Second Circuit Denies Rehearing in Third Party Debt Collector Preemption Case

Case: Madden v. Midland Funding, LLC, et al.

Issue: Whether a national bank’s sale of consumer debt to a third-party debt collector is governed by the federal preemption doctrine of the National Bank Act.

Case Summary: The Second Circuit denied Midland Funding LLC’s (Midland) petition for a rehearing en banc of its prior decision holding that the preemption doctrine of the National Bank Act (NBA) does not extend to a purchaser of charged-off debts from a national bank that claims the preemption of state usury laws.

Plaintiff Saliha Madden brought the class action alleging that Midland, which purchased charged-off credit card debt from Bank of America, violated the Fair Debt Collection Practices Act (FDCPA) by engaging in abusive and unfair collection practices in charging interest that was usurious under New York state law. The district court ruled that the NBA preempted plaintiffs’ state-law usury claims, but on appeal, the Second Circuit reversed. The panel for the Second Circuit ruled that because Midland is not a national bank or acting on behalf of a national bank, Midland cannot claim preemption of state usury laws under the NBA.

Midland filed a petition with the Second Circuit asking for a panel rehearing en banc. The ABA, California Bankers Association, and the Independent Community Bankers of America (collectively Amici) filed an amicus brief supporting Midland’s petition. Amici argued that the panel’s decision is misguided because it narrowly focused on the fact that Midland is not a national bank and overlooked “the exercise of a national bank’s powers” to make and sell loans under the NBA. As a result, amici argued the decision would have harmful ripple effects for national banks to sell loans in the secondary debt market.

On August 12, 2015, the Second Circuit denied Midland’s petition.

Bottom Line: The Second Circuit’s ruling does not apply where a non-bank entity is acting as an agent for the bank or where a state law interferes with the powers of a national bank.

About Thomas Pinder

Thomas Pinder
Thomas Pinder is senior vice president and senior counsel for litigation in the office of ABA's general counsel.
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