This week, the Solicitor General filed a brief recommending that the U.S. Supreme Court deny certiorari in Madden v. Midland Funding, LLC because of, among other things, the absence of a circuit split and the possibility that the appellants may still prevail in the underlying dispute after the case is remanded to federal district court. This submission, however, makes clear that the Solicitor General disagrees with the Second Circuit's controversial decision restricting non-bank loan purchasers from benefitting from state usury law preemption under the National Bank Act (the "NBA"). We previously addressed this case and the Supreme Court's call for the views of the Solicitor General here.
Flaws in the Second Circuit's Decision
The Solicitor General's brief observes that the Second Circuit's reasoning is flawed because, among other reasons, a national bank's right to charge interest under the NBA includes the power to assign to transferees the right to charge interest at the same rate even if that rate would otherwise violate state usury law. In the Solicitor General's view, this is the case regardless of whether the assignor retains an interest in the debt post-transfer. These views are consistent with criticisms by market participants and others concerning the Second Circuit's ruling and rationale.
Specifically, the Solicitor General acknowledges that a "national bank's power to charge the interest rate authorized by Section 85 includes the power to transfer a loan, including the agreed-upon interest-rate term, to an entity other than a national bank," and that precluding a non-bank debt purchaser from charging an interest rate available to the assignor national bank would impair a "national bank's federal right to charge interest up to the rate allowed under NBA." Brief for the United States as Amicus Curiae at 7-8, Midland Funding, LLC v. Madden, No. 15-610 (U.S. May 24, 2016). Citing the "valid-when-made" doctrine, the Solicitor General observes that "the power to originate loans at the maximum interest rate allowed by the national bank's home State . . . carries with it the power to use the loans . . . for their usual commercial purposes, which includes assignment of such loans to others." Id. Accordingly, the Solicitor General suggests that, even in the absence of a demonstrated diminution of the value of the loans on the secondary market, the NBA preempts state laws limiting the terms upon which a national bank may assign its loans. Id. at 13.
In addition, the Solicitor General describes the Second Circuit's suggestion that the assignor national bank must maintain some interest in the debt for the non-bank purchaser to benefit from NBA preemption as "misconceived." Id. at 12. In the Solicitor General's view, such a requirement would improperly prevent national banks from exercising their right under the NBA to originate loans carrying interest rates permissible in their home state. Id.
Implications for Secondary Market
The Solicitor General's recommendation that certiorari be denied is unwelcome. The brief, however, represents a compelling dissent to the Second Circuit's controversial decision and should be persuasive in further proceedings in this dispute and in other cases. Further, as the Solicitor General notes, even if certiorari is denied, the defendants may still prevail in the remanded proceedings before the district court, by arguing that a Delaware choice-of-law provision in Ms. Madden's cardholder agreement with the national bank card issuer permits assignees to charge interest as permitted under Delaware law.