The U.S. Court of Appeals for the Second Circuit recently reversed a district court’s ruling that federal National Bank Act preemption applicable to the loan originator allowed a non-bank consumer debt buyer to charge interest in excess of state usury limits.
In so ruling, the Second Circuit noted that, “[a]lthough it is possible that usury laws might decrease the amount a national bank could charge for its consumer debt in certain states (i.e., those with firm usury limits, like New York), such an effect would not ‘significantly interfere’ with the exercise of a national bank power.”
The Court did not address the “valid when made” doctrine. Based on its ruling, the Court revived the consumer’s claims under the federal Fair Debt Collection Practices Act and state usury law. The Court also vacated the district court’s denial of the consumer’s motion for class certification.
A copy of the opinion is available at: Link to Opinion
The plaintiff obtained a credit card from a national bank in 2005. The following year, the bank’s credit card program was transferred to another national bank, at which point the consumer received a document amending the terms and conditions of her credit card agreement, which included a Delaware choice-of-law provision.
The consumer’s debt of approximately $5,000 was “charged-off” in 2008 as uncollectable, and the transferee bank sold the debt to an unaffiliated non-bank company specializing in the purchase of consumer debts.
In November of 2010, the non-bank purchaser’s affiliate and servicer of its consumer debt accounts sent the plaintiff a demand letter seeking to collect the balance owed plus interest at 27% per annum.
In 2011, the plaintiff filed a putative class action against the non-bank debt purchaser and its non-bank servicer, alleging by charging more than the 25% interest per year permitted by New York law, the defendants engaged in abusive and unfair debt collection practices in violation of the federal Fair Debt Collection Practices Act (“FDCPA”), and violated New York usury law.
The plaintiff moved to certify the class and the defendants moved for summary judgment, both of which were denied by the district court on September 30, 2013. As to the defendants’ motion for summary judgment, the district court reasoned that genuine issues of material fact existed as to whether plaintiff received the cardholder agreement and change in terms, and whether the transferee bank had properly assigned the debt to the defendant non-bank debt purchaser.
As to the plaintiff’s motion for class certification, the district court reasoned that because the National Bank Act applied to defendants as assignees of a national bank, a class action was inappropriate and the proposed class failed to satisfy Federal Rule of Civil Procedure 23(a)’s commonality and typicality requirements.
In May of 2014, the parties stipulated to the entry of judgment in defendants’ favor for purposes of appeal. The stipulation included an agreement that the account was properly assigned to the defendants and that the plaintiff received the cardholder agreement and change in terms, thereby eliminating the two issues of material fact on which the district court had based its denial of the defendants’ motion for summary judgment. The district court approved the stipulation and the plaintiff appealed.
On appeal, the plaintiff argued that the district court committed error when it held that the federal National Bank Act (“NBA”) preempted plaintiff’s state law usury claim.
The Court first cited to U.S. Supreme Court and Second Circuit precedent on preemption, explaining that the federal preemption doctrine derives from the Supremacy Clause of the United States Constitution. The Court further explained that “[p]reemption can generally occur in three ways: where Congress has expressly preempted state law, where Congress has legislated so comprehensively that federal law occupies an entire field of regulation and leaves no room for state law, or where federal law conflicts with state law.”
The Court went on to explain that the NBA expressly allows national banks to “charge on any loan … interest at the rate allowed by the laws of the State, Territory, or District where the bank is located.” See 12 U.S.C. § 85. The NBA also “provide[s] the exclusive cause of action” for usury claims against national banks, and thus preempts claims under state usury laws.
The defendants argued that, as assignees of a national bank, they were effectively covered by the NBA and could legally recover interest at the rate allowed by Delaware, the state where the assignor bank is headquartered.
The Second Circuit disagreed, reasoning that, while under certain circumstances preemption under the NBA could be extended to entities that are not national banks, in order for this exception to apply, the state law at issue must “significantly interfere with a national bank’s ability to exercise its powers” under the NBA. For example, the Court noted that in most of the cases where the NBA has been extended to an unaffiliated non-national bank entity, the entity was acting on behalf of a national bank in the process of conducting the bank’s business.
The Second Circuit distinguished the actions of the defendants in the case at bar from agents acting on a national bank’s behalf, finding that the non-bank defendants here were acting on their own behalf in attempting to collect the plaintiff’s credit card debt. In so finding, the Court cited to guidance published by the Office of the Comptroller of the Currency (“OCC”), the federal agency responsible for chartering, regulating and supervising national banks, which clarified in an OCC Bulletin that third-party debt buyers are not agents or subsidiaries of a national bank for purposes of NBA preemption.
The Court further distinguished the case at bar from two Eighth Circuit decisions holding that the NBA preempted state law usury claims, which were relied upon by the district court and defendants.
In Krispin v. May Department Stores, 218 F. 3d 919 (8th Cir. 2000), the Eighth Circuit applied the NBA to preempt state law usury claims against a department store chain that issued credit cards assigned to a wholly-owned national bank. The Court explained that Krispin did not support the defendants’ preemption argument because, in Krispin, the department store chain assigned its credit card accounts to a wholly owned national bank and subsequently re-purchased the accounts, but the national bank retained an ownership interest in the accounts.
According to the Second Circuit, this led the Eighth Circuit in Krispin to conclude that that the real party in interest was the national bank. Unlike in Krispin, the Second Circuit noted, the national banks in the case at bar did not retain any ownership interest in the plaintiff’s account.
In Phipps v. FDIC, 417 F.3d 1006 (8th Cir. 2005), the plaintiffs sued under Missouri law to recover a “finder’s fee” paid to a third party entity upon the sale of mortgage loans. The Eighth Circuit in Phipps held that the fees constituted “interest” under the NBA, and held that the originating bank, not the assignee, was the real party in interest and the claims were preempted.
The Second Circuit reasoned that in Phipps, the national bank charged the interest or “finder’s fee,” while in the case at bar, the interest was charged to the plaintiff by the non-bank defendants after her account was sold to defendants. In addition, the Second Circuit noted, the non-bank entity in Phipps was an agent of the national bank and 12 C.F.R. § 7.1004(a) allows a national bank to use the services of and compensate non-employees for originating loans. In the case at bar, no such relationship existed between the non-bank defendants and the originating bank or its national bank transferee.
Turning to the issue of whether Delaware or New York law applied based on the choice-of-law provision in the underlying agreement, the Second Circuit declined to address the issue because it had not been ruled upon by the district court.
However, the Second Circuit rejected the plaintiff’s argument that by attempting to collect interest at a rate higher than New York law allows, the non-bank defendants supposedly made a false representation in violation of FDCPA subsections 1692e(2)(A), (5), (10) and 1692f(1).
The Court reasoned that the district court’s analysis was mistakenly based on its determination that the defendant non-bank entities were entitled to the same protections as the national bank from which they acquired the plaintiff’s credit card account.
In addition, the Second Circuit held that the district court mistakenly concluded that Delaware law applied if the plaintiff received the cardholder agreement and change in terms, but those facts were only established by stipulation by the parties for purposes of appeal. Because the district court never reached the issue of which state’s law applied, the Court vacated the district court’s judgment on the FDCPA claim.
The Court also vacated the district court’s denial of class certification because its analysis was based on the same ruling that the non-bank defendants were entitled to the same protection under the NBA as the originating bank.
Thus, the Second Circuit reversed the district court’s holding that the NBA preempted the plaintiff’s claims, vacated the district court’s judgment and denial of class certification, and remanded the case for further proceedings.
Ralph T. Wutscher
Maurice Wutscher LLP
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