Borrower Wins Key Victory in Madden v. Midland

by Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

A federal judge has ruled that New York law—not Delaware law as the parties agreed in the initial loan agreement—applies to the defaulted borrower's claims and has certified a class action against the debt collector.

On February 27, U.S. District Judge Cathy Seibel issued a long-awaited decision in Madden v Midland Funding, LLC. The District Court's order considered the following questions: (1) which state's law should apply to the defaulted borrower's claims, and (2) whether to certify a class action against the debt collector on behalf of similarly situated borrowers.

After a brief history of the case, we summarize both holdings and discuss their implications for marketplace lending. In short, Judge Seibel's decision compounds uncertainty surrounding debt collection practices and could have far-reaching implications for related industries, including marketplace lending.

Procedural History

In 2005, Saliha Madden, a New York resident, opened a credit card account with Bank of America. The account cardholder agreement ultimately included a Delaware choice-of-law clause, whereby both parties stipulated that Delaware law would govern the agreement. Madden defaulted on the loan and her account was later sold to debt purchaser Midland Funding, LLC. Midland's affiliate attempted to collect the debt with a default interest rate of 27%.

In 2011, Madden sued Midland and the affiliate, claiming abusive and unfair debt collection practices under federal law and excessive interest under New York law, which provides that rates exceeding 25% per year are criminally usurious. The District Court found that the National Bank Act (NBA) preempted state usury law, thereby defeating both claims. The Second Circuit reversed in a ruling that has been roundly criticized, concluding that preemption applies only where application of state law would hinder a national bank's exercise of its powers under the NBA. While Bank of America is a national bank, neither Midland nor its affiliate is. The current eight-member U.S. Supreme Court declined to hear a further appeal and the case was remanded to the District Court for additional proceedings that resulted in the February 27 decision.

Choice of Law

Although the cardholder agreement chose Delaware law to govern the contractual relationship between the parties, the District Court determined that New York law should be applied. Midland argued for Delaware law, which has no interest rate cap, while Madden argued for New York law, which does. The Court found there was no reasonable relationship between the parties or the transaction with the State of Delaware. Moreover, the Court noted that New York's usury prohibition "constitutes a fundamental public policy" against excessive interest rates. Application of Delaware law would frustrate that policy.

Class Certification

The District Court also granted Madden's motion to certify a class action on behalf of as many as 50,000 similarly situated borrowers. The class includes New York residents from whom Midland has attempted to collect interest exceeding 25% since November 2008, and whose cardholder agreements purported to be governed by state laws (such as Delaware's) that have no usury cap.

Industry Implications

The District Court's decision could prevent enforcement of choice-of-law provisions in credit agreements against New York borrowers unless the counterparty is a national bank. This could be especially consequential for agreements that provide for payment of interest exceeding 25%, which is common among consumer loans and credit cards.

Moreover, the decision creates added uncertainty among lenders and debt purchasers who operate in the Second Circuit (New York, Vermont and Connecticut). Before Madden, it was widely understood that loans that are "valid when made" are not made invalid when assigned or sold to another party. The District Court's decision undermines this principle, rendering a valid-when-made loan potentially unenforceable to the extent it contravenes the law of the borrower's home state.

Choice of law was an alternative to the preemption argument raised in the appeal, since even if federal bank preemption does not run to non-banks as the Second Circuit held, (1) Delaware recognizes the "valid when made" doctrine, and (2) no usurious interest was charged if the loan agreement is governed by Delaware law. But as proceedings continue, it remains unclear whether the District Court will recognize the "valid when made" doctrine under New York law. Unless it does so, the Second Circuit's preemption finding, together with the District Court's choice of law finding, could prove fatal to Midland's position.

The reasoning employed in Madden could apply beyond the sale of delinquent loans to debt collectors including, perhaps, to any secondary sale of loans to non-national bank buyers. In particular, this decision could adversely impact marketplace lenders. Even if an originating bank could enforce the terms of high interest loan agreements, its third-party debt collectors may be unable to do so. This could cause banks to scale back their primary lending (particularly at higher interest rates), reducing the supply of loans available for purchase by marketplace lenders. Further, as enforceability of existing loans is made less certain, their value on the secondary market is diminished. Uncertainty also increases risk of loss, making investments through platforms that hold loans made to New York borrowers less attractive.

It should be noted that Madden has not yet been followed by any other court, nor has its reasoning been directly applied to marketplace lending. In fact, two other circuits have come to the opposite view. Nonetheless, we urge marketplace lenders and others to carefully consider the District Court's decision and to closely monitor the ongoing proceedings. The prospect of class action is especially concerning, as it could lead to additional litigation and larger recoveries. In the meantime, industry members should evaluate whether their lending activities could bring them within Madden's reach, especially in the Second Circuit states of Connecticut, New York and Vermont.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Manatt, Phelps & Phillips, LLP | Attorney Advertising

Written by:

Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.