American Financial Services Assn. v. Burke, 3:01CV1690(CFD).

• Decision Date: 05 October 2001
• Docket Number: No. 3:01CV1690(CFD).,3:01CV1690(CFD).
• Citation: 169 F.Supp.2d 62
• Court: U.S. District Court — District of Connecticut
• Parties: AMERICAN FINANCIAL SERVICES ASSOCIATION, Plaintiff, v. John P. BURKE, Banking Commissioner of the State of Connecticut, in his official capacity, Defendant.

169 F.Supp.2d 62

AMERICAN FINANCIAL SERVICES ASSOCIATION, Plaintiff, v. John P. BURKE, Banking Commissioner of the State of Connecticut, in his official capacity, Defendant.

No. 3:01CV1690(CFD).

United States District Court, D. Connecticut.

October 5, 2001.

Eric J. Mogilnicki, David W. Ogden, Trevor W. Morrison, Joel A. Nichols, Wilmer, Cutler & Pickering, Washington, DC, James Sicilian, Donald J. Marchesseault,

Day, Berry & Howard, Hartford, CT, for plaintiff.

John G. Haines, Attorney General's Office, Hartford, CT, for defendant.

RULING ON PLAINTIFF'S APPLICATION FOR A PRELIMINARY INJUNCTION

DRONEY, District Judge.

Plaintiff American Financial Services Association ("AFSA") brought this action against Defendant John P. Burke, Banking Commissioner of the State of Connecticut, seeking declaratory and injunctive relief from section 5(7) of the Connecticut Abusive Home Loan Lending Practices Act, P.A. No. 01-34 (S.H.B.6131), 2001 Conn. Legis. Serv. 01-34 (West) ("Connecticut Act"), on the ground that it is inconsistent with section 2 of the Federal Arbitration Act, 9 U.S.C. § 2 ("FAA"), and thus preempted under the Supremacy Clause. U.S. Const. art. VI, cl. 2. The Connecticut Act took effect on October 1, 2001. See Conn. Gen.Stat. § 2-32 ("All public acts, except when otherwise therein specified, shall take effect on the first day of October following the session of the general assembly at which they are passed."). AFSA has filed an application for a preliminary injunction prohibiting defendant Banking Commissioner from enforcing section 5(7) of the Act against AFSA and its members. For the reasons stated below, the Court grants AFSA's application for a preliminary injunction.

FINDINGS OF FACT

Based on the stipulated fact, affidavits, and declarations submitted by AFSA, and the testimony of William Nahas, Jr., Director of the Consumer Credit Division of the Department of Banking of the State of Connecticut,¹ the Court makes the following findings of fact:

1. Plaintiff American Financial Services Association is a non-profit trade association incorporated in the District of Columbia. AFSA represents about 360 entities engaged in broad-based consumer lending services, including home mortgages.

2. American General Finance, Inc. ("American General"), CitiFinancial, Inc. ("CitiFinancial"), Household Realty Corp. ("Household"), and Wells Fargo Financial, Inc. ("Wells Fargo") are all members of AFSA. All of those companies were incorporated and have their principal places of business in states outside the State of Connecticut.

3. AFSA's members are engaged in a broad range of interstate commercial activities.

4. The Connecticut Act contains a number of provisions relating to loans it defines as "high cost home loan[s]." Section 3(4) of the Act defines a "high cost home loan" as any loan or extension of credit (except a "reverse mortgage transaction"):

(A) In which the borrower is a natural person;

(B) The proceeds of which are to be used primarily for personal, family, or household purposes;

(C) In which the loan is secured by a mortgage upon any interest in one-to-four family residential real property located in [Connecticut] which is, or, when the loan is made, is intended to be occupied by the borrower as a principal residence; and (D) In which the APR at consummation will exceed the yield on [United States Department of] Treasury securities having comparable periods of maturity to the loan maturity as of the fifteenth day of the month immediately preceding the month in which the application for the loan or extension of credit is received by the lender, by more than the number of percentage points specified in 12 C.F.R. 226.32(a)(1)(i), as from time to time amended.

At present, the percentage specified in 12 C.F.R. § 226.32(a)(1)(i) is ten percent. Thus, the Act presently covers loans with APRs greater than ten percentage points above the rate for securities issued by the United States Treasury Department with comparable periods of maturity. (Loans fitting this definition, whether entered into before, on, or after October 1, 2001, are referred to herein as "high cost home loans.")

5. CitiFinancial has in the past extended loans that would have qualified as "high cost home loans" under the Act if the Act had been in effect at the time the loans were made. American General, CitiFinancial, Household, and Wells Fargo also extend a substantial number of home loans that would constitute "high cost home loans" under the Connecticut Act.

