Supreme Court Case About Debt Buying and Interest Rates Now in Question

On March 21, 2016, the U.S. Supreme Court announced that it had invited the Solicitor General to file a brief expressing his views in connection with the certiorari petition in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).

insideARM originally wrote about this case on May 26, 2015.  As outlined in that earlier article, the facts are relatively simple:

Madden had opened a credit card account through Bank of America, a national bank. Bank of America later consolidated its credit card program with FIA Card Services, also a national bank. In 2010, Midland Funding LLC (Midland) purchased Madden’s charged-off credit card account of approximately $5000 from FIA Card Services. Midland, however, is not a national bank.

In November of 2010 Midland sent Madden a letter seeking to collect payment of the debt and stating that an interest rate of 27% per year applied.

The plaintiff resided in New York state where the usury limit is 25% annually. Madden claimed, on behalf of herself and a putative class, that Midland had engaged in abusive and unfair debt collection practices and had charged a usurious rate of interest under New York Law.

Midland’s position is the National Bank Act permits the higher interest rate above and, as an assignee of the account, they stepped into the shoes of a national bank when they purchased the account.

A lower court had previously ruled that the original agreement between Madden and the national bank permitted the interest rate applied to the account and, as an assignee from a national bank, Midland was allowed to charge that rate.

The Court of Appeals for the Second Circuit disagreed with the lower court; holding that, although National Bank Act preemption “may extend to entities beyond a national bank itself,” the defendants (Midland) could not benefit from the act’s preemptive effect.

Even though the court of appeals reversed the lower court on the National Bank Act preemption issue, the case was remanded back to the lower court to decide whether New York or Delaware law is applicable in the case. The court of appeals noted that “the parties appear to agree that if Delaware law applies, the interest rate charged was permissible.”

On November 10, 2015 a Petition for a writ of certiorari was filed by Midland at the Supreme Court.

insideARM Perspective

Why is this case important to the ARM industry? It involves a significant issue for debt buyers. The national bank preemption would simplify decisions on applicable interest rates for debt buyers of accounts from national banks. Rather than attempting to determine applicable interest rates on an account-by-account, state-by-state, basis the debt buyer could simply rely on the interest rate charged by the national bank.

Unfortunately, due to a confluence of events, the Supreme Court may never rule on the issue.  With the death of Justice Antonin Scalia four votes are needed to get the case heard before the Supreme Court. Thus, it is unclear whether certiorari will be granted.  The response from the Solicitor General may impact that decision.

insideARM will continue to monitor the case and provide updates.