Cohen v. Capital One Funding, LLCCohen v. Capital One Funding, LLC
MEMORANDUM AND ORDER
KIYO A. MATSUMOTO, United States District Judge:
Plaintiffs William Cohen, Sue Paivanas, and Christy Ogrodoski (collectively, “Plaintiffs“), individually, and on behalf of others similarly situated, bring this action against Capital One Funding, LLC (“CO Funding“), Capital One Multi-Asset Execution Trust (“COMET“), and the Bank Of New York Mellon Corporation (“BONY“), solely in its capacity as Trustee of Capital One Master Trust (“COMT“) (collectively, “Defendants“), alleging violations of New York usury and banking law, as well as unjust enrichment. (ECF No. 34, Amended Complaint (“Compl.“) ¶¶ 2, 29.) Plaintiffs are New York residents with outstanding loan balances on credit cards that were issued by non-party Capital One Bank (USA) National Association (“Capital One“). (Id. ¶¶ 9-22.) Defendants, but notably, not Capital One, are alleged to have charged and received payments from Plaintiffs and other New York consumers at interest rates exceeding New York‘s 16% usury limit, in violation of
Presently before the court is Defendants’ motion to dismiss pursuant to
BACKGROUND
The background information is derived from the well-pleaded factual allegations of the Amended Complaint and other information the court may consider in determining whether the pleading is legally sufficient.
I. The Amended Complaint
A. The Parties
Plaintiffs represent a putative class of New York residents who, at any time since June 12, 2013, have paid credit card interest to Defendants at a rate exceeding 16%. (Compl. ¶ 77.) Plaintiffs have paid Defendants interest rates ranging from 22.5 to 27.74% on their outstanding Capital One credit card balances. (Id. ¶¶ 11, 16, 21.) Defendants are primarily entities affiliated with Capital One, as discussed further below. CO Funding is a Virginia Limited Liability Company. (Id. ¶ 24.) COMT is a common law trust, with BONY serving as its Trustee. (Id. ¶ 25.) COMET is a Delaware Statutory Trust, with Deutsche Bank Trust Company as Trustee, and CO Funding as the beneficiary. (Id.) CO Funding, COMT, and COMET are not banks. (Id. ¶ 26.)
B. Credit Card Securitization
Credit card securitization can be summarized as follows: first, a financial institution, such as a bank, designates select credit card accounts;1 the bank then pools the accounts’ receivables, which generally include all payments owed by accountholders, such as principal and interest payments, and payments for all fees, including late fees, over limit fees, and annual fees; finally, the bank sells the receivables to and through shell-company intermediaries, with the receivables ultimately serving as a collateral base to secure bond-like, fixed-income securities issued
The “sponsor,” usually a bank, initiates securitization by selling the entire balance of receivables arising from select credit card accounts, along with rights to purchase future receivables generated therefrom, to its wholly-owned, special-purpose subsidiary. (Compl. ¶ 32.) The subsidiary, or “depositor,” has no assets or liabilities. (Id.) It exists to shield the receivables if the sponsor‘s assets fall under the control of a bankruptcy trustee or FDIC receivership. (Id. ¶ 33.) By making the receivables “bankruptcy remote,” prospective investors can assess the pooled assets based on their intrinsic value, without regard to the sponsor firm‘s general operating risks. (Id. ¶¶ 33, 37.)
After the initial sale of receivables from sponsor to depositor, the latter sells the pooled receivables and associated rights to a passive, single-purpose entity (“SPE“), typically a trust. (Compl. ¶ 34.) The SPE is legally independent of the sponsor. (Id.) The attenuated relationship between the SPE and sponsor further protects the receivables from consolidation into a bankruptcy or FDIC receivership estate. (Id.) After the SPE acquires the receivables, it issues certificated securities to the depositor. (Id. ¶ 35.) These securities are collateralized, or backed, by the pooled receivables. (Id.) The depositor now holds “asset-backed” securities, or ABS. The depositor then sells the ABS to investors, either through various underwriting affiliates, or by transferring ABS to the sponsor, which, in turn, sells them directly to investors or through underwriters. (Id.) The depositor pays the sponsor for the initial sale of the receivables with the proceeds from ABS sales. (Id.)