6. Many of the "high cost home loans" extended by AFSA members are funded wholly or in part by investment sources from outside the State of Connecticut. AFSA members often resell such loans to secondary lenders in a national market for mortgage agreements. The loan documents for many of those loans are prepared outside the State of Connecticut, and many of the loans are processed outside the State of Connecticut.

7. When extending "high cost home loans," AFSA members use standard form contracts that include mandatory arbitration clauses. Such clauses typically require that any dispute arising under the agreement be resolved through binding individual arbitration between the parties, unless both parties subsequently agree to forgo arbitration.

8. The inclusion of mandatory arbitration clauses in AFSA members' "high cost home loan" agreements decreases the cost to them of providing such loans.

9. Section 5(7) of the Connecticut Act provides that "[a] high cost home loan shall not provide for or include .... [a] mandatory arbitration clause or a waiver of participation in a class action." The Act authorizes defendant Banking Commissioner to impose civil penalties of up to $15,000 per violation on lenders that he determines have violated section 5(7) of the Act. See Connecticut Act § 10; see generally Conn. Gen.Stat. § 36a-50.

10. Defendant Banking Commissioner intends to enforce section 5(7) of the Act in a manner consistent with its text. Defendant Banking Commissioner has defined section 5(7) as prohibiting "mandatory arbitration with binding results." Neither party has identified any relevant ambiguity in the scope of section 5(7)'s prohibitions, and neither party denies that section 5(7) would apply to bar the kinds of mandatory arbitration clauses that AFSA members have included in their "high cost home loan" agreements in the past.

11. AFSA members intend to comply with the law. Thus, in the absence of a ruling from this Court enjoining enforcement against them of section 5(7) of the Connecticut Act, the "high cost home loan" agreements that AFSA members enter into on or after October 1, 2001 will not provide for mandatory arbitration.

12. After October 1, 2001, AFSA members wishing to provide "high cost home loans" will lose the opportunity to include mandatory arbitration clauses in the agreements for those loans. AFSA members will not later have any right to reform the "high cost home loan" agreements they enter into on or after October 1, 2001, even if AFSA ultimately prevails in this suit.

13. By entering into "high cost home loan" agreements lacking mandatory arbitration clauses, or if neither party has a right to mandatory arbitration so long as section 5(7) remains in full force and effect, AFSA members will be subject to the litigation of disputes arising under those agreements. Such litigation is more expensive than arbitration for AFSA members and is likely to increase the cost to AFSA members of extending "high cost home loans." Because AFSA members will not have the right under their "high cost home loan" agreements to arbitrate such disputes, they will lose the ability to protect themselves against exposure to such increased costs.

14. Because resolving disputes arising out of "high cost home loan" agreements by litigation rather than by arbitration will increase the costs of those loans to AFSA members, some AFSA members may decrease their subprime lending activities in Connecticut if section 5(7) of the Connecticut Act remains in effect.

15. After October 1, 2001, AFSA members wishing to provide "high cost home loans" will, pursuant to the law, modify their standard form loan contracts, distribute those revised contracts, and train their employees and agents about their revised contracts.

16. If the Court issues the preliminary injunctive relief requested by AFSA in this litigation, AFSA members will continue to use mandatory arbitration clauses in their "high cost home loan" agreements.

DISCUSSION

Preliminary injunctive relief is appropriate where the movant has shown:

(i) that it is likely to suffer irreparable injury if the injunction is not granted, and (ii) either (a) a likelihood of success on the merits of its claim or (b) the existence of serious questions going to the merits of its claim and a balance of the hardships tipping decidedly in its favor.

Beal v. Stern, 184 F.3d 117, 122 (2d Cir. 1999). The "likelihood of success" standard applies where, as here, the movant "seeks to stay governmental action taken in the public interest pursuant to a statutory or regulatory scheme." Plaza Health Labs., Inc. v. Perales, 878 F.2d 577, 580 (2d Cir.1989); see Wright v. Giuliani, 230 F.3d 543, 547 (2d Cir.2000). Also, where a request for a preliminary injunction "implicates public interests, a court should give some consideration to the balance of such interests in deciding whether a plaintiff's threatened irreparable injury and probability of success on the merits warrants injunctive relief." Time Warner Cable of New York City v. Bloomberg, L.P., 118 F.3d 917, 929 (2d Cir.1997).

I. Likelihood of Success on the Merits

A. Procedural Issues

AFSA has established that it is likely to succeed on the merits of its complaint. First, this Court has federal question jurisdiction over AFSA's suit under 28 U.S.C. § 1331. As the United States Supreme Court has explained, "[a] plaintiff who seeks injunctive relief from state regulation, on the...