Dollar Loan Ctr. of S.D., LLC v. Afdahl

• Decision Date: 29 May 2018
• Docket Number: 3:17–CV–03024–RAL
• Citation: 325 F.Supp.3d 968
• Parties: DOLLAR LOAN CENTER OF SOUTH DAKOTA, LLC, Plaintiff, v. Bret AFDAHL, Defendant.
• Court: U.S. District Court — District of South Dakota

325 F.Supp.3d 968

DOLLAR LOAN CENTER OF SOUTH DAKOTA, LLC, Plaintiff,

v.Bret AFDAHL,¹ Defendant.

3:17–CV–03024–RAL

United States District Court, D. South Dakota, Central Division.

Signed May 29, 2018

Jack H. Hieb, Zachary W. Peterson, Richardson, Wyly, Wise, Sauck, Hieb LLP, Aberdeen, SD, for Plaintiff.

Robert L. Morris, Morris Law Firm, Belle Fourche, SD, for Defendant.

OPINION AND ORDER DENYING DEFENDANT'S MOTION TO DISMISS, GRANTING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT, AND DENYING DEFENDANT'S CROSS MOTION FOR SUMMARY JUDGMENT

ROBERTO A. LANGE, UNITED STATES DISTRICT JUDGE

Plaintiff Dollar Loan Center of South Dakota, LLC (DLC) brought this suit under 42 U.S.C. § 1983 against Defendant Bret Afdahl (Afdahl), the director of the South Dakota Division of Banking, alleging Afdahl deprived DLC of procedural due process required under the Fourteenth Amendment when he revoked DLC's money lending licenses. Doc. 1. Afdahl moved to dismiss the action for failure to state a claim, Doc. 8, DLC moved for partial summary judgment, Doc. 11, and Afdahl filed a cross motion for summary judgment, Doc. 19. For the reasons stated below, this Court denies Afdahl's motion to dismiss, denies Afdahl's cross motion for summary judgment, and grants in part DLC's motion for partial summary judgment.

I. Factual Background

The South Dakota Division of Banking (Division), an agency within the South Dakota Department of Labor and Regulation, is charged with the supervision and control of activities set forth in SDCL chapter 51A (Banks and Banking). Doc. 21 at ¶¶ 10–11. Afdahl is the director of the Division. Doc. 21 at ¶ 9; Doc. 29 at ¶ 4. As director, Afdahl has authority with respect to entities holding money lending licenses, such as investigations and examinations of business records and accounts, and has powers over licenses themselves including issuing cease and desist orders, approval or denial of applications and renewals, and authority to revoke or suspend in certain circumstances.

Doc. 21 at ¶ 13; Doc. 29 at ¶ 5. See SDCL §§ 54–4–41–57.

DLC applied for a money lender's license under SDCL chapter 54–4 in 2010. Doc. 21 at ¶ 14; Doc. 29 at ¶ 7; Doc. 22–2. DLC's initial application indicated it would not provide short-term consumer loans as defined under South Dakota law.² Doc. 21 at ¶ 15; Doc. 22–2. The Division issued a license to DLC, MYL2840, which is considered DLC's main license. Doc. 21 at ¶¶ 16–17; Doc. 29 at ¶ 7. DLC submitted several renewal applications for its lending license, and applied for additional licenses to open branches in different communities in South Dakota. No renewal application or license application indicated that DLC would provide short-term loans, or that DLC was making any substantive change to its loan products (with the exception in 2012 of a change from a 52 week to a 65 week amortized loan product). Doc. 21 at ¶¶ 18–36; Docs. 22–3, 22–4, 22–5, 22–6, 22–7, 22–8, 22–9. DLC historically made high interest loans at rates exceeding 300 percent per annum and had successfully expanded to twelve locations across South Dakota. Largely to target the lending practices of DLC, Initiated Measure 21 (IM 21) was placed on the South Dakota ballot in 2016 to set a usury rate cap in South Dakota.

South Dakota voters on November 8, 2016, passed M 21 to set a maximum finance charge for money lenders licensed under SDCL chapter 54–4. Doc. 21 at ¶¶ 1–2; Doc. 29 at ¶ 1. IM 21 prohibits all money lenders licensed under SDCL chapter 54–4 from making a loan that imposes total interest, fees, and charges at an annual percentage rate (APR) greater than 36 percent, or from evading that rate limitation by indirect means.³ Doc. 21 at ¶¶ 3–4. Following the passage of IM 21, the South Dakota Legislature passed House Bill 1090 during the 2017 Legislative Session which added a new section to Chapter 54–4 which instructed that "late fees, return check fees, and attorney's fees incurred upon consumer default are not fees 'incident to the extension of credit.' " SDCL § 54–4–44.3.

DLC did not seek renewal of eight branch licenses. Doc. 21 at ¶ 37. Because DLC's then existing loan product offered interest rates that exceeded 36 percent, DLC could no longer originate that product after IM 21 went into effect in November of 2016. See Doc. 21 at ¶¶ 153–163. DLC still held a main office license for its location at 921 West 10th Street in Sioux Falls and four branch licenses for locations in Rapid City, Aberdeen, Watertown, and Sioux Falls. Doc. 21 at ¶ 38; Doc. 29 at ¶ 6.

