—a practice on which banks have
depended in order to securitize their holdings, manage
risk, and obtain essential liquidity. See Rustom M. Irani
et al., Loan Sales and Bank Liquidity Risk Management: Evidence from the Shared National Credit Program 2 (Aug. 1, 2014) <tinyurl.com/iraniarticle>.
What is more, the Second Circuit’s decision will have
repercussions across a wide range of credit-based products, especially those for small businesses and lowincome consumers, for whom bank credit is often the only means of obtaining access to funds.8 And it will subject national banks to myriad state laws beyond the usury laws at issue here. The law of even a single State “can
have a detrimental effect on [a national] bank’s operations and consumers,” insofar as application of that law
could “cause[] secondary market participants to cease
purchasing” loans in that State. Congressional Review
203.
2. In light of the practical consequences of the Second Circuit’s decision, resolving the question presented
8
For example, the Second Circuit’s decision casts doubt on the viability of online lending marketplaces currently envisioned by the
federal government. See Department of the Treasury, Public Input
on Expanding Access to Credit Through Online Marketplace Lending, 80 Fed. Reg. 42,866-01 (2015). The decision “pose[s] an acute
risk” to lenders in those marketplaces, because they may be subject
to state usury laws based on the vagaries of a particular customer’s
location. See Michael Tarkan et al., Compass Point Research &
Trading LLC, Lending Club Corp.: Will Evolving Institutional
Demand Prompt Changes to the P2P Issuance Model? 2 (2015).
24
is a matter of the utmost urgency. As this Court has repeatedly recognized, uniformity is paramount in national
bank regulation. See, e.g., Beneficial National Bank,
539 U.S. at 10-11. Indeed, “the ability of national banks
to operate under consistent, uniform national standards
[is] a crucial factor in their business future.” Congressional Review 208. Under the approach adopted by the
Second Circuit in this case, however, national banks are
no longer subject to uniform national standards but must
now navigate the laws of all fifty States in order to determine their ability to assign validly originated loans.
There is no legitimate reason to wait before granting
review on the question presented. Federal regulators
have recognized the need for prompt action on prior occasions where, as here, “the continuing uncertainty
about the applicability of State laws has already affected
national banks’ ability to lend in certain markets and to
access the secondary market,” on the ground that such
limitations may “adversely affect credit availability as
well as detract from the banks’ financial strength.” Congressional Review 204. And the need for prompt action
is all the more acute here because the Second Circuit is
home to much of the American financial-services industry—and the Second Circuit’s decision will therefore
subject a disproportionate share of the industry to the
very sort of disuniformity that the National Bank Act
was intended to prevent.
3. Finally, this case constitutes an excellent vehicle
for resolving the circuit conflict. Because the parties in
this case entered into a joint stipulation, there are no factual issues that could complicate the Court’s analysis.
And it is undisputed that a ruling that respondent’s
state-law claims are preempted would dispose of the entire case. The preemption question is thus cleanly presented here for the Court’s review.
25
States should not be permitted to “expose [a national
bank] to the hazard of unfriendly legislation,” Tiffany v.
National Bank of Missouri, 85 U.S. (18 Wall.) 409, 413
(1874), through the simple expedient of regulating counterparties essential to the bank’s exercise of its core
powers. This case presents a clear circuit conflict on a
vitally important question of federal law—a conflict that
is in urgent need of resolution. Accordingly, this case
satisfies all of the criteria for further review. The Court
should grant the petition for certiorari and resolve the
conflict on an issue of enormous significance to the
American financial-services industry and its customers.
CONCLUSION
The petition for a writ of certiorari should be granted.
Respectfully submitted.
THOMAS A. LEGHORN
JOSEPH L. FRANCOEUR
WILSON ELSER MOSKOWITZ
EDELMAN & DICKER LLP
150 East 42nd Street
New York, NY 10017
NOVEMBER 2015
KANNON K. SHANMUGAM
Counsel of Record
ALLISON B. JONES
MASHA G. HANSFORD
KATHERINE A. PETTI
WILLIAMS & CONNOLLY LLP
725 Twelfth Street, N.W.
Washington, DC 20005
(202) 434-5000
[email protected]
APPENDIX
TABLE OF CONTENTS
Appendix A:
Court of appeals opinion,
May 22, 2015 .................................................1a
Appendix B:
Court of appeals order,
Aug. 12, 2015...............................................19a
Appendix C:
District court oral ruling,
Sept. 30, 2013 ..............................................21a
Appendix D:
District court order,
Sept. 30, 2013 ..............................................49a
Appendix E:
Stipulation for entry of judgment,
June 2, 2014 ................................................51a
Appendix F:
Statutory provisions ..................................56a
APPENDIX A
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
No. 14-2131
Saliha Madden, on behalf of herself and all others
similarly situated, Plaintiff-Appellant
v.
Midland Funding, LLC, Midland Credit Management,
Inc., Defendants-Appellees
May 22, 2015
Before: LEVAL, STRAUB and DRONEY, Circuit
Judges.
OPINION
STRAUB, Circuit Judge.
This putative class action alleges violations of the
Fair Debt Collection Practices Act (“FDCPA”) and New
York’s usury law. The proposed class representative,
Saliha Madden, alleges that the defendants violated the
FDCPA by charging and attempting to collect interest at
a rate higher than that permitted under the law of her
home state, which is New York. The defendants contend
that Madden’s claims fail as a matter of law for two rea-
(1a)
2a
sons: (1) state-law usury claims and FDCPA claims predicated on state-law violations against a national bank’s
assignees, such as the defendants here, are preempted
by the National Bank Act (“NBA”), and (2) the agreement governing Madden’s debt requires the application
of Delaware law, under which the interest charged is
permissible.
The District Court entered judgment for the defendants. Because neither defendant is a national bank nor a
subsidiary or agent of a national bank, or is otherwise
acting on behalf of a national bank, and because application of the state law on which Madden’s claims rely
would not significantly interfere with any national bank’s
ability to exercise its powers under the NBA, we reverse
the District Court’s holding that the NBA preempts
Madden’s claims and accordingly vacate the judgment of
the District Court. We leave to the District Court to address in the first instance whether the Delaware choiceof-law clause precludes Madden’s claims.
The District Court also denied Madden’s motion for
class certification, holding that potential NBA preemption required individualized factual inquiries incompatible with proceeding as a class. Because this conclusion
rested upon the same erroneous preemption analysis, we
also vacate the District Court’s denial of class certification.
3a
BACKGROUND
A.
Madden’s Credit Card Debt, the Sale of Her Account, and the Defendants’ Collection Efforts
In 2005, Saliha Madden, a resident of New York,
opened a Bank of America (“BoA”) credit card account.
BoA is a national bank.1 The account was governed by a
document she received from BoA titled “Cardholder
Agreement.” The following year, BoA’s credit card program was consolidated into another national bank, FIA
Card Services, N.A. (“FIA”). Contemporaneously with
the transfer to FIA, the account’s terms and conditions
were amended upon receipt by Madden of a document
titled “Change In Terms,” which contained a Delaware
choice-of-law clause.
Madden owed approximately $5,000 on her credit
card account and in 2008, FIA “charged-off” her account
(i.e., wrote off her debt as uncollectable). FIA then sold
Madden’s debt to Defendant-Appellee Midland Funding,
LLC (“Midland Funding”), a debt purchaser. Midland
Credit Management, Inc. (“Midland Credit”), the other
defendant in this case, is an affiliate of Midland Funding
that services Midland Funding’s consumer debt accounts. Neither defendant is a national bank. Upon Midland Funding’s acquisition of Madden’s debt, neither
FIA nor BoA possessed any further interest in the account.
1
National banks are “corporate entities chartered not by any
State, but by the Comptroller of the Currency of the U.S. Treasury.” Wachovia Bank v. Schmidt, 546 U.S. 303, 306 (2006).
4a
In November 2010, Midland Credit sent Madden a
letter seeking to collect payment on her debt and stating
that an interest rate of 27% per year applied.
B.
Procedural History
A year later, Madden filed suit against the defendants—on behalf of herself and a putative class—alleging
that they had engaged in abusive and unfair debt collection practices in violation of the FDCPA, 15 U.S.C.
§§ 1692e, 1692f, and had charged a usurious rate of interest in violation of New York law, N.Y. Gen. Bus. Law
§ 349; N.Y. Gen. Oblig. Law § 5-501; N.Y. Penal Law
§ 190.40 (proscribing interest from being charged at a
rate exceeding 25% per year).
On September 30, 2013, the District Court denied the
defendants’ motion for summary judgment and Madden’s motion for class certification. In ruling on the motion for summary judgment, the District Court concluded that genuine issues of material fact remained as to
whether Madden had received the Cardholder Agreement and Change In Terms, and as to whether FIA had
actually assigned her debt to Midland Funding. However, the court stated that if, at trial, the defendants were
able to prove that Madden had received the Cardholder
Agreement and Change In Terms, and that FIA had assigned her debt to Midland Funding, her claims would
fail as a matter of law because the NBA would preempt
any state-law usury claim against the defendants. The
District Court also found that if the Cardholder Agreement and Change In Terms were binding upon Madden,
any FDCPA claim of false representation or unfair practice would be defeated because the agreement permitted
the interest rate applied by the defendants.
5a
In ruling on Madden’s motion for class certification,
the District Court held that because “assignees are entitled to the protection of the NBA if the originating bank
was entitled to the protection of the NBA . . . the class
action device in my view is not appropriate here.” App’x
at 120. The District Court concluded that the proposed
class failed to satisfy Rule 23(a)’s commonality and typicality requirements because “[t]he claims of each member of the class will turn on whether the class member
agreed to Delaware interest rates” and “whether the
class member’s debt was validly assigned to the Defendants,” id. at 127-28, both of which were disputed with respect to Madden. Similarly, the court held that the requirements of Rule 23(b)(2) (relief sought appropriate to
class as a whole) and (b)(3) (common questions of law or
fact predominate) were not satisfied “because there is no
showing that the circumstances of each proposed class
member are like those of Plaintiff, and because the resolution will turn on individual determinations as to cardholder agreements and assignments of debt.” Id. at 128.
