The U.S. District Court for the Southern District of New York injected additional uncertainty into the debt buying and bank partnership markets with its remand decision in Madden v. Midland Funding. In Madden, the U.S. Court of Appeals for the Second Circuit – which includes Connecticut, New York, and Vermont – held that non-national bank entities that purchase loans originated by national banks cannot rely on the National Bank Act (“NBA”) to protect them from state-law usury claims. The Second Circuit’s decision in Madden undermined the “valid when made” theory on which assignees relied for many years and impeded the ability of national banks (and, by analogy, state-chartered banks) to sell the loan obligations they originate, thus reducing their ability to lend. One issue the Second Circuit did not decide is what state law should governing the underlying loan agreement – New York, the state where Madden lived, or Delaware, the state chosen as the governing law for the underlying agreement.
On remand, the trial court weighed the facts that connected New York and Delaware to the transaction. Generally, New York courts will enforce a choice-of-law clause so long as the chosen law bears a reasonable relationship to the parties or the transaction and the law chosen by the parties does not violate a fundamental public policy of New York. In addressing the reasonable relationship issue, courts have looked to the location of the following factors: the parties’ negotiation of the agreement; performance under the agreement, including where loan payments were received; the parties’ places of incorporation; the parties’ principal places of business; and the property that is the subject of the transaction. The fact that one of the parties’ principal place of business is in the selected forum is generally enough to satisfy the reasonable relationship test. The trial court here concluded that most of these factors do not support a finding that a reasonable relationship existed between the parties, the transaction, and the Delaware forum. However, the court did not decide the reasonable relationship issue. Rather, the court concluded that the application of Delaware law would violate a fundamental public policy of New York as expressed in its criminal usury statute, which makes it a criminal offense to impose interest that exceeds 25% per year. The court thus concluded that New York law governed the underlying agreement as well as Madden’s lawsuit.
Having established that New York law governs the dispute, the trial court determined that although Madden would use the violations of New York’s criminal usury law as a predicate for the Fair Debt Collection Practices Act and the UDAP claims, she could not sue Midland Funding directly for violating New York usury law. This result stems from case law and the statute itself that the criminal usury law does not provide a private right of action. Additionally, the court noted that although New York’s “civil usury cap” forbids charging interest on a “loan or forbearance” at a rate above 16% annually, case law makes clear that this civil usury cap does not apply to the kind of defaulted obligations at issue in Madden. The court thus granted Midland Funding’s motion for summary judgment on the usury claim. However, the court allowed the FDCPA and unfair and deceptive acts and practices (“UDAP”) claims to proceed, using the criminal usury violation as a predicate act. In other words, because Midland Funding was attempting to collect a debt it falsely claimed it was owed, Madden could look to the FDCPA and the UDAP for redress.
To that end, the court also granted Madden’s motion for class certification, The court certified two classes:
- A Rule 23(b)(2) injunctive and declaratory relief class comprising all persons residing in New York who were sent a letter by Defendants attempting to collect interest in excess of 25% 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. This class covers only claims arising out of UDAP violations from November 10, 2008 through February 27, 2017.
- A Rule 23(b)(3) damages class comprising all persons residing in New York who were sent a letter by Defendants attempting to collect interest in excess of 25% 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. This class comprises two subclasses: (a) for claims arising out of UDAP violations from November 10, 2008 through February 27, 2017; and (b) for claims arising out of FDCPA violations from November 10, 2010 through February 27, 2017.
The decision on remand in Madden provides some additional insight for bank partnership arrangements. The trial court noted that Midland Funding was unable to establish why Delaware law should apply. The court noted that if Midland Funding had been able to establish that the Bank that originated the debt with Madden has been headquartered and located in Delaware, that might be enough to establish a reasonable relationship to support the application of Delaware law. The court was able to leap over this analysis of whether the principal place of business of an intermediate creditor suffices to establish a reasonable relationship because of Midland Funding’s failure to produce evidence and because of the public policy represented in the 25% criminal usury cap. It is possible that a court considering an actual bank partnership case would have to confront whether the New York public policy represented in the 25% criminal usury cap trumps the clear federal policy of permitting national and state banks to export the interest rates permitted to it in their home states.