Pa Dept. of Banking v. Ncas of Delaware

• Decision Date: 29 May 2008
• Docket Number: No. 79 MAP 2007,79 MAP 2007
• Citation: 948 A.2d 752
• Parties: PENNSYLVANIA DEPARTMENT OF BANKING, Appellee v. NCAS OF DELAWARE, LLC, d/b/a Advance America Cash Advance Centers, Appellant.
• Court: Pennsylvania Supreme Court

948 A.2d 752

PENNSYLVANIA DEPARTMENT OF BANKING, Appellee v. NCAS OF DELAWARE, LLC, d/b/a Advance America Cash Advance Centers, Appellant.

No. 79 MAP 2007

Supreme Court of Pennsylvania.

Submitted on Briefs March 20, 2008.

Decided May 29, 2008.

Kerry Elizabeth Smith, Community Legal Services, for Community Legal Services, amicus curiae.

Irwin William Aronson, Willig, Williams & Davidson, Philadelphia, for PA AFL-CIO, amicus curiae.

Mark Jay Levin, Arthur Makadon, Jeremy Rosenblum, Alan S. Kaplinsky, Ballard Spahr Andrews & Ingersoll, L.L.P., Philadelphia, for NCAS of Delaware, LLC, appellant.

Robert L. Byer, John Jeming Soroko, Duane Morris, L.L.P., Philadelphia, for Pennsylvania Dept. of Banking, appellee.

BEFORE: CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD and McCAFFERY, JJ.

OPINION

Justice SAYLOR.

This direct appeal involves primarily the question of whether, by charging certain fees and interest as a "payday lender," the appellant violated the Consumer Discount Company Act.

NCAS of Delaware, LLC ("Appellant") is a Delaware limited liability company doing business as Advance America, Cash Advance Center, a payday cash lender with approximately 100 locations in the Commonwealth. Payday loans are short-term, high-interest-or-fee loans that are generally secured by a post-dated check or a debit authorization executed by the borrower and, subsequently, presented by the lender after a predetermined period, usually set at two weeks to coincide with the borrower's payday.¹ Accord NCAS Revolving Credit Agreement, R.R. at 182a ¶ 2 ("The monthly cost of your account is extremely high compared to other forms of credit that you may be able to obtain."). See generally Smith v. Steinkamp, 318 F.3d 775, 775-76 (7th Cir.2003) ("A payday loan is a loan of short duration, typically two weeks, at an astronomical annual interest rate[.]").

In June 2006, Appellant began offering in Pennsylvania a "Choice Line of Credit" in which a $500 credit line was provided to qualifying borrowers at a simple daily periodic interest rate corresponding with an annual percentage rate ("APR") of 5.98 percent. To participate in this "Line of Credit" Appellant also charged consumers a "monthly participation fee" of $149.95. This fee was charged each month as long as the consumer had any outstanding principal, fees, and finance charges. Appellant operated this program without the partnership of any bank and without obtaining a license from the Secretary of Banking pursuant to Section 3 of the Consumer Discount Company Act.² See 7 P.S. §§ 6201, 6203.

In September 2006, the Department of Banking (the "Department") filed a complaint in the Commonwealth Court seeking declaratory and injunctive relief to prevent Appellant from charging Pennsylvania consumers the monthly participation fees on the basis that they violated the CDCA and the Loan Interest and Protection Law.³ The complaint alleged that Appellant's line-of-credit product violated Section 3.A of the CDCA, which provides that:

[N]o person shall engage or continue to engage in this Commonwealth, either as principal, employe, agent or broker, in the business of negotiating or making loans or advances of money on credit, in the amount or value of twenty-five thousand dollars ($25,000) or less, and charge, collect, contract for or receive interest, discount, bonus, fees, fines, commissions, charges, or other considerations which aggregate in excess of the interest that the lender would otherwise be permitted by law to charge if not licensed under this act on the amount actually loaned or advanced....

7 P.S. § 6203.A. The Department maintained that, pursuant to Section 201 of the LIPL, 41 P.S. § 201, Appellant was prohibited from charging more than six percent annual interest on its line-of-credit product. The complaint alleged that the monthly participation fee ($149.95) was actually interest on the sum loaned. That fee, together with the line-of-credit interest rate (5.98%), amounted to more than six percent annual interest on the amount advanced; thus, imposition of the fee violated the CDCA and the LIPL.