On May 30, 2014, the parties entered into a “Stipulation for Entry of Judgment for Defendants for Purpose
of Appeal.” Id. at 135. The parties stipulated that FIA
had assigned Madden’s account to the defendants and
that Madden had received the Cardholder Agreement
and Change In Terms. This stipulation disposed of the
two genuine disputes of material fact identified by the
District Court, and provided that “a final, appealable
judgment in favor of Defendants is appropriate.” Id. at
138. The District Court “so ordered” the Stipulation for
Entry of Judgment.
This timely appeal followed.
6a
DISCUSSION
Madden argues on appeal that the District Court
erred in holding that NBA preemption bars her statelaw usury claims. We agree. Because neither defendant
is a national bank nor a subsidiary or agent of a national
bank, or is otherwise acting on behalf of a national bank,
and because application of the state law on which Madden’s claims rely would not significantly interfere with
any national bank’s ability to exercise its powers under
the NBA, we reverse the District Court’s holding that
the NBA preempts Madden’s claims and accordingly vacate the judgment of the District Court. We also vacate
the District Court’s judgment as to Madden’s FDCPA
claim and the denial of class certification because those
rulings were predicated on the same flawed preemption
analysis.
The defendants contend that even if we find that
Madden’s claims are not preempted by the NBA, we
must affirm because Delaware law—rather than New
York law—applies and the interest charged by the defendants is permissible under Delaware law. Because the
District Court did not reach this issue, we leave it to the
District Court to address in the first instance on remand.
I.
National Bank Act Preemption
The federal preemption doctrine derives from the
Supremacy Clause of the United States Constitution,
which provides that “the Laws of the United States
which shall be made in Pursuance” of the Constitution
“shall be the supreme Law of the Land.” U.S. Const. art.
VI, cl. 2. According to the Supreme Court, “[t]he phrase
‘Laws of the United States’ encompasses both federal
statutes themselves and federal regulations that are
7a
properly adopted in accordance with statutory authorization.” City of New York v. FCC, 486 U.S. 57, 63 (1988).
“Preemption can generally occur in three ways:
where Congress has expressly preempted state law,
where Congress has legislated so comprehensively that
federal law occupies an entire field of regulation and
leaves no room for state law, or where federal law conflicts with state law.” Wachovia Bank, N.A. v. Burke, 414
F.3d 305, 313 (2d Cir. 2005), cert. denied, 550 U.S. 913
(2007). The defendants appear to suggest that this case
involves “conflict preemption,” which “occurs when compliance with both state and federal law is impossible, or
when the state law stands as an obstacle to the accomplishment and execution of the full purposes and objective of Congress.” United States v. Locke, 529 U.S. 89,
109 (2000) (internal quotation marks omitted).
The National Bank Act expressly permits national
banks to “charge on any loan . . . interest at the rate allowed by the laws of the State, Territory, or District
where the bank is located.” 12 U.S.C. § 85. It also “provide[s] the exclusive cause of action” for usury claims
against national banks, Beneficial Nat’l Bank v. Anderson, 539 U.S. 1, 11 (2003), and “therefore completely
preempt[s] analogous state-law usury claims,” Sullivan
v. Am. Airlines, Inc., 424 F.3d 267, 275 (2d Cir. 2005).
Thus, there is “no such thing as a state-law claim of usury against a national bank.” Beneficial Nat’l Bank, 539
U.S. at 11; see also Pac. Capital Bank, N.A. v. Connecticut, 542 F.3d 341, 352 (2d Cir. 2008) (“[A] state in which a
national bank makes a loan may not permissibly require
the bank to charge an interest rate lower than that allowed by its home state.”). Accordingly, because FIA is
incorporated in Delaware, which permits banks to
charge interest rates that would be usurious under New
8a
York law, FIA’s collection at those rates in New York
does not violate the NBA and is not subject to New
York’s stricter usury laws, which the NBA preempts.
The defendants argue that, as assignees of a national
bank, they too are allowed under the NBA to charge interest at the rate permitted by the state where the assignor national bank is located—here, Delaware. We disagree. In certain circumstances, NBA preemption can be
extended to non-national bank entities. To apply NBA
preemption to an action taken by a non-national bank
entity, application of state law to that action must significantly interfere with a national bank’s ability to exercise
its power under the NBA. See Barnett Bank of Marion
Cnty., N.A. v. Nelson, 517 U.S. 25, 33 (1996); Pac. Capital Bank, 542 F.3d at 353.
The Supreme Court has suggested that that NBA
preemption may extend to entities beyond a national
bank itself, such as non-national banks acting as the
“equivalent to national banks with respect to powers exercised under federal law.” Watters v. Wachovia Bank,
N.A., 550 U.S. 1, 18 (2007). For example, the Supreme
Court has held that operating subsidiaries of national
banks may benefit from NBA preemption. Id.; see also
Burke, 414 F.3d at 309 (deferring to reasonable regulation that operating subsidiaries of national banks receive
the same preemptive benefit as the parent bank). This
Court has also held that agents of national banks can
benefit from NBA preemption. Pac. Capital Bank, 542
F.3d at 353-54 (holding that a third-party tax preparer
who facilitated the processing of refund anticipation
loans for a national bank was not subject to Connecticut
law regulating such loans); see also SPGGC, LLC v.
Ayotte, 488 F.3d 525, 532 (1st Cir. 2007) (“The National
Bank Act explicitly states that a national bank may use
9a
‘duly authorized officers or agents’ to exercise its incidental powers.” (internal citation omitted)), cert. denied,
552 U.S. 1185 (2008).
The Office of the Comptroller of the Currency
(“OCC”), “a federal agency that charters, regulates, and
supervises all national banks,” Town of Babylon v. Fed.
Hous. Fin. Agency, 699 F.3d 221, 224 n.2 (2d Cir. 2012),
has made clear that third-party debt buyers are distinct
from agents or subsidiaries of a national bank, see OCC
Bulletin 2014-37, Risk Management Guidance (Aug. 4,
2014), available at http://www.occ.gov/news-issuances/
bulletins/2014/bulletin-2014-37.html (“Banks may pursue
collection of delinquent accounts by (1) handling the collections internally, (2) using third parties as agents in
collecting the debt, or (3) selling the debt to debt buyers
for a fee.”). In fact, it is precisely because national banks
do not exercise control over third-party debt buyers that
the OCC issued guidance regarding how national banks
should manage the risk associated with selling consumer
debt to third parties. See id.
In most cases in which NBA preemption has been
applied to a non-national bank entity, the entity has exercised the powers of a national bank—i.e., has acted on
behalf of a national bank in carrying out the national
bank’s business. This is not the case here. The defendants did not act on behalf of BoA or FIA in attempting to
collect on Madden’s debt. The defendants acted solely on
their own behalves, as the owners of the debt.
No other mechanism appears on these facts by which
applying state usury laws to the third-party debt buyers
would significantly interfere with either national bank’s
ability to exercise its powers under the NBA. See Barnett Bank, 517 U.S. at 33. Rather, such application would
“limit [] only activities of the third party which are oth-
10a
erwise subject to state control,” SPGGC, LLC v. Blumenthal, 505 F.3d 183, 191 (2d Cir. 2007), and which are
not protected by federal banking law or subject to OCC
oversight.
We reached a similar conclusion in Blumenthal.
There, a shopping mall operator, SPGGC, sold prepaid
gift cards at its malls, including its malls in Connecticut.
Id. at 186. Bank of America issued the cards, which
looked like credit or debit cards and operated on the Visa
debit card system. Id. at 186-87. The gift cards included
a monthly service fee and carried a one-year expiration
date. Id. at 187. The Connecticut Attorney General sued
SPGGC alleging violations of Connecticut’s gift card law,
which prohibits the sale of gift cards subject to inactivity
or dormancy fees or expiration dates. Id. at 187-88.
SPGGC argued that NBA preemption precluded suit. Id.
at 189.
We held that SPGGC failed to state a valid claim for
preemption of Connecticut law insofar as the law prohibited SPGGC from imposing inactivity fees on consumers
of its gift cards. Id. at 191. We reasoned that enforcement of the state law “does not interfere with BoA’s ability to exercise its powers under the NBA and OCC regulations.” Id. “Rather, it affects only the conduct of
SPGGC, which is neither protected under federal law nor
subject to the OCC’s exclusive oversight.” Id.
We did find, in Blumenthal, that Connecticut’s prohibition on expiration dates could interfere with national
bank powers because Visa requires such cards to have
expiration dates and “an outright prohibition on expiration dates could have prevented a Visa member bank
(such as BoA) from acting as the issuer of the Simon
Giftcard.” Id. at 191. We remanded for further consideration of the issue. Here, however, state usury laws would
11a
not prevent consumer debt sales by national banks to
third parties. Although it is possible that usury laws
might decrease the amount a national bank could charge
for its consumer debt in certain states (i.e., those with
firm usury limits, like New York), such an effect would
not “significantly interfere” with the exercise of a national bank power.
Furthermore, extension of NBA preemption to thirdparty debt collectors such as the defendants would be an
overly broad application of the NBA. Although national
banks’ agents and subsidiaries exercise national banks’
powers and receive protection under the NBA when doing so, extending those protections to third parties would
create an end-run around usury laws for non-national
bank entities that are not acting on behalf of a national
bank.
The defendants and the District Court rely principally on two Eighth Circuit cases in which the court held
that NBA preemption precluded state-law usury claims
against non-national bank entities. In Krispin v. May
Department Stores, 218 F.3d 919 (8th Cir. 2000), May
Department Stores Company (“May Stores”), a nonnational bank entity, issued credit cards to the plaintiffs.
