Consumer Fin. Prot. Bureau v. Cashcall, Inc.

• Decision Date: 23 May 2022
• Docket Number: s. 18-55407,18-55479
• Parties: CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiff-Appellant/Cross-Appellee, v. CASHCALL, INC. ; WS Funding, LLC ; Delbert Services Corporation; J. Paul Reddam, Defendants-Appellees/Cross-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

35 F.4th 734

CONSUMER FINANCIAL PROTECTION BUREAU, Plaintiff-Appellant/Cross-Appellee,

v.CASHCALL, INC. ; WS Funding, LLC ; Delbert Services Corporation; J. Paul Reddam, Defendants-Appellees/Cross-Appellants.

Nos. 18-55407

18-55479

United States Court of Appeals, Ninth Circuit.

Argued and Submitted September 9, 2019

Submission Withdrawn October 21, 2019

Argued and Resubmitted September 23, 2021 Pasadena, California

Filed May 23, 2022

Kristin Bateman (argued) and Kevin E. Friedl, Senior Counsel; Steven Y. Bressler, Assistant General Counsel; John R. Coleman, Deputy General Counsel; Mary McLeod, General Counsel; Bureau of Consumer Financial Protection, Washington, D.C.; for Plaintiff-Appellant/Cross-Appellee.

Reuben Camper Cahn (argued), Reuben C. Cahn, and Gregory M. Sergi, Keller/Anderle LLP, Irvine, California; Allen L. Lanstra Jr. (argued), Caroline W. Van Ness, and Kasonni M. Scales, Skadden Arps Slate Meagher & Flom LLP, Los Angeles, California; Thomas J. Nolan, Pearson Simon Warshaw LLP, Sherman Oaks, California; for Defendants-Appellees/Cross-Appellants.

Robert M. Loeb and Analea J. Patterson, Orrick Herrington & Sutcliffe LLP, Washington, D.C.; Christopher J. Cariello and Ned Hirschfeld, Orrick Herrington & Sutcliffe LLP, New York, New York; for Amicus Curiae Innovative Lending Platform.

Before: John B. Owens, Ryan D. Nelson, and Eric D. Miller, Circuit Judges.

MILLER, Circuit Judge:

CashCall, Inc., made unsecured, high-interest loans to consumers throughout the country. After attracting unwanted attention from regulators, it sought to avoid state usury and licensing laws by using an entity operating on an Indian reservation. CashCall paid for that entity to issue loans and then purchased the loans days later. The loan agreements contained a choice-of-law provision calling for the application of tribal law, so they would not be subject to the law of borrowers' home States, which would have prohibited the loans. CashCall sought advice from a scholar of federal Indian law, who opined that the scheme "should work but likely won't."

His concern proved well founded. The Consumer Financial Protection Bureau brought this action against CashCall, its CEO, and several affiliated companies, alleging that the scheme was an "unfair, deceptive, or abusive act or practice," 12 U.S.C. § 5536(a)(1)(B), because CashCall demanded payment from consumers under the pretense that the loans were legally enforceable obligations, when in fact they were invalid under state law. The district court found the defendants liable and imposed a civil penalty of $10.3 million, but the court declined to order restitution.

The Bureau appeals, arguing that the civil penalty should have been larger and that the district court should have ordered restitution. CashCall cross-appeals the finding of liability. We conclude that the district court correctly found liability but erred in assessing the penalty and in evaluating whether to grant restitution. We therefore affirm in part, vacate in part, and remand for further proceedings.

I

CashCall, Inc., is a California corporation that makes high-interest consumer loans. Until 2006, California was its primary market. CashCall sought to expand beyond California, but it was concerned that complying with usury laws in other States would make its operations unprofitable. 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. See 12 U.S.C. § 1831d(a) (permitting a federally insured state-chartered bank to charge interest "at the rate allowed by the laws of the State ... where the bank is located").

The arrangement drew regulatory scrutiny. In 2009, Maryland authorities ordered CashCall to pay a civil penalty of $5.6 million for what they characterized as a "rent-a-bank" scheme, in which "a payday lender partners with a federally insured bank to take advantage of the bank's exemption from state usury caps." CashCall, Inc. v. Maryland Comm'r of Fin. Regul. , 448 Md. 412, 139 A.3d 990, 995–96 & n.12 (2016). West Virginia also imposed a large civil penalty. CashCall, Inc. v. Morrisey , No. 12-1274, 2014 WL 2404300, at *1 (W. Va. May 30, 2014). Under pressure from the Federal Deposit Insurance Corporation, the state-chartered banks ceased their partnerships with CashCall. CashCall's last purchase of a loan from a bank was in November 2008.