Because the SPE acquires the right to purchase any new receivables, as cardholders’ subsequent purchase activity generates more receivables on designated accounts, new receivables are likewise purchased by the SPE through the series of transactions described above. (Compl. ¶ 36.) The SPE pays for new receivables with funds from cardholders’ principal payments; credit card interest and fees fund the SPE‘s operating expenses and coupons due to ABS investors. (Id.) As a passive entity, however, the SPE lacks significant operational capacity—its sole purpose is to purchase receivables and issue securities. Therefore, a servicing agent, or “servicer,” is engaged to manage the receivables on the SPE‘s behalf, and for the benefit of the ABS investors. (Id. ¶ 37.) For instance, the servicer sends cardholders their billing statements, and collects their outstanding debt payments. (Id.) Where, as here, the SPE is a common law trust, the trustee holds legal title to the receivables, whereas beneficial ownership of the receivables resides with ABS investors. (Id. ¶ 38.)
C. Capital One Asset-Backed Securities
Plaintiffs opened credit card accounts with Capital One, the ABS sponsor. (Compl. ¶¶ 40-42; see also ECF No. 43-4, Prospectus for Class A(2019-1) Notes, dated February 20, 2019 (“Prospectus“).)2 Capital One is a national bank located in
Pursuant to a Receivables Purchase Agreement, dated August 1, 2002 (“RPA“), Capital One sold credit card receivables to CO Funding. (Compl. ¶¶ 40-45; see also ECF No. 43-2, RPA, p. 1 - Recitals (“Capital One desires to sell and assign, from time to time, certain Receivables to [CO] Funding upon the terms and conditions hereinafter set forth[.]“).) CO Funding, a wholly-owned, operating subsidiary of Capital One, acquired all “right, title and interest, whether now or hereafter acquired, in, to and under [the credit card receivables].” (Compl. ¶ 44; RPA §§ 2.01(a), (d); Prospectus 21.) CO Funding and Capital One additionally agreed that the transfers of receivables “constitute an absolute sale, conveying good title, free and clear of any liens, claims, encumbrances or rights of others, from Capital One to [CO] Funding.” (Compl. ¶ 45; RPA § 2.01(d).)
Once CO Funding acquired the receivables from Capital One, it sold them to COMT pursuant to an Amended and Restated Pooling and Servicing Agreement, originally dated as of September 30, 1993 (“PSA“). (Compl. ¶¶ 47-50; see also 43-5, PSA § 2.01(a) (CO Funding “transfers, assigns, sets over and otherwise conveys to [BONY as COMT‘s Trustee] all of its right, title and interest, whether now owned or hereafter acquired, in, to and under” the credit card receivables).) COMT issued a collateral certificate to COMET, representing an undivided interest in the credit card receivables owned by COMT. (Prospectus 73; Compl. ¶ 54.) The collateral certificate did not, and does not, effect a transfer of the credit card receivables themselves. (Id.) Rather, the collateral certificate secures the investors’ notes, and also conveys payments from Plaintiffs and other class members from COMT to COMET. (Compl. ¶ 55.) COMET, for its part, sells securities backed by Plaintiffs’ and class members’ credit card payment obligations, predicated on its “undivided interest” in the receivables. (Id. ¶ 56; see also Prospectus 96 (“Each series of investor certificates represents an undivided interest in the master trust, including the right to the applicable investor percentage of all cardholder payments on the receivables in the master trust.“).)
COMET, like COMT, is a SPE. It engages exclusively in the purchase of receivables and issuance of debt against payments from class members. (Compl. ¶ 53.) Because COMT and COMET are both “bankruptcy remote” SPEs with no employees, a servicer is needed to manage the credit card receivables. (Id. ¶¶ 57, 58.) Capital One acts as the “servicer for [COMT] and is responsible for servicing, managing and making collections on the receivables in the master trust.” (Prospectus 21; see also PSA §§ 3.01(a)-(b), 4.03(c).) Defendants pay Capital One a servicing fee to manage the accounts. (Prospectus 22; PSA § 3.02.)
