Consumer Finance Insights
June 15, 2015

Second Circuit Declines To Allow National Bank Preemption by Assignee of National Bank

A national bank can charge an interest rate that exceeds state law maximums, but the bank’s assignee cannot, the U.S. Court of Appeals for the Second Circuit ruled recently, in a decision that could impact the ability of debt purchasers and others to rely on an originating bank’s federal preemption.

The ruling, in Madden v. Midland Funding, LLC, held that preemption under the National Bank Act (NBA) did not apply to the assignee of credit card debt from a national bank.  The bank had issued a credit card to the plaintiff, who owed about $5,000 on her account.  After the bank charged-off the account, it sold the debt to a debt purchaser, which (via an affiliated servicer) sent a letter to the plaintiff seeking to collect on the debt and stating that a 27% annual interest rate applied.

Seeking to represent a putative class, the plaintiff alleged that the 27% interest rate violated New York law.  The federal district court held that NBA preemption applied to the assignee of a national bank.  The NBA preempts state-law usury claims by allowing national banks to charge any interest rate allowed by their home state and by providing the exclusive cause of action for usury claims against state banks.  As such, there is “no such thing as a state‐law claim of usury against a national bank,” the Second Circuit noted, quoting the Supreme Court.

But although state-law usury claims against national banks are preempted, the Second Circuit reversed the district court’s ruling that NBA preemption applied to the bank’s assignee.  The court held that the assignee “did not act on behalf of” a national bank “in attempting to collect on [the plaintiff’s] debt.”  The court reasoned that applying a state law interest rate limitation to the assignee of a national bank “would not significantly interfere with any national bank’s ability to exercise its powers under the NBA.”

The defendants indicated in a court filing that they intend to petition for rehearing by the panel and the en banc Second Circuit on or by June 19.

If the decision stands, it makes assignees of national banks—of credit card debt or other assets—potentially more susceptible to state-law claims that would be preempted if brought against the national banks themselves.

The Second Circuit also vacated the district court’s decision denying class certification.  The district court had declined to certify a class partly because of individualized questions about whether the assignee was entitled to NBA preemption, but the Second Circuit’s ruling eliminated that basis for denying class certification.

Finally, the Second Circuit also left open a choice-of-law question for the district court on remand.  The assignee argued that the applicable state law is that of Delaware, not New York, and that the interest rate does not violate Delaware law.  If upheld, the Madden decision could affect banks’ ability to sell charged-off debt.