A federal appeals court decision Friday allows a lawsuit involving interest rates in debt collection cases to move forward as a class action.

Encore Capital Group allegedly violated New York usury laws by charging double-digit interest rates on overdue debts. The 2nd U.S. Circuit Court of Appeals in New York said Encore entities, Midland Credit Management and Midland Funding, don't qualify as national banks and thus don’t deserve protections that banks receive against claims brought under state usury laws. 

The decision should make it easier for consumers to challenge interest rates in collection cases. The decision allows plaintiff Saliha Madden to try to win class-action status against the Midland units, on behalf of up to 50,000 consumers who live in New York state. 

Madden had objected to a 27% interest rate that Midland sought to impose on an estimated $5,000 debt it had bought, and which she had incurred on a credit card account opened years earlier at Bank of America, according to court documents.

Appellate Judge Chester Straub said the Midland units acted solely on their own behalves, as the owners of the debt, and therefore don’t have protections of the federal National Bank Act, including against claims that they violated the Fair Debt Collection Practices Act.

The decision reversed a dismissal of Madden's lawsuit by U.S. District Judge Cathy Seibel in White Plains, N.Y. The district court ruled the Midland units could charge interest rates higher than New York’s 25% limit because they were nationwide entities and state laws should not apply. 

The appellate court directed Seibel to consider whether Delaware law, which may allow the interest rate Midland wanted to charge, should apply, rather than New York law.

Encore Capital last year collected $1.6 billion on debts acquired from banks, credit card companies and other lenders. In a recent filing with the Securities and Exchange Commission, Encore officials said: "We operate in an extremely litigious climate and currently are, and may in the future be, named as defendants in litigation, including individual and class action lawsuits under consumer credit, consumer protection, theft, privacy, data security, automated dialing equipment, debt collections and other laws. Many of these cases present novel issues on which there is no clear legal precedent, which increases the difficulty in predicting both the potential outcomes and costs of defending these cases."The case is Madden v Midland Funding LLC et al, 2nd U.S. Circuit Court of Appeals, No. 14-02131.

Separately, Encore Capital is currently negotiating a settlement in a consolidated lawsuit involving some 150 class action plaintiffs, alleging that the company violated federal laws by harassing them over their cellphones without permission and despite their objections. A settlement is expected within 30 days, according to one of the lead attorneys in that case. 

In another case, Midland Credit Management in March reached a settlement with the New York City Department of Consumer Affairs related to an investigation of the company’s collection practices that started in 2012.

A consent order outlined the details of the settlement, including that, "the parties wish to completely settle, release and discharge all claims and any disputes and disagreements between Midland and the Department with respect to Midland’s business activities in New York City."


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