Although Capital One transferred the select credit card accounts’ receivables, the securitization documents reflect that, at all times, Capital One retained control of the credit card accounts themselves. The Prospectus cover page, for example, states
II. The Instant Motion
Plaintiffs filed the Amended Complaint on September 11, 2019. Defendants subsequently moved to dismiss the Amended Complaint pursuant to
The motion hinges on the relevance of Capital One‘s status as a national bank, and moreover, its relationship to the credit card accounts from which the ABS derives its main assets, the receivables. In the main, Defendants contend the NBA preempts Plaintiffs’ state law usury claim because it is Capital One, not Defendants, which owns the ABS‘s underlying credit card accounts. In essence, Defendants maintain Capital One is the real party-in-interest, and as a national bank, is not subject to a state law cause of action for usury. Plaintiffs, on the other hand, reject that Capital One‘s status has any bearing at the pleading stage. Plaintiffs did not name Capital One as a Defendant, did not allege that Capital One maintained control and ownership of Plaintiffs’ credit card
The Defendants’ motion also centers on the parties’ dueling interpretations of Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015). In Madden, a credit card customer‘s usury claim against a debt collector, which had purchased plaintiff‘s debt from national banks, survived NBA preemption. Critically, the defendants in Madden purchased plaintiff‘s debt outright from the national banks. To Plaintiffs, Madden stands for the simple proposition that “non-bank debt purchasers like Defendants cannot avail themselves of the National Bank Act to evade liability for charging usurious interest rates.” (Opp. 1.) Plaintiffs contend that Madden is on-point and fatal to Defendants’ motion.
Defendants argue the instant facts are distinguishable from Madden. (Mot. 10.) Far from selling its interests or ownership rights in the underlying credit card accounts, like the banks in Madden, Capital One remained both the real party-in-interest and legal owner of the credit card loans through each step of securitization. (Id.) Defendants therefore assert that Capital One permissibly “exported” the non-limits of Virginia‘s usury law to other jurisdictions in which it extended credit, including New York. Defendants also note that NBA preemption extends to non-bank entities where application of state law would significantly interfere with the authorized activities of a national bank—such as setting interest rates on loans—a standard codified by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank“),
In the alternative, Defendants argue that Plaintiffs’ usury claim fails under New York state‘s “valid when made” rule. (Mot. 16.) According to Defendants, this doctrine holds that valid interest rates charged at a loan‘s inception are not transformed into usurious rates based on subsequent events. (Id. 2.) Here, Capital One charged Plaintiffs interest rates that were valid at the time of origination under Virginia law. The subsequent securitization of receivables arising from Plaintiffs’ loans, Defendants insist, does not convert the interest rates validly charged at origination into usurious rates. (Id. 16-19.) Defendants also urge the court to dismiss Plaintiffs’ second cause of action for unjust enrichment, as derivative and duplicative of the Amended Complaint‘s usury claim. (Id. 19.)
There have also been numerous supplemental filings, beyond the parties’ moving papers. The Bank Policy Institute (“BPI“) and Structured Finance Association (“SFA“) jointly submitted an amicus curiae brief in support of Defendants’ motion. (ECF No. 46, BPI/SFA Amicus Brief in Support of Motion to Dismiss.) The amici attempt to bolster Defendants’ case by describing securitization‘s critical role and function in the field of banking, and warn that allowing state usury laws to trump the NBA would significantly impair and upend lending markets, which rely on the continued application of NBA preemption to securitizations. (Id. 20, 23.) Plaintiffs dismiss the BPI/SFA brief as a mere regurgitation of Defendants’ motion, and reject amici‘s commentary on securitization
Defendants further supplemented their briefing with additional authority, namely, a Report and Recommendation (“R&R“) by Magistrate Judge Jeremiah J. McCarthy in a similar case, currently pending in the Western District of New York. (ECF No. 51 (appending R&R issued in Petersen v. Chase Card Funding, LLC, No. 19-CV-00741-LJV-JJM, 2020 WL 613531 (W.D.N.Y. Jan. 22, 2020)).)5 Petersen also involves usury allegations arising from the securitization of receivables for loans originated by a non-party national bank. See generally Petersen, 2020 WL 613531. Judge McCarthy recommended the complaint be dismissed, reasoning that New York‘s usury law was preempted by the NBA, owing to the originator‘s status as a national bank, and because applying New York‘s usury law would significantly interfere with the national bank‘s ability to sell or assign receivables. Id. at *4. Accordingly, Judge McCarthy determined that the third-party non-bank defendants permissibly
charged plaintiff interest rates in excess of New York‘s usury limits.