Appellant filed an answer with new matter denying that its revolving credit product violated the CDCA or the LIPL and averring that, pursuant to a choice-of-law clause contained in the revolving credit agreements, Delaware law governed the legality of its conduct. Arguing that this choice-of-law provision in Appellant's contracts violated Pennsylvania's fundamental public policy against usurious lending, the Department made a motion for judgment on the pleadings. Appellant filed a cross-motion for judgment on the pleadings. Community Legal Services and the Pennsylvania AFL-CIO filed a brief as amici on behalf of the Department.

A three-judge panel of the Commonwealth Court granted the Department's motion and issued a permanent injunction preventing Appellant from charging Commonwealth consumers the monthly participation fee. See Pennsylvania Dep't of Banking v. NCAS of Delaware, LLC, 931 A.2d 771 (Pa.Cmwlth.2007). On the choice-of-law issue, the court concluded that Pennsylvania law applied because the Department brought the action pursuant its statutory police power. The court acknowledged the parties' arguments favoring application of Section 187 of the Second Restatement of Conflicts of Laws. Since the Department was not a party to any contract with Appellant, however, the court concluded that the terms of Appellant's contracts with Commonwealth consumers were not binding on the Department. The court also explained that, although a consumer's claim against a lender might be subject to the contract's choice-of-law provision, the Department's enforcement action was not subject to the agreement in the present situation where the agency filed an action in its own name to enforce a statutory provision. See id. at 778. Further, the court opined that, assuming arguendo that the choice-of-law provision applied, Pennsylvania law would nevertheless control. See id. at 778 n. 12.

Applying Pennsylvania law, the court found that the 5.98 percent interest aggregated with the monthly fee on Appellant's line-of-credit constituted an interest rate exceeding six percent in violation of the CDCA. Under Section 3.A of the CDCA, the court observed that the test is whether the interest and any other "`discount[s], bonus[es], fees, fines, commissions, charges or other considerations,' in the aggregate, exceed the six percent [allowable] annual simple interest." NCAS, 931 A.2d at 779 (emphasis in original) (quoting 7 P.S. § 6203.A). Using an APR rate calculator, the court determined that the $149.95 monthly participation fee in combination with the 5.98 percent interest rate aggregated into an annual interest rate of approximately 368 percent. The court concluded that Appellant violated the CDCA because it was required to be licensed to charge interest in excess of the six percent rate authorized by Section 201 of the LIPL. See id. (citing 41 P.S. § 201). In response to Appellant's argument that the fee should not be considered because it was not charged "on the amount actually loaned" as required by Section 3.A, the court explained that the charge was "inextricably related" to the amount loaned because it was a necessary condition to be fulfilled before Appellant would provide any loan. Id.

Finally, in response to the Department's allegation that Appellant had violated the LIPL, the Commonwealth Court determined that there were insufficient facts in the record to decide whether Appellant violated the LIPL. The court observed that Section 201 of the LIPL provides that "the maximum lawful rate of interest for the loan or use of money in an amount of fifty thousand dollars ($50,000) or less in all cases where no express contract shall have been made for a less rate shall be six per cent (6%) per annum." NCAS, 931 A.2d at 780 (quoting 41 P.S. § 201). Section 201 only refers to a "lawful rate of interest" not an aggregation of fees and interest as in the CDCA; thus, the court concluded that, without a further development of the record, it could not determine whether the fee constituted disguised interest that would bring the total interest rate over the six percent limit.⁴

On appeal to this Court, Appellant argues that the Commonwealth Court erred in holding that Pennsylvania law rather than Delaware law regulates its conduct. Appellant asserts that Section 187 of the Second Restatement of Conflicts of Law sets forth a prudential rule that applies to all controversies, because it protects the interests of both contracting parties and the Commonwealth by requiring application of Pennsylvania law only where Pennsylvania has a materially greater interest in the controversy and a fundamental policy at stake. If it did not, Appellant maintains that private parties and the courts would have no guidance for determining whether and when Pennsylvania statutory law should apply. Appellant also contends that the court erred in concluding that Pennsylvania law would apply in the event Section 187 governed because Appellant had substantial contacts with Delaware, its state of incorporation. Further, Appellant argues that Pennsylvania does not have a fundamental policy prohibiting the fees and interest charged under its Revolving Credit Agreement because there are exceptions to the six percent interest rate within other Pennsylvania statutes.⁵

Appellant next argues that the Commonwealth Court misinterpreted the plain language of the CDCA by determining that the monthly participation fee was within the scope of Section 3.A of that statute. Appellant maintains that the plain language of Section 3.A indicates that it applies only when interest and other charges "on the amount actually loaned or advanced" exceed the interest the lender may otherwise charge. 7 P.S. § 6203.A. Since the fee was a fixed amount levied regardless of the amount that the consumer is loaned or advanced, Appellant contends that it is not...