The OCC and FDIC have filed a joint amicus brief in a Colorado federal district court arguing that the court should affirm the decision of a bankruptcy court holding that a non-bank loan assignee could charge the same interest rate the bank assignor could charge under Section 27(a) of the Federal Deposit Insurance Act, 12 U.S.C. § 1831d(a), despite the Second Circuit’s decision in Madden v. Midland Funding (which we have criticized.)
The loan in question was made by Bank of Lake Mills, a Wisconsin state-chartered bank, to CMS Facilities Maintenance, Inc. (CMS), a Colorado-based corporation. It carried an interest rate just over 120% per annum. In addition to personal property of CMS, the loan was secured by a deed of trust on real property owned by Yosemite Management, LLC (Yosemite).
About two months after the loan was made, the Bank assigned the loan to World Business Lender, LLC (the “Assignee”). The Promissory Note provided that it was “governed by federal law applicable to an FDIC insured institution and to the extent not preempted by federal law, the laws of the State of Wisconsin without regard to conflict of law rules.”
Yosemite subsequently sold the real property to Rent-Rite Superkegs West, Ltd. (the “Debtor”), which subsequently filed for bankruptcy relief. The Assignee filed a proof of claim asserting an in rem claim against the real property. The Debtor filed a complaint in the bankruptcy court seeking to disallow the Assignee’s claim on the grounds that the interest rate on the loan was usurious under Colorado law. While Wisconsin law permits loans to corporations at any interest rate, Colorado law prohibits interest rates above 45%. The Assignee argued that Section 27(a) governed the permissible interest rate on the loan but the Debtor argued that the loan was subject to Colorado usury law.
The bankruptcy court agreed with the Assignee that: (1) pursuant to Section 27(a), the Bank could charge the contract rate because such rate was permissible under Wisconsin law; and (2) as a consequence of the “valid-when-made rule,” the Assignee could also charge that rate. Even though it was not cited by the Debtor in support of its position, the bankruptcy court specifically noted its disagreement with Madden. In Madden, the Second Circuit ruled that a purchaser of charged-off debts from a national bank was not entitled to the benefits of the preemption of state usury laws under Section 85 of the National Bank Act, the law upon which Section 27(a) was modeled.
The amicus brief filed by the OCC and FDIC presents a compelling argument in favor of the assignability of an originating bank’s rate authority under federal banking law when it assigns the underlying loan. The brief first argues that, under the longstanding “valid-when-made rule,” an interest rate that is non-usurious when the loan is made remains non-usurious despite assignment of the loan. In support of this argument, described by the U.S. Supreme Court as a “cardinal rule” of American law, the brief cites U.S. Supreme Court cases and other federal authority dating to 1828, cases from a dozen states and even English cases and commentary from the late 18th and early 19th Centuries. It goes on to argue that, under another well-settled rule, an assignee steps into the “shoes of the assignor” and succeeds to all the assignor’s rights in the contract, including the right to receive the interest permitted by Section 27(a). Again, the brief cites considerable authority for this proposition.
To our mind, however, the brief concludes with its strongest argument—that the “banks’ authority to assign their usury-exempted rates was inherent in their authority to make loans at those rates.” In support, it quotes a Senate report addressing another usury exemption, applicable to residential mortgage loans by specified lenders, which was enacted at the same time as Section 27(a): “[L]oans originated under this usury exemption will not be subject to claims of usury even if they are later sold to an investor who is not exempt under this section.” The brief argues that, in light of the “disastrous” consequences to banks of limits on loan assignability, a bank’s right to charge the interest permitted by its home state would be “hollow” and “stunted” if a loan assignee could not charge the same interest as its bank assignor.
This is not the first time the OCC has taken issue with Madden. Indeed, the OCC and Solicitor General previously criticized Madden in connection with Midland Funding’s unsuccessful certiorari petition to the Supreme Court. The new brief, however, is far more detailed and powerful. After reading the brief, it is hard to disagree with its ultimate conclusion that Madden “is not just wrong: it is unfathomable.”
With this brief, the OCC and FDIC have done a great service to the proper development of the law on an issue of critical importance to the national banking system. We look forward to further contributions of this type in other cases raising similar issues.