Securitization Trust Defeats Efforts to Apply Madden

Troutman Pepper
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Troutman Pepper

In the first case decided on the issue of whether Madden v. Midland Funding, LLC is applicable to a credit card securitization, the United States District Court for the Western District of New York, on September 21, 2020, decided that Madden was inapplicable. The plaintiff’s claims of credit card charges in excess of New York’s usury cap were preempted by the National Bank Act (the “NBA”). The Court in Peterson v. Chase Funding determined the NBA expressly preempted the plaintiff’s state-law usury claims because the national bank retained a substantial interest in the accounts at issue, relying on the holding in Krispin v. May Department Stores. The court also concluded that even if the claims had not been expressly preempted by the NBA, the claims would be implicitly preempted pursuant to the so-called “Madden fix” issued by the Office of the Comptroller of the Currency (the “OCC”) on June 2, 2020 that provided that “[i]nterest on a loan that is permissible under 12 U.S.C. 85 shall not be affected by the sale, assignment, or other transfer of the loan.”

Courts have typically found that the NBA preempts state-law usury claims based upon the “valid when made” doctrine. In Krispin, a case cited favorably by the Madden court, the Eighth Circuit Court of Appeals held that a state law limiting delinquency fees was unenforceable against a non-national-bank entity that had purchased credit card receivables from a national bank. In contrast, in Madden, the Second Circuit Court of Appeals held that the NBA did not preempt enforcement of New York’s usury laws against two non-national-bank entities. The Second Circuit distinguished the facts of its case from Krispin, reasoning that in Krispin, the “national bank retained ownership of the accounts,” whereas in Madden, neither of the national banks “retained an interest in [the] account.” 

The Peterson court distinguished the facts at issue from Madden, concluding that the national bank retained a number of rights, including the right to increase or decrease periodic interest charges on the credit card accounts it continued to hold. In a typical securitization involving credit cards, the originator bank sells the receivables generated by the credit card account to a trust that issues beneficial interests to investors but retains the accounts and continues to service them. This was a similar fact pattern found in the Krispin case. Importantly, however, the court concluded that while the defendants would prevail on that fact alone, it went on to state that the defendants would prevail based upon the OCC’s Final Rule, which established that enforcing state usury laws would “significantly interfere” with the national bank’s exercise of its NBA powers.

This is the first decision by a federal court defeating consumer claims that the Madden case should apply to credit card securitization transactions. Two other cases involving the same claim were filed against two other banks. These cases are still pending but this case will certainly be cited for support in their bid to defeat the plaintiffs’ claims.

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