Madden v. Midland Funding: National Bank Act does NOT preempt state usury laws for non-national bank
On May 22nd, the US Court of Appeals for the Second Circuit decided that the National Bank Act would not preempt a state law usury claim against the assignee of credit card debt that was initially issued by a national bank.
In Madden v. Midland Funding, LLC, No. 14-2131-cv (2nd Cir. 5-22-15), the Second Circuit Court considered the claim of a debtor who argued that Midland Funding, a non-national bank that had purchased the credit card debt of a New York consumer from a Delaware national bank, had no right to charge 27% interest as part of its efforts to collect on the debt. The consumer argued that the interest rate charged by the collecting bank exceeded the usury limit in New York; however, the lower court dismissed the claim, holding that it was preempted by the National Bank Act which looked to the interest rate limits for the state where the national bank was located. And in this case, the issuing national bank was based in Delaware, which did not prohibit a 27% interest rate on collections.
The Second Circuit reversed on the preemption issue, finding that the National Bank Act did not apply insofar as the collecting bank was not a national bank. The Court did examine whether there were any facts present justifying application of the Act to the non-national bank, e.g. whether the debt purchasing bank was an agent or subsidiary of the national bank. The Court found no such facts. The Court further noted that: “Although national banks’ agents and subsidiaries exercise national banks’ powers and receive protection under the [National Bank Act] 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 Court also considered whether application of state law would “significantly interfere” with the exercise of a national bank power, which would justify preemption under the National Bank Act. However, the Court found that even though state usury laws “might decrease the amount a national bank could charge for its consumer debt in certain sales),” such effect did not rise to the level of “significant interference.” As a result, the Court did not find a basis for preempting state usury law under the National Bank Act.
A separate issue in the case related to the “choice of law” provision in the credit card agreement calling for application of Delaware law, which did not have usury limits. The defendant debt purchasing bank argued that this provision was controlling, and therefore New York usury limits should not apply. However, because this issue was not decided by the lower court, the Second Circuit remanded the issue to the District Court – but noting that there was a split in authority as to whether the choice of law provision was effective under similar facts.