By Michael J. Riedl

Consumer lenders across America breathed an initial sigh of relief on February 8, as the Northern District of California sided with the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”) in upholding the “valid-when-made” rule pertaining to high-interest consumer loans.[1]  By upholding this rule, the district court provided certainty in the first high-level challenge to the OCC and FDIC’s rules that were promulgated on June 2, 2020, and July 18, 2020, respectively.[2]  In a nutshell, the rules reaffirmed the allegedly long-standing—though recently in considerable uncertainty—authority for secondary market participants to purchase loans or loan obligations, and collect on the debt at the same interest rate as that of the original bank lender.[3]  In fact, such authority can be noticed in the Supreme Court as far back as 1833, when the Court held that as long as a loan was “in its inception, . . . unaffected by usury, [it] can never be invalidated by any subsequent usurious transaction.”[4]

While American banking law is complicated, irrational, inefficient, and “offends all of our aesthetic and logical instincts,” it largely works.[5]  In 1978, the Supreme Court espoused a fundamental tenet of modern American banking law.  In the landmark case of Marquette National Bank of Minneapolis v. First of Omaha Service Corp.,[6]  the Court held that a nationally chartered bank may export the maximum allowable interest rate of its charter state to loans made in other states.[7]  For example, a nationally chartered bank in Utah, where there is no statutory cap on interest rates,[8] could offer a loan to a citizen of New York at 50% APR, which is far more than the New York statutory maximum of 16%.[9]  The Marquette decision caused large, nationally chartered banks to consider moving to states with high, or nonexistent, usury caps or to aggressively lobby their state legislatures to raise interest rates.[10]  As a result, the nascent credit card and subprime lending boom continued to accelerate.

The development of a robust secondary market for loan obligations further enhanced the credit card and subprime lending boom.  For example, an originating national bank could find willing buyers, in collection agencies, of nonperforming accounts and remove loans from their balance sheet by selling to secondary market participants who would bundle and securitize the loan obligations.[11]  Implicit in the sale of the loans, was that the buyer-assignee—often times a nonbank entity—would be able to “step into the shoes” of the originating bank and collect on the debt obligation at the same interest rates as the originating bank, had they kept the loan.  Such a principle is consistent with common law principles of assignment taught in first-year contract classes in American law schools.[12]  However, considering that only nationally and state-chartered banks are allowed to export interest rates, when they assign or sell their loans to nonbank entities, can those entities collect on those obligations at the same interest rates as the national bank?

For the longest time, the answer to that question was a resounding yes.  However, in 2015, the Second Circuit threw a wrench in the secondary market machinery.  In Madden v. Midland Funding, LLC,[13] the Second Circuit held that when a nationally chartered bank sells loans to a nonbank entity, that nonbank entity cannot collect on the debt at a rate that would be usurious under state law.[14]  The decision was immediately and widely panned.[15]  Despite a bevy of amicus briefs and the invitation of the solicitor general to write a brief, the Supreme Court denied certiorari.[16]  The uncertainty was immediate in the secondary loan market.[17]

For example, consider a $5,000 credit card loan to a consumer in New York that was originated by a nationally chartered bank in Utah.  Because of the decision in Marquette, the Utah bank can charge whatever interest rate it would like on the debt, as Utah does not have a usury limit for contracting parties.[18]  For purposes of the illustration, assume that the rate on past-due debt was 36%.  After the debt went into charge-off, the Utah bank sold it to a debt collection agency in New York.  Prior to Madden, both parties could be sure that the contractual interest rate, 36%, would be valid for the collection agency to pursue, and eventually seek a judgment on.  However, after Madden, that would no longer be the case.  The debt could only be collected at the statutory maximum of 16% in New York.[19]  Thus, after Madden, debt held by collection agencies or in asset backed securities was, almost overnight, worth considerably less.