CashCall then decided to pursue a similar arrangement with a lender operating under the laws of an Indian tribe. In 2009, a member of the Cheyenne River Sioux Tribe formed Western Sky Financial, LLC, as a South Dakota limited liability company with its offices located on the Cheyenne River Sioux Reservation. CashCall and Western Sky entered into an assignment agreement and a service agreement. Under the assignment agreement, CashCall used a subsidiary, WS Funding, LLC, to set up an account with funds that Western Sky used to make loans. CashCall agreed to purchase all of the loans that Western Sky made; it did so just days after the loans were made, before the borrowers had made any payments. All economic benefits and risks then passed to CashCall, which also agreed to indemnify Western Sky for any expenses associated with legal or regulatory action. CashCall serviced the loans, together with Delbert Services Corporation, a company that CashCall created to collect on defaulted loans.

Western Sky offered loans of up to $10,000 at interest rates ranging from 89 to 169 percent. None of the borrowers resided on the Tribe's reservation. The borrowers did not apply for loans on tribal land; instead, they applied online or by telephone. At first, the calls were handled by CashCall loan agents in California, but eventually those duties transitioned to Western Sky loan agents on tribal land. Borrowers signed the loan agreement electronically on Western Sky's website, which was hosted by CashCall's servers in California. Borrowers made all payments from their home States.

Borrowers signed a loan agreement with Western Sky that identified Western Sky as the lender. The agreement contained a choice-of-law provision calling for the application of tribal law:

This Agreement is governed by the Indian Commerce Provision of the Constitution of the United States of America and the laws of the Cheyenne River Sioux Tribe.... Neither this Agreement nor Lender is subject to the laws of any state of the United States of America.

By early 2011, several state authorities had initiated enforcement actions against CashCall or Western Sky. In September 2013, CashCall discontinued its purchase of Western Sky loans; without CashCall, Western Sky ceased its operations.

In December 2013, the Bureau brought this enforcement action against CashCall, WS Funding, and Delbert Services (collectively, "CashCall"). The complaint also named as a defendant J. Paul Reddam, CashCall's founder, CEO, and sole owner.

The Bureau alleged a violation of the Consumer Financial Protection Act (CFPA), which makes it unlawful for any "covered person"—defined as anyone who "engages in offering or providing a consumer financial product or service"—or any service provider "to engage in any unfair, deceptive, or abusive act or practice." 12 U.S.C. §§ 5481(6)(A), 5536(a)(1)(B). The complaint focused on 16 States (later narrowed to 13 States) in which CashCall, using Western Sky, made loans to consumers that were unlawful either because they had excessively high interest rates or because CashCall lacked a license to operate in the State. According to the complaint, CashCall engaged in deceptive acts by "represent[ing], expressly or impliedly, that the entire loan balance was owed ... and that consumers were legally obligated to pay the full amount collected or demanded," when in fact "the loans, or some parts thereof, were void or not subject to a repayment obligation" under applicable state law.

The parties filed cross-motions for summary judgment, and the district court granted summary judgment to the Bureau on liability. The court observed that the Bureau's theory of liability "rests entirely on its argument that the Court should disregard the tribal choice-of-law provision in the loan agreements, and apply the law of the borrowers' home states." The court agreed that state law governed. Although the loan agreements called for the application of tribal law, the court found that provision to be unenforceable because CashCall, not Western Sky, was the true lender and real party in interest to the loan agreements, so the Tribe did not have a substantial relationship to the parties or the transactions. The court also concluded that applying tribal law would violate the fundamental public policy of the States involved. After determining that the choice-of-law provision was unenforceable, the district court then concluded that the borrowers' home States had the most significant relationships to the parties and the transactions, so it applied the law of those States. And under state law, the court determined that "the Western Sky loans are void or uncollectible."

The district court concluded that CashCall "engaged in a deceptive practice ... [b]y servicing and collecting on Western Sky loans, ... [which] created the ‘net impression' that the loans were enforceable and that borrowers were obligated to repay the loans in accordance with the terms of their loan agreements." That impression, the court explained, was "patently false." CashCall objected that the Bureau's enforcement action improperly federalized state-law violations by using them as the basis for identifying a violation of the CFPA. The district court rejected that argument, reasoning that "while Congress did not intend to turn every violation of state law into a violation of the CFPA, that does not mean that a violation of a state law can never be a violation of the CFPA."

The district court also determined that Reddam was individually liable for CashCall's...