In response to a request of the U.S. Supreme Court (discussed here), the U.S. Solicitor General’s Office on Tuesday filed a brief with the Court expressing the U.S. Government’s views on the merits of the claims brought in Midland Funding v. Madden and on the suitability of the case for Supreme Court review.As discussed in greater detail in previous alerts (here and here), Midland has asked the Court to review a decision of the Second Circuit holding that the federal preemption provision of the National Bank Act, 12 U.S.C. § 85, cannot be invoked by a non-national bank assignee.Although the Solicitor General’s brief advocated against a grant of review in this case, it provides resounding support for Midland’s substantive position.

The Solicitor General (SG) brief, which was cosigned by the Office of the Comptroller of the Currency (OCC), unambiguously said the Second Circuit’s decision was flat wrong in its reading of the National Bank Act preemption provision.The brief explained that the National Bank Act grants the right to issue loans consistent with the usury law where the bank is based and to sell those loans.That power to issue and sell loans means, according to the Government, that the non-bank purchaser can also enforce the rate that was lawfully charged by the bank.The SG brief found further support for this reading of the Act in the longstanding common-law principle that a loan interest-rate term that is “valid-when-made” may lawfully be charged by an assignee.The brief read Section 85 as implicitly incorporating this doctrine.Further, the SG brief found that the Second Circuit’s analysis failed to account for the significant interference its contrary reading would have with the marketability of a national bank’s loans.

Nonetheless, the Solicitor General’s bottom line was that further review of the case is not warranted.The SG’s brief reviewed three criteria commonly considered by the Court when deciding whether or not to grant review and concluded that those traditional concerns favor denial in this case.First, the SG considered whether a conflict exists among the lower courts and found no actual or significant conflict among the courts of appeals on the issue.Second, the brief opined that the issue of preemption was not fully or clearly briefed before the trial or appellate court and was therefore not sufficiently explored or considered when the Second Circuit reached its decision.Finally, the SG considered the global importance of the case and determined that the impact of the case is still potentially small if, on remand, New York state usury law is read to honor a choice of law provision in the national bank’s contract or to itself incorporate the “valid-when-made” doctrine.

Midland will now have a chance to file a quick response brief, and then we should hear in late June about the decision to grant review.

Notwithstanding the SG’s recommendation to the Court, there is still a substantial chance that the Court might choose to grant review.The Second Circuit’s ruling significantly disrupts the marketability of higher interest loans, an issue that is in need of timely resolution.The Court’s fall docket is not quite full and, similarly, is in need of cases.Assuming Midland files a strong reply to the SG’s brief, the scales may even tip in favor of a grant.

And if the Court does grant review, this brief on behalf of the SG and OCC, saying that the court of appeals reading of the Act was wrong, makes the likelihood of success on the merits much higher than it was.

If the Court denies review of the case, the Solicitor General’s brief is still of great importance for a number of reasons, including:

  • The legal views of the SG and the OCC set out in the brief on an issue of federal preemption should be given deference in the courts going forward.The brief should, thus, help serve as a significant firewall keeping the decision of the Second Circuit from spreading to other circuits.
  • The SG’s position also provides strong support for arguing that, even in the Second Circuit, state law should honor an initial, lawfully issued interest rate.As the SG brief noted, it is very possible Midland could win on remand under that theory.If it does (and that ruling is sustained on appeal), the impact of the Madden preemption ruling will be substantially ameliorated going forward.
  • Finally, should another similar case arise in the Second Circuit, the SG’s brief will be strong material to support asking that Court to reconsider its Madden decision.