Initially, Congress tried to take legislative action to fix the “Madden problem,” with the House of Representatives passing a bill to ensure that the “valid-when-made” doctrine would become law.[20]  However, the bill stalled in the Senate, which led the OCC and the FDIC to promulgate rules through notice and comment to ensure that if a loan was not usurious at the time it was made, and was thus “valid,” that loan did not become usurious through sale or assignment to a nonbank entity.[21]  Within two months, California, Illinois, and New York filed suit for declaratory and injunctive relief against the new rules.[22]  The plaintiff states first argued that the OCC rule would impermissibly allow the exportation of federal preemption of state law usury claims to secondary market participants. The states also argued that the OCC was trying to address the question as to whom the exportation doctrine applies.[23]  If either of these were true, then the OCC or FDIC would have exceeded its authority under Chevron, U.S.A., Inc.  v. National Resources Defense Council, Inc.[24]

However, the Northern District of California disagreed with the plaintiff states’ characterization, and held that the rule was addressing the question of whether a national bank must alter the contractually set interest rate of a loan it originated when selling it on the secondary market to a nonbank entity.[25]  Since the controlling statute, 12 U.S.C. § 85, did not speak directly to the issue, the OCC had the authority to promulgate the rule under Chevron.[26]  Moving on to the second question under a Chevron analysis, whether the OCC’s interpretation of 12 U.S.C. § 85 was manifestly unreasonable, the district court held that it was not.[27]    Rejecting testimony from a leading scholar on the issue, Professor Adam Levitin, that the “valid-when-made” principle is a modern invention, the court relied on basic contract law to justify its holding: that an assignee steps into the shoes of an assignor.[28] Thus, Michael J. Hsu, the Acting Comptroller of the Currency, stated after the ruling, the “legal certainty” in the ruling allows for “the interest permissible before the transfer [] to be permissible after the transfer.”[29]

[1] See Order Resolving Cross-Motions for Summary Judgment, California v. OCC, No. 4:20-cv-05200-JSW (N.D. Cal. Feb. 8, 2022); Order Resolving Cross-Motions for Summary Judgment, California v. FDIC, No. 4:20-cv-5860-JSW (N.D. Cal. Feb. 8, 2022).

[2] Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 85 Fed. Reg. 33,530 (June 2, 2020); Federal Interest Rate Authority Rule, 85 Fed. Reg. 44,146 (July 22, 2020).

[3] See id.

[4] Nichols v. Fearson, 32 U.S. 103, 106 (1933).

[5] See John D. Hawke, Jr., Comptroller of the Currency, Remarks Before the Exchequer Club Washington, D.C., (Apr. 16, 2003),

[6] 439 U.S. 299 (1978).

[7] Id. at 308.

[8] See infra note 18.

[9] N.Y. Banking Law § 14-a (McKinney 2014).

[10] See Charles R. Geisst, Beggar Thy Neighbor 221–23 (2013).

[11] See Michael Marvin, Interest Exportation and Preemption: Madden’s Impact on National Banks, the Secondary Credit Market, and P2P Lending, 116 Colum. L. Rev. 1807, 1837–40 (2016).

[12] See, e.g., Charles L. Knapp et al., Problems in Contract Law 1115–34 (9th ed. 2019); Restatement (Second) of Contracts § 317 (Am. L. Inst. 1981); 29 Williston on Contracts § 74:10, Assignment of contracts rights, generally (4th ed. 2021).

[13] 786 F.3d 246 (2015).

[14] Id. at 249.

[15] See Madden v. Midland Funding, LLC: Potentially Far Reaching Implications for Non-Bank Assignees of Bank-Originated Loans, Paul Hastings (June 11, 2015),

[16] 136 S. Ct. 2505 (2016).

[17] Outside of immediate uncertainty, the fact that secondary market participants may be less willing to purchase high-interest debt caused lenders in Second Circuit states to lend less in terms of average loan size and total number of loans. See Colleen Honigsberg et al., How Does Legal Enforceability Affect Consumer Lending? Evidence from a Natural Experiment, 60 J.L. & Econ. 673, 645 (2017).

[18] Utah Code Ann. § 15-1-1 (2019).

[19] N.Y. Banking Law § 14-a (McKinney 2014).

