While arguing that procedurally, and because of a lack of relevant diverging precedents, the Supreme Court should not hear the case, the United States government otherwise stood behind a debt buyer that tried to charge the same amount of interest on a credit card that had been charged by the original creditor.
The Supreme Court ultimately agreed with the amicus brief submitted by the Solicitor General’s office and declined to hear the case, Midland Funding v. Madden. But that doesn’t mean that there still isn’t good news for the industry and that this case could ultimately make it back to the Supreme Court in the future.
The plaintiff sued Midland Funding, a unit of Encore Credit, after the debt buyer purchased a portfolio of credit card loans from Bank of America. As a national bank, BofA was exempt from state usury laws, and was allowed to charge the maximum interest rate based on the state in which it is headquartered, which is Delaware. Delaware’s interest rate cap is 27%. When Midland purchased the portfolio, it tried to continue charging the same interest rate. A plaintiff in New York, where the cap is 25%, sued, arguing that Midland should not enjoy the same pre-emption benefits since it is not a national bank.
The district court agreed with Midland and granted a summary judgment. But the ruling was appealed to the Second Circuit Court of Appeals, which ruled that the pre-emption did not apply to Midland because it was not a unit or otherwise affiliated with the original creditor.
“The court of appeals’ decision is incorrect,” the Solicitor General’s office wrote in its brief. “Under the long- established “valid-when-made” rule, if the interest-rate term in a bank’s original loan agreement was non-usurious, the loan does not become usurious upon assignment, and so the assignee may lawfully charge interest at the original rate.”
Essentially, the U.S. government told the Supreme Court that the Second Circuit got it wrong when ruling on this case. ACA International and the American Bankers Association also filed amicus briefs to the Supreme Court in support of Midland Funding.
One of the criteria that the Supreme Court has used in the past to determine whether to hear a case is whether there are different rulings or opinions on similar cases at the Appeals Court level. Right now, in this matter, no such split positions exist. In the event that another Appeals Court rules in favor of the defendant, that would create the necessary split opinions and give the Supreme Court more ammunition to decide whether to hear the case.
For debt buyers, the larger issue in question is whether to try and charge interest after a debt has been charged off. By and large, most debt buyers do not charge interest post-charge-off, but those who do may want to look at this case and determine an appropriate course of action.