After eight years of litigation—and a major ruling from the U.S. Court of Appeals for the Second Circuit that has spawned uncertainty and a chilling effect for lenders—the parties in Madden v. Midland Funding have reached a deal that would bring the case to a close.

The settlement agreement would require Midland to pay $555,000 in monetary relief to class members, provide $9.2 million in credit balance reductions, and agree to comply with all applicable laws, regulations and case law regarding the imposition and collection of interest, including usury limits.

What happened

In 2005, New York resident Saliha Madden opened a credit card account with a national bank. One year later, the credit card program was consolidated into another national bank; in 2008, that bank sold Madden’s $5,000 obligation to Midland Funding, LLC, a debt purchaser. Midland’s affiliate, Midland Credit Management, handled collection efforts and sent Madden a letter in November 2010 seeking to collect payment on the debt and stating that an interest rate of 27 percent per year applied.

Madden filed a putative class action suit against Midland and its affiliate, alleging they had engaged in abusive and unfair debt collection practices in violation of the Fair Debt Collection Practices Act (FDCPA) and charged a usurious rate of interest in violation of New York’s General Business Law (GBL), which prohibits annual percentage rates (APR) in excess of 25 percent.

The defendants responded with a motion for summary judgment, arguing that because the defendants were assignees of a national bank, the plaintiff’s claims were pre-empted by the National Bank Act (NBA), which permits a bank to charge interest at rates allowed by the state where it is located. The NBA also provides the exclusive cause of action for usury claims against national banks. Because Delaware—where the national bank was incorporated—permits banks to charge interest above 25 percent, the defendants argued the rate was legal and non-usurious.

A district court judge denied the defendants’ motion for summary judgment, finding genuine issues of material fact as to whether Madden had received the applicable terms of her cardholder agreement. If the defendants could prove she had received them, the judge determined that Madden’s claims would fail because the NBA would pre-empt any state law usury claims. To appeal the ruling, the parties agreed to stipulate that Madden had received the documents.

In an unexpected ruling, the Second Circuit then reversed.

“Because neither defendant is a national bank nor a subsidiary or agent of a national bank, or is otherwise acting on behalf of a national bank, and because application of the state law on which Madden’s claim relies would not significantly interfere with any national bank’s ability to exercise its powers under the NBA, we reverse the District Court’s holding that the NBA pre[-]empts Madden’s claims,” the panel wrote.

Midland filed a petition for writ of certiorari to the U.S. Supreme Court, but the justices declined to take the case.

Congress then stepped in, introducing multiple bills to codify the “valid when made” doctrine and overturn the Second Circuit decision.

In the meantime, the Madden litigation continued. The district court in New York granted the plaintiff’s motion for class certification and denied the defendant’s motion for summary judgment on the FDCPA and New York’s statutory interest rate claims. Discovery identified a potential class of 58,000 members.

The parties then negotiated a settlement agreement, which they submitted to the district court for preliminary approval earlier this month.

Pursuant to the proposed settlement, Midland would provide three forms of relief to the class, defined as “all persons residing in New York who were sent a letter by Defendants attempting to collect interest in excess of 25 percent per annum regarding debts incurred for personal, family or household purposes, whose cardholder agreements: (i) purport to be governed by the law of a state that, like Delaware’s, provides for no usury cap; or (ii) select no law other than New York.”

Two subclasses were also included in the definition. The FDCPA Subclass (class members with claims arising out of FDCPA violations from November 10, 2010, through February 27, 2017) would be entitled to a portion of monetary relief totaling $297,233. The second subclass—members with GBL claims who are not in the FDCPA subclass—have the option of filing a claim for a total of $118,392 in monetary relief, capped at $50 per person.

Class members in either subclass who paid the defendants interest in excess of 25 percent may also receive a pro rata share of $139,375, capped at $320 per person.

The second form of relief involved balance adjustment, with a credit pool of $9.25 million, and the final relief came in the form of the defendant’s agreement to “comply with all laws, regulations and case law regarding the collection of interest, including those related to the application and or attempted collection of usurious interest, on class member accounts, and all accounts of New York residents more generally.”

Class members who choose cash relief are estimated to receive approximately $58 to $116 each, with balance adjustments likely between $1,920 and $5,250. The defendants also agreed to pay the four named plaintiffs (Madden was substituted as named plaintiff in 2017) $5,000 each, along with $550,000 in class counsel fees and costs.

Urging the federal court to grant preliminary approval of the deal, the plaintiffs called it “an excellent result for the class” evaluated against the risks of establishing liability and damages and maintaining the class action through a trial.

To read the proposed settlement agreement in In Re Midland Funding, LLC, Interest Rate Litigation, click here.

Why it matters

The Second Circuit decision in Madden made waves in the financial services industry that are still being felt today. If the court approves the settlement agreement between the parties, the uncertainty created by the federal appellate panel’s opinion will remain unresolved—unless one of the proposed Madden fix bills manages to pass. Madden fix bills seem unlikely to gain momentum in the current Congress. However, many lenders and investors have made peace with the Madden decision and do not believe it stands for the proposition that loans that are sold to a third-party investor are no longer enforceable. In fact, no loan has ever been deemed uncollectable because of the Madden decision.

Several jurisdictions have tried to expand Madden, most notably Colorado in its “true lender” actions against Avant and Marlette Funding. However, many realize that doing so might limit the choices and thereby the cost of credit for their constituents.