[20] Protecting Consumers’ Access to Credit Act of 2017, H.R. 3299, 115th Cong. (2018) (amending 12. U.S.C. § 85 to add “[a] loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”). For a more thorough discussion of the congressional attempts to codify the “valid-when-made” doctrine, see Abbye Atkinson, Rethinking Credit as Social Provision, 71 Stan. L. Rev. 1093, 1113–20 (2019).

[21] See supra note 2 and accompanying text.  Specifically, the OCC’s rule, as codified in 12 C.F.R. § 7.4001(e) adds “[i]nterest on a loan that is permissible under 12 U.S.C. 85 shall not be affected by the sale, assignment, or other transfer of the loan.”

[22] See Complaint for Declaratory and Injunctive Relief, California v. OCC, No. 20-cv-5200 (N.D. Cal. July 29, 2020).

[23] See supra note 1, at 10–15.

[24] 467 U.S. 837 (1984).

[25] See supra note 1, at 12.

[26] Id. at 13.  While this is what the district court held, it does not take many logical connectors. See also 12 U.S.C. § 85.

[27] See supra note 1, at 13.

[28] See supra note 1, at 15. Professor Levitin takes the view that the “valid-when-made” doctrine is not well established, but rather is a modern invention “fabricated by attorneys for financial services trade associations.” See Adam J. Levitin, Spurious Pedigree of the “Valid-When-Made” Doctrine, 71 Duke L.J. Online 87 (2022).

[29] Press Release, Office of the Comptroller of the Currency, Acting Comptroller Issues Statement on Court Decision Regarding ‘Madden Rule’ (Feb. 9, 2022)



By Eric Jones

On January 7, 2016, the Fourth Circuit issued a published opinion in the criminal case United States v. Martinovich.  At trial, Jeffrey A. Martinovich (“Martinovich”) was convicted of one count of conspiracy to commit mail and wire fraud, four counts of wire fraud, five counts of mail fraud, and seven counts of money laundering.  On appeal, Martinovich argued that the district court’s frequent interruptions and interferences at trial deprived him of a fair trial, and that the treatment of sentencing guidelines as mandatory led to an excessive sentence.  The Fourth Circuit affirmed his conviction in part, vacated in part, and remanded for resentencing before a different judge.

The Investment Firm Fraud

In 2005, Martinovich became the sole owner and CEO of MICG, a financial services company that provided investment services to clients.  In November of 2006, MICG formed MICG Venture Strategies, LLC (“Venture Fund”) as a hedge fund for MICG’s clients to invest in EPV Solar, Inc., a privately held solar energy company.  Martinovich was given a managerial role in the Venture Fund, and had sole authority for investment decisions, asset valuations, incentive allocation, and management fees.  Martinovich received a 1% management fee and 20% incentive fee based on the Venture Fund’s performance.  Determining the value of the management and incentive fees owed to Martinovich required an independent valuation of the EPV shares held by the Venture Fund.

Despite the requirement of independent valuations, Martinovich had an EPV shareholder and consultant perform a valuation by misleading him into thinking the valuation was only to be used internally at EPV.  Based on this valuation, Martinovich took an incentive/management fee of $357,019 for end-of-year 2007.  Through 2009, Martinovich personally and consistently inflated the value of EPV shares and other assets held by the Venture Fund in order to justify increased incentive and management fees.  Additionally, Martinovich “(1) sought unsophisticated investors; (2) failed to disclose EPV’s dire condition; (3) misinformed investors about their redemption ability; and (4) used new investment money to pay other investors.”  In October of 2012, Martinovich was charged with conspiracy to commit mail and wire fraud and multiple counts of mail and wire fraud.