Id. at 921. By agreement, those credit card accounts
were governed by Missouri law, which limits delinquency
fees to $10. Id. Subsequently, May Stores notified the
plaintiffs that the accounts had been assigned and transferred to May National Bank of Arizona (“May Bank”), a
national bank and wholly-owned subsidiary of May
Stores, and that May Bank would charge delinquency
fees of up to “$15, or as allowed by law.” Id. Although
May Stores had transferred all authority over the terms
and operations of the accounts to May Bank, it subse-
12a
quently purchased May Bank’s receivables and maintained a role in account collection. Id. at 923.
The plaintiffs brought suit under Missouri law
against May Stores after being charged $15 delinquency
fees. Id. at 922. May Stores argued that the plaintiffs’
state-law claims were preempted by the NBA because
the assignment and transfer of the accounts to May
Bank “was fully effective to cause the bank, and not the
store, to be the originator of [the plaintiffs’] accounts
subsequent to that time.” Id. at 923. The court agreed:
[T]he store’s purchase of the bank’s receivables
does not diminish the fact that it is now the
bank, and not the store, that issues credit, processes and services customer accounts, and sets
such terms as interest and late fees. Thus, although we recognize that the NBA governs only
national banks, in these circumstances we agree
with the district court that it makes sense to
look to the originating entity (the bank), and not
the ongoing assignee (the store), in determining
whether the NBA applies.
Id. at 924 (internal citation omitted).2
2
We believe the District Court gave unwarranted significance to
Krispin’s reference to the “originating entity” in the passage quoted
above. The District Court read the sentence to suggest that, once a
national bank has originated a credit, the NBA and the associated
rule of conflict preemption continue to apply to the credit, even if the
bank has sold the credit and retains no further interest in it. The
point of the Krispin holding was, however, that notwithstanding the
bank’s sale of its receivables to May Stores, it retained substantial
interests in the credit card accounts so that application of state law
to those accounts would have conflicted with the bank’s powers authorized by the NBA. The crucial words of the sentence were “in
13a
Krispin does not support finding preemption here. In
Krispin, when the national bank’s receivables were purchased by May Stores, the national bank retained ownership of the accounts, leading the court to conclude that
“the real party in interest is the bank.” Id. Unlike
Krispin, neither BoA nor FIA has retained an interest in
Madden’s account, which further supports the conclusion
that subjecting the defendants to state regulations does
not prevent or significantly interfere with the exercise of
BoA’s or FIA’s powers.
The defendants and the District Court also rely upon
Phipps v. FDIC, 417 F.3d 1006 (8th Cir. 2005). In that
case, the plaintiffs brought an action under Missouri law
to recover allegedly unlawful fees charged by a national
bank on mortgage loans. The plaintiffs alleged that after
charging these fees, which included a purported “finder’s
fee” to third-party Equity Guaranty LLC (a non-bank
entity), the bank sold the loans to other defendants. The
court held that the fees at issue were properly considered “interest” under the NBA and concluded that, under those circumstances, it “must look at ‘the originating
entity (the bank), and not the ongoing assignee . . . in determining whether the NBA applies.’” Id. at 1013 (quoting Krispin, 218 F.3d at 924 (alteration in original)).
these circumstances,” which referred to the fact stated in the previous sentence of the bank’s retention of substantial interests in the
credit card accounts. As we understand the Krispin opinion, the fact
that the bank was described as the “originating entity” had no significance for the court’s decision, which would have come out the
opposite way if the bank, notwithstanding that it originated the
credits in question, had sold them outright to a new, unrelated owner, divesting itself completely of any continuing interest in them, so
that its operations would no longer be affected by the application of
state law to the new owner’s further administration of the credits.
14a
Phipps is distinguishable from this case. There, the
national bank was the entity that charged the interest to
which the plaintiffs objected. Here, on the other hand,
Madden objects only to the interest charged after her
account was sold by FIA to the defendants. Furthermore, if Equity Guaranty was paid a “finder’s fee,” it
would benefit from NBA preemption as an agent of the
national bank. Indeed, Phipps recognized that “‘[a] national bank may use the services of, and compensate persons not employed by, the bank for originating loans.’”
Id. (quoting 12 C.F.R. § 7.1004(a)). Here, the defendants
do not suggest that they have such a relationship with
BoA or FIA.3
II.
Choice of Law: Delaware vs. New York
The defendants contend that the Delaware choice-oflaw provision contained in the Change In Terms precludes Madden’s New York usury claims.4 Although
raised below, the District Court did not reach this issue
in ruling on the defendants’ motion for summary judg3
We are not persuaded by Munoz v. Pipestone Financial, LLC,
513 F. Supp. 2d 1076 (D. Minn. 2007), upon which the defendants
and the District Court also rely. Although the court found preemption applicable to an assignee of a national bank in a case analogous
to Madden’s suit, it misapplied Eighth Circuit precedent by applying unwarranted significance to Krispin’s use of the word “originating entity” and straying from the essential inquiry—whether applying state law would “significantly interfere with the national bank’s
exercise of its powers,” Barnett Bank, 517 U.S. at 33, because of a
subsidiary or agency relationship or for other reasons.
4
The Change In Terms, which amended the original Cardholder
Agreement, includes the following provision: “This Agreement is
governed by the laws of the State of Delaware (without regard to its
conflict of laws principles) and by any applicable federal laws.”
App’x at 58, 91.
15a
ment.5 Subsequently, in the Stipulation for Entry of
Judgment, the parties resolved in the defendants’ favor
the dispute as to whether Madden was bound by the
Change In Terms. The parties appear to agree that if
Delaware law applies, the rate the defendants charged
Madden was permissible.6
We do not decide the choice-of-law issue here, but instead leave it for the District Court to address in the
first instance.7
5
We reject Madden’s contention that this argument was waived.
First, although the defendants’ motion for summary judgment
urged the District Court to rule on other grounds, it did raise the
Delaware choice-of-law clause. Defs.’ Summ. J. Mem. 4 & n. 3, No.
7:11-cv-08149 (S.D.N.Y. Jan. 25, 2013), ECF No. 32. Second, this
argument was not viable prior to the Stipulation for Entry of Judgment due to unresolved factual issues—principally, whether Madden
had received the Change In Terms.
6
We express no opinion as to whether Delaware law, which permits a “bank” to charge any interest rate allowable by contract, see
Del. Code Ann. tit. 5, § 943, would apply to the defendants, both of
which are non-bank entities.
7
Because it may assist the District Court, we note that there appears to be a split in the case law. Compare Am. Equities Grp., Inc.
v. Ahava Dairy Prods. Corp., No. 01 Civ. 5207(RWS), 2004 WL
870260, at *7-9 (S.D.N.Y. Apr. 23, 2004) (applying New York’s usury
law despite out-of-state choice-of-law clause); Am. Express Travel
Related Servs. Co. v. Assih, 26 Misc. 3d 1016, 1026 (N.Y. Civ. Ct.
2009) (same); N. Am. Bank, Ltd. v. Schulman, 123 Misc. 2d 516, 52021 (N.Y. Cnty. Ct. 1984) (same) with RMP Capital Corp. v. Bam
Brokerage, Inc., 21 F. Supp. 3d 173, 186 (E.D.N.Y. 2014) (finding
out-of-state choice-of-law clause to preclude application of New
York’s usury law).
16a
III. Madden’s Fair Debt Collection Practices Act
Claim
Madden also contends that by attempting to collect
interest at a rate higher than allowed by New York law,
the defendants falsely represented the amount to which
they were legally entitled in violation of the FDCPA, 15
U.S.C. §§ 1692e(2)(A), (5), (10), 1692f(1). The District
Court denied the defendants’ motion for summary judgment on this claim for two reasons. First, it held that
there was a genuine dispute of material fact as to whether the defendants are assignees of FIA; if they are, it
reasoned, Madden’s FDCPA claim would fail because
state usury laws—the alleged violation of which provide
the basis for Madden’s FDCPA claim—do not apply to
assignees of a national bank. The parties subsequently
stipulated “that FIA assigned Defendants Ms. Madden’s
account,” App’x at 138, and the District Court, in accord
with its prior ruling, entered judgment for the defendants. Because this analysis was predicated on the District Court’s erroneous holding that the defendants receive the same protections under the NBA as do national
banks, we find that it is equally flawed.
Second, the District Court held that if Madden received the Cardholder Agreement and Change In Terms,
a fact to which the parties later stipulated, any FDCPA
claim of false representation or unfair practice would fail
because the agreement allowed for the interest rate applied by the defendants. This conclusion is premised on
an assumption that Delaware law, rather than New York
law, applies, an issue the District Court did not reach. If
New York’s usury law applies notwithstanding the Delaware choice-of-law clause, the defendants may have
made a false representation or engaged in an unfair
practice insofar as their collection letter to Madden stat-
17a
ed that they were legally entitled to charge interest in
excess of that permitted by New York law. Thus, the
District Court may need to revisit this conclusion after
deciding whether Delaware or New York law applies.
Because the District Court’s analysis of the FDCPA
claim was based on an erroneous NBA preemption finding and a premature assumption that Delaware law applies, we vacate the District Court’s judgment as to this
claim.
IV. Class Certification
Madden asserts her claims on behalf of herself and a
class consisting of “all persons residing in New York []
who were sent a letter by Defendants attempting to collect interest in excess of 25% per annum [] regarding
debts incurred for personal, family, or household purposes.” Pl.’s Class Certification Mem. 1, No. 7:11-cv08149 (S.D.N.Y. Jan. 18, 2013), ECF No. 29. The defendants have represented that they sent such letters with
respect to 49,780 accounts.