Two consumer rights organizations, the National Consumer Law Center (“NCLC“) and the Center for Responsible Lending (“CRL“), filed a separate amicus brief to address the Petersen R&R, as well as the broader implications of the instant suit. Amici take particular issue with Judge McCarthy‘s holding that denying national banks the ability to export home state interest rates would inhibit the capacity of banks to sell or assign the receivables from credit card accounts. See Petersen, 2020 WL 613531, at *4. Amici express concern that the R&R implies “state usury laws do not apply to assignees of bank loans.” (ECF No. 51-1, Amicus Brief in Response to Magistrate Judge‘s Report and Recommendation (“NCLC/CRL Amicus Br.“) 6.) Although amici proclaim neutrality, they warn that a sweeping ruling in Defendants’ favor may have unintended consequences. Specifically, amici worry that predatory lenders will opportunistically use national banks to nominally originate loans, solely to avail themselves of lax usury limits in the bank‘s home jurisdiction, and thereby evade local usury laws. (Id. 4.)
On April 29, 2020, Plaintiffs also provided the court with the NCLC and CRL‘s amicus brief filed in the Petersen case, in response to Judge McCarthy‘s R&R. (ECF No. 52, Amicus Brief in Response to Petersen Report and Recommendation, dated Feb. 7, 2020 (“NCLR/CLR Amicus (R&R)“).) In that submission, amici register two objections to the R&R: (1) Judge McCarthy ignored Madden by concluding that, where the loan originator is a national bank, the NBA preempts usury limits on interest rates charged by non-bank assignees of those loans; and (2) Judge McCarthy erred by holding that application of state usury laws would prevent the exercise of the national bank‘s powers. (Id. 5.) On September 21, 2020, Judge Lawrence J. Vilardo adopted Judge McCarthy‘s R&R, and dismissed the Petersen plaintiff‘s complaint. See Petersen, 2020 WL 5628935, at *1 (W.D.N.Y. Sept. 21, 2020).
LEGAL STANDARD
I. Motion to Dismiss
In deciding a motion to dismiss pursuant to
In deciding the motion, “courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on
II. Preemption
Principles of federalism recognize that “both the National and State Governments have elements of sovereignty the other is bound to respect.” Arizona v. United States, 567 U.S. 387, 398 (2012) (citations omitted). Under the Supremacy Clause of the United States Constitution, “state laws that conflict with federal law are without effect” and are preempted. Altria Grp., Inc. v. Good, 555 U.S. 70, 76 (2008) (citation and quotation omitted);
Preemption is an affirmative defense. At the pleading stage, preemption constitutes grounds for dismissal only “if the statute‘s barrier to suit is evident from the face of the complaint.” Ricci v. Teamsters Union Local 456, 781 F.3d 25, 28 (2d Cir. 2015). “A district court may grant a motion to dismiss based on federal preemption, if the defense can easily be determined from the pleadings.” Aaronson v. Am. Med. Sys., Inc., No. 09-CV-2487 (NGG), 2010 WL 3603618, at *1 (E.D.N.Y. Sept. 7, 2010) (internal citation and quotation marks omitted); see also Farash v. Cont‘l Airlines, Inc., 574 F. Supp. 2d 356, 362-63 (S.D.N.Y. 2008), aff‘d, 337 Fed. App‘x 7 (2d Cir. 2009). The factual allegations relevant to preemption must be construed in the light most favorable to the plaintiff. Galper v. JP Morgan Chase Bank, N.A., 802 F.3d 437, 444 (2d Cir. 2015).