The District Court’s Interruptions

At trial, the district court “frequently interrupted counsel and questioned counsel’s tactics.”  For example, at one point the court asked Martinovich’s counsel to clarify his line of questioning.  When he attempted to do so, the court interrupted saying “[n]o, don’t say anything.”  When counsel responded “[y]ou asked me why,” the court answered “I did, and I made a mistake.”  On another occasion, the district court “criticized [Martinovich]’s counsel for developing a sequential timeline. Shortly thereafter, however, the district court reproached [Martinovich]’s counsel for proceeding in a non-sequential manner.”  The district court additionally interrupted the presentation of evidence.  For example, defense counsel, addressing a witness, said “[a]nd why is the date-” when the court interrupted, asking “[s]top. Have we got a date when this all took place?”  Defense counsel responded “[t]hat’s what I’m asking him.”  At times, the district court even attempted to move forward in time and interfered with the defense’s presentation, interrupting repeatedly to ask if they could move from discussing events in 2005 and “get to somewhere near here, get up to 2007.”  When defense counsel responded that they were getting there, the court answered “[w]ell, get there.  Excuse me.  I want to get there, okay?”  At no point during trial did Martinovich’s counsel object to any of the district court’s comments, questions, or disruptions.

The Sentencing Guidelines

At sentencing, the district court stated numerous times that “it viewed the Guidelines as mandatory and that its discretion was restricted to a sentence that fit within the range set forth in the Guidelines.”  Counsel for both Martinovich and the Government repeatedly argued that the Guidelines were merely advisory and not mandatory, but the district court refused to agree.  Despite expressly acknowledging that “the Supreme Court indicates that they are advisory,” the court continually stated that “I will follow the guidelines only because I have to.  I find that they’re not discretionary, they’re mandatory.”  The court even stated that “[t]he sentences now are draconian” in reference to the Guidelines.  Confronted with a Guideline range of 135-168 months, the district court sentenced Martinovich to 140 months.

The Standard for Judicial Interference

Because Martinovich did not timely object at trial, the alleged judicial interference was reviewed only for plain error.  Even after finding plain error, the Fourth Circuit explained, for the convictions to be overturned, “the error must be so prejudicial that it affected [Martinovich]’s substantial rights, i.e., it had to change the outcome of the trial.”  The Circuit held that although the district court crossed the line and was in error, Martinovich was not deprived of a fair trial, and thus the convictions must be affirmed.  The Fourth Circuit held that the trial record was “replete with the district court’s ill-advised comments and interference,” and stated that “[c]onsidering the breadth of the district court’s actions, from questioning witnesses and counsel to interrupting unnecessarily, we find that the district court strayed too far from convention. Ultimately, we find the district court’s actions were in error.”

As to the second prong, however, the Circuit concluded that the error did not prejudice Martinovich.  The Fourth Circuit primarily based this holding on the plain error standard of review, which is extremely deferential.  The Court held that “although the district court’s interferences in this case went beyond the pale, in light of the plain error standard of review and the overwhelming evidence against [Martinovich], the district court’s conduct did not create such an impartial and unfair environment as to affect [Martinovich]’s substantial rights and undermine confidence in the convictions.”

The Standard for Criminal Sentencing

The Fourth Circuit first explained that criminal sentences are reviewed for abuse of discretion.  The Circuit further stated that “[u]pon a finding of a procedural error, the error shall be subject to harmlessness review.”  “When a district court has treated the Guidelines range as mandatory, the sentence is procedurally unreasonable and subject to vacatur” if the resulting sentence is longer than the defendant would otherwise be subject to.

After concluding that significant procedural error had occurred, the Circuit Court explained that “had the district court considered the Guidelines as discretionary, [Martinovich]’s sentence may have been lower.”  The Court pointed to several instances where the district court expressed concern that the Guidelines set too high a sentence, and did not consider Martinovich’s “good character.”  This, the Fourth Circuit held, left them “obliged to vacate [Martinovich]’s sentence and remand for resentencing.”

The Fourth Circuit Affirmed in Part, Vacated in Part, and Remanded

Because the evidence against Martinovich was overwhelming, the Fourth Circuit affirmed his convictions despite the repeated interruptions and interference by the trial court.  Because Martinovich likely received a lengthier sentence than he otherwise would have if the trial court had treated the Guidelines as advisory and not mandatory, the Circuit reversed the sentence and remanded for further sentencing proceedings.  Finally, because the Circuit feared that “remanding the case to that court with our own reminder of the correct law would most likely be an exercise in futility,” because of the trial court’s repeated misunderstanding of the advisory nature of the Guidelines, the Circuit ordered that the further proceedings occur before a different judge.