Madden moved for class certification before the District Court. The District Court denied the motion, holding that because “assignees are entitled to the protection
of the NBA if the originating bank was entitled to the
protection of the NBA . . . the class action device in my
view is not appropriate here.” App’x at 120. Because the
District Court’s denial of class certification was entwined
with its erroneous holding that the defendants receive
the same protections under the NBA as do national
banks, we vacate the denial of class certification.
CONCLUSION
We REVERSE the District Court’s holding as to National Bank Act preemption, VACATE the District
18a
Court’s judgment and denial of class certification, and
REMAND for further proceedings consistent with this
opinion.
19a
APPENDIX B
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
At a stated term of the United States Court of Appeals
for the Second Circuit held at the Thurgood Marshall
United States Courthouse, 40 Foley Square, in the City
of New York, on the 12th day of August, two thousand
fifteen
No. 14-2131
Saliha Madden, on behalf of herself and all others
similarly situated, Plaintiff-Appellant
v.
Midland Funding, LLC, Midland Credit Management,
Inc., Defendants-Appellees
August 12, 2015
OPINION
Appellees, Midland Funding, LLC, and Midland
Credit Management, filed a petition for panel rehearing,
or, in the alternative, for rehearing en banc. The panel
that determined the appeal has considered the request
for panel rehearing, and the active members of the Court
have considered the request for rehearing en banc.
20a
IT IS HEREBY ORDERED that the petition is denied.
FOR THE COURT:
/s/
Catherine O’Hagan Wolfe, Clerk
21a
APPENDIX C
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
No. 11-8149
Saliha Madden, Plaintiff
v.
Midland Funding, LLC, Midland Credit Management,
Inc., Defendants
September 30, 2013
ORAL RULING ON MOTIONS
SEIBEL, District Judge.
*****
[2] THE CLERK:
LLC.
Madden v. Midland Funding,
THE COURT: Good afternoon.
MR. LEGHORN: Good afternoon, Your Honor.
THE COURT: Mr. Schlanger and Mr. Leghorn.
And let’s get Mr. Bragg on the phone.
Hi, Mr. Bragg.
MR. BRAGG: Yes.
22a
THE COURT: Okay. I’m here with Mr. Schlanger
and Mr. Leghorn.
You guys can have a seat.
I’m ready to give my rulings on the various motions.
There’s a Motion to Strike the Offer of Judgment;
there’s a Motion for Class Certification, and there’s a
Motion for Summary Judgment.
Let me start with the Motion to Strike the Defendants’ Offer of Judgment.
Defendants served Plaintiff in her individual capacity
with an Offer of Judgment dated November 21, 2012 under Rule 68. Plaintiff apparently did not accept the offer
within the 14-day period set by that rule. Rather, in response to the Defendants’ November 27th, 2012 premotion letter seeking permission to move for summary
judgment, Plaintiff, by letter dated December 12th, 2012,
sought permission to make the instant motion to strike,
which [3] permission I granted at the conference on December 17th.
Plaintiff argues that the Offer of Judgment should be
stricken because it is inconsistent with Plaintiff’s fiduciary duty as representative of the putative class and is
inherently unfair to the named Plaintiff in the event it is
rejected.
The merits of Plaintiff’s arguments touch on the recognized tension between Rule 23 and Rule 68 that arises
when a defendant tries to “pick off” a named plaintiff in a
putative class action through a Rule 68 offer.
See Weiss v. Regal Collections, 385 F.3d 337, at 344
(Third Circuit 2004), where the court said, “Allowing the
defendants here to ‘pick off’ a representative plaintiff
with an offer of judgment less than two months after the
23a
complaint is filed may undercut the viability of the class
action procedure and frustrate the objectives of this procedural mechanism for aggregating small claims, like
those brought under the FDCPA.”
Defendants here, have on three separate occasions
represented to the Court that they have no intention of
attempting to “pick off” plaintiffs here, that is, they will
not move to dismiss the case as moot for lack of subject
matter jurisdiction based on an Offer of Judgment. See
Document 22, at Page 2; Document 36, Exhibit B, at
Page 3, and Document 41, at Page 4.
[4] In view of Defendants’ representation, the unaccepted Offer of Judgment simply “has no legal significance” at this stage of the proceedings. McDowall v.
Cogan, 215 F.R.D. 46, at 52 (EDNY 2003).
See Rule of Civil Procedure 68(a), which provides
that the offer together with the acceptance can be filed,
after which the clerk will enter judgment, and Rule
68(b), which says, “Evidence of an unaccepted offer of
judgment is not admissible except in a proceeding to determine costs.”
Indeed, before Plaintiff included a copy with her Motion to Strike, the Offer of Judgment was not a part of
the Court’s record, so “there is nothing to strike here.”
That’s from McDowall, 216 F.R.D. at 52. The Motion to
Strike is therefore premature and thus denied.
In addition, given the divergence in authority and the
lack of clear guidance from the Second Circuit and the
Supreme Court as to the legal significance of an offer of
judgment made to a named Plaintiff in a putative class
action prior to the certification of a class, see, for example, Morgan v. Account Collection, 2006 Westlaw
2597865, at Page 4 (SDNY September 6, 2006), and that
24a
the Supreme Court has distinguished class actions from
collective or other individual actions for Rule 68 purposes, see Genesis Healthcare v. Symczyk, 133 Supreme
Court 1523, at 1529 (2013); Velasquez v. Digital Page,
2013 Westlaw 3376903, at [5] Page 3 (EDNY July 8th,
2013), I find it appropriate to await further guidance
from the higher courts on the merits of the parties’ arguments or at least wait until the issue is properly before
me in a proceeding under Rule 68(d). But it is my preliminary view, for what it’s worth, that Plaintiff has the
better of the arguments and has not unduly delayed the
class certification process.
I now turn to the Motion for Summary Judgment.
The following facts are set forth based on the parties’
Local Civil Rule 56.1 statements and the supporting materials:
Defendants allege that Plaintiff opened a credit card
account with Bank of America on April 23rd, 2005.
Defendants contend that by opening that credit card
account, Plaintiff agreed to be bound by the terms and
conditions found in the Bank of America Cardholder
Agreement, but Plaintiff denies receiving this agreement.
On October 19th, 2006, Bank of America’s credit card
program was consolidated into a single national bank,
FIA Card Services, N.A.
According to Defendant, the new terms and conditions that would be applicable to Plaintiff’s account after
the October 19th, 2006 consolidation, which document I
will refer to — which document I will refer to as the
Change in Terms, were sent to Plaintiff with her August
14th, 2006 [6] account statement.
25a
According to Defendant, that Change in Terms document allowed it to charge interest which was legal under Delaware law, and Delaware law in turn allows interest greater than 25 percent. Plaintiff contends that
she never received the Change in Terms.
On September 30th, 2008, Plaintiff’s account was
“charged-off” in the amount of $5,291.25.
Defendants contend that on November 10th, 2010,
FIA “sold, transferred, and set over unto” — that’s a
quote. Let me back up.
Defendants contend that on November 10th, 2010,
FIA “sold, transferred, and set over unto” Midland
Funding, LLC Plaintiff’s outstanding debt. Defendants
assert that as a result of this sale, they were granted
complete authority to “settle, adjust, compromise, and
satisfy” Plaintiff’s account.
On November 20th, 2010, Defendants sent Plaintiff a
letter seeking to collect payment of her debt, and that
letter stated that the actual — that the applicable interest rate was 27 percent per year.
Plaintiff brings this action pursuant to the Fair Debt
Collection Practices Act, 15, United States Code, Section
1692, the New York General Business Law, or GBL, Section 349, and the New York General Obligations Law, or
[7] GOL, Section 5-501 and following, alleging that Defendants engaged in unfair debt collection practices by
charging, collecting, and/or seeking to collect interest at
a usurious rate.
I will assume everybody’s familiarity with the legal
standards governing summary judgment motions and
move right to my analysis.
26a
There are several issues in dispute on summary
judgment, most significantly, whether:
One, Defendants have sufficiently demonstrated that
an agreement existed between Plaintiff and Bank of
America;
Two, whether Plaintiff’s debt was validly assigned to
the Defendants; and
Three, whether the National Bank Act applies to Defendants as assignees of a national bank.
What the parties do not dispute, however, is that the
interest rate Defendants charged Plaintiff is not usurious under Delaware law. They don’t dispute that Bank
of America and FIA extended credit to Plaintiff and that
she incurred an obligation, and they do not dispute that
if the NBA does apply to the Defendants, then Plaintiff’s
state-law usury claims are preempted.
I will address first whether Plaintiff’s state-law
claims are preempted by the NBA.
In actions against national banks for usury, [8] Sections 85 and 86 of the NBA “supersede both the substantive and the remedial provisions of state usury laws and
create a federal remedy for overcharges that is exclusive.” Beneficial National Bank v. Anderson, 539 U.S.
1, at 11 (2003).
That case further stated, “Because Sections 85 and 86
provide the exclusive cause of action for usury claims
against national banks, there is, in short, no such thing
as a state-law claim of usury against a national bank.”
See Sullivan v. American Airlines, 424 F.3d 267, at
275 (Second Circuit 2005), where the Circuit said that
Sections 85 and 86 completely preempt state-law usury
claims.
27a
Multiple courts have concluded that in determining
whether the National Bank Act applies, “courts must
look at the originating entity, the bank, and not the ongoing assignee.” Munoz v. Pipestone Financial, 513
F. Supp. 2d 1076, at 1079 (District of Minnesota 2007).
In that case, the obligation was transferred from the
originating bank to the purchaser of defaulted debt portfolios through a series of assignments and the NBA was
held to the assignee.
In that regard, see Phipps v. FDIC, 417 F.3d 1006, at
1011, an Eighth Circuit case from 2005, where the court
held that the NBA preemption available to the loan originator also applied to the borrower’s claims against a
subsequent [9] purchaser of the loan.
Krispin v. May Department Stores, 218 F.3d 919, at
924 (Eighth Circuit 2000), which held NBA preemption
available to a national bank that extended — excuse me.
