A New York federal district court in Petersen v. Chase Card Funding, LLC held that the National Bank Act (NBA) preempted the plaintiff’s claims that the interest charged on his credit card account violated New York usury law.
The named plaintiff was the holder of a credit card issued by JPMorgan Chase Bank, N.A. (JPMCB). He filed a putative class action against Chase Card Funding, LLC (Card Funding), a non-bank entity that purchased credit card receivables from JPMCB, Chase Issuance Trust (Trust), a special purpose entity that purchased the receivables from the Trust and securitized them, and the Trust’s trustee. Relying on the Second Circuit’s Madden decision, the plaintiff claimed that, although the NBA preempted the application of New York usury law to credit card accounts issued by JPMCB, that preemption ceased once the credit card receivables were sold to Card Funding and the Trust. In Madden, the Second Circuit held that NBA preemption of New York usury law did not apply to charged-off credit card receivables sold by a national bank to a non-bank.
Card Funding and the other defendants filed a motion to dismiss asserting that the plaintiff’s usury claims were preempted by the NBA. The magistrate judge hearing the motion found that while Madden was helpful to the plaintiff’s claim, it did not “unequivocally answer the question of whether Petersen’s usury claims are preempted.” Applying preemption principles, he determined that New York usury law was preempted because its application would significantly interfere with JPMCB’s power to sell or assign the receivables generated by its credit card accounts and recommended that the lawsuit be dismissed. The plaintiff filed objections with the district court to the magistrate judge’s recommendation.
The district court ruled that the plaintiff’s state law usury claims should be dismissed because they were expressly preempted by the NBA due to JPMCB having “retain[ed] a substantial interest in [the plaintiff’s] account.” Under the securitization process used by JPMCB, JPMCB no longer owned the receivables generated by the underlying credit card accounts but remained the owner of the accounts and continued to have the right to change the account terms, including periodic interest charges. The district court distinguished Madden as involving “materially different facts—a loan that had been sold ‘outright,’ not one that remained in at least some legal sense with the national bank.” In the court’s view, JPMCB was “akin to the national bank in Krispin [v. May Department Stores, 218 F.3d 919 (8th Cir. 2000)],” which the Second Circuit distinguished in Madden based on the Krispin bank having “‘retained substantial interests in the credit card accounts.’” (In Krispin, the Eighth Circuit held that the NBA preempted the application of Missouri late charge limits to credit card accounts funded by a national bank where the receivables were sold to an affiliated department store.) Moreover, according to the district court, even if JPMCB did not retain a “substantial interest” in the plaintiff’s account, “it retains, at the very least, more than “‘[no] further interest.’”
The district court expressly stated that in finding that the plaintiff’s claims were expressly preempted by the NBA, it was not relying on the OCC’s “Madden fix” final rule (which had not yet been issued when the magistrate judge made his recommendation). The Madden fix codified the OCC’s position under Section 85 of the NBA that the assignee of a loan made by a national bank can charge the same interest rate that the bank is authorized to charge under federal law. According to the district court, instead of the Madden fix, its preemption finding “is premised on the Second Circuit’s reasoning in Madden.”
The district court’s preemption ruling is a welcome but unsurprising development, particularly for securitizations. However, it is mildly disappointing that the court did not take the opportunity to simultaneously approve the OCC’s Madden fix. Had the court done so, the decision would have had even broader precedential value for the industry.