DISCUSSION
I. Facts Considered at the Pleading Stage
As a threshold matter, the court addresses which materials it may properly consider in disposing of Defendants’ motion under
and their potential liabilities, derive from the Prospectus, PSA, and RSA. Without question, these documents are integral to the Amended Complaint. Chambers, 282 F.3d at 153 (document appropriately considered at
Nonetheless, Plaintiffs assert the court may look no further than the four corners of the Amended Complaint. Plaintiffs seek to cabin any reference to the Prospectus, PSA, and RSA to those select provisions quoted in the pleading. For example, Plaintiffs insist that factual assertions about Capital One‘s ownership of the underlying credit card accounts, servicing activities for COMT, i.e. managing and collecting receivables, and administrative duties for COMET, may not be raised at the pleading stage. (Opp. 8-11.) Because these documents are integral to the
Facts drawn from integral documents, even those not expressly incorporated by reference, are fair game in the context of a
The court may also take judicial notice of the OCC Decision converting Capital One into a national bank located in Virginia. Under
II. Plaintiffs’ Usury Claim is Preempted
A. Statutory Framework
1. Usury under New York and Virginia Law
Under Virginia state law, there is no usury limit as long as the interest rate is disclosed and agreed to by the borrower.
2. The National Bank Act
The NBA authorizes national banks to charge on any loan . . . interest at the rate allowed by the laws of the State, Territory, or District where the bank is located.
3. The Dodd-Frank Act
In the context of the NBA, Dodd-Frank provides that state laws are preempted if they prevent[ ] or significantly interfere[ ] with the exercise by the national bank of its powers.
B. Applying New York Law Would Significantly Interfere With Capital One‘s Powers Under the NBA
In certain circumstances, NBA preemption can be extended to non-national bank entities. Madden, 786 F.3d at 250. To apply NBA preemption to an action taken by a non-national bank entity, application of state law to that action must significantly interfere with a national
Capital One, a national bank, owns and controls the credit card accounts that generate the receivables at issue, which, in turn, collateralize the ABS and fund payments to ABS investors. Capital One maintains the authority to modify terms and provisions of the underlying customer loans, including the interest rate and fees charged to the credit card holders. Although receivables generated by the credit card accounts are transferred to, and collected by Defendants, only Capital One is vested with authority to determine the total receivables that each account yields, based on the interest rate it sets, and the fees it charges.
Capital One exercises these powers pursuant to authority granted by the NBA, which expressly permits Capital One to charge on any loan . . . interest at the rate allowed by the laws of the State, Territory, or District where the bank is located.
Under the circumstances, subjecting Defendants to interest rate limits imposed by New York law would significantly interfere with Capital One‘s exercise of its power as a national bank. The RPA defines Receivables as amounts shown on Capital One‘s records as amounts payable by [borrowers] on any Account, including principal and various fees and charges. (RPA § 1.01, pp. 5, 8.) Accounts are lending agreements between Capital One and any borrower. (Id., pp. 1, 2, 5, 8.) As the Account Owner, Capital One retained the contractual lending relationship with the credit card borrowers and controlled the interest rate charged to their accounts. (See PSA § 1.01; RPA § 5.01(i).) Simply put, Capital One‘s credit card accounts generate the receivables in question, which are the by-product of terms and conditions that Capital One puts in place for those accounts.
Moreover, Plaintiffs do not allege that Defendants, which are non-bank SPEs with no employees, possess executive authority to set the interest rates or fees paid by borrowers, or otherwise determine the amount of receivables the borrowers’
terms of credit and repayment of interest, and would frustrate Capital One‘s ability to operate lending programs on a nationwide basis. See
Relatedly, exposing Defendants to liability under New York‘s usury law would also intrude on Capital One‘s authority to discount[ ] and negotiat[e] promissory notes, drafts, bills of exchange, and other evidences of debt.
