A United States Magistrate Judge for the United States District Court, Western District of New York, today issued his report and recommendation on the defendants’ motion to dismiss in Petersen et al. v. Chase Card Funding, LLC et al., No. 1:19-cv-00741 (W.D.N.Y. June 6, 2019).  The Magistrate Judge recommended dismissal of both the plaintiffs’ usury and unjust enrichment claims on preemption grounds, stating that “the preemption analysis boils down to this: does the application of New York’s usury statutes to these defendants ‘prevent’ or ‘significantly interfere’ with Chase USA’s power to sell or assign the receivables generated by its credit card accounts?”.  The Magistrate Judge answered this question in the affirmative, reasoning that “since applying New York’s usury statutes to defendants would prevent Chase USA’s ability to sell or assign the receivables from its credit card accounts, they are preempted.”

The Magistrate Judge relied on Supreme Court and Second Circuit precedent as to what constitutes a “sale” and an “assignment” citing case law holding that “[i]t is essential that . . . the seller’s right of property must pass to the purchaser”. MacDonald v. Commissioner of Internal Revenue, 76 F.2d 513, 514 (2d Cir. 1935) (emphasis added by Magistrate Judge).  The Magistrate Judge concluded that “[i]f Chase USA can receive interest exceeding state usury limits but defendants cannot, then Chase USA’s right of property in the receivables has not passed to them, and there has been no sale.”  The Magistrate Judge similarly analyzed Chase USA’s right to assign the receivables.

The lawsuit had been filed against Chase Card Funding LLC and Chase Issuance Trust, special purpose entities in the JPMorgan Chase Bank sponsored credit card securitization program, and Wilmington Trust Company, as trustee of Chase Issuance Trust. The putative class action was brought by several New York residents with credit card accounts originated by JPMorgan Chase Bank (which is not named as a defendant), who allege that JPMorgan Chase Bank securitized their credit card receivables in Chase Issuance Trust. The complaint contends that the defendants are required to comply with New York state’s usury law under the United States Court of Appeals for the Second Circuit decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S. Ct. 2505 (June 27, 2016) because they are non-bank entities that are not entitled to the benefits of federal preemption.[1]

The plaintiffs will have until February 5, 2020 to file any objections to the Magistrate Judge’s report and recommendation (unless otherwise ordered by the district judge).

[1] As reported in the Chase Issuance Trust, Form 10-D, filed July 16, 2019.