CLS Blue Sky Blog

Sullivan & Cromwell Discusses New Type of Lawsuit Involving Securitized Debt

On June 12, 2019, in Cohen v. Capital One Funding,1 certain Capital One credit card holders filed a putative class action lawsuit in the U.S. District Court for the Eastern District of New York against

Plaintiffs’ complaint is a result of Madden v. Midland Funding,2 a 2015 decision from the U.S. Court of Appeals for the Second Circuit, which held that federal preemption of New York’s usury laws no longer applies once the originating national bank sells credit card receivables to a non-bank, third-party debt collector.  According to the Madden court, removing federal usury preemption from debt once it was   sold by a bank to a non-bank would not materially hinder the bank’s power to originate loans,  and  so extending preemption to the third-party debt collector was not warranted under the NBA. Although Madden  has  been  widely criticized—including  by the Office of  the Comptroller  of  the    Currency3—as contrary to the NBA’s text, economic reality, and hundreds of years of industry expectations, it remains law within the Second Circuit (which covers New York, Connecticut, and Vermont).  An attempt to  overrule the Madden decision via federal legislation stalled last session in the U.S. Congress.

To date, post-Madden lawsuits claiming violations of usury laws have tended to focus on tribal, payday, and fintech lenders, and third-party debt collectors. The Cohen case appears to be the first case filed based on the securitization of debt by a national bank. If the Cohen lawsuit is successful, it could have significant deleterious effects on the lending industry in general, including:

It is important to note the Second Circuit is still the only Circuit to adopt the Madden rule. Because New York’s civil usury rate is 16% (and its criminal usury rate is 25%), the current low interest rate environment might make Madden’s impact less dramatic than normal. Other states, however, have much lower usury rates, and, if interest rates rise and Madden is adopted in other Circuits, the effect on the lending industry could be dramatic.


Cohen v. Capital One Funding, LLC, et al., 19-cv-03479-KAM-RLM (E.D.N.Y.).

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

See Brief for the United States as Amicus Curiae, Midland Funding, LLC v. Madden,  No. 15-610, 2016 WL 2997343 (U.S. May 2016).

This post comes to us from Sullivan & Cromwell LLP. It is based on the firm’s memorandum, “New Type of Lawsuit Involving Securitized Debt: Citing Madden, Plaintiffs Contend That Credit Card Debt Became Subject to NY Usury Laws Once the Debt Was Securitized,” dated June 17, 2019, and available here.

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