Payday Lenders Can't Halt Operation Choke Point, Court Rules

by Manatt, Phelps & Phillips, LLP
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A federal judge in the District of Columbia denied a request for injunctive relief sought by a group of payday lenders allegedly affected by the Department of Justice's (DOJ) controversial Operation Choke Point.

What happened

A payday lender filed suit against the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency (OCC), among others, accusing these defendants of violating its right to due process under the Fifth Amendment of the United States Constitution.

Joined by several other payday lenders, the suit alleged that the financial regulators participated in a campaign to force banks to terminate their business relationships with the plaintiffs. Known as Operation Choke Point, the campaign included regulatory guidance regarding reputation risk promulgated by the defendants, who later relied upon that guidance "as the fulcrum for a campaign of backroom regulatory pressure seeking to coerce banks to terminate longstanding, mutually beneficial relationships with all payday lenders," according to the plaintiffs' complaint.

The plaintiffs filed a motion for preliminary injunction to halt the financial regulators from harming the plaintiffs' reputation, applying informal pressure to banks to encourage them to terminate business relationships with the plaintiffs, seeking to deny the plaintiffs' access to financial services, and attempting to deprive plaintiffs of their ability to pursue their line of business.

Determining that the plaintiffs could not satisfy the necessary elements of their due process claim and thus demonstrate a likelihood of success on the merits, Judge Kessler denied plaintiffs' motion. According to the court, the plaintiffs were required to show that in additional to reputational harm, the government has deprived them of some benefit to which they have a legal right or that the government-imposed stigma is so severe that it "broadly precludes" them from pursuing their chosen trade or business.

"Plaintiffs' submissions do not establish a likelihood of success on the merits—or even a 'serious legal question' on the merits,'" the court said.

First, the court held that plaintiffs could succeed on their claim by showing that the defendants deprived them of their right to hold a bank account. However, it was insufficient for the payday lenders to show that "merely some" bank accounts have been terminated, the court explained, as "in order to demonstrate a change in legal status, each Plaintiff must show that it has had so many bank accounts and banking relationships terminated it has effectively been cut off from the banking system."

According to the court, while the evidence submitted by the plaintiffs demonstrated that their relationships with some banks had been terminated, plaintiffs failed to demonstrate that any of them had been cut off from the banking system by effectively being denied a right to hold a bank account or access the banking system.

Second, the court held that the plaintiffs could succeed on their claims by showing that the continued loss of banking relationships, caused by Operation Choke Point, "may preclude them from pursuing their chosen line of business." However, again according to the court, the evidence submitted did not establish that plaintiffs had been put out of business.

For example, the payday lender told the court that it received termination notices from 21 banks since 2013. But the company did not indicate how many banks it continues to have accounts or business relationships with leaving the court unable to conclude that they have been "cut off" from the system. "In sum, the fairest reading of Plaintiffs' submissions is that, presently, they do have a right to hold bank accounts and otherwise access the banking system," the court wrote.

The payday lender also did not submit financial statements or analyses showing that the terminations have harmed their bottom line and at oral argument, one plaintiff agreed that the company has been profitable in some years since 2013, the court concluded. "Plaintiffs remain in business and therefore cannot show that they have been broadly precluded from the payday lending industry."

Further, in response to plaintiffs' arguments that their due process rights will be violated in the near future if Operation Choke Point continues unabated, Judge Kessler held that plaintiffs' evidence was too "speculative and conclusory" to justify an injunction. "[T]he fact that some discrete number of banks refuse to transact with [the payday lender] tells us almost nothing about how many banks remain willing to transact with payday lenders," she said. What the submissions do make clear is that "there are some banks that are still willing to do business with payday lenders, including Plaintiffs."

The evidence submitted also demonstrated that many of the payday lenders have experienced similar terminations in the past but have still been able to find new banks willing to do business with them, the court noted, which "undercuts Plaintiffs' assertions that they will be unable to replace the accounts that are about to be terminated."

Next, while the court held that to succeed on the merits, plaintiffs must ultimately prove that the defendants made stigmatizing statements about them that "caused banks to terminate their business relationships with Plaintiffs," Plaintiffs had not demonstrated that they are likely to succeed in proving the "wide-ranging campaign of backroom strong-arming" by the defendants. Judge Kessler found that the plaintiffs introduced "only a few scattered statements in which Federal Defendants may have pressured a small number of banks to discontinue their relationships with specific payday lenders," but failed to link these statements to the terminations of bank relationships. Other evidence was hearsay—in some cases, "anonymous double hearsay"—which the court found of little persuasive value, or contradicted by sworn statements of defendants' employees.

Moreover, the one piece of direct, uncontroverted evidence of a regulator seeming to pressure a bank to terminate a relationship with a payday lender did not contain any impermissibly stigmatic statements, rather "appears based on FDIC's permissible concerns regarding a particular payday lender's business practices," the court added.

Although the court held that a violation of plaintiffs' right to due process is irreparable, plaintiffs' failure to carry their burden and demonstrate either a likelihood of success on the merits or that issuance of a preliminary injunction would be in the public interest warranted a denial of the injunction request.

To access the memorandum opinion in, click here.

Why it matters

The Court found the evidence submitted by the payday lenders lacking not just in its sufficiency but in context as well, writing that without information such as a baseline number of how many banks the plaintiffs continue to have a relationship with or financial statements to demonstrate a decrease in profits due to the relationship terminations, the payday lenders failed to carry their burden of proving the likelihood of success on the merits. Undeterred, the plaintiffs have already asked the U.S. Court of Appeals for the D.C. Circuit to review the case.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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