In sum, applying state law usury limits to Defendants’ collection of receivables would significantly interfere with Capital One‘s NBA powers, and justifies NBA preemption. See Monroe Retail, Inc. v. RBS Citizens, N.A., 589 F.3d 274, 283 (6th Cir. 2009) ([T]he level of interference that gives rise to preemption under the NBA is not very high.). Indeed, there is no question that Plaintiffs’ usury claim would be preempted as against Capital One, if it were a named Defendant. Plaintiffs’ decision not to name Capital One as a Defendant does not produce a different outcome. National banks, such as Capital One, securitize their credit card receivables to convert those assets into cash proceeds, and access the liquidity needed to fund further credit card lending. Here, Defendants facilitated that goal for Capital One by, inter alia, cordoning the receivables off from Capital One‘s general operating risks, making the assets bankruptcy remote
At bottom, it is apparent from the Amended Complaint, and its integral documents, that the NBA preempts Plaintiffs’ state law usury claims. Applying New York‘s usury limits would significantly interfere with Capital One‘s ability to exercise its power to charge interest on the loans it issues, to sell interests in loan contracts, and to participate in the securitization market. Federal courts routinely dismiss state law claims under
Before moving on to Plaintiffs’ second cause of action, unjust enrichment, the court feels it necessary to examine the Second Circuit‘s decision in Madden. Although Madden‘s reasoning provides a helpful guidepost for NBA preemption analysis, it is ultimately distinguishable. Contrary to Plaintiffs’ insistence that Madden necessitates denying Defendants’ motion to dismiss, the Second Circuit‘s reasoning actually supports granting the motion and dismissing the Complaint.
C. Madden Supports Dismissal of this Action
Plaintiffs contend that Madden determined non-bank debt purchasers like Defendants cannot avail themselves of the National Bank Act to evade liability for charging usurious interest rates. (Opp. 1.) This overstates Madden‘s reach. In Madden, the plaintiff sued debt collector Midland Funding, LLC (Midland) and its affiliate, under New York‘s usury law. Midland had purchased plaintiff‘s debt from FIA Card Services, N.A. (FIA), which had previously acquired plaintiff‘s debt from Bank of America (BoA). 786 F.3d at 247-48. BoA and FIA are both national banks. Id. The plaintiff claimed that Midland ran afoul of New York‘s usury law by charging interest in excess of the state limit. See id. at 247. Midland, which was not a national bank, argued that the NBA preempted the state law usury claim because Midland acquired plaintiff‘s credit card loan from a national bank that was entitled to charge an interest rate in excess of New York‘s usury limit. Id. at 250.
The Second Circuit disagreed. The court observed that, although NBA preemption was available to non-national bank entities where the application of state law risked significantly interfering with a national bank‘s powers, it had usually been in circumstances where the non-bank entity acted on behalf of a national bank in
Madden is readily distinguishable from the present circumstances. In contrast to Madden, where plaintiff‘s account was sold outright to a non-bank debt collector, Capital One retains ownership and control of the relevant credit card accounts. (E.g., Prospectus 63.) Indeed, the sponsor bank‘s continued ownership of its debtors’ accounts, despite assigning the accounts’ receivables, is a hallmark of credit card securitization. See Fed. Deposit Ins. Corp., Credit Card Securitization Manual 10-11 (2007),
Capital One‘s role as ABS sponsor and servicer, and retention of ownership and control over the underlying credit card loans (see, e.g., Prospectus 21; PSA §§ 3.01(a)-(b), 3.02, 4.03(c)), is not analogous to Madden, where BoA and FIA severed their contractual ties to plaintiff‘s debt. The centrality of
this fact caused the Second Circuit to distinguish, but not reject, two notable Eighth Circuit decisions: Krispin v. May Dept. Stores, Inc., 218 F.3d 919 (8th Cir. 2000), and Phipps v. FDIC, 417 F.3d 1006 (8th Cir. 2005). Although neither Krispin nor Phipps are controlling law, both cases are persuasive, and worth examining in detail.8
excess of the limit under Missouri‘s usury law. Id. at 922. May Stores argued that the plaintiffs’ state law claims were preempted by the NBA because the assignment and transfer of the accounts to May Bank was fully effective to cause the bank, and not the store, to be the originator of [the plaintiffs‘] accounts subsequent to that time. Id. at 923.
