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From Banking and Finance Law Daily, June 3, 2014

State’s high court rejects finance company’s challenges to AG’s $13.8 million recovery for company’s “rent-a-bank” scheme

By Thomas G. Wolfe, J.D.

Despite a finance company’s numerous challenges to a West Virginia state court’s rulings in favor of the West Virginia Attorney General for the AG’s enforcement action against the company for violations of West Virginia law in a “rent-a-bank” scheme, the West Virginia Supreme Court of Appeals upheld the lower court’s rulings. The West Virginia high court not only upheld the state trial court’s determination that CashCall, Inc., violated the West Virginia Consumer Credit Protection Act (WVCCPA) and other state laws by engaging in abusive debt collection and usurious lending practices through its marketing agreements with a bank, but also affirmed the court’s granting of $13.8 million in civil penalties and restitution, as well as its awarding of $446,180 for the West Virginia AG’s attorney’s fees and costs (CashCall, Inc. v. Morrisey, May 30, 2014).

Background. As recounted by the court, in approximately 2006, the finance company, CashCall, Inc., entered into marketing agreements with the First Bank and Trust of Millbank (FB&T). FB&T was chartered in South Dakota and was supervised and insured by the Federal Deposit Insurance Corporation.

Typically, FB&T made small, unsecured loans to consumers in various states—including West Virginia—at high interest rates. For example, under CashCall’s marketing agreements with FB&T, CashCall purchased FB&T’s loans within three days of each loan’s origination date. During the period of August of 2006 and February of 2007, CashCall purchased loans made by FB&T pertaining to 292 West Virginia residents. Depending on the amount of the respective consumer loans, the annual interest rates fell between 59 percent and 96 percent. According to the court, out of the 292 West Virginia consumers obtaining these loans, 212 of them defaulted on them.

AG’s enforcement action. In 2007, in response to consumer complaints, the West Virginia AG began a formal investigation into CashCall’s business practices. As a result of that investigation, the AG found that CashCall’s agreement with FB&T was “essentially a sham that claimed federal preemption as a means of evading West Virginia’s licensing and usury laws, and that CashCall’s debt collection practices violated the WVCCPA.”

When the West Virginia AG demanded that CashCall permanently cease its lending program in West Virginia and make restitution to aggrieved consumers in the state, the finance company responded by contending that the WVCCPA was preempted by federal law because the loans marketed and serviced by CashCall were properly made under a Federal Deposit Insurance Approved bank installment loan program. While CashCall did cease purchasing loans made by FB&T to West Virginia residents, it resisted responding to the AG’s investigative subpoena, based on its claim of complete federal preemption, and engaged in litigation regarding the subpoena.

In 2008, the West Virginia AG filed a “Complaint for Injunction, Consumer Restitution, Civil Penalties and Other Appropriate Relief” in West Virginia state court against CashCall. Notably, the AG claimed that the company participated in “what is commonly called a ‘rent-a-bank’ scheme designed to avoid a state’s usury and consumer protection laws by claiming federal preemption under Section 27 of the Federal Deposit Insurance Act (FDIA).”

Procedural context. Although CashCall removed the action to the U.S. District Court for the Southern District of West Virginia on the ground that the West Virginia AG’s state claims were preempted by federal law because FB&T originated the loans to the 292 West Virginia consumers, the federal district court determined: (i) the FDIA did not apply to non-bank entities such as CashCall; (ii) the court did not have subject matter jurisdiction over the matter because the West Virginia AG had raised only state law claims against the company “that neither invoked, nor were preempted by, the FDIA”; and (iii) if CashCall were to be deemed a “de facto lender,” then the company would be subject to liability under West Virginia usury laws.

After the matter was remanded back to the West Virginia state court, the West Virginia AG amended its complaint against CashCall. The AG alleged that the finance company violated the WVCCPA and other state laws by: (i) failing to comply with the investigative subpoena; (ii) engaging in unlawful lending and usury practices; and (iii) engaging in unlawful debt collection practices. After the West Virginia AG successfully prevailed on its bifurcated claims at respective bench trials on the issues, CashCall appealed to the West Virginia Supreme Court of Appeals on the three court orders issued by the state trial court in favor of the West Virginia AG.

Court’s rulings. Despite CashCall’s contention that the state trial court committed 14 points of error at the underlying bench trials, the West Virginia high court rejected all of the finance company’s arguments. In affirming all three of the state trial court’s orders in favor of the West Virginia AG, the court determined:

  1. The West Virginia AG not only was authorized to bring a civil action against CashCall under the WVCCPA and under recognized equitable principles in the state, the AG also was authorized to cancel the unsecured debts of the 292 West Virginia consumers and to seek civil penalties as compensation for the “pecuniary loss to injured persons.”
  2. The state trial court did not abuse its discretion in admitting certain exhibits into evidence or in relying on them to make its findings.
  3. Contrary to CashCall’s assertion, the trial court did not err in finding that the trial testimony of the State’s 10 witnesses could be considered representative of all 292 West Virginia consumers because, among other things, there was clear consistency in the individuals’ testimony, and there was no indication in the court record of an objection by CashCall to the testimony.
  4. The state trial court properly applied the “predominant economic interest” test, and not the “federal law test,” to determine whether CashCall or FB&T was the true lender of the loans made to the West Virginia consumers.
  5. Despite CashCall’s challenge to the trial court’s reliance on the State’s expert witness from the National Consumer Law Center as tantamount to usurping the role of the court, the appellate court stressed that, even if it had concluded that the expert witness was not qualified to offer an expert opinion on the subject of consumer lending and the relationship between CashCall and FB&T, the agreements between CashCall and FB&T fully supported the trial court’s finding that CashCall was the “true lender of the subject loans.”
  6. The trial court’s award of civil punitive damages was amply supported by the court record concerning the willfulness by CashCall to repeatedly violate the WVCCPA; additionally, the civil penalties did not infringe upon the finance company’s due process rights.
  7. The civil penalty of more than $10 million imposed on CashCall was authorized by West Virginia law, accomplished the public protection purposes of the WVCCPA, and was consistent with usurious lending remedies in the state.
  8. CashCall’s challenge to the separate civil penalty of $730,000 under the West Virginia Code provision (§46A-6-104) governing unfair or deceptive acts in the conduct of trade or commerce was not supportable because the finance company raised that assignment of error “for the first time on appeal.”

In affirming the decisions of the lower court, the West Virginia Court of Appeals remarked that the state trial court had issued “extraordinarily thorough and remarkably well-reasoned orders.”

The case is No. 12-1274.

Attorneys: Charles L. Woody and Bruce M. Jacobs (Spilman Thomas & Battle, PLLC) for CashCall, Inc. Norman Googel and Douglas L. Davis of the West Virginia Attorney General’s Office for Patrick Morrisey in his capacity as West Virginia Attorney General.

Companies: CashCall, Inc.; First Bank and Trust of Millbank; National Consumer Law Center

MainStory: TopStory ConsumerCredit DebtCollection EnforcementActions InterestUsury Loans Preemption WestVirginiaNews

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