On September 10, the FDIC and the OCC jointly submitted an amicus brief to the U.S. District Court for the District of Colorado in support of the appellee debt buyer in In re Rent-Rite Super Kegs West Ltd. In their joint brief, the banking agencies urge the district court to uphold the bankruptcy court’s decision that the sale and assignment of a commercial loan by a Wisconsin bank transferred all of the bank’s rights to enforce that debt to the debt buyer, including the bank’s right to charge interest as authorized under the laws of its home state. The ability of a bank to transfer these rights is known as the “valid when made” doctrine. A key tenant of this doctrine is that a loan that is valid when it was made cannot be rendered invalid and unenforceable by transfer to a new owner. Although the doctrine is not mentioned in the relevant federal banking laws, the banking agencies contend that the doctrine was so “well-established and widely-accepted” in common law when those laws were enacted that its express inclusion in their terms should be imputed.1

In expressing their support for the valid when made doctrine, the agencies strongly rebuke the decision of the Second Circuit Court of Appeals in Madden v. Midland Funding, which they describe as “not just wrong; it is unfathomable.” According to the agencies, Madden inexplicably failed to consider either the valid when made doctrine or the “stand-in-the-shoes” rule of contract law in concluding that the defendant debt buyer Midland Funding had no right to assess new interest charges at rates that could have been charged by the bank that originated the subject credit card loan.2 In addition, the agencies harshly criticize the Madden court’s conclusion that prohibiting loan purchasers/assignees from enforcing interest rates on the loans they acquire does not have the de facto effect of prohibiting banks from assigning loans. In this regard, the brief bluntly asserts that “Madden is wrong because a state law that prohibits assignees from enforcing the transferred rates actually makes the banks’ rights to transfer those interest rates non-assignable in practice.” (Emphasis in original.)

Throughout the brief, the agencies stress the enormous economic importance of the valid when made doctrine. To this end, the agencies assert that the continued uncertainty regarding the doctrine caused by Madden has “serious implications for thousands of banks and financial institutions across the country, potentially affecting their ability to maintain their safety and soundness through loan sales and securitizations, which could have unintended consequences for consumers, credit markets, and the U.S. financial system.” In support of the foregoing, the agencies cite a 2018 U.S. Treasury report documenting the negative effects Madden has had on the U.S. economy.

In addition to discussing the valid when made doctrine, the brief includes related discussions of (i) the rights of federally regulated banks to “export” their home states’ interest rates by charging those rates to borrowers nationwide, first with respect to national banks under section 85 of the National Bank Act (NBA) and then with respect to state banks under section 27 of the Federal Deposit Insurance Act (FDI Act) and (ii) federal preemption of state usury laws.

The brief’s discussion of interest rate exportation is presented in support of the bankruptcy court’s finding that the contested loan was, indeed, lawful and not usurious when made. According to the agencies, there should be no doubt in this regard as “the Supreme Court of Colorado has itself concluded that under Section 1831d [i.e., section 27], Colorado law is inapplicable . . . where a loan is made by a state bank located outside Colorado.”3 Furthermore, looking beyond the case at hand, this portion of the brief strongly reaffirms the OCC and the FDIC’s complete accord that section 27 and section 85 should be mirror images of each other.4

The detailed discussion of federal preemption, in turn, both refutes Madden and rejects what the agencies view as the appellant’s misplaced reliance on the decision of the U.S. district court in Meade v. Avant of Colorado, LLC307 F. Supp. 3d 1134 (D. Colo. 2018). The brief explains that there are three distinct types of federal preemption: complete preemption, express preemption and conflict preemption. The first type applies when federal law addresses the subject matter of the legislation so pervasively that there is no room left for state legislation. To this end, the agencies explain that “complete preemption is not a ‘measure of the breadth of the preemption,’ but rather involves a situation in which federal law ‘substitutes a federal cause of action for the state cause of action.’”5 As the name implies, express preemption applies where the subject federal law explicitly preempts state law by its terms, which, as noted above, the agencies contend applies through imputation in the case of section 27 of the FDI Act and section 85 of the NBA, respectively. Finally, conflict preemption applies where state law presents a “clear conflict” with rights granted under federal law.

According to the agencies, Madden, in which the Second Circuit considered and rejected the applicability of conflict preemption was wrongly decided because the court’s analysis “blinks reality” by ignoring the fact that “if the interest rate is not enforceable upon assignment, there is nothing for the bank to assign.” Thus, the state law at issue in Madden should have been deemed preempted because it precludes banks from transferring their rates to assignees. In addition, the agencies view the preemption analysis applied in Meade as fatally flawed because the court failed to even consider either express or conflict preemption. Regarding the former, the agencies note that rights can be implicit in a statute, which they contend is true with respect to the federal right of banks to assign their interest rates. In sum, according the agencies, “nothing in Meade informs the Court’s analysis” of either express or complete preemption, as neither of those concepts were taken into account.

At the conclusion of their brief, the agencies ask the district court to affirm the bankruptcy court’s decision on the basis that affirmance would “preserve the banks’ longstanding ability to engage in loan sales, would reaffirm the traditional protections that such loan sales have received under the law, would ensure the proper functioning of the credit markets, and would promote safety and soundness in the banking sector by supporting loan sales and securitizations, which are used to manage capital and liquidity positions.”

Pepper Points

  • Notwithstanding the harsh criticism levied at Madden by the FDIC and the OCC, that case remains binding authority in the Second Circuit and may continue to influence courts located in other jurisdictions, including Colorado state courts.

  • The continued strong support within the federal banking agencies for the position that Madden was wrongly decided may help persuade Congress to override the effects of Madden through federal legislation. In this regard, it should be noted that prior attempts to enact such legislation have not progressed beyond the House of Representatives.

  • The facts of Meade are materially different from those of In re Rent-Rite in that the primary allegation in Meade is that the nonbank defendants, and not an insured bank, were the “true lenders” that engaged in making usurious loans to consumers. In this regard, the state district court of Colorado, Denver County, asserted in the related case Meade v. Funding, 2018 Colo. Dist. LEXIS 3856, *56-57, that “it is unnecessary to delve into the origins (old or new) of the ‘valid when made doctrine’ because the Administrator alleges that ‘both Defendants were engaged in a ruse, improperly hiding behind the interest rate exportation rights of [insured banks].’”

  • The strong, unified bank agency support for the valid when made doctrine is attributable to the fact that, as the agencies explain in their brief, all banks must be able to sell their loans. That is why the doctrine has major importance for the U.S. economy. The same cannot be said for relationships between banks and nonbank lenders that are the subject of true lender lawsuits, as only a mere handful of very small banks, most of which are Utah Industrial Banks and almost none of which are national banks, are parties to these relationships.

  • The banking agencies’ discussion of conflict preemption is helpful for purposes other than the valid when made doctrine. For example, some states have attempted to indirectly impede “bank sponsor” lending relationships between banks and nonbanks by requiring the nonbank party to become licensed as a lender under state law, even though the bank is the named lender. It may be possible to challenge these licensing requirement on the grounds of conflict preemption, as significantly interfering with a bank’s federal rights to export its interest rates and utilize the services of third-party agents.