Utah Federal Court Dismisses Putative Class’s “True Lender” Claims Against Online Merchant


On May 23, the U.S. District Court for the District of Utah dismissed a putative class action filed against an ecommerce merchant for allegedly operating a financing program that violated various California laws, including the state’s usury law. Sawyer v. Bill Me Later, Inc., No. 11-988, 2014 WL 2159044 (D. Utah May 23, 2014). The court explained that the customer chose to finance his online purchase and was required to sign a contract: (i) identifying a Utah-chartered bank as the lender and as the owner of the account; (ii) specifying that the customer was accepting the loan in Utah, credit was being extended from Utah, and an annual interest rate of 19.99% would apply to outstanding loan amounts; and (iii) disclosing a schedule for late fees. The bank funded the transaction by paying the merchant on the customer’s behalf and held the receivables for at least two days before selling them to the merchant. The customer sued after he failed to pay for the purchase within 30 days and the merchant applied the disclosed interest rate and assessed a late fee, which the customer claimed together exceeded the usury cap in California, where the purchase was made. The court rejected the customer’s claim that the merchant, rather than the bank, was the “true lender” or the real party in interest. The court determined that “the lending framework more closely resembles credit card programs than the circular payday loan structures” described by the customer. The court concluded that loans serviced through contracts with third parties such as the merchant in this case are included within the definition of “any loan” under Section 27 of the Federal Deposit Insurance Act and as such are expressly preempted by federal statute.

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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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