DLC advised the Division on June 21, 2017, that it would begin making loans using a new loan contract that differed from those previously disclosed to the Division. Doc. 21 at ¶ 42; Doc. 29 at ¶ 10. DLC counsel Sander Morehead (Morehead) provided a blank copy of the updated loan contract and advised the Division that DLC planned to begin making the loans sometime after July 1, 2017. Doc. 21 at ¶ 43; Doc. 29 at ¶ 10. On June 22, 2017, Division counsel Brock Jensen (Jensen) emailed Morehead and acknowledged receipt of the letter and blank loan contract, and requested a copy of the current loan contract which was to be replaced. Doc. 21 at ¶¶ 47–49; Doc. 29 at ¶ 10.

In a letter from Jensen to Morehead dated July 7, 2017, Jensen expressed the Division's concern regarding the proposed signature loan product. The letter reads as follows:

Dear Mr. Morehead:

The South Dakota Division of Banking (Division) received and reviewed your letter with attachment dated June 21, 2017. In your letter, you indicate that your client, Dollar Loan Center South Dakota, LLC (DLC), intends to begin making loans with an updated loan contract sometime after July 1, 2017, after some recent amendments to SDCL Chapter 54–4 go into effect. Specifically, it appears that DLC's new loan contracts attempt to take advantage of a provision of House Bill 1090 (HB1090) that provides that late fees are not "incident to the extension of credit."

Please note that SDCL 54–4–44.1 provides the following regarding the manipulation of fees to avoid the application of the requirements of SDCL 54–4–44 :

[text of SDCL § 54–4–44.1 omitted but included herein, supra note 2]

Prior to receiving your June 21 letter, it was the Division's understanding that DLC would not originate, renew, or roll over any new loans after the provisions of Initiated Measure 21 became effective on November 16, 2016. As such, it appears that DLC may intend to use the late fee provision in the new loan contracts as a "device, subterfuge, or pretense to evade the requirements of § 54–4–44."

It is the position of the Division that any effort to exploit the very limited exemptions provided in HB 1090, in order to engage in high cost consumer lending, will not be permitted. Please consider this letter to be notice that the Division intends to conduct a full examination of DLC within the next thirty days in order to more fully understand the actions and intent of DLC in this matter.

If you have any questions or need more information, please feel free to contact this office. Thanks.

Doc. 22–13. In response, Morehead replied in a letter dated July 12, 2017, that DLC would fully cooperate with the examination and "has not and has no intention of violating SDCL Chapter 54–4." Doc. 22–14 at 1.

The Division conducted a target examination on July 13, 2017, at the DLC office in Sioux Falls, South Dakota, where the operations of the Sioux Falls branch and the Rapid City branch of DLC were examined. Doc. 21 at ¶¶ 53, 57, 58; Doc. 29 at ¶ 14. DLC Regional Manager Beau Fritts (Fritts) and DLC's outside counsel, attorney Justin Smith (Smith), were present for the target examination. Doc. 21 at ¶ 61; Doc. 29 at ¶ 14. Fritts provided the examiners with a copy of DLC's South Dakota Operations Training Manual (OTM) along with access to DLC's loan software system known as Infinity. Doc. 21 at ¶ 63; Doc. 29 at ¶ 14. Fritts provided the examiners with a brief tutorial on how to navigate the Infinity software, and an examiner provided Fritts and Smith with a list of requested items and reports needed for the examination. Doc. 21 at ¶¶ 69–70; Doc. 29 at ¶ 14. The examiners reviewed several loans, read through the OTM, and received several of the requested items from Smith. Doc. 21 at ¶¶ 71–72, 75; Doc. 29 at ¶ 14, 16. At approximately 1:30 p.m., the examiners asked to meet with Fritts and Smith to make further inquiries after reviewing the selection of loans. Doc. 21 at ¶ 76; Doc. 29 at ¶ 14. The examiners reviewed the request list with Fritts and Smith and inquired about items that were still outstanding. Doc. 21 at ¶ 77; Doc. 29 at ¶ 14. The examiners communicated a desire for reports that would present a "more high-level overview" on the performance of the new loans. Doc. 21 at ¶¶ 79, 81; Doc. 29 at ¶ 17. Fritts explained that the examiners already had reports which included information on each loan originated, and that no reports existed at that time matching the criteria sought by the examiners. Doc. 21 at ¶¶ 79, 80, 81, 82; Doc. 29 at ¶ 17.

The Division determined after the target examination that additional information and a larger loan sample were needed to complete the examination of DLC. Doc. 21 at ¶ 84; Doc. 29 at ¶ 19. At the time of the target examination, DLC's new loan product was 10 days old and only 27 loans had reached their seven day maturity period.⁴ Doc. 21 at ¶ 85, 87. The Division found that of those 27 loans, 16 were past due. Doc. 21 at ¶ 87. On July 18, 2017, the Division sent an email to Fritts with a list of follow-up questions requesting a response as soon as possible. Doc. 21 at ¶ 88; Doc. 29 at ¶ 19. There were six questions, some with subparts, which requested certain information about the signature loan product and lending practices of DLC:

1. The New Signature Loan Product that DLC began offering on July 3, 2017 (Signature Loan) has an APR that is capped at 36%, which is the same as the interest rate cap on active military members through the Military

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