Midland Funding Case Reaches a Settlement

In 2015, the Second Circuit Court of Appeals issued a ruling in Madden v. Midland Funding that seemed to overturn the “valid-when-made” doctrine, sending shock waves through the financial services sector. Denied a hearing by the U.S. Supreme Court, the two sides have recently reached a settlement that would end the seven years long dispute.

The settlement would require Midland Funding to provide $9.25 million in balance reductions for class members and $550,000 for monetary relief to thousands of New York borrowers. The plaintiffs have stated that “the proposed settlement forecloses a realistic possibility of several more years of complex and expensive litigation.”

The dispute originated in 2011. At that time, a bank sold an uncollected credit card debt to a third party. That third party attempted to continue charging an interest rate of 27 percent on the amount owed, which was the same rate previously charged by the bank creditor.

Madden, a resident of New York, claimed that Midland Funding’s attempt to charge 27 percent violated New York state’s usury limit of 25 percent. The court ultimately determined that the rate exporting permission for banks under the National Bank Act did not extend to third-party purchasers of debt.

The Second Circuit’s decision remains binding precedent in New York, Connecticut, and Vermont. In 2017, the House of Representatives passed the bipartisan Protecting Consumers’ Access to Credit Act (H.R.3299) that would have overturned the decision and restored the “valid-when-made” doctrine. It failed to pass the Senate.