1 June 2015
Practice Group(s):
Consumer Financial
Services
Second Circuit Holds that National Bank Act
Preemption Does Not Apply to an Independent,
Third-Party Debt Collector that Purchased Debt from
a National Bank
U.S. Consumer Financial Services Alert
By Steven Kaplan, R. Bruce Allensworth, Andrew C. Glass, David Beam, and Roger L. Smerage
The Second Circuit recently issued a National Bank Act preemption decision with significant
implications for purchasers of loans and other debt from national banks. See Madden v.
Midland Funding, LLC, --- F.3d ---, 2015 WL 2435657 (2d Cir. May 22, 2015). The court held
that a debt collector, which had bought a national bank’s charged-off accounts, could not rely
on federal National Bank Act (“NBA”) preemption to avoid liability under state usury laws
because the debt collector was not a national bank, a subsidiary or agent of a national bank,
or “otherwise acting on behalf of a national bank.” Id. at *1. The court concluded that
application of state usury laws to such a debt collector “would not significantly interfere with
any national bank’s ability to exercise its powers under the NBA.” Id. at *1, 4-5.
Federal law permits a national bank to “take, receive, reserve, and charge” interest at the
rate allowed by the state where the bank is located. See 12 U.S.C. § 85. “It also provides
the exclusive cause of action for usury claims against national banks, and therefore
completely preempts analogous state-law usury claims.” Madden, 2015 WL 2435657, at *3
(quoting Beneficial Nat’l Bank v. Anderson, 539 U.S. 1, 11 (2003), and Sullivan v. Am.
Airlines, Inc., 424 F.3d 267, 275 (2d Cir. 2005)) (internal alternations and quotations
omitted); see also Pacific Capital Bank, N.A. v. Connecticut, 542 F.3d 341, 352 (2d Cir.
2008) (“[A] state in which a national bank makes a loan may not permissibly require the bank
to charge an interest rate lower than that allowed by its home state.”).
The plaintiff, a New York resident, opened a credit card account with a national bank.
Subsequently, the purchaser national bank amended the credit card agreement to permit the
bank to charge an interest rate that, while permissible under the law of the bank’s home state
of Delaware, exceeded the limit set by New York law. After the plaintiff defaulted, the
purchaser national bank charged off plaintiff’s $5,000 remaining balance as bad debt and
sold the account to the defendant Midland Funding, LLC (“Midland”), which is not a national
bank. Midland subsequently sent a letter to the plaintiff seeking to collect on her debt and
applying an interest rate that allegedly ran afoul of New York usury law.
The plaintiff filed a putative class action alleging that Midland had violated the federal Fair
Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq. (“FDCPA”) and New York law by
charging a usurious interest rate. Midland responded that the NBA preempted the plaintiff’s
claim because a national bank had originated the debt. Agreeing with Midland, the district
court entered a stipulated judgment in favor of Midland and denied the plaintiff’s request to
certify a class.
Second Circuit Holds that National Bank Act Preemption Does Not Apply to an
Independent, Third-Party Debt Collector that Purchased Debt from a National Bank
On appeal, the Second Circuit reversed. The court recognized that the Supreme Court and
lower courts had held that NBA preemption may extend to operating subsidiaries and agents
of national banks when the non-national bank entities effectively exercise the powers of the
national bank.1 The court ruled, however, that such authority did not extend to Midland. The
record evidence reflected that when attempting to collect the subject debt, Midland, as a
third-party debt buyer, was acting solely on its own behalf and not as a subsidiary or agent of
the originating national bank. Moreover, the court concluded that applying state usury laws
to debt buyers, which had no relationship to a national bank other than having purchased
debt from such a bank, would not “significantly interfere with a national bank’s ability to
exercise its powers under the NBA.”
Thus, although NBA preemption applies to claims against certain entities arising out of
alleged violations of state usury laws, Midland was not entitled to rely upon such preemption
simply because it had purchased debt that a national bank had originated. The Second
Circuit reasoned that applying NBA preemption to encompass Midland under the
circumstances presented “would create an end-run around usury laws for non-national bank
entities that are not acting on behalf of a national bank.” Because Midland could not avoid
liability by means of NBA preemption for the FDCPA or state usury law claims, the Second
Circuit vacated the judgment for Midland.
The Second Circuit distinguished Krispin v. May Department Stores, 218 F.3d 919 (8th Cir.
2000), and Phipps v. FDIC, 417 F.3d 1006 (8th Cir. 2005), two cases on which the district
court and Midland had relied. The Second Circuit noted that in Krispin, while the defendant
department store had purchased the national bank’s receivables, the bank had retained
ownership of the accounts and thus remained the real party in interest. Madden, 2015 WL
2435657, at *6 (citing Krispin, 218 F.3d at 924). Thus, it appears that purchasers of
receivables or participation interests in account or loans would not be covered by the court’s
decision in Madden. In Phipps, the plaintiff challenged the interest charged by the national
bank and thus the involvement of the third-party non-national bank entity was not pertinent to
the decision. Madden, 2015 WL 2435657, at *6 (citing Phipps, 417 F.3d at 1013).
In addition, the Second Circuit vacated the district court’s denial of class certification as
being “entwined” with the district court’s decision regarding preemption. The district court
had ruled that it would have to conduct a case-by-case review of each putative class
member’s claim to determine whether the debt was validly assigned to Midland and thus
preempted by the NBA, and denied class certification, in part, on that ruling. It appears,
however, that other bases for the district court’s denial remain viable, including the
individualized questions of whether an account holder had expressly or implicitly agreed to
the choice of law provision in the account agreement and whether the applicable law permits
the holder of the debt to charge the subject interest rate. In its opinion, the Second Circuit
did not reach the question of whether the Delaware choice-of-law provision in the plaintiff’s
account agreement might preclude her claims.
The Second Circuit remanded the matter for further proceedings consistent with its opinion.
In conclusion, entities that purchase debt or other financial assets—whether performing or
non-performing—on the secondary market should take care to ensure they are properly
1
The Dodd-Frank Act overturned this aspect of the holdings in these decisions. See 12 U.S.C. § 24b(h)(2) (“No
provision of [the NBA] shall be construed as preempting, annulling, or affecting the applicability of State law to any
subsidiary, affiliate, or agent of a national bank[.]” Because the Second Circuit distinguished these decisions,
however, the impact of the Dodd-Frank Act in this manner was not relevant to the outcome of the case.
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Second Circuit Holds that National Bank Act Preemption Does Not Apply to an
Independent, Third-Party Debt Collector that Purchased Debt from a National Bank
factoring in whether they can continue to enforce the validly originated interest rate and the
risk of liability when valuing a prospective asset, including evaluating whether or not NBA or
other source preemption may exist as a defense to various types of claims. Moreover, given
the important federal question involved, the decision may be a candidate for a petition for
rehearing en banc by the Second Circuit or for a writ of certiorari to the U.S. Supreme Court.
Authors:
Steven M. Kaplan
steven.kaplan@klgates.com
+1.202.778.9204
R. Bruce Allensworth
bruce.allensworth@klgates.com
+1.617.261.3119
Andrew C. Glass
andrew.glass@klgates.com
+1.617.261.3107
David L. Beam
david.beam@klgates.com
+1.202.778.9026
Roger L. Smerage
roger.smerage@klgates.com
+1.617.951.9070
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