Inapplicability of NBA Preemption Provision Leads to Choice-of-Law Questions

By Patrick Siegfried

Jun 24, 2015

Madden v. Midland Funding, 2015 U.S. App. LEXIS 8483 (2d Cir. 2015)

TheMaddendecision will likely lead to increased scrutiny of choice-of-law provisionswhere usury claimshave been made.

While the court of appeals' decision has foreclosed Midland's NBA preemption argument, the court did not decidewhether the choice-of-law provision in the Madden's original cardholder agreement precluded Madden's New York usury claims. The provision provided that the agreement would be governed by the laws of Delaware. In the district court proceeding, the parties stipulated that if Delaware law was found to apply, the rate charged by the defendant would be permissible.

Though the appellate court did not decide the question, it offered two interesting footnotes. First, the court stated that"[w]e express no opinion as to whether Delaware law, which permits a "bank" to charge any interest rate allowable by contract,seeDel. Code Ann. tit. 5§ 943, would apply to the defendants, both of which are non-bank entities." While the court did not take a firm position, its statement suggests that it may not agree with the parties that the rate charged Madden would be permissible under Delaware law.

Secondly, the courtoffered some guidance to the district court regarding the enforceability of the choice-of-law provision in New York:

Because it may assist the District Court, we note that there appears to be a split in the case law. Compare Am.Equities Grp., Inc. v. Ahava Dairy Prods. Corp., No. 01 Civ. 5207(RWS), 2004 WL 870260, at *7-9 (S.D.N.Y. Apr. 23,2004) (applying New York's usury law despite out-of-state choice-of-law clause); Am. Express Travel Related Servs.Co. v. Assih, 26 Misc. 3d 1016, 1026 (N.Y. Civ. Ct. 2009) (same); N. Am. Bank, Ltd. v. Schulman, 123 Misc. 2d 516,520-21 (N.Y. Cnty. Ct. 1984) (same) with RMP Capital Corp. v. Bam Brokerage, Inc., 21 F. Supp. 3d 173, 186(E.D.N.Y. 2014) (finding out-of-state choice-of-law clause to preclude application of New York's usury law).

The cases noted by the circuit court discuss the applicability of out-of-state choice-of-law provisions where claims of usury are involved. As explained by the cited decisions, some courts maynot enforce a choice-of-law provision if the application of the chosen lawwould violate a public policy of the forum state. As usury is often found to be an issue of public policy,the enforceability of such clauses tends to be a point of contention in usury actions. The circuit court's footnote highlights asplit in New Yorkcase law on this point. But New York is by no means the only state where the case law is unclear.

TheMaddendecision will likely increase the importance of choice-of-law analysisin relation to usury law. Assignees that previously relied on the NBA's preemption provision as a method of usury law compliance will now need to addressthe enforceability of their contractual choice-of-law provisionswhere claims of usury may become an issue. This analysis is often a complex undertaking because states take varying views of what constitutes usury and whether or not usuryis an issue of public policy.