Today's Trends in Credit Regulation

Copycatting Madden
By Catherine M. Brennan

On the heels of a federal appellate court decision that held that a non-bank could not rely on the National Bank Act ("NBA") to support attempts to collect interest on the debt it purchased from a national bank, another lawsuit is wending its way through the appellate process in that same court. Although the debt buyers won at the trial level in this most recent case, the consumers are appealing to the U.S. Court of Appeals for the Second Circuit, buoyed by that court's recent decision in Madden v. Midland Funding, which held that non-national bank entities that purchase loans originated by national banks cannot rely on the NBA to protect them from state-law usury claims.

In Avila v. Riexinger & Associates LLC, which was combined with Elrod v. Riexinger & Associates LLC, two women assert that Riexinger & Associates LLC, a law firm, and Crown Asset Management LLC and Bureaus Investment Group Portfolio No. 15 LLC, two debt buyers, violated the Fair Debt Collection Practices Act, New York usury law and the Racketeer Influenced and Corrupt Organizations Act in attempting to collect on debts they purchased from a national bank. According to the court opinion ruling against the consumers, Annmarie Avila incurred her debt from Wells Fargo, although it is not clear what kind of debt it was, while Sara Elrod owed money to Capital One Card Services Inc. According to ACA International, more than $143 billion in face value of debt was purchased in the United States in 2008. According to the Nilson Report, debt buyers in 2008 purchased $72.3 billion in consumer debt, including credit card, medical, utility, auto, and mortgage debt. Of that total, $55.5 billion, or 76.8% was credit card debt bought directly from issuers. This is a huge industry that is directly in the crosshairs of the Madden decision, and it is not unreasonable to assume the debt at issue in Avila is credit card debt.

Avila asserted in her lawsuit that the debt buyer attempted to charge her a usurious interest rate in violation of New York law. The court easily disposed of the consumer's FDCPA claims, noting that the communications received from the law firm on behalf of the debt buyers were clear and followed the law, and next turned to the RICO issue, which claimed a violation of that statute by collecting portfolios or receiving income from "unlawful debts." The defendants argued that Avila could not assert the RICO claim, because she did not plead an injury to her business or property, a required element of a RICO claim. The court agreed and dismissed the RICO claim. With regard to the usury claim, Avila alleged that the debt buyers attempted to charge and collect interest in excess of 16% per year, in violation of New York law that requires creditors seeking to exceed 16% per year to obtain a license. The court rejected her claim, noting that New York case law has held that usury laws do not apply to defaulted obligations or interest charged only on past due debts. Avila countered that the right to increase interest after a default only extends to the creditor who originated the loan. The U.S. District Court of the Eastern District of New York rejected this assertion, noting that no law supported it. The court further reasoned that even if the ability to charge a default rate only belonged to the original creditor, there is no reason why the original creditor could not assign that ability. The court thus dismissed the lawsuit.

In the appeal brief filed in early July, Avila raises four issues under the FDCPA. However, she relies on Madden to support her FDCPA claim. She noted that the defendants charged an interest rate in excess of 25% per year, the criminal usury cap in New York. In the absence of a lawful basis for this rate of interest, i.e., a contract or legal basis, Avila asserted that the defendants violated the FDCPA, which prohibits debt collectors from collected unlawful debts. In the appeal brief, Avila noted that the U.S. Court of Appeals for the Second Circuit held that the attempt to collect interest from a New York consumer in excess of 25% per year can violate the FDCPA.

It remains to be seen whether the Second Circuit will grant the appeal in Avila. Certainly, the issue is fresh in the minds of the federal appellate court. And, Avila is right that based on the reasoning in Madden, she should prevail. Much of what will occur will depend on whether the appellate court grants Midland Funding's petition for a rehearing of the Madden decision. We are hopeful we will have more clarity on both Avila and Madden by year's end.

Catherine M. Brennan is a partner in the Hanover, MD office of Hudson Cook, LLP. Cathy can be reached at 410-865-5405 or by email at

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