A New York Class Action Relying on the Second Circuit’s Madden Decision Is In Jeopardy After Magistrate Judge’s Recommendation
In 2019, two putative class actions were filed in New York by plaintiffs seeking to build off the Second Circuit’s decision in Madden v. Midland Funding, LLC, 786 F. 246 (2d Cir. 2015). The plaintiffs alleged that the defendants, who acquired securitized credit card receivables from national banks, violated New York law by charging interest amounts that were in excess of New York’s usury cap of 16%. One of these cases, Petersen v. Chase Chard Funding LLC, 19-cv-0741 (W.D.N.Y.) is now in jeopardy after a magistrate judge recommended that the plaintiff’s claims be dismissed in their entirety. A copy of the magistrate judge’s report and recommendation can be found here.
In Petersen, the defendants moved to dismiss the plaintiff’s claims on the basis that, among other things, his claims were preempted by the National Bank Act, 12 U.S.C. §24 (the “NBA”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C. §25b. The magistrate judge began his analysis by considering the Second Circuit’s Madden decision, which he found contained “language favorable to both sides in this case.” He noted that Madden declined to preempt the plaintiff’s claims because the non-bank defendants were not “acting on behalf of the bank,” but were acting on behalf of themselves, “as the owners of the debt.” The magistrate judge found this contention “undercuts” the defendants’ argument that Petersen’s claims were preempted.
However, he also noted Madden’s treatment of Krispin v. May Department Stores, 218 F.3d 919 (8th Cir. 2000), which concluded that the NBA would preempt state usury laws against a store that had only purchased a national bank’s credit card receivables, as opposed to the accounts themselves. Madden noted that the difference in Krispin was that the national bank “retained substantial interests in the credit card accounts so that the application of state law to those accounts would have conflicted with the bank’s powers authorized by the NBA.” The magistrate judge found that the decision in Madden contained language that supported both sides and ultimately, did not “unequivocally answer the question of whether Petersen’s usury claims are preempted.”
Ultimately, the magistrate judgment found that the preemption analysis “boils down to this: does the application of New York’s usury statutes to these defendants ‘prevent’ or ‘significantly interfere’ with Chase USA’s power to sell or assign the receivables generated by its credit card accounts?” The magistrate judge ultimately concluded it would and based his decision on Supreme Court and Second Circuit precedent determining what is necessary to constitute a “sale” and an “assignment” of the receivables. The magistrate judge relied upon precedent which held that in order for a sale to take place the seller’s property rights must transfer to the buyer. He reasoned that “[i]f Chase USA can receive interest exceeding state usury limits but defendants cannot, then Chase USA’s right of property in the receivables has not passed to them, and there has been no sale.” The magistrate judge held the same is true for an “assignment,” which allows an assignee to take “all of the rights of the assignor, no greater, no less.” The magistrate judge held that applying New York’s usury cap would prevent Chase USA’s ability to sell or assign the receivables and therefore, Petersen’s claims were preempted.
Petersen has until February 5, 2020 to file his objections to the magistrate judge’s report and recommendations. Notwithstanding, this is undoubtedly a good first step for a financial services industry that is looking to clarify and limit the Second Circuit’s decision in Madden.
Please contact Ryan DiClemente, Esq. for more information.