It held that the NBA preemption available to the national bank that extended credit also applied to a subsequent
non-bank assignee of the account.
See also FDIC v. Lattimore Land Corporation, 656
F.2d 139, at 148 to 49 (Fifth Circuit 1981), where the
court said, “The non-usurious character of a note should
not change when the note changes hands.”
In that case, although the Eighth Circuit ultimately
concluded that the NBA did not apply to Hamilton National Bank, which was the assignee of a partial interest
in the note at issue, it based its conclusion on the fact
that there the bank was not the originator of the loan.
See 656 F.2d at 147 to 48. Rather, the loan had originated from a mortgage company that was not a national
banking association. In contrast, here, Bank of America
28a
and FIA are the original creditors and they are protected by the NBA.
And, finally, in that regard, cf. Nichols v. Fearson, 32
U.S. 103, at 109, from 1833, where the court said it is a
“cardinal rule of usury” “that a contract, which, in its inception, is unaffected by usury, can never be invalidated
by any subsequent usurious transaction.”
[10] Under the logic of this line of cases, because FIA
is a national bank entitled to exemption from state usury
laws, Defendants are entitled to the same if they are
FIA’s assignees.
Plaintiff contends that Krispin, among other cases, is
inapposite, because unlike the original creditor there,
FIA did not retain any interest and/or role in the debt
collection.
In Krispin, the district court based its conclusion on
the fact that it was the bank, and not the assignee, that
was the originator of the loan, in that it “issued credit,
processed and serviced customer accounts, and set such
terms as interest and late fees,” that’s Krispin, at 294,
all of which Bank of America or FIA did here.
Bank of America and/or FIA extended credit to the
Plaintiff, processed and serviced her accounts, see, for
example, the declaration of Mr. Schlanger, which is Document 36, Exhibits A through D. Excuse me. It’s Exhibit 57, Exhibits A through D. Let me back up. It’s
Document 57.
I’m talking about Mr. Schlanger’s declaration in connection with the summary judgment motion, which is
Document 57, and to which is attached the Exhibits A
through [11] D, and they set the applicable interest rate.
29a
Plaintiff’s contention that the Krispin court was focused on the bank’s “role in servicing or collection of the
debt” simply mischaracterizes the decision. Moreover,
cases decided after Krispin, such as Munoz, have concluded that the NBA applies to the assignee even where
the bank retains no interest in debt collection.
See Munoz, 513 F. Supp. 2d at 1079, holding that the
NBA applied even when, through a series of assignments, plaintiff’s debt was assigned from a national bank
to a purchaser of defaulted debt portfolios, which was
wholly responsible for collecting the debt.
Further, I see no reason why a national bank’s assignees should not be afforded the same protections as
those given to the bank itself with regard to changing a
particular interest rate. In this scenario, the assignee is
merely attempting to collect what Plaintiff originally and
legitimately owed, no more.
Moreover, prohibiting assignees, such as Defendants,
from changing the same interest rate as the assignor
would give debtors, such as Plaintiff, a perverse incentive to avoid their obligations long enough to ensure that
their debt was charged-off and assigned to a debt collector required to change a lower interest rate.
For all these reasons, I find that if Defendants [12]
are valid assignees of FIA, they are entitled to protection under the NBA.
Plaintiff contends that Defendants have not adduced
evidence sufficient to show that her obligation was validly assigned to Midland Funding.
Plaintiff pleaded in her Amended Complaint that she
incurred an obligation with Bank of America, which was
acquired by Midland Funding and placed with Midland
Credit Management after it went into default. Plaintiff
30a
did not admit, concede or contend, however, that Defendants acquired her obligation by assignment from
Bank of America, and, in fact, Defendants concede that
they are not assignees of Bank of America, but rather,
they contend they are assignees of FIA.
Neither party disputes that Bank of America is a national bank, but Plaintiff argues that Defendants did not
provide sufficient evidence to establish that FIA, the
original creditor and assignor is a national bank.
To support the allegation that FIA is a national bank
and thus covered by the NBA, Defendants submitted an
excerpt from the List of National Banks compiled by the
United States Office of the Comptroller of the Currency,
or OCC, and made available to individuals online. That is
Exhibit 4 to the Leghorn declaration, which is Document
31.
Plaintiff argues that because Defendants’ exhibit [13]
list was procured from a website, it is inadmissible as evidence and cannot be used in resolving Defendants’ motion. I am, however, permitted to take judicial notice of
documents, such as those found on the OCC’s website,
given that it is a “public record of a federal regulatory
agency” and “available on the agency website.” Short v.
Connecticut Community Bank, 2012 Westlaw 1057302,
at Page 7, Note 10 (District of Connecticut, March 28th,
2012).
See Cancel v. New York City, 2012 Westlaw 4761491,
at Page 1, Note 2 (SDNY August 1, 2012), where the
court took judicial notice of the government website and
was affirmed in part, reversed in part on other grounds,
and vacated in part, at 2013 Westlaw 2302115 (Second
Circuit May 23rd, 2013).
31a
Also see Perez v. Ahlstrom Corp., 2011 Westlaw
2533801, at Page 2 (District of Connecticut June 27th,
2011), collecting cases where courts have taken judicial
notice of government websites.
Plaintiff correctly pointed out, however, that the
website did not show that FIA was a national bank at the
time the debts at issue were incurred.
Defendants thereafter submitted a certificate from
someone named Connie Smith, a corporate Assistant
Secretary of FIA, which states that FIA has been a Delaware National Bank since its inception in June 2006 and
is a successor in interest, and is a successor in interest to
Bank of America [14] and other national banks. That
declaration from Ms. Smith is Exhibit A to the affidavit
of Ms. Pellicciaro that I’ll refer to later.
Despite having had the opportunity for a surreply,
Plaintiff neither raises any issue with respect to the exhibit nor adduces any evidence suggesting that FIA was
not, in fact, a national bank at the time Plaintiff’s obligation was assigned to Defendants or at the time she incurred debt to FIA.
To survive a motion for summary judgment, Plaintiff
“must do more than simply show that there is some metaphysical doubt as to the material facts.” See Matsushita Electric v. Zenith, 475 U.S. 574, at 586, from 1986.
Defendants have not, however, sufficiently then —
so, I therefore find that Defendants have shown that
there is no genuine issue of material fact with respect to
whether FIA was a national bank at the relevant times.
Defendants have not, however, sufficiently demonstrated that FIA assigned them Plaintiff’s debt.
Defendants have merely provided an affidavit from a
process manager at Midland Collection — excuse me,
32a
Midland Credit Management, someone named Misael —
I can’t read my own handwriting — Moreno, I believe.
They merely provide an affidavit from this process manager at Midland Credit Management to the effect that
Plaintiff’s FIA account was [15] assigned to Defendants,
without giving any indication how that employee of Midland Credit Management knows that Plaintiff’s account
was assigned and without any supporting documentation.
When Plaintiff pointed out the weakness of that
showing, Defendants came back with an affidavit from an
employee of FIA, that is Deborah Pellicciaro, a bank officer, to the same effect, but the Pellicciaro affidavit suffers from the same flaws. Neither affiant purports to
have personal knowledge or says anything about what
makes her think Plaintiff’s account was assigned, or provides any documentation, which one would think would
exist had an assignment occurred.
Defendants have already been told by at least one
other court that such a showing is insufficient to demonstrate a valid assignment. See Hengeller v. Brumbaugh
& Quandahl, 894 F. Supp. 2d 1180, at 1187 to 88, a District of Nebraska case from 2012. They should have
known that more was required here. Their failure to
produce any evidence of assignment makes granting
summary judgment on Plaintiff’s state-law claims inappropriate.
The mere say-so of an employee, without any basis
provided, does not suffice to meet the movant’s burden
to show an absence of genuine issues of material fact. If,
however, Defendants can demonstrate at trial, through
[16] competent evidence, that they are valid assignees of
FIA, Plaintiff’s state-law claims will be preempted by the
NBA, but at this stage Defendant’s Motion for Summary
Judgment on Plaintiff’s state-law claims is denied.
33a
I now turn to the federal claim.
Plaintiff’s federal claim arises under the FDCPA, the
purpose of which is, in part, “to eliminate abusive debt
collection practices by debt collectors.” That’s 15, U.S.
Code, Section 1692e. Neither party contends that the
NBA preempts the FDCPA, nor does the preemption
rationale of uniformity apply to a federal statute, and
thus Plaintiff is entitled to bring this claim.
I turn, accordingly, to whether there are genuine issues of material fact with respect to whether Plaintiff is
entitled to relief.
Plaintiff alleges that the Defendants violated Section
1692e and f of the FDCPA by using a false representation or deceptive means or unfair practices to collect interest at a rate greater than that allowed by New York
law.
Section 1692(f) prohibits “the collection of any
amount unless such amount is expressly authorized by
the agreement creating the debt or permitted by law.”
That’s Section 1692(f), Subsection 1.
Whether Defendants are liable thus turns not only
[17] on whether Defendants are assignees of FIA entitled to the protection of the NBA, but also on whether
Plaintiff’s agreement with Bank of America and FIA allowed those institutions to charge the interest rate at issue. There are genuine issues of material fact as to the
former issue, as just discussed, and also with respect to
the latter issue.
Defendants have provided what it describes as an exemplary Cardholder Agreement, in other words, a form
that it says Bank of America gave to Plaintiff when she
opened her account, as well as an exemplary or form
Change in Terms, which Defendants contend Plaintiff
34a
received with her August 14th, 2006 credit card statement. Those are Exhibits A and C to the Pellicciaro affidavit. Plaintiff, however, denies receiving these documents, and thus argues that no valid agreement exists.
