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Financial Services & Products / Financial Services Litigation ADVISORY n
SEPTEMBER 2, 2015
Second Circuit’s Madden v. Midland Decision Could Upend
Secondary Credit Markets
The Second Circuit Court of Appeals’ May 22, 2015, decision in Madden v. Midland Funding, LLC held that a
nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under
the National Bank Act (NBA) from state law usury claims. (Madden v. Midland Funding, LLC, No. 14-2131-cv,
2015 WL 2435657, at *1, *8 (2d Cir. May 22, 2015.)) The Second Circuit and the Southern District of New York
both appear to have not considered the “Valid-When-Made Doctrine” – a longstanding principle of usury law
that if a loan is not usurious when made, then it does not become usurious when assigned to another party.
The Madden holding could signicantly disrupt secondary markets for consumer and commercial credit,
impacting a broad cross section of nancial services providers and other businesses that rely on the
availability and post-sale validity of loans originated by national or state-chartered depository institutions.
However, until the case on remand and the potential appeal play themselves out, the marketplace must deal
with the uncertainties of the Second Circuit opinion and decide what actions to take, or not take, depending
upon their business models. During this period of uncertainty (which could last up to a year), marketplace
participants must also address what, if anything, to do about existing loans made in the Second Circuit
(Connecticut, New York and Vermont) that are directly impacted by the holding.
The Court’s Holding
In Madden, the Second Circuit addressed the rights of purchasers or assignees of loans to collect interest as
set forth in the original note or credit agreement. Under the facts of the case, the credit was originated by
a national bank, the card agreement specied Delaware law and the debt was later assigned to a nonbank
debt buyer (Marine Midland).
There was no question that the interest rate contracted for by the national bank was lawful, even though
it exceeded the 16 percent usury rate cap of the consumer-debtor’s home state of New York, because the
origination of the loan was a national bank with preemption over New York’s usury ceiling. The Second Circuit
acknowledged that Section 85 of the NBA permits national banks to charge interest at any rate permitted
