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U.S. SC won't hear Second Circuit's decision on interest rate

By Kyle Perrotti | Jul 20, 2016

WASHINGTON (Legal Newsline) – The U.S. Supreme Court has decided not to review the U.S. Court of Appeals for the Second Circuit's decision in the controversial Madden v. Midland Funding case back to New York federal court. 

Because the district court will not be able to provide a judgment for the better part of a year, the standing law in that jurisdiction will follow the Second Circuit’s ruling, which was in favor of the plaintiff, Saliha Madden. 

When the plaintiff defaulted on a loan provided by Bank of America at 27 percent interest, it was sold to Midland Funding in New York, which applied the same rate, despite the fact that New York law dictates the rate cannot be more than 16 percent. 

Bank of America was able to charge such a high interest rate even though Madden resides in New York because of the National Bank Act, which allows a national bank to charge the interest rate of the state where it is based, regardless of the location of the individual obtaining credit. 

But Madden argued Midland Funding isn’t a national bank and, therefore, cannot operate under the same statute.

The district court decided in favor of the defendant, saying the loan was valid when made, and that Midland Funding stepped into the shoes of Bank of America and can charge the same rate. But the Second Circuit ruled the opposite, stating that Midland Funding should be subject to New York state law, which dictates the maximum rate can be 16 percent.

Steve Levitan, a partner at the New York City firm Morgan Lewis who has been watching this situation with great interest, told Legal Newsline there are many people under the circuit’s jurisdiction who are keeping a close eye on this case. 

“At the moment, everyone is very concerned, because in the Second Circuit - which is the states of New York, Connecticut and Vermont - there is a decision that says transferees cannot avail themselves of the rights of the transferor,” he said.

The case was sent to the solicitor general with the argument that the Second Circuit got the case wrong because it ignored valid points.

However, the solicitor general recommended to the Supreme Court that it deny the writ of certiorari on the basis that there are no conflicting rulings in lower courts and it wouldn’t be worth the Supreme Court’s time. 

Until that happens, at least for a while, people who live under the Second Circuit’s jurisdiction will be able to obtain lower interest rates on defaulted loans, but it also could become tougher for consumers in those states to obtain lines of credit.   

“It is the law in the Second Circuit,” Levitan said. “And until something comes along to change that, we’re stuck with what we have. Meanwhile, it’ll be another year until the district court rules on this particular case, and it very well may be that this judge in the district court determines that Delaware law applies and everything goes back to normal again.”

Levitan says there is still a chance the case could end up back at the Supreme Court, which would then establish a precedent for all circuits to follow.

“They’ll have to bring it up if another case comes along that is in direct contradiction to Madden, so that there is an on-the-record split between the circuits,” he said. “When that happens, the Supreme Curt is supposed to agree to decide the case. They don’t want different laws applying in different circuits around the country.”


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