Securitization trust frustrates efforts to enforce Madden | Man’s pepper with trout

In the first case ruled on 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 ruled on September 21, 2020 that Madden was inapplicable. The plaintiff’s claims for credit card charges in excess of the New York usury limit were preempted by the National Bank Act (the “NBA”). The Court in Peterson v. Chase Funding determined that the NBA expressly preempted the claimant’s state usury claims because the National Bank retained a substantial interest in the accounts at issue, relying on the holding of Krispin v. Department Stores May. The court also found that even if the claims were not expressly pre-empted by the NBA, the claims would be implicitly pre-empted pursuant to the so-called “mad correction” issued by the Office of the Comptroller of the Currency (the “OCC “). on June 2, 2020 which provided that “[i]Interest on a loan authorized under Section 12 USC 85 will not be affected by the sale, assignment or other transfer of the loan.

Courts have generally found that the NBA preempts usury claims in state law on the basis of the “valid once made” doctrine. In Krispin, a case cited favorably by the Madden court, the Eighth Circuit Court of Appeals ruled that a state law limiting delinquency fees was unenforceable against a non-national banking entity that had purchased credit card receivables from a national bank . On the other hand, in Madden, the Second Circuit Court of Appeals ruled that the NBA had not prevented the application of New York’s usury laws against two non-national banking entities. The second circuit distinguished the facts of its cause of Krispin, reasoning that in Krispin, the “national bank retained ownership of the accounts”, while in Madden, none of the national banks “retained an interest in [the] Account.”

the Peterson court distinguished the facts in question from Madden, finding that the national bank retained a number of rights, including the right to increase or decrease periodic interest charges on credit card accounts that it continued to hold. In a typical securitization involving credit cards, the issuing bank sells the receivables generated by the credit card account to a trust that issues beneficial interest to investors but keeps the accounts and continues to manage them. This was a similar fact pattern found in the Krispin Case. Importantly, however, the court concluded that even though the defendants would prevail over that fact alone, it went on to state that the defendants would prevail on the basis of the OCC Final Rule, which established that the application of laws on State usury would “significantly interfere” with national law in the exercise by the bank of its NBA powers.

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

Alice P. Darby