Although prior cases have found that a plaintiff’s
bare self-serving assertion that she did not receive a
cardholder agreement was insufficient to raise a triable
issue of fact, see Dzanoucakis v. Chase Manhattan
Bank, 2009 Westlaw 910691, at Page 8 (EDNY March
31st, 2009) and collecting cases. That proposition does
not apply here for several reasons:
First, Plaintiff states a bit more than just a bald assertion that she did not receive the documents. She contends that she “keeps all records of her credit card [18]
agreements, bills, and mailings in one place” and these
documents are not there. That’s Plaintiff’s declaration,
Paragraph 5.
Second, Defendants have not provided enough information about the mailing of the agreement and the
Change in Terms to sufficiently demonstrate that they
were sent to Plaintiff. This is in contrast to the
Dzanoucakis case, at Page 2, which noted that the defendant had established that it “had a permanent message system on its computer system that keeps track of
what documents are sent to its customers,” and that that
system indicated that a particular form notice number
had been mailed to the Plaintiff in a particular month,
and the Defendants provided all relevant computer records.
Defendants here have not done anything of the kind.
They have merely submitted the affidavit of Ms.
Pellicciaro, an FIA bank officer, stating that Plaintiff received the Cardholder Agreement when she opened her
35a
account and the Change of Terms, in August 2006, along
with her account statement.
It also submitted the affidavit of Misael Moreno, the
FIA process manager, who also says that the Change in
Terms was sent with the August 6th account statement.
The problem is, with respect to the Moreno affidavit, the
affiant’s basis of knowledge is simply records provided
by [19] FIA to the Defendants. So, that affidavit doesn’t
add anything to the affidavit of the FIA employee, Ms.
Pellicciaro.
The issues with her affidavit are that she works for
FIA, who provides no information with regard to when
or how the Cardholder Agreement was sent by Bank of
America or how she knows that it was actually sent by
Bank of America. No details or documents or even explanations are provided. Her affidavit and the Defendants’ showing are pure say-so and not sufficient to
demonstrate that Plaintiff received the agreement.
See Hayes v. New York City Department of Corrections, 84 F.3d 614, at 619, a Second Circuit case from
1996, where the court cautioned that the district court
“should not weigh evidence or assess the credibility of
witnesses” in reviewing a motion for summary judgment.
And, in any event, the Cardholder Agreement is not
properly authenticated as a business record.
There are three prongs to the business records exception to the hearsay rule, which is Federal Rule of Evidence 803(6), and the Pellicciaro affidavit does not address any of them except in a completely conclusory
fashion, and even then, only addresses some of them, not
all of them.
As to the Change in Terms, Ms. Pellicciaro does not
[20] give any indication that she has firsthand knowledge
36a
of the mailing, nor does she, nor does she say how she
knows it was in fact mailed.
Admittedly, her statement that the Change in Terms
was sent with the August 2006 account statement is corroborated by the August 14th, 2006 account statement
itself, which Plaintiff does not deny receiving and which
includes some of the changed terms and refers to the enclosed supplemental document containing some other of
the changed terms. Defendants, however, have not sufficiently authenticated either the August 14th, 2006
statement or the enclosure, and Ms. Pellicciaro does not
provide any reason to think she is in a position to say
when or how Bank of America made or kept its records.
Even if Defendant had demonstrated that Plaintiff
received the Change in Terms, the Change in Terms was
a unilateral amendment of the Cardholder Agreement.
Unilateral amendment is allowed under the original
agreement. Section 7.14 of the Cardholder Agreement
provides that Bank of America “may amend this Agreement by changing, adding or deleting any term, condition, service or feature of one’s Account or of this
Agreement at any time.” That’s on Page 4 of the Cardholder Agreement, which is Exhibit B to Ms. Pellicciaro’s affidavit.
Plaintiff is correct that the Cardholder Agreement
[21] states that if an amendment changes the interest
rate, the account holder’s consent will be obtained before
the change becomes effective. An individual’s consent,
however, may be obtained merely “by the account holder’s usage of the Account after Bank of America gives
the account holder notice of the amendment.” Bank of
America sent Plaintiff the Change in Terms in August
37a
2006, and Plaintiff continued to use her credit card until
2008.
Thus, if Plaintiff received the original agreement, she
agreed that Bank of America could unilaterally amend it,
and if she received the Change in Terms, she evidenced
her consent to any Change in Terms, by continuing to
use the card after receiving it.
Because Plaintiff denies receiving the Cardholder
Agreement and Defendants have not sufficiently shown
that it was sent, an issue of fact remains as to whether
Plaintiff got the original agreement that would have allowed for unilateral amendment via the Change in
Terms.
If a jury finds that Plaintiff did receive these documents, and assuming Defendants to be valid assignees of
FIA, it will follow that Defendants’ attempt to collect interest at the rate at issue was neither a false representation nor misleading, nor an unfair practice, as the
Change in Terms, which replaced the Cardholder
Agreement and became the binding agreement between
the parties, allowed for [22] the interest rate at which
Defendants attempted to collect.
Nevertheless, an issue of fact remains as to whether
Plaintiff received the agreements, and thus summary
judgment is inappropriate as to Plaintiff’s FDCPA claim
at this time.
See Penberg v. HealthBridge Management, 823
F. Supp. 2d 166, at 185 (EDNY 2011), where a fact issue
remains concerning plaintiff’s compliance with agreements where no evidence demonstrated defendant provided plaintiff with the agreement and plaintiff alleged
he did not read it.
38a
Cf. Shea Developments v. Watson, 2008 Westlaw
762087, at Page 2 (SDNY March 24th, 2008), which held
that a party was not bound by a forum selection clause
where she did not see the agreement containing the
clause and the terms of it were not communicated to her.
Accordingly, the Defendant’s Motion for Summary
Judgment is denied.
In light of my ruling on summary judgment, I must
address Plaintiff’s Motion for Class Certification. But
my ruling that assignees are entitled to the protection of
the NBA if the originating bank was entitled to the protection of the NBA, and that under some circumstances,
interest greater than 25 percent can be permissible,
those rulings mean that the class action device in my
view is not appropriate here, for reasons I’ll explain
shortly.
[23] First, the legal standard: In determining whether to certify a putative class, I am guided by Rule 23.
Class certification is appropriate under Rule 23(a) only
where the class is so numerous that joinder of all members is impracticable; there are questions of law or fact
common to the class; the claims or defenses of the representative parties are typical of the claims or defenses of
the class, and the representative parties will fairly and
adequately protect the interests of the class.
Courts have also recognized an implied requirement
that there be an identifiable class. See Jeffries v. Pension Trust Fund, 2007 Westlaw 2454111, at Pages 11 and
14 (SDNY August 20th, 2007), where the court said the
implied requirement of “ascertainability” requires that
the plaintiff identify the existence of an aggrieved class.
See also In Re MIBE Products Liability Litigation, 209
F.R.D. 323, at 336 to 337 (SDNY 2002).
39a
If the requirements of Rule 23(a) are met, a court
must then determine whether the class is “maintainable”
as defined by Rule 23(b). See Jeffries, at Page 15.
Where a putative class seeks certification pursuant to
Rule 23(b)(2), a plaintiff must show that “the party opposing the class has acted or refused to act on grounds
generally applicable to the class, so that final injunctive
relief or corresponding declaratory relief is appropriate
[24] regarding the class as a whole.”
Where the class seeks certification under Rule
23(b)(3), a plaintiff must establish that questions of law
or fact common to class members predominate over any
questions affecting individual members, and that the
class action device is superior to any other method of adjudication. See In Re Initial Public Offering Securities
Litigation, 471 F.3d 24, at 32 (Second Circuit 2006); rehearing denied, 483 F.3d 70 (Second Circuit 2007).
A class may be certified only after a district court has
determined that each of the Rule 23 requirements has
been met. This determination involves a “rigorous analysis,” designed to ensure “actual, not presumed conformance,” with Rule 23. That’s In Re Initial Public Offerings, at Page 29, and it is quoting General Telephone
Company of the Southwest v. Falcon, 457 U.S. 147, at
160 to 61.
The putative class carries the burden of establishing
that the requirements of Rule 23 are met by a preponderance of the evidence. See Teamsters Local 445 v.
Bombardier, 546 F.3d 196, at 202 (Second Circuit 2008).
Each of Rule 23’s requirements must be proven by
preponderance of the evidence, even where a requirement overlaps with a merits issue in the case. Trawinski
40a
v. KPMG, 2012 Westlaw 6758059, at Page 5 (SDNY December 21, 2012).
[25] Here, the proposed class is all New York residents who were sent a letter by Defendants attempting
to collect interest greater than 25 percent per year regarding debts incurred for personal, family or household
purposes. There are alleged to be 49,780 such persons.
The class is not limited to those whose underlying debt
arose from a transaction with Bank of America or FIA,
or even with a bank, but it encompasses anybody in New
York who got such a letter regardless of the circumstances.
I’m first going to discuss commonality and typicality
under Rule 23(a)(2) and (a)(3). Those requirements are
usually “discussed together because courts treat them as
closely linked.” In Re Telik, 576 F. Supp. 2d 570, at 582
(SDNY 2008), which collects cases, and see Marisol A. v.
Giuliani, 126 F.3d 372, at 376 (Second Circuit 1997),
where the court said, “The commonality and typicality
requirements tend to merge into one another, so that
similar considerations animate the analysis.”
The commonality requirement requires a showing
that “there are questions of law or fact common to the
class.” “Commonality does not mean that all issues must
be identical as to each member, but it does require that
plaintiffs identify some unifying thread among the members’ claims that warrants class treatment.” Damassia
v. Duane Reade, 250 F.R.D. 152, at 156 (SDNY 2008).
[26] “Generally, courts have liberally construed the
commonality requirement to mandate a minimum of one
issue common to all class members.” Toure v. Central
Parking Systems, 2007 Westlaw 2872455, at Page 6
(SDNY September 28th, 2007).
