Madden Class Action Update: Financial Institutions Win at Trial Level; Madden Distinguished
A district court in the Eastern District of New York recently dismissed a class action against bank-related defendants relating to credit card interest charges, effectively limiting the Second Circuit’s ruling in Madden v. Midland Funding, LLC, 786 F.3d 246 (2nd Cir. 2015). See Cohen v. Capital One Funding, LLC, Case No. 19-cv-3479 (EDNY, September 28, 2020).
In Madden, the Second Circuit considered the provision of the National Bank Act that permits national banks 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. The provision all but eliminates state law usury claims against national banks based on the laws of the state where the consumer resides. The Madden court held that a non-bank debt collector could not claim the National Bank Act’s usury cap preemption, even though it acquired the charged off accounts from a national bank. The ruling means that non-banks charging interest on debts acquired from national banks must follow the usury laws of the state of the consumer’s residence (or the state law governing the contract between the consumer and the non-bank).
The recent Cohen case addressed similar facts with one distinct difference: the non-bank entities that acquired the accounts were affiliates of the national bank that sold the debts. The defendants were affiliates of Capital One Bank, N.A., a Virginia-based national bank, which bundled and sold the debts to its affiliates as asset-backed securities. The plaintiffs were New York residents who claimed that the non-bank entities charged interest rates that violated New York’s usury law. The defendants argued that Madden was factually distinguishable because Capital One still controlled and was “connected” to the debts, which entitled the non-bank defendants to rely on the usury cap preemption in the National Bank Act. The court agreed and dismissed the claims, observing that Capital One retained ultimate ownership of the accounts, with the authority to modify the terms and provisions of the loans including interest rates and fees.
Other district courts have similarly limited—or at least clarified—the Madden decision since it was issued in 2015. For instance, in Peterson v. Chase Card Funding, LLC, the court held that “even if [JP Morgan Chase Bank] does not retain a ‘substantial interest’ in [the] loan, it retains, at the very least, more than ‘[no] further interest.’ And in the context of that middle ground, the Court defers to the OCC’s reasoned judgment that enforcing New York’s usury laws against the Chase defendants would significantly interfere with [JP Morgan Chase Bank]’s exercise of its [National Bank Act] powers.” No. 19-CV-00741-LJV-JJM, 2020 WL 5628935 at *7 (W.D.N.Y. Sept. 21, 2020). Similarly, in Cole v. Stephen Einstein & Assocs., the court held that interest charged by a national bank on a debt before it sells the debt to a non-bank falls within the National Bank Act’s usury cap preemption and may still be collected by a non-bank that purchases the debt. 365 F. Supp. 3d 319, 333–34 (W.D.N.Y. 2019).