The Eighth Circuit agreed. May Store‘s purchase of receivables from May Bank did not diminish the fact that it is now the bank, and not the store, that issues credit, processes and services customer accounts, and sets such terms as interest and late fees. Krispin, 218 F.3d at 924. The Eighth Circuit held that, even though the NBA ostensibly governs only national banks, the circumstances warranted look[ing] to the originating entity (the bank), and not the ongoing assignee (the store), in determining whether the NBA applies. Id. at 924 (internal citation omitted).
In Phipps, plaintiffs initiated suit in Missouri state court to recover fees charged on second mortgage loans by Guaranty National Bank of Tallahassee (GNBT), a federally chartered national bank. Phipps, 417 F.3d at 1008-09. The plaintiffs also claimed the loan origination and loan discount fees charged by GNBT were actually finder‘s fees paid to a third party, non-bank Equity Guaranty LLC (Equity). Id. at 1009. According to plaintiffs, defendants’ actions violated the Missouri Second Mortgage Loan Act. Defendants removed the case to federal court. The district court denied plaintiffs’ subsequent motion to remand.
In affirming the district court, the Eighth Circuit agreed that the fees at issue conformed to the OCC‘s definition of interest, and therefore, plaintiffs had actually asserted a claim for excessive interest, i.e. usury. Because the NBA completely preempted state law claims challenging interest charged by national banks, and the alleged unlawful fees qualified as interest under the NBA, both the removal and dismissal of the plaintiffs’ complaint were warranted. Id. at 1011-13. With respect to the alleged finder‘s fee paid to Equity, the court examined its precedent in Krispin, which urged looking to the originating entity (the bank), and not the ongoing assignee . . . in determining whether the NBA applies. Id. at 1013 (quoting Krispin, 218 F.3d at 924). GNBT was the acknowledged lender that funded and made the loans and charged the fees, and accordingly, plaintiffs failed in their attempt to evade the NBA by characterizing certain fees as non-interest finder‘s fees paid to Equity. Id.
The Second Circuit found Krispin and Phipps distinguishable, but did not repudiate their reasoning. Far from it. With respect to Krispin, Judge Straub, writing for the Madden panel, discerned that when the national bank‘s receivables were purchased by May Stores, the national bank
The Second Circuit‘s basis for distinguishing Madden from Krispin and Phipps does not obtain here. Capital One both retained ownership of the underlying credit card accounts, as in Krispin, and determined the rate of interest to which Plaintiffs now object, as with Phipps. Plaintiffs apparently recognize this, and so, downplay Madden‘s analysis of Krispin as immaterial to the Second Circuit‘s non-preemption finding. (Opp. 17.) According to Plaintiffs, the Second Circuit‘s treatment of Krispin in Madden makes clear that the supposedly differentiating fact in Krispin was of no significance. (Id.) Therefore, even if there had been retained account ownership, the Second Circuit would not have found significant interference with national bank powers. (Id. (citing Madden, 786 F.3d at 252-253).)
