The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
Predatory consumer lender, CashCall, Inc., tried to avoid state usury laws by making loans through an LLC created by an Indian tribe. The loans had a built-in choice of law provision favoring tribal law. CashCall immediately bought all such loans and provided the funding. In litigation initiated by the Consumer Financial Protection Bureau (CFPB), the Central District Court of California (the District Court) tossed out the choice of law provision and found CashCall liable for an “unfair, deceptive, or abusive act” based on the state law violations but restricted its award of damages. In a recently published opinion, Consumer Financial Protection Bureau v. CashCall, Inc., 2022 WL 1614930 (9th Cir. May 23, 2022), the Ninth Circuit (the Court) affirmed the rejection of the choice of law provision and the subsequent liability of CashCall for violation of consumer protection laws, then reversed the limitation on available damages, ruling that CashCall had acted recklessly, which allowed for tier-two damages, and also that both legal and equitable restitution were viable recovery avenues. It remanded for consideration of these additional damages.
To view the opinion, click here.
CashCall makes high-interest consumer loans. Until 2006 California was its primary market, but it then decided to expand its operations nationally. In an attempt to avoid various states’ usury and other consumer protection laws, it decided to pay two federally insured state-chartered banks to make loans, which it then purchased and serviced. Under federal law, those banks were exempt from out-of-state usury limits. This scheme drew regulatory scrutiny, putting pressure on both banks, which withdrew from the arrangement in late 2008.
To replace this means to avoid usury, CashCall then devised a new scheme whereby it paid a member of the Cheyenne River Sioux Tribe to form Western Sky Financial, LLC, as a South Dakota LLC to make the loans, all of which were purchased by CashCall for servicing and collection, with all risks on CashCall. The Western Sky interest rates ranged from 89 to 169 percent. The loans all carried a choice of law provision calling for application of tribal law. CashCall sought advice about this arrangement from a scholar of federal Indian law, who opined that the scheme “should work but likely won’t.”
By 2011 several states had initiated enforcement actions against CashCall and, on advice of counsel, in 2013 it ceased purchasing new loans but continued to service and collect on the existing ones. The CFPB sued CashCall under the Consumer Financial Protection Act (CFPA) in District Court for engaging in “unfair, deceptive, or abusive acts.” The District Court found liability on summary judgment, disregarding the tribal choice of law, then held a bench trial on the appropriate remedy. The CFPA has three tiers of civil penalties, the first requiring no scienter, the second requiring a finding of reckless actions, and the third tier turning on a knowing violation. The District Court concluded that CashCall did not act recklessly and imposed only first-tier penalties of about $10 million. It also denied the CFPB’s request for $235 million in restitution, which reflected the total interest and fees on the void loans.
CashCall appealed the choice of law and liability conclusions and the CFPB cross appealed the limitations on remedies. The Court affirmed on liability, but reversed and remanded on damages, finding that CashCall acted recklessly as a matter of law after 2013 and also that restitution was an appropriate remedy here.
The Court first addressed CashCall’s argument that the CFPB lacked authority to pursue the action because it was unconstitutionally structured, arguments which had disposed of by the Supreme Court by the time of this opinion and will not be covered in this review. It then turned to the choice of law arguments, agreeing with the District Court that federal common law choice-of-law rules applied. Under these rules there are two circumstances in which the parties’ choice does not control: (1) if the chosen jurisdiction has no substantial relationship to the parties or the transactions and (2) if application of the chosen law would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen jurisdiction. The Court concluded that both provisions required that the choice of law be rejected. The Cheyenne River Sioux Tribe had no relationship to the parties, the transactions occurred mostly online and certainly not on tribal land, and the true party to the loans was CashCall, not Western Sky. Additionally, the home states of the borrowers had fundamental policies to enforce usury laws which, if not followed, would result in predatory interest rates, such as the ones here. As a consequence, state laws would control the transactions.
CashCall then argued that a violation of the CFPA could not be founded on deception under state law. The Court tossed this argument as not supported by the text of the CFPA, since the CFPA makes unlawful any engagement in unfair, deceptive or abusive practices, no matter the source of the offended law. It also rejected that applying the CFPA here would be de facto federalization of an area of state regulation by noting that the enforcement action was nationwide, not directed toward one state’s regulation of lending.
The Court next considered the CFPB’s assertion that a tier-two penalty based on reckless actions was warranted. The District Court had excused CashCall from reckless behavior because it had relied on advice of counsel and its model had not initially been declared unlawful. The Court cut through this subterfuge because the intent of CashCall to avoid state usury laws, despite hearing from several advisors that its actions were risky, was evident. Even if there was some doubt when the Western Sky loans were initiated, however, by 2013 when CashCall stopped buying new loans it was aware the loans were tainted. Notwithstanding this realization, it continued to enforce the void loans by all manner of collection techniques. From 2013 forward, its behavior was reckless, warranting tier-two penalties. The remand was to fix those penalties.
Finally, the opinion contains an extensive discussion of both legal and equitable restitution and concluded that the District Court had placed unlawful limitations on the availability of restitution as a remedy. The Court even left open the possibility that measuring the restitution on net revenues, not just net profits, could be considered by the lower court.
This opinion is packed with issues and analyses; each part should be read directly by any practitioner or court who wishes to understand the nuances addressed. The comparison of legal and equitable restitution is too extensive to adequately summarize here, but it is intellectually sound and informative when digested. In this author’s view, this decision was long in coming and the assessments against a known predatory lender (just ask any consumer bankruptcy lawyer in California about CashCall loan terms as well as its aggressive collection techniques and you will understand why I say “known”) were well-deserved. I predict extensive negotiations will settle the penalty and restitution damages before the District Court rules on remand.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.