On Monday, the United States Supreme Court decided not to review whether National Bank Act preemption, which provides national banks with a safe harbor from state usury laws, extends to third-parties that purchase and collect debt originated by national banks. The decision to deny certiorari in Midland Funding, LLC v. Madden, No. 15-610 (U.S. Nov. 10, 2015) (“Madden”), leaves intact a May 2015 decision of the Court of Appeals for the Second Circuit. The Second Circuit had ruled that National Bank Act preemption only applies to purchasers of national-bank-originated debt where the purchaser is a subsidiary or agent of, or is otherwise acting on behalf of, a national bank. (The K&L Gates alert regarding the Second Circuit decision can be found here.)
In Madden, the petitioner asked the Supreme Court to review “[w]hether the National Bank Act, which preempts state usury laws regulating the interest a national bank may charge on a loan, continues to have preemptive effect after the national bank has sold or otherwise assigned the loan to another entity.” The petitioner urged the Supreme Court to consider the case because of the potential impact the Second Circuit’s decision could have on the secondary market for debt, including deterring entities that are not covered by preemption under the decision from purchasing debt originated by national banks that otherwise may raise usury concerns. Additionally, the petitioner argued that the Second Circuit’s decision conflicted with that of the Eighth Circuit in Krispin v. May Department Stores Co., 218 F.3d 919 (8th Cir. 2000), and also could not be reconciled with the Fifth Circuit’s decision in FDIC v. Lattimore Land Corp., 656 F.2d 139 (5th Cir. Unit B Sept. 1981). At the Supreme Court’s invitation, the U.S. Solicitor General filed an amicus brief in which he (1) agreed that the decision could have a negative effect on the secondary debt market, but (2) disagreed that certiorari should be granted because, in his opinion, there was no true conflict with the earlier decisions.
Following the Supreme Court’s denial of certiorari, debt purchasers likely will need to give continued consideration to the impact of the Second Circuit’s 2015 decision in Madden, especially in the context of debt obtained by borrowers who reside in the Second Circuit or secured by property located in the Second Circuit.