Banks Seek Judgment That Loans Facilitated By Online Platforms Are Exempt From Colorado's Lending Laws
Fintech Alert | March.13.2018
Colorado's ongoing challenge to the bank partnership model of online lending will next play out, at least in part, in state court.
Last year, the Administrator of Colorado's Uniform Consumer Credit Code filed suits in state court against two online lending platforms, Avant, Inc. and Marlette Funding LLC. The platforms facilitate, market, and service loans originated by two state-chartered banks - WebBank and Cross River Bank, which have filed their own actions seeking to enjoin the State's actions against the platforms. Colorado seeks civil penalties from the platforms, contending that the banks' role in the transactions is insufficient to preempt state lending statutes under federal banking law. In so arguing, Colorado relies on two cases: the Second Circuit's decision in Madden v. Midland Funding, LLC, which held that charged-off debt sold by a bank was not entitled to federal preemption; and the West Virginia Supreme Court of Appeals' decision in Cashcall, Inc. v. Morrisey, which held that a loan's true lender is the party with the "predominant economic interest."
Avant and Marlette argue that Colorado's lending laws regulating interest rates are preempted by the Depository Institution Deregulation and Monetary Control Act of 1980, 12 U.S.C. § 1831d. That federal statute permits a state-chartered bank to charge any interest rate authorized in its "home" state, preempting contrary state lending statutes. Avant and Marlette contend that when a bank validly issues a loan and later sells it to an entity that is not a bank, the interest rate remains enforceable and state law to the contrary continues to be preempted by the federal statute.
Colorado brought its enforcement actions against Avant and Marlette in state court. Avant and Marlette, however, removed the cases to federal district court, where they claimed the cases belonged. They argued that Colorado's claims, although couched in terms of state law, in fact present a question of federal law under the doctrine of "complete preemption." Avant and Marlette contended that the federal law completely preempts the state-law enforcement actions asserted in Colorado's complaint. Colorado disagreed and asked the federal court to remand both cases back to state court.
On March 1, 2018, U.S. District Court Judge William Martinez remanded Colorado's case against Avant back to state court, holding that the state-law claims at issue are not completely preempted by federal law. See Meade v. Avant of Colorado, LLC, No. 17-CV-0620-WJM-STV, 2018 WL 1101672 (D. Colo. Mar. 1, 2018).
Although this jurisdictional ruling is unfavorable to Avant, it has no binding impact on the merits of Avant's preemption defense. Judge Martinez's opinion repeatedly emphasizes that distinction. It holds that federal law does not, as a jurisdictional matter, completely and expressly displace state-law usury claims against non-bank entities. But the opinion also makes clear that substantive issues bearing on the merits of Avant's preemption defense (such as the identity and legal significance of the "true lender," the persuasiveness of Madden, and the contours of the valid-when-made doctrine) remain open to be litigated by the State and Avant in state court.
While not addressing the merits of the true lender issue, at times Judge Martinez's opinion casts the bank-platform arrangements in an unfavorable light. The opinion describes the State's pleadings as "suggesting that the non-bank is the true lender." Op. 18; see also Op. 21-22. Later, in distinguishing Discover Bank v. Vaden, 489 F.3d 594 (4th Cir. 2007), and Krispin v. May Department Stores Co., 218 F.3d 919 (8th Cir. 2000), the court further suggests that Avant was the true lender under the facts pled: "Avant is for all practical purposes in control of the Avant loans, and it has indemnified WebBank, whose role was short-lived and is now entirely in the past." Op. 26. Of course, Avant and WebBank have disputed the State's pleadings in several respects. But Colorado will likely cite Judge Martinez's analysis as it seeks to defeat Avant's preemption defense on the merits.
We note that Judge Martinez is not assigned to the three related actions still pending in Colorado district court. The State's similar action against Marlette, and the declaratory judgment actions brought by WebBank and Cross River challenging the State's actions, have all been assigned instead to Judge Phillip Brimmer. Judge Brimmer has before him the same jurisdictional issue in the Marlette case - whether to permit removal on "complete preemption" grounds - and is not bound to follow Judge Martinez's approach. In the WebBank and Cross River cases, meanwhile, the State has advanced a number of arguments in motions to dismiss, including that Judge Brimmer must abstain until the state-court litigation runs its full course. If Judge Brimmer declines to abstain, he will likely reach the merits of the preemption arguments.
By statute, Judge Martinez's ruling on remand is not appealable. See 28 U.S.C. § 1447(d). So, absent something extraordinary, the Avant case will be proceeding in Colorado state court.
Orrick will continue to monitor these proceedings and provide updates as appropriate.