I have been thinking about what the banking and consumer financial services industry might do to deter state attorneys general and banking agencies from seeking to enforce statutes or promulgating regulations that run afoul of provisions of the U.S. Constitution, like the Supremacy Clause, Commerce Clause, etc.  My idea might even deter state legislatures from enacting Constitutionally-flawed statutes in the first place. 

As explained below, under the Federal Civil Rights Act and the Civil Rights Attorney’s Fee Award Act of 1976, a company might threaten to seek recovery of its reasonable attorney’s fees from the state if a court renders a final judgment in favor of the company on any one of its constitutional claims asserted in a complaint or counterclaim for deprivation of constitutional rights brought under 42 U.S.C. §1983.  That section provides in pertinent part:

Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia, subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress,..

To state a claim under 42 U.S.C. §1983, the plaintiff is required to allege that (1) the conduct complained of was committed by a person acting under the color of state law; and (2) the conduct deprived the plaintiff of a constitutional right. 

42 U.S.C. §1988(b) provides, in relevant part, as follows:

(b) Attorney’s fees. In any action or proceeding to enforce a provision of [42 U.S.C. §1983] the court, in its discretion, may allow the prevailing party …a reasonable attorney’s fee as part of the costs….”

Now, let me give you an example of how this authority might be used in practice.  Colorado recently enacted a statute which purports to exercise a state’s right under Section 525 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (“DIDMCA”) to opt out of Section 521 of DIDMCA (the federal statute giving state-chartered, FDIC-insured banks parity with national banks insofar as usury laws are concerned) with respect to loans “made in” such state.

However, the Colorado opt-out statute flouts the language of DIDMCA Section 525 by purporting to opt-out of interest rate exportation with respect to all “consumer credit transactions” in Colorado.  This clearly exceeds the permitted scope of the opt-out, which per Section 525 allows opt-out only with respect to loans “made in” Colorado.  The constitutional flaw arises when Colorado’s opt-out is coupled with Colorado’s definition of when a consumer credit transactions is “made in” Colorado, under Colo. Rev. Stat. §5-1-201(1):

(1) Except as otherwise provided in this section, this code applies to consumer credit transactions made in this state and to modifications, including refinancing, consolidations, and deferrals, made in this state, of consumer credit transactions, wherever made.  For purposes of this code, a consumer credit transaction is made in this state if:

(a) A written agreement evidencing the obligation or offer of the consumer is received by the creditor in this state; or

(b) A consumer who is a resident of this state enters into the transaction with a creditor who has solicited or advertised in this state by any means, including but not limited to mail, brochure, telephone, print, radio, television, internet, or any other electronic means.

But Section 525 of DIDMCA is a federal statute, and where a loan is “made” pursuant to this federal statute calls for a federal definition.  Under federal law, for purposes of DIDMCA, a loan is “made in” Colorado only if the core activities the lender undertakes to make the loan occur in Colorado: accordingly, an opt-out would apply only to loans made by state-chartered banks that are physically located in Colorado.  Colorado’s new statute is an egregious violation of the Supremacy Clause and the Commerce Clause if applied to state-chartered banks located outside Colorado who lend to Colorado residents through the internet, by mail, or by telephone.

Iowa’s DIDMCA opt-out has been in place since 1980, and several other states currently are considering opt-out bills that, coupled with existing or proposed territorial application language, likely have the same resulting constitutional infirmity as the Colorado statute.

Accordingly, if a party were able to assert a cause of action under 42 U.S.C. §1983 with respect to one of these state opt-out statutes and prevail on that claim, that party would have the right to ask the court to award its reasonable attorney’s fees.  

This is not just a theoretical idea.  Several years ago, we were counsel to a lender located in Illinois that was making loans to residents of Indiana who obtained loans from our client by driving from their homes in Indiana to our clients’ offices in Illinois.  The Indiana Department of Financial Institutions took the position that the Indiana Uniform Consumer Credit Code (“IUCCC”) covered those loans.  After our client received a cease-and-desist letter from the Indiana Department of Financial Institutions, we sought and obtained a declaratory judgement from the U.S. District Court for the Northern District of Illinois that the IUCCC extraterritorial application provision ran afoul of the Commerce Clause.  This decision was affirmed on appeal to the U.S. Court of Appeals for the Seventh Circuit (in a unanimous opinion written by Richard Posner), after which certiorari was denied by the Supreme Court.  As a result, we were able to recover from the defendants a large chunk of our client’s attorney’s fees.

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