41a
Typicality is satisfied if “each class member’s claim
arises from the same course of events, and each class
member makes similar legal arguments to prove the defendant’s liability.” Robinson v. Metro-North Commuter
Railroad, 267 F.3d 147, at 155 (Second Circuit 2001).
“A named plaintiff’s claim is ‘typical’ under Rule
23(a)(3) if it arises from the same event or course of conduct that gives rise to claims of other class members and
the claims are based on the same legal theory.” That’s
Jeffries, at Page 12.
Plaintiff maintains that she has met the commonality
and typicality requirements because “each class member
was sent a letter by Defendants attempting to collect interest in excess of 25 percent per annum on an alleged
debt,” and thus that “each of the class members was subjected to the same treatment which violated the FDCPA
and New York law.” Thus, Plaintiff continues, “the only
individual issue is the identification of the class members,” which can be accomplished by reviewing the Defendants’ records. I’m quoting from Pages 8 and 9 of
Plaintiff’s memorandum in [27] support of her Motion for
Class Certification, which is Document 29.
Notwithstanding Plaintiff’s arguments, I am not convinced that the class is really the homogenous group that
Plaintiff claims or homogenous enough for Rule 23.
While at the grossest level of generality, the purported class members may share among themselves the fact
that Defendants sent them a collection letter seeking interest in excess of 25 percent per year, beyond that each
purported class member would require an individual determination before he or she could be included within the
class.
42a
As to the FDCPA, such an interest rate may have
been perfectly proper for some class members, specifically, those who agreed to that rate with a bank entitled
to change it, such as Plaintiff would have had she received the card member agreement and Change of
Terms.
There is no reason to believe that the 49,780 members of the putative class were all persons who, like
Plaintiff, dispute having agreed to such terms with a
bank entitled to seek them. Thus, it appears that the
class is over-inclusive, since it will likely include persons
who do not deny being bound by the terms and conditions of the applicable cardholder agreements and who
therefore do not share Plaintiff’s claims against Defendants.
[28] The problem at this juncture is that “a review of
Defendant’s records” will not reveal which class members dispute receipt of the cardholder agreements or
otherwise dispute the originating bank’s entitlement to
charge a rate greater than 25 percent. Whether any
member of the class has a claim will thus require individual exploration.
The same is true with respect to the validity of the
assignments. If, as stated above, the class member’s
debt was validly assigned to Defendants by a national
bank, his or her state-law claims of usury would be
preempted by the NBA. Thus, in each instance, I would
need to determine whether a valid assignment had taken
place in order to know whether a particular class member could pursue state-law claims.
While Defendants’ records should reveal whether or
not there is a valid assignment, it would have to be determined Plaintiff by Plaintiff.
43a
In other words, in light of my rulings above, the claim
is not simply, as Plaintiff would have it, that “Defendants
charged me interest greater than 25 percent,” it is that
“Defendants charged me interest greater than 25 percent in circumstances where I never received the agreement which would have authorized such interest or otherwise agreed to such interest,” and/or “Defendants
charged me interest greater than 25 percent in circumstances where my debt had [29] not been acquired from a
national bank protected by the NBA.”
Plaintiff has not met her burden of showing that the
proposed members of the class share those circumstances. Thus, some of the persons included within Plaintiff’s
proposed class may indeed agree that they were bound
by the terms and conditions of the applicable cardholder
agreement or otherwise — or that they otherwise agreed
to Delaware interest rates, and/or that their debt was
validly assigned from a national bank, and they therefore
do not have similar legal arguments as the Plaintiff.
The claims of each member of the class will turn on
whether the class member agreed to Delaware interest
rates, whether the class members — and whether the
class member’s debt was validly assigned to the Defendants, and thus they do not arise from the same event or
course of conduct that gives rise to the claim of the
named Plaintiff or other class members.
Where there is variance among proposed class members of “such factors as the complexity of the facts, the
need for followup to verify” — excuse me, “the need for
followup to verify evidence, and the difficulty of the determination,” as here, the inquiry that would be necessitated “is ill-suited for disposition via a class action because there is insufficient commonality.” Dobson v.
44a
Hartford Financial, 342 Fed Appendix 706, at 709 (Second [30] Circuit 2009).
I might phrase it as insufficient typicality, but as noted earlier, those two requirements are usually discussed
together. But there’s really no reason to believe that
Plaintiff’s claim that she didn’t receive her agreement or
that there was an invalid assignment are going to be typical of the other almost 50,000 people who got letters;
many of whom were dealing with other banks entirely;
further — or many of which I presume were dealing with
other banks entirely.
Further, even if Rule 23(a) were met, the same considerations dictate that neither Rule 23(b)(2) or (b)(3) are
met. The matter could not be resolved on grounds generally applicable to the class, because there is no showing
that the circumstances of each proposed class member
are like those of Plaintiff, and because the resolution will
turn on individual determinations as to cardholder
agreements and assignments of debt.
Likewise, because of those difficulties — excuse me.
Because of those differences in factual circumstances,
common questions of law or fact do not predominate over
individual questions and the class action device is not superior to other methods of adjudication.
As Plaintiff has failed to satisfy the requirements of
Rule 23(a), her Motion for Class Certification is [31] accordingly denied.
So, to summarize, for the reasons stated above, both
Plaintiff’s motions and Defendants’ motions are denied.
The Clerk of Court is respectfully directed to terminate
the pending motions, which are Documents 25, 30 and 35.
We now need to talk about our next steps. We either
need to talk about a trial date or about a settlement.
45a
I understand that the landscape has shifted considerably and you may not be able to tell me at this moment
which way you think you are headed, but I can do one of
two things. I can either set some dates for trial submissions and if you settle, you settle, or I can let you talk
and come back to me. We can have another conference
in a few weeks.
MR. LEGHORN: Your Honor, Thomas Leghorn.
Mr. Schlanger and I have worked successfully on many
cases. So, I would opt for the scenario of allowing us to
speak, first, and then reporting back in a couple of
weeks’ time.
THE COURT:
Schlanger?
Is that all right with you, Mr.
MR. SCHLANGER: Yes, Your Honor. I would just
note there was a stay of all discovery pending Your Honor’s decision. So, that doesn’t prohibit us from setting a
trial date, but there is — no depositions have been held
in this case.
[32] THE COURT: Oh, all right. So, you would need
to, you would need to take some discovery, if you don’t
settle.
MR. LEGHORN: That’s accurate, Your Honor.
THE COURT: All right. So —
MR. LEGHORN: In fact, I think that also lends itself to us discussing first.
THE COURT: So, why don’t we do this. Why don’t I
— I don’t know if you are going to be ordering the transcript. Do you think you’ll be ordering the transcripts?
MR. SCHLANGER: I didn’t understand what Your
Honor said.
46a
THE COURT: Do you think you’ll be ordering the
transcript?
MR. SCHLANGER: I will be ordering this transcript for sure, Your Honor.
THE COURT: Okay, So, let me build in some time
for the reporter to get you the transcript and then for
you guys to talk after you get it. So, why don’t we come
back in six weeks. Does that sound reasonable?
MR LEGHORN: Very reasonable, Your Honor.
MR. SCHLANGER: Your Honor, this just speaks to
my not having dealt with this particular scenario before.
I have never had a Judge read a substantive ruling like
that from the bench. So, I don’t know if I’m expected to
put in an objection in on the record or the regular rules
regarding [33] our time to ask for reconsideration or appeal or any of that apply here.
THE COURT: Well, I’m going to today file an order
that says, “for the reasons stated in open court, the motions are denied,” and that will trigger anything that a
written decision would ordinarily trigger. If you want to
move for reconsideration, be my guest.
MR. SCHLANGER: In terms of that triggering our
time, could — I would ask that our time be triggered
from when we get the transcript, not from when today’s
order goes in. There is a lot to digest in that ruling.
THE COURT: Yes, that makes sense. I don’t know
if that 14 days is one that I can extend. I think it actually
comes from the local rule, not the federal rule, so I think
I can extend it. But, sure, I’ll extend the time to move to
reconsider to two weeks after you get the transcript, but
I still would like to have a conference in about six weeks
where hopefully you can tell me where we are going.
47a
MR. SCHLANGER: Sure.
THE COURT: Let me ask Ms. Cama for a date.
THE CLERK: November 15th, at 4:00 o’clock.
THE COURT: November 15th, at 4:00 o’clock.
MR. SCHLANGER: Is Mr. Bragg still on the phone
with us?
THE COURT: You are still on the phone with us?
[34] MR. BRAGG: Yes.
MR. SCHLANGER: I just went to make sure this is
a date you can make.
THE COURT: Mr. Schlanger just wants to make
sure that date is good for you.
MR. BRAGG: I am checking as we talk.
MR. SCHLANGER: Your Honor, it says, it says on
the sign outside the door I have to ask you to turn this
on.
THE COURT: Go ahead and turn on your phone.
MR. SCHLANGER: Thank you.
MR. BRAGG: This is Randolph Bragg. November
15th is fine with me.
THE COURT: All right. These gentlemen here are
checking their phones.
MR. SCHLANGER: November 15th is also fine for
me, Your Honor.
MR. LEGHORN: It’s fine for me as well, Your Honor.
THE COURT: All right. Three for three.
All right. I will see you all November 15th.
48a
MR LEGHORN: Thank you, Your Honor.
MR. SCHLANGER: Your Honor, just so we don’t
end up disagreeing with this later, I just went to understand, is discovery still stayed until this next conference
or are we — I don’t want to be faulted for not trying to
push discovery forward and I don’t want to be faulted for
running [35] up costs by trying to hold depositions in advance of this conference.
THE COURT: Discovery is still stayed pending the
next conference, and at that time we will set a schedule
for whatever additional discovery is necessary and take
it from there.
MR LEGHORN: Thank you.
MR. SCHLANGER: Thank you, Your Honor.
THE COURT: All right. Thank you.
MR. BRAGG: Thank you, Your Honor.
