In the most recent development in Cohen v. Capital One Funding LLC [1], a case seeking to certify a class asserting that New York State’s usury laws can apply to securitized credit card debts, Capital One-affiliated defendants have prevailed in their efforts to have the claims dismissed.  Plaintiffs sought to apply New York’s statutory caps on interest charges of 16 percent (civil) [2] and 25 percent (criminal) [3] to interest payments on credit cards issued by ex-New York banks (in this case, Virginia) but bundled into asset-backed securities held by New York trusts.

As we noted previously, the dispute turns on the application of a 2015 decision by the U.S. Court of Appeals for the Second Circuit, [4] in which that Court held that a purchaser of a bank loan was governed by the New York limits because it was neither a national bank itself nor acting on behalf of a national bank.  As a result, applying New York’s usury limits did not “significantly interfere” with the activities of a national bank, the seller. The significant interference standard was first articulated by the Supreme Court in Marquette Nat. Bank v. First of Omaha Svc. Corp. [5] applying the National Banking Act of 1864 (“NBA”), which preempts state usury laws with respect to national banks.

Plaintiffs argued that because defendants are not national banks and do not exercise national banking authority, Madden is dispositive and New York’s usury limits apply to their debts.

The District Court disagreed, holding Plaintiff’s claims to be preempted by the NBA, focusing on the distinction between the role of the parties in Cohen and Madden:

Although Defendants are not national banks, the Amended Complaint and documents on which it relies clearly show that Defendants were either subsidiaries of Capital One … or else carrying out Capital One’s business. [6]

Analyzing Madden, the District Court pointed out the distinction that it found crucial:

Capital One’s role as ABS sponsor and servicer, and retention of ownership and control over the underlying credit card loans … is not analogous to Madden, where [the banks] severed their contractual ties to plaintiff’s debt. [7]

The District Court found support for this position in Madden itself, where the Second Circuit explicitly conditioned the circumstances in which a non-bank can avail itself of NBA protections:

The [Second Circuit] observed that, although NBA preemption was available to non-national bank entities where the application of state law risked significantly interfering with a national bank’s powers, it had usually been in circumstances where the non-bank entity “acted on behalf of a national bank in carrying out the national bank’s business.” Madden, 786 F.3d at 251. That was not the case with Midland and its affiliate, which were acting “solely on their own behalves, as the owners of the debt,” and not on behalf of [banks]. [8]

The Second Circuit will likely have an opportunity to revisit its decision in Madden as Plaintiffs have appealed the District Court’s dismissal. [9]

[1] Cohen v. Capital One Funding LLC, No. 19-cv-03479 (E.D.N.Y.).

[2] N.Y. Gen. Oblig. Law § 5–501; N.Y. Banking Law § 14-a.

[3] N.Y. Penal Law § 190.40.

[4] Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).

[5] 439 U.S. 299, 313 (1978).

[6] Cohen, slip op. at 31 (emphasis added; quotation omitted).

[7] Id. at 35.

[8] Id. at 34.

[9] Cohen v. Capital One Funding, LLC, No. 20-3690 (2nd Cir.).