Madden v. Midland Update: District Court Denies Summary Judgment and Certifies Class

Supreme Court & Appellate Alert
March.01.2017

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.

We will continue to monitor developments in the case.

Authors

Robert Loeb Partner, Supreme Court & Appellate, Bankruptcy Litigation

Washington, D.C.

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D:+1 202 339 8475
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Finance Sector
Supreme Court & Appellate
Bankruptcy Litigation
Complex Litigation & Dispute Resolution
Energy
Litigation & IP
White Collar, Investigations, Securities Litigation & Compliance

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Robert Loeb Partner

Washington, D.C.

The breadth and depth of Bob's appellate experience, and his consistent track record of success in high-stakes matters, are why clients, including top tech and energy companies, trust him with their most important cases.

The National Law Journal’s Litigator of the Week column recently recognized Bob’s appellate major wins in energy and product liability cases for Broadreach Power and Johnson & Johnson. Bob’s recent victories also include Fifth Circuit wins for energy clients Cheniere and Eni. In the Cheniere-Midship case, Bob obtained an emergency stay from the court of appeals of the regulating agency proceedings and, then after oral argument, achieved a full victory. And for Eni, Bob convinced the Fifth Circuit to vacate a $300M judgment against Eni in a dispute with another energy company. These types of big wins in the most challenging cases show why both Chambers and Legal 500 rank Bob among the Country’s top appellate advocates.

Bob has argued before the Supreme Court multiple times (including a 9-0 victory regarding application of the Fourth Amendment to rental cars), and has filed hundreds of briefs in the Supreme Court. He has also handled cases in highest state courts in California, New York, Maine, Kentucky and New Jersey.

Before joining Orrick, Bob served as one of the leaders of an elite appellate group at the Department of Justice. There, in addition to major national security, commercial, and administrative law, Bob supervised bankruptcy appeals. At Orrick, Bob has continued to handle big ticket bankruptcy matters, such as a billion-dollar dispute over whether DHL’s claim was discharged by United’s bankruptcy, appeals from the City of Stockton bankruptcy confirmation, and a Ninth Circuit matter involving the interplay of the Takings Clause and bankruptcy law.

Bob’s recent work includes matters for Johnson & Johnson, Avon, Microsoft, Eni, Cheniere Energy, Freeport LNG, Broadreach Power, LS Power, Exxon, Medidata, Renco, MSC Cruise Line, Golden 1 Credit Union, Credit Suisse, TravelCenters of America, Gannett, and the City of Stockton.

Christopher J. Cariello Partner, Supreme Court & Appellate, Litigation & IP

New York

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Supreme Court & Appellate
Litigation & IP

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Christopher J. Cariello Partner

New York

Chris has represented major ISPs in high-stakes copyright litigation, tech titans pushing the cutting edge, national retailers with key trademarks on the line, and global manufacturers facing class action risk. He has authored dozens of appellate briefs, winning results in federal and state courts of appeals and the U.S. Supreme Court. And he is a consummate team player when partnering with trial teams to craft winning legal strategies and themes, brief dispositive motions, win key legal and evidentiary rulings at trial, and construct a record with an eye towards appeal.

Chris is most passionate about the novel issues that arise at the intersection of tech and commerce, implicating the balance between creation, innovation, and competition. Whether it's the DMCA and copyright's intermediary liability doctrines, generative AI, data scraping, or trade secrets, he relishes litigating in the gray areas, presenting what the law ought to be as plain common sense. Chris also has a wealth of experience in class action defense in both trial and appellate courts, including several appellate victories defending the denial of class certification. And his broader experience includes bankruptcy, telecommunications, constitutional law, and various issues confronting Fintech companies.

Chris maintains an active pro bono practice. He led a team that prevailed in both federal district court and in the Second Circuit in one of the nation's most closely watched police transparency cases. The year before, he argued and won a precedent-setting parole appeal in New York’s Appellate Division on behalf of a former juvenile offender. And he has won victories for clients in immigration cases and cases presenting novel legal issues under freedom of information laws.

Prior to joining Orrick, Chris was a law clerk to Judge Robert D. Sack of the U.S. Court of Appeals for the Second Circuit and Chief Judge Carol B. Amon of the U.S. District Court for the Eastern District of New York.

Ned Hirschfeld Senior Associate, Supreme Court & Appellate

New York

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Supreme Court & Appellate

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Ned Hirschfeld Senior Associate

New York

Ned focuses on appellate litigation. He has authored successful merits briefs and petitions for certiorari in the U.S. Supreme Court, as well as dozens of briefs in federal and state appellate courts. Ned's work has covered a wide range of subject areas, including patent, constitutional law, and complex commercial litigation. He has also counseled Fintech clients on novel issues confronting the industry.

Ned maintains an active pro bono practice focused on immigration and criminal justice matters, including a successful appeal in the Second Circuit that vacated an arbitrary change to the meaning of "moral turpitude" under the Immigration and Nationality Act.

Prior to joining Orrick, Ned served as a law clerk to Judge Robert Sack of the U.S. Court of Appeals for the Second Circuit and Judge Kimba Wood of the U.S. District Court for the Southern District of New York. During law school, he served as an Articles Editor for the Yale Law Journal.