Choice of Law and Commerce Clause Do Not Bar Minnesota Regulation of Internet Loans, State Court Rules

A recent Minnesota state court decision serves as a painful reminder to Internet lenders of the perils of relying on choice-of-law provisions or arguments citing the Commerce Clause of the U.S. Constitution to avoid application of a borrower’s home state law.

In State of Minnesota v. Integrity Advance, LLC, the Minnesota Second Judicial District Court ruled that a payday lender, in making at least 1,269 Internet loans to Minnesota residents, had committed at least 7,614 separate violations of state law (six violations per loan). The court rejected the lender’s arguments that it was entitled to rely on the Delaware choice-of-law provision in its loan contracts and that application of Minnesota law would violate the Commerce Clause.

Under Minnesota law, a payday loan contract may not contain a choice-of-law provision designating the law of any other state. According to the court, it did not violate the Commerce Clause to apply that prohibition, as well as Minnesota’s limits on payday loan interest charges and terms and other payday loan requirements, to the lender’s Internet loans because the loans did not occur “wholly outside” of Minnesota. The court considered the lender as having “entered” into Minnesota in its solicitation, origination, and servicing of the loans.

The case also highlights the severe penalties that Internet lenders can face for violations. Violations of Minnesota’s payday loan law are subject to statutory damages of up to $1,000 per violation and civil penalties of up to $25,000 per violation. Noting that assessment of the maximum statutory damages and civil penalties formula would produce a total penalty of nearly $40 million, the court found the state’s imposition of a total penalty of $7 million to be “both measured as well as appropriate.” It also held the lender liable for the state’s costs, disbursements, and attorneys’ fees.

While illustrating the obstacles Internet lenders face, this case does not diminish the ability of lenders entering into in-person transactions to avoid states’ attempts to apply their laws to loans made to their residents but consummated in another state. In Midwest Title Loans, Inc. v. Mills, a unanimous decision by the U.S. Court of Appeals for the Seventh Circuit, a Ballard Spahr client successfully argued that the Commerce Clause precluded Indiana from applying its laws to loans made in person in Illinois to Indiana residents. (In the aftermath of that decision, we successfully recovered $440,000 in attorneys’ fees for our client from the State of Indiana under Section 1988 of the federal Civil Rights Act.).