The Solicitor General’s brief argues the Second Circuit’s holding was incorrect, but does not recommend a grant of certiorari.

On May 24, the U.S. Solicitor General and the Office of the Comptroller of the Currency (OCC) criticized the U.S. Court of Appeals for the Second Circuit’s decision in Madden v. Midland Funding, calling it “incorrect” with an “analysis reflect[ing] a misunderstanding” of section 85 of the National Bank Act and Supreme Court precedent. However, in a blow to the banking and marketplace lending industries, the Solicitor General urged the Supreme Court to deny the petition for a writ of certiorari, noting that defendant Midland Funding may win on remand. A summary of the case and recent updates are available.

In a strongly worded summary of settled banking law, the Solicitor General’s brief said the analysis employed by the Second Circuit was wrong in holding that the state usury laws may prohibit a national bank’s assignee from enforcing the interest-rate provisions of an account agreement that was valid under the laws of Delaware, the state in which the national bank assignor was located. However, despite such criticism, the Solicitor General said the Supreme Court should not grant certiorari for three reasons: (1) there is no circuit split on the question presented; (2) the parties did not present key aspects of the preemption analysis to the courts below; and (3) Midland Funding may still prevail on remand, despite the error in the Second Circuit’s interlocutory decision.

According to the brief, the basis for the Second Circuit’s incorrect decision centered on its misunderstanding that a “national bank’s federal right to charge interest up to the rate allowed by Section 85 [of the National Bank Act] would be significantly impaired if the national bank’s assignee could not continue to charge that rate.” More specifically, “[t]he power explicitly conferred on national banks by Section 85 — i.e., the power to originate loans at the maximum interest rate allowed by the national bank’s home State — therefore carries with it the power to use the loans once originated for their usual commercial purposes, which include assignment of such loans to others.”

This principle was overlooked by the Second Circuit and, according to the brief, if the Second Circuit had fully appreciated this principle, the court should have ruled the other way. However, this may not have been fully the fault of the Second Circuit, but rather an attempt to do its best given the “lack of clarity in the briefing.” The Solicitor General’s brief made clear that “the deficiencies in the court of appeals’ preemption analysis may be attributable in part to the parties’ failure to present the full range of preemption arguments.”

According to the Solicitor General, certiorari should be denied because the resolution of the question presented may not affect the outcome of the case. The Solicitor General and the OCC believe that the likely outcome of the case on remand could be in favor of Midland Funding because the court of appeals did not decide the issue of whether the credit card agreement choice of Delaware law would prevail. If the district court determines that the Delaware law applies, then the rates charged would be permissible because Delaware does not have a usury ceiling on bank-made loans. If the district court determines that New York law applies, Midland Funding could still prevail if New York law “itself incorporates the valid-when-made principle” assuming it is a fundamental principle of usury law.

Pepper Points

  • Whether this brief will persuade the Supreme Court to deny certiorari is unclear, although the position of the United States on this issue will weigh heavily in the Court’s deliberations. It may deny certiorari, but, if it does so, it will be after the Solicitor General and the OCC publicly stated that the Second Circuit made the wrong decision. If the Supreme Court accepts certiorari, the Solicitor General and the OCC have laid out a strong basis upon which the Court could rely if it agrees with their position.
  • If the Supreme Court denies the request for certiorari, then the choice-of-law issue will be considered at the district court level. However, the decision by the Second Circuit on the valid-at-inception rule will still be binding precedent in the three states that make up the Second Circuit.
  • The Solicitor General’s brief took aim at the notion that the national bank would need to retain an interest in the loan for preemption to apply, specifically, calling that analysis by the Second Circuit “misconceived.” This point made by the Solicitor General should ease some concern from those in the marketplace lending arena that, in the long term, the United States will uphold the valid-when-made doctrine regardless of whether an interest in loans originated and sold by a national bank is retained by that bank.
  • While we continue to analyze the brief, having the OCC join in and articulate what many believe to be settled black-letter law in this area is good news. It allows the industry to take some comfort from the fact that the OCC was highly critical of the Second Circuit’s decision. However, questions remain as to why the OCC did not intervene at an earlier stage in this case as an amicus to make its views known, particularly when the brief criticizes the parties below for not raising the very issues covered by the Solicitor General’s brief.
  • Although the Solicitor General seems optimistic that Madden could win on the choice-of-law argument, we are less confident, since Madden would need to overcome the argument that the 25 percent criminal usury statute in New York does not represent a fundamental public policy of New York, which, if so, defeats the Delaware choice-of-law provision.