United States: Madden v. Midland Update: District Court Denies Summary Judgment And Certifies Class

After the U.S. Supreme Court refused to grant review of the Second Circuit's May 2015 decision in Madden v. Midland concerning federal preemption of state usury rates for loans issued by a national bank (discussed here, here and here), the case was remanded back to the district court in the Southern District of New York. The district court judge has now denied Midland's renewed motion for summary judgment and certified a class action. The most significant aspect of the decision is the court's refusal to enforce a choice-of-law clause in the plaintiff's loan agreement that purported to select Delaware law, under which there is no usury cap. In rejecting that clause and holding that New York law applies, the district court paved the way for potential damages and injunctive relief against the debt collector defendant.

Plaintiff in the case, Saliha Madden, initially opened a credit card with Bank of America. After she defaulted, defendant Midland Funding purchased the debt and sought to collect at an annualized interest rate of approximately 32%, the contractually established rate in the event of Madden's default. Madden brought a putative class action, predicating her claims on the basic contention that Midland's attempt to collect at the 32% interest rate violated New York's civil and criminal usury cap. The district court found those claims preempted under the National Bank Act, but the Second Circuit reversed and remanded. After the Supreme Court denied its petition for certiorari, Midland renewed its motion for summary judgment in the district court. It argued that Delaware law—not New York law—applied and that Delaware law imposes no usury cap. It also argued that even under New York law, the applicable usury caps do not apply to defaulted debt.

The district court disagreed on both counts. As to the Delaware choice-of-law clause, the court acknowledged the general "policy of the courts of [New York] to enforce such clauses" unless the parties bear no "reasonable relationship" to the state selected, or the law chosen "violate[s] a fundamental policy of New York." And the court further recognized that if the record were to demonstrate that the bank that administered Madden's loan prior to default resided in Delaware, that could be sufficient to show a reasonable relationship with that state. But the court found that enforcing the clause—and thus applying state law with no usury cap—would offend New York's "fundamental" and "strong" public policy against the charging of interest rates above 25%.

As to whether New York's usury cap applies to defaulted debt, the district court acknowledged conflicting authorities on the question. After a lengthy analysis of both state and federal court cases discussing the question, it found that New York's civil usury cap of 16% did not apply, but that the criminal cap of 25% did apply. And it found that Madden could state a claim based on Midland's attempt to recover at a rate above that usury cap under the Federal Debt Collection Practices Act and New York's General Business Law. 

The court then proceeded to certify classes for both injunctive and monetary relief consisting generally of New York citizens similarly situated to Madden. Midland may attempt to appeal this decision immediately pursuant to Federal Rule of Civil Procedure 23(f), which gives courts of appeals discretion to immediately review class certification decisions.

Two aspects of the district court's decision are particularly noteworthy:

  • The district court's decision not to enforce the Delaware choice-of-law clause frustrates, in the context of this case, a common method lenders utilize to select loan terms or avoid state laws that would undermine loan terms. Moreover, by ruling on the ground that the contractually established usury rate in this case implicates fundamental public policy concerns in New York, the district court's reasoning would appear to undermine a choice-of-law clause even where one of the parties to the suit resides in Delaware.
  • The district court's lengthy discussion of state law illustrates the potential thicket defendants face after the Second Circuit's Madden decision. 

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