Special Alert: Second Circuit Will Not Rehear Madden Decision That Threatens To Upset Secondary Credit Markets

Two months ago we issued a Special Alert regarding the decision of the Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, which held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (“NBA”) from state-law usury claims. We explained that the Second Circuit’s reasoning in Madden ignored long-standing precedent upholding an assignee’s right to charge and collect interest in accordance with an assigned credit contract that was valid when made. And, because the entire secondary market for credit relies on this Valid-When-Made Doctrine to enforce credit agreements pursuant to their terms, the decision potentially carries far-reaching ramifications for securitization vehicles, hedge funds, other purchasers of whole loans, including those who purchase loans originated by banks pursuant to private-label arrangements and other bank relationships, such as those common to marketplace lending industries and various types of on-line consumer credit.

After the decision, Midland Funding, the assignee of the loan at issue, petitioned the Second Circuit to rehear the case either by the panel or en banc – a petition that was broadly supported by banking and securities industry trade associations in amicus briefs.  On August 12, the court denied that petition.

Click Here to View the Full Special Alert

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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

 

 

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Special Alert: Second Circuit Decision Threatens to Upset Secondary Credit Markets

The Second Circuit Court of Appeals’ recent decision in Madden v. Midland Funding, LLC held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (“NBA”) from state-law usury claims.  In reaching this conclusion, the Court appears to have not considered the “Valid-When-Made Doctrine”—a longstanding principle of usury law that if a loan is not usurious when made, then it does not become usurious when assigned to another party.  If left undisturbed, the Court’s decision may well have broad and alarming ramifications.  The decision could significantly disrupt secondary markets for consumer and commercial credit, impacting a broad cross-section of financial services providers and other businesses that rely on the availability and post-sale validity of loans originated by national or state-chartered depository institutions.

Click here to view the full special alert.

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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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International Bank to Pay $30 Million to Resolve Overdraft Fee Allegations

On March 2, an international bank agreed to pay $30 million to settle allegations that it changed the order in which customers’ debit transactions cleared in order to generate additional overdraft fees. According to the plaintiffs, the bank engaged in a practice known as “high-to-low” posting, whereby a bank orders transactions from the largest to the smallest dollar amount before posting them to the customer’s account. The bank also charged a $35 fee for each overdraft, regardless of the amount of the transaction. The plaintiffs allege that, when combined, these practices increased the number of overdraft fees paid by some customers because processing the largest charges first depleted their funds more quickly and increased the total number of transactions that failed to clear. The bank appropriately defended its practices, contending, among other things, that the claims were preempted by the National Bank Act and barred by the Uniform Commercial Code, and that the deposit agreement provided for discretion to order transactions. The settlement is scheduled to face a fairness hearing and final approval by the court.

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Ninth Circuit Affirms Preemption of State Law Claims Asserting National Bank Mislead Consumers by Failing to Make Material Disclosures

On May 22, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s holding that the National Bank Act (NBA) preempts state disclosure requirements on a bank’s deposit-related activities. Robinson v. Bank of Am., N.A., No. 11-57194, 2013 WL 2234073 (9th Cir. May 22, 2013). In this case, the bank charged a customer a fee for using a cash-access account, which could be avoided by withdrawing all funds from the account each month before the fee was assessed. The customer alleged that the failure to disclose the ability to avoid the fee violated, among other things, California’s Consumer Legal Remedies Act and Unfair Competition Law. The district court dismissed the case, holding that the NBA preempts state laws that attempt to regulate disclosures of national banks on deposit accounts. The district court also rejected the customer’s argument that state laws that require all businesses generally (as opposed to banks in particular) to refrain from misrepresentations and from fraudulent, unfair, or illegal behavior cannot be preempted by the NBA. The Ninth Circuit affirmed the dismissal on the same grounds.

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Ninth Circuit Affirms Dismissal of Unfair Competition Claims over Teaser Rates

On January 9, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s dismissal of a putative class action against a national bank over its adjustable rate mortgage disclosure and payment application. O’Donnell v. Bank of Am., N.A., No. 11-16351, slip op. (9th Cir. Jan. 9, 2013). On appeal, the borrowers argued that the district court erred in holding that their California state-law claims for common law fraud and violations of the Unfair Competition Law based on the lender’s alleged concealment of material facts about the loans’ escalating principal balances and interest rates are preempted by the National Bank Act and OCC regulations. The borrowers also challenged the district court’s dismissal of their state-law breach of contract claim based on allegations that the lender improperly applied payments solely toward satisfying part of the interest owed while adding the remaining interest to the principal balance. In affirming the dismissal, the appeals court held that the fraud and unfair competition claims are expressly preempted because they would force the lender to make additional disclosures not required by federal law. The appeals court also affirmed the district court’s holding that the FTC Act does not provide a private right of action and therefore cannot be employed as a premise for the borrowers’ unfair competition claim. With regard to the borrowers’ breach of contract claim, the court held that the mortgage contract did not include any representation that the lender would apply payments to principal if the payment failed to cover the accrued interest, and, therefore, the borrowers failed to state a plausible claim.

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