Bad Apples In The Barrel

By Matthew T. Sanning, Attorney at Law, Augusta, Kentucky

All debtors who file a bankruptcy proceeding suffer from financial difficulties. Many of those debtors, due to strapped financial circumstances, take out high interest internet loans. Then, when the debtors file bankruptcy, those internet lenders in turn file proofs of claim. Many internet lenders write loans that are in violation of the small loan acts, licensing acts, and usury laws of the jurisdictions of the individual debtors. Unless objected to, these lenders can and will participate in distributions to unsecured creditors to the detriment of the other unsecured creditors and possibly the debtors.

On such lender is CashCall, Inc. CashCall has engaged in two internet loan schemes that have been the subject of much litigation, with several courts finding that CashCall’s loans are void or uncollectible under the laws of various states.¹

In the first scheme, CashCall partnered with two state charted banks which did business in jurisdictions without state usury laws. CashCall would assist in marketing the loans, and would immediately have the loans assigned to it within 3 days of the loans being written by the state chartered banks. CashCall would agree to indemnify the state chartered bank from any lawsuits or regulatory actions resulting from the loans. The loans would typically carry interest rates with an APR of 99%.

CashCall’s purpose in writing the loans was to take advantage of Section 27 of the Federal Deposit Insurance Act, 12 U.S.C. § 1831d(a), which allows state chartered banks to benefit from much of the same type of federal preemption of state usury and licensing laws that national banks enjoy. In effect, CashCall would argue that because it purchased loans from a state chartered bank, it was entitled to charge consumers whatever the state chartered banks did.

The problem with this scheme, as described in an enforcement action the State of West Virginia brought against CashCall, is that CashCall, not the banks, was the de facto lender and the real party in interest. Courts have now held that CashCall, a non-bank private lender operating as the de facto lender in the “rent-a-bank” scheme, could not take advantage of the federal preemption of state usury laws as a state-chartered bank could. Last year the United States Supreme Court denied certiorari on CashCall’s appeal of the federal preemption issue, letting stand a $13,000,000 judgment against CashCall.²

The second scheme involved CashCall entering into a loan purchase agreement with Western Sky Financial, a South Dakota entity which was wholly owned by an enrolled member of the Cheyenne River Sioux Tribe. In this scheme, CashCall would market, fund, and approve loans by Western Sky Financial. Those loans would be immediately assigned by Western Sky to WS Funding, LLC, a wholly owned subsidiary of CashCall. The loans would in turn be assigned to CashCall for servicing, and if a loan went into default, it would be assigned to Delbert Services (another wholly owned subsidiary of CashCall) for collection.

This scheme was formed with the idea that because the loans were written by a company owned by a member of a sovereign Native American Tribe, it would not be subject to state usury or licensing laws. The loan agreement contained an extensive arbitration clause, which some courts have found to be enforceable.³ The loans asserted that only the laws of the Cheyenne River Sioux tribe would apply to the loans, and that jurisdiction to enforce the loans would only lie with the Tribal Courts. The loans carried interest rates ranging from 89% to 200%.

This loan scheme has been the subject of over nine class action complaints and in excess of 12 state enforcement actions. Most recently in the case of the Consumer Financial Protection Bureau vs. CashCall, Inc. et. al.,⁴ the United States District Court for the Central District of California entered a partial summary judgment in favor of the CFPB, finding that:

1. The Cheyenne River Sioux Tribe had no interest in applying its laws to the loans; consequently, the choice-of-law provision in the loans is unenforceable.
2. The law of the jurisdiction of the debtors’ residence would apply to the loans of debtors who resided in the following states: Arizona, Arkansas, Colorado, Illinois, Indiana, Minnesota, New Hampshire, New York, North Carolina, Kentucky, Massachusetts, Montana, New Jersey, New Mexico, and Ohio (collectively “the Subject States”).
3. The loans are void or uncollectible in the Subject States.
4. Delbert Services and CashCall attempted to collect upon unenforceable loans.
5. These loans have been the subject of proofs of claim filed by CashCall, its agent Delbert Services, or its assigns. This is a significant bankruptcy issue as CashCall and its assigns are and have been receiving distributions from bankruptcy estates on claims based on loans which are unenforceable.⁵

Some loans/claims have been assigned to debt purchasers such as LVNV Funding, LLC. A class action has recently been filed against LVNV, assignee of CashCall, in the United States Bankruptcy Court for the Eastern District of Kentucky based upon the filing of proofs of claim arising from CashCall’s first lending scheme. The complaint seeks damages under state and federal law and disgorgement of all funds received by LVNV based upon void proofs of claims.⁶

In summary, bankruptcy trustees and debtors’ counsel should be on the lookout for these types of claims. Discovering the claims and objecting to them is the first step in ensuring the proper operation of the claims process. Additionally, depending upon the jurisdiction and the state law of the individual debtors, any such claims could be evidence of causes of action which would normally be estate property. If such claims were prosecuted by either a trustee or the debtors then it could lead to additional funds being available for either the estate or the debtors (depending upon the remaining exemptions available to the particular debtors).

Should any reader desire additional information regarding the issues discussed in this article, please feel free to contact me or my co-counsel Robert Sparks at [email protected] or [email protected].

_______________________

[1] See, e.g., CashCall, Inc. v. Maryland Commissioner of Financial Regulation, 139 A.3d 990 (Md. 2016), and other cases discussed in this article.

[2] CashCall, Inc. v. Morrisey, 2014 WL 2404300 (W.Va. 2014) (unpublished opinion); cert. denied 135 S.Ct. 2050 (2015). A fine summation of the issues involved in the case is contained in the brief of the West Virginia Attorney General in opposition to the writ of certiorari, 2015 WL 1455716.

[3] See Moses v. CashCall, Inc., 781 F.3d 63 (4th Cir. 2015) (bankruptcy court could retain jurisdiction over chapter 13 debtor’s adversary proceeding seeking to declare loan void, but court erred in denying CashCall’s motion to compel arbitration of debtor’s state law claims for damages).

[4] Consumer Financial Protection Bureau v. CashCall, Inc., et al., Case 2:15-cv-07522-JFW-RAO, Doc. #213 (C.D. Calif., Aug. 31, 2016).

[5] 11 U.S.C. § 502(b)(1).

[6] Kiskaden vs. LVNV Funding, LLC, Adv. No.16-2008 (Bankr. E.D. Ky.).

_______________________

Matthew T. Sanning is partner in the firm of Sanning & Sanning PSC located in Augusta, Kentucky. His practice focuses on bankruptcy and consumer class action. He represents both debtors and creditors. He received his Juris Doctor from Salmon P. Chase College of in 1997, magna cum laude. He is a past speaker at both the Northern Kentucky Bar Association Bankruptcy CLE, the UK 9th Biennial Consumer Bankruptcy Law Conference, and the Midwest Bankruptcy Institute.