THE COURT: Thank you. Goodbye.
MR. BRAGG: Good-bye.
(Case adjourned)
49a
APPENDIX D
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
No. 11-8149
Saliha Madden, on behalf of herself and all others
similarly situated, Plaintiff
v.
Midland Funding, LLC, Midland Credit Management,
Inc., Defendants
September 30, 2013
ORDER
SEIBEL, J.
On September 30, 2013, the parties appeared before
me for an oral ruling on Plaintiff’s Motion to Strike Defendants’ Offer of Judgment, (Doc. 35), Plaintiff’s Motion
for Class Certification, (Doc. 25), and Defendants’ Motion for Summary Judgment, (Doc. 30). For the reasons
stated on the record, Plaintiff’s Motions are DENIED
and Defendant’s Motion is DENIED. The Clerk of Court
is respectfully directed to terminate the pending Motions. (Docs. 25, 30, 35.)
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Should the parties wish to file a motion for reconsideration, they shall do so within fourteen (14) days of receipt of the September 30, 2013 conference transcript.
The parties are directed to appear for a status conference on November 15, 2013 at 4:00 p.m. Discovery will be
stayed pending the status conference.
SO ORDERED.
Dated: September 30, 2013
White Plains, New York
/s/
CATHY SEIBEL, U.S.D.J.
51a
APPENDIX E
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
No. 11-8149
Saliha Madden, on behalf of herself and all others
similarly situated, Plaintiff
v.
Midland Funding, LLC, Midland Credit Management,
Inc., Defendants
STIPULATION FOR ENTRY OF JUDGMENT
FOR DEFENDANTS FOR PURPOSE OF APPEAL
Plaintiff Saliha Madden (“Ms. Madden” or “Plaintiff”) and Defendants Midland Funding LLC (“Midland”)
and Midland Credit Management (“MCM”) (collectively,
“Defendants”) stipulate to the entry of Judgment for Defendants in order that Plaintiff may expeditiously appeal
the denial of her motion for class certification which was
encompassed within the Court’s Order dated September
30, 2013, which also denied Defendants’ motion for summary judgment. (Doc. 64) (formalizing the more detailed
oral ruling issued earlier that day). Specifically, the parties state as follows:
WHEREAS within its oral ruling of September 30,
2013 (“the Order”), the Court held that the National
Bank Act (“NBA”)’s preemption of New York’s usury
52a
laws applies to non-bank assignees of national banks, regardless of whether the national bank retains any interest in or control over the assigned accounts. (“[M]y ruling that assignees are entitled to the protection of the
NBA if the originating bank was entitled to the protection of the NBA, and that under some circumstances, interest greater than 25 percent can be permissible, those
rulings mean that the class action device in my view is
not appropriate here.” Order at 22.);
WHEREAS Plaintiff’s Motion for Certification of Interlocutory Appeal pursuant to 28 U.S.C. 1292(b) was
denied;
WHEREAS Plaintiff’s Petition for Leave To File An
Appeal Of A Denial Of Class Certification Pursuant To
Fed. R. Civ. P. Rule 23(f) was denied;
WHEREAS the September 30, 2013 Order denied
Defendants’ motion for summary judgment with regard
to Plaintiff’s individual claims on grounds that disputed
issues of fact remain for determination, including whether Defendants were assigned and owned Ms. Madden’s
account, and whether Defendants provided notification
to Plaintiff with certain documents;
WHEREAS determination of these remaining issues
involve questions specific to Ms. Madden’s account, impact only her ability to prevail on her individual claims,
and do not relate to the theory of liability underlying
Plaintiff’s claims on behalf of the putative class of approximately 49,780 consumers, or Ms. Madden’s ability
to proceed on behalf of the putative class, i.e. will not alter or affect the Court’s ruling that the exemption for
national banks pursuant to the National Bank Act
(“NBA”) from state usury laws applies to their assignees;
53a
WHEREAS on April 2, 2014 by Minute Entry the
Court set the deadline for conducting depositions as
June 30, 2014, the close of discovery as July 30, 2014, and
scheduled a status conference for August 15, 2014;
WHEREAS, if Ms. Madden were to proceed to trial
individually (i.e. not on a class basis), her maximum recovery would be limited;
WHEREAS, Defendants made a Rule 68 Offer of
Judgment dated November 21, 2012 (“the Offer”), offering to have judgment entered against them by Ms. Madden in her individual capacity plus attorney’s fees and
costs in an amount to be decided by the Court upon application;
WHEREAS, Plaintiff filed a Motion to Strike Defendants’ Rule 68 Offer Of Judgment, and the Court, in
its 9/30/13 Order declined to rule conclusively on the Offer’s validity until such time as the Offer was filed;
WHEREAS the parties wish to avoid the expenditure of additional time and expense involved in completing discovery and trial in order to resolve the remaining
issues in this case relevant only to Ms. Madden’s individual claims.
WHEREAS Plaintiff wishes to appeal the central issue of whether the National Bank Act (“NBA”) preempts
New York’s usury laws, as applied to an entity that purports to be a non-bank assignee of a national bank,
where the national bank retains no interest in or control
over the assigned accounts to the U.S. Court of Appeals
for the Second Circuit;
WHEREAS the parties agree that Defendants have
expressly preserved all grounds and arguments for dismissal and have not waived any of those defenses in
permitting judgment to be entered at this time;
54a
WHEREFOR:
1. The parties stipulate solely for purposes of expediting appeal that FIA assigned Defendants Ms.
Madden’s account, and that Plaintiff received the
Cardholder Agreement and Change In Terms
discussed in the Order;
2. The parties acknowledge that the stipulation regarding assignment of the account and receipt of
the Cardholder Agreement and Change in Terms,
may not be revoked or undone regardless of the
outcome of Plaintiff’s anticipated appeal to the
Second Circuit.
3. In light of this stipulation, a final, appealable
judgment in favor of Defendants is appropriate,
and the parties hereby stipulate to the entry of
Judgment for Defendants per Rule 54 of the Federal Rules of Civil Procedure.
4. Defendants hereby withdraw their Offer of
Judgment, agree that it is null and void, and further agree to make no additional Offers of Judgment directed at Plaintiff solely in her individual
capacity in this litigation.
5. Defendants agree that they shall not pursue fees
or costs as against Ms. Madden in this litigation
pursuant to Rule 54(d), 15 U.S.C. § 1692k, or otherwise.
6. Defendant agrees that they shall not use the fact
of the stipulation or any of its contents as a basis
for challenging Ms. Madden’s suitability as a class
representative.
55a
Agreed.
Dated: 5/30/14
SCHLANGER & SCHLANGER,
LLP
By: /s/
Daniel A. Schlanger
For Plaintiffs
Dated: 5/30/14
HORWITZ, HORWITZ & ASSOC.
By: /s/
O. Randolph Bragg
For Plaintiffs
Dated: 5/30/14
WILSON ELSER MOSKOWITZ
EDELMAN & DICKER LLP
By: /s/
Thomas A. Leghorn
For Defendants
So Ordered.
/s/
Hon. Cathy Seibel, U.S.D.J.
6/2/14
56a
APPENDIX F
STATUTORY PROVISIONS
1. Section 25b(b)(1) of Title 12 of the United States
Code provides:
(b) Preemption standard
(1) In general
State consumer financial laws are preempted, only if—
(A) application of a State consumer financial law
would have a discriminatory effect on national
banks, in comparison with the effect of the law
on a bank chartered by that State;
(B) in accordance with the legal standard for
preemption in the decision of the Supreme Court
of the United States in Barnett Bank of Marion
County, N.A. v. Nelson, Florida Insurance
Commissioner, et al., 517 U.S. 25 (1996), the
State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers; and any preemption
determination under this subparagraph may be
made by a court, or by regulation or order of the
Comptroller of the Currency on a case-by-case
basis, in accordance with applicable law; or
(C) the State consumer financial law is preempted by a provision of Federal law other than title
62 of the Revised Statutes.
2. Section 25b(f) of Title 12 of the United States
Code provides:
57a
(f) Preservation of powers related to charging interest
No provision of title 62 of the Revised Statutes shall
be construed as altering or otherwise affecting the
authority conferred by section 85 of this title for the
charging of interest by a national bank at the rate allowed by the laws of the State, territory, or district
where the bank is located, including with respect to
the meaning of “interest” under such provision.
3. Section 85 of Title 12 of the United States Code
provides as follows:
Any association may take, receive, reserve, and
charge on any loan or discount made, or upon any
notes, bills of exchange, or other evidences of debt,
interest at the rate allowed by the laws of the State,
Territory, or District where the bank is located, or at
a rate of 1 per centum in excess of the discount rate
on ninety-day commercial paper in effect at the Federal reserve bank in the Federal reserve district
where the bank is located, whichever may be the
greater, and no more, except that where by the laws
of any State a different rate is limited for banks organized under State laws, the rate so limited shall be
allowed for associations organized or existing in any
such State under title 62 of the Revised Statutes.
When no rate is fixed by the laws of the State, or
Territory, or District, the bank may take, receive, reserve, or charge a rate not exceeding 7 per centum,
or 1 per centum in excess of the discount rate on
ninety-day commercial paper in effect at the Federal
reserve bank in the Federal reserve district where
the bank is located, whichever may be the greater,
and such interest may be taken in advance, reckoning
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the days for which the note, bill, or other evidence of
debt has to run. The maximum amount of interest or
discount to be charged at a branch of an association
located outside of the States of the United States and
the District of Columbia shall be at the rate allowed
by the laws of the country, territory, dependency,
province, dominion, insular possession, or other political subdivision where the branch is located. And the
purchase, discount, or sale of a bona fide bill of exchange, payable at another place than the place of
such purchase, discount, or sale, at not more than the
current rate of exchange for sight drafts in addition
to the interest, shall not be considered as taking or
receiving a greater rate of interest.

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