News Round-up

Madden uncertainty to continue

Tuesday 28 June 2016 11:25 London/ 06.25 New York/ 19.25 Tokyo

The US Supreme Court has denied certiorari in the Madden vs Midland Funding case, electing not to review a Second Circuit decision that found state usury laws applied to debt that had been purchased from a national bank (SCI passim). The decision is expected to prolong the legal uncertainty related to the marketplace lending and securitisation industries.

Other circuits are not anticipated to adopt the reasoning of the Second Circuit - in part due to the arguments made by the Solicitor General - but the appellate decision stands as good law in New York. "The case will return to the district court for further consideration of other issues and there is reason to believe that the outcome there may be favourable for the financial services industry, due to a choice of law issue, which remains to be decided. For the foreseeable future, parties can be expected to structure their arrangements in an attempt to distinguish the Madden decision from their transaction - though it is not clear how best to do that," observes Vincent Basulto, partner at Richards Kibbe & Orbe.

The decision nevertheless opens the door for further lawsuits to be brought against marketplace lenders. Indeed, the Supreme Court yesterday allowed a class-action lawsuit against debt collector Encore Capital Group to move forward, following the denial of cert.

Joseph Cioffi, chair of the insolvency & financial institutions practice group and partner at Davis & Gilbert in New York, says: "Not only are marketplace lenders at risk, but so will be the sponsors and other participants in the securitisation of marketplace loans to the extent loans are held unenforceable or interest rates are reduced. Experience shows that when cashflows to investors are reduced, litigation follows."

28/06/2016 11:25:37