U.S. District Court Weighs in on Madden v. Midland

On February 27th, the U.S. District Court for the Southern District of New York issued an opinion on Madden v. Midland Funding, LLC in response to the defendants' motion for summary judgment and the plaintiff's motion for class certification. According to a recent National Law Review article, the Second Circuit had remanded the case to the U.S. District Court for the Southern District of New York for the resolution of remaining state law questions, including whether Delaware law governed the account agreement.

SFIG previously submitted an amicus curiae brief which focused on the long standing legal analysis and precedent that a loan is "valid when made". We argued that if the interest rate on a loan was not deemed usurious based on state law in the originating state, then, even after that loan is sold, the original loan should remain valid and the new owner of the loan may take collection action on the loan, even if a new loan originated with those terms would be considered usurious.

The recent findings of the District Court are summarized here:

On the defendants' summary judgment motion, the court found that where, as in the Madden case, the debt was in default, the plaintiff/borrower cannot assert violations of New York's civil usury statute as a defense, but could assert violations of New York's criminal usury statute as a defense. The court also held that plaintiff did not have an affirmative claim for usury and dismissed claims of civil and criminal usury, both of which formed the basis of her claim for relief that the debt was void and uncollectible. However, the district court found that the violation of criminal usury law could be used as a predicate in support of the plaintiff’s claims under the Fair Debt Collection Practices Act (FDCPA) and New York General Business Law Section 349, both of which provide for statutory damages and actual damages. Consequently, the underlying loan remains valid, but attempts to collect interest rates that violate New York’s criminal usury statute serve as a predicate for FDCPA and New York law.

On choice-of-law, the court applied New York law rather than Delaware law because it found New York has a fundamental public policy to prevent criminal usury. As such, the court did not enforce the Delaware law set forth in the cardholder agreement. Finally, the court granted the plaintiff’s motion for class certification.

Based on this decision, SFIG continues to have concerns around many aspects of Madden and what it means for our industry. This opinion does not resolve the issues surrounding the case, particularly given that it did not address the potential conflict between federal preemption and state public policy.

If you are interested in learning more about SFIG's advocacy on this matter, or if you would like to join the Marketplace Lending Committee, please contact Michael.Williams@sfindustry.org.

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