Plaintiffs misapprehend Madden, and consequently arrive at a flawed conclusion. The Second Circuit did observe that May Bank‘s designation as the originating entity had no significance to the Eighth Circuit‘s preemption finding. But this was only because the gravamen of Krispin‘s preemption holding was the national bank‘s ongoing relationship with the debt in question, not its nominal designation as debt originator. Judge Straub explained, using a counterfactual, that the Eighth Circuit would have reached a different outcome had May Bank originated the credits in question, but subsequently sold them outright to a new, unrelated owner, divesting itself completely of any continuing interest in them, so that its operations would no longer be affected by the application of state law to the new owner‘s further administration of the credits. Madden, 786 F.3d at 252 n.2. The Second Circuit‘s point was that the originator‘s status as a national bank was not dispositive. As Judge Straub‘s counterfactual makes clear, May Bank‘s nominal status as originator was not the differentiating fact of Krispin, but rather, the bank‘s continued role in issuing credits, processing and servicing customer accounts, and setting interest and late fees. See Krispin, 218 F.3d at 924. All of which applies to Capital One. (See, e.g., Prospectus 63.) At bottom, nothing in Madden supports Plaintiffs’ sweeping assertion that the Second Circuit would have rejected preemption even if BoA and FIA retained ownership of the credit card accounts at issue. Here, Capital One retains ownership of the underlying credit accounts, and reserves the right to change terms, such as interest and late fees. It thus maintains a continuous relationship with the customer accounts that goes beyond its designation as originator of those accounts.9
apply NBA preemption where a non-national bank entity sought to charge an interest rate exceeding that permitted by New York law after it had purchased the debt from a national bank entity. 365 F. Supp. 3d 319, 333 (W.D.N.Y. 2019). The Cole court‘s review of Madden, and the distinction drawn with Phipps, led it to conclude that interest charged by a national bank . . . does not become interest charged by a third-party once the balance has been sold off. Id. at 334. And in Petersen, Judge Vilardo adopted the Judge McCarthy‘s decision recommending preemption, focusing particularly on the distinction between Madden and Krispin discussed above. Petersen, 2020 WL 5628935, at *6 (Unlike in Madden—where the national banks had entirely discharged, and no longer possessed any further interest in, the loan account—here JPMCB retains a number of rights[;] JPMCB is therefore akin to the national bank in Krispin[.]). In short, Petersen, Cole, and Gissendaner recognize that Madden‘s outcome turned on the fact that BoA and FIA relinquished their interests in the underlying debt. To reiterate, that is not the case with Capital One.
In sum, although Defendants acquired credit card receivables from Capital One in the course of the securitization transactions, Capital One retains ownership and control of the underlying credit card accounts, remains the entity that lends money to Plaintiffs, charges fees and interest to Plaintiffs, sets Plaintiffs’ interest rates, establishes Plaintiffs’ credit limits, and receives principal and interest payments from Plaintiffs. Madden is therefore not only distinguishable, it supports this court‘s conclusion that the NBA preempts Plaintiffs’ usury claim.
III. The Unjust Enrichment Claim is Derivative and Duplicative
Plaintiffs’ unjust enrichment claim under common law also fails to state a claim because it is duplicative of Plaintiffs’ usury claim, and therefore preempted. The Amended Complaint alleges that Defendants have been and continue to be unjustly enriched at the expense of Plaintiffs and the Class as a result of their payment of excessive and improper interest rates. (¶ 90.) Plaintiffs’ unjust enrichment claim presumes Defendants charged excessive interest, i.e. violated New York‘s usury statute. As stated above, Defendants’ collection of receivables was not subject to New York‘s usury law, but rather Virginia‘s. Virginia does not prescribe interest rate limits, as relevant here. Accordingly, the court cannot conceive of any set of facts upon which [Plaintiffs] would fail to establish [their usury claim], but nonetheless succeed in proving unjust enrichment. Silva v. Smucker Nat. Foods, Inc., No. 14-CV-6154 JG RML, 2015 WL 5360022, at *12 (E.D.N.Y. Sept. 14, 2015); see also Shak v. JPMorgan Chase & Co., 156 F. Supp. 3d 462, 479-80 (S.D.N.Y. 2016) (because the plaintiffs articulate no theory of unjust conduct independent of the alleged acts underlying the plaintiffs’ other claims, the unjust enrichment claim is derivative and duplicative.). Therefore, Plaintiffs’ unjust enrichment claim also fails.
CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss is GRANTED. Plaintiffs’ Amended Complaint is DISMISSED in its entirety. Plaintiffs fail to state a claim under New York‘s usury statute, which is preempted by the National Bank Act. The court declines to consider the applicability of the valid when made doctrine because the issue is moot. Moreover, Plaintiffs’ unjust enrichment claim is dismissed as duplicative of their preempted usury claim. Finally, the court finds that any pleading amendment would be futile, and therefore dismisses the Amended Complaint with prejudice. The Clerk of the Court is respectfully directed to enter judgment and to close the case.
SO ORDERED.
Dated: September 28, 2020
Brooklyn, New York
/s/
KIYO A. MATSUMOTO
United States District Judge
Eastern District of New York