Marketplace Lending Update #2: Another Rocky Mountain Remand

by Cadwalader, Wickersham & Taft LLP
Contact

Cadwalader, Wickersham & Taft LLP

In our prior Clients & Friends Memo “Who’s My Lender?” published on March 14, 2018, we analyzed two actions brought against marketplace lenders, one against Kabbage Inc. (“Kabbage”) in federal court in Massachusetts and the other against Avant in federal court in Colorado. In that memo, we noted that the Massachusetts action against Kabbage is proceeding to arbitration, while the action against Avant was remanded to state court.

Last week, Colorado courts issued several new rulings related to marketplace lending. First, the federal court in Colorado remanded another enforcement action brought by the Administrator of the Colorado Consumer Credit Code against Marlette Funding (“Marlette”), which had been doing business as a marketplace lender in Colorado under the name Best Egg. Following the reasoning in the Avant decision discussed in our prior memo, the court rejected the marketplace lender’s argument that Colorado’s usury laws were subject to complete preemption under federal law and therefore the court granted plaintiff’s motion to remand. As a result, Avant and Marlette will be forced to make their arguments that a bank is the “true lender” and that the Colorado Administrator’s usury claims are therefore preempted by federal law, and any other defenses, in Colorado state court.

Second, the federal court dismissed two parallel actions brought to halt the state court proceedings. In separate actions, WebBank and Cross River Bank, the banks that partner with Avant and Marlette, each attempted to prevent the enforcement actions from moving forward by filing actions in federal court seeking (1) a declaratory judgment that Section 27 of the Federal Deposit Insurance Act (“FDIA”) expressly preempts Colorado usury laws as to loans originated by WebBank and Cross River, and (2) a permanent injunction against Colorado barring its enforcement of usury laws against the banks or any party associated with loans they originated. Because the enforcements actions against Avant and Marlette had been remanded, the courts held that the Younger abstention doctrine, as articulated by the Supreme Court in Younger v. Harris, applied to these challenges, and dismissed the banks’ challenges to the state’s enforcement powers. The Younger abstention doctrine bars federal courts from hearing claims that are subject to concurrent administrative proceedings initiated by a state agency, among others.

In reaching this conclusion, the courts found that the requirements for Younger abstention were met and rejected each of WebBank’s and Cross River’s arguments as to why the doctrine should not apply. The banks contended that: (1) they were not parties to the Avant and Marlette actions and were not an alter egos of the non-bank finance companies; (2) the Younger doctrine did not apply to the Avant or Marlette actions because they are enforcement actions; and (3) preemption under Section 27 of the FDIA is “facially conclusive” such that no state interest would be served by allowing the state court to act.

In rejecting these arguments, the courts wrote that although WebBank and Cross River are not parties to the related cases, they also are not strangers to the enforcement actions because they “[have] a close business relationship with Avant [and Marlette]” and their “mutual interests go beyond merely opposing the same policy . . . [seeking] to vindicate the same conduct that is at issue in the enforcement action[s].” The Court also found that Younger abstention applies to civil enforcement actions and that, even if a “facially conclusive” exception to Younger did exist, as WebBank and Cross River had argued, they made no showing that it would apply to the facts of these cases.

Considered alongside the remand of the state enforcement actions against Avant and Marlette, the federal court’s rejection of WebBank and Cross River’s challenges to the state’s enforcement powers is notable. Unlike many prior marketplace lending cases, the litigants were represented by nationally renowned law firms and supported by national trade groups as amici. These recent rulings illustrate the risks that persist in some states for marketplace lenders utilizing the bank origination model. We will continue to closely monitor these developments.

 

1   NRO Boston LLC and Indelicato v. Kabbage Inc. and Celtic Bank Corp., No. 17-cv-11976 (D. Mass. Oct. 12, 2017).

2   Meade v. Avant of Colorado LLC, No. 17-cv-620 (D. Col. Mar. 9, 2017).

3   Meade v. Marlette Funding, No. 17-cv-575 (D. Col. Mar. 3, 2017).

4   WebBank v. Meade, No. 17-cv-786 (D. Col. Mar. 28, 2017); Cross River Bank v. Meade, No. 17-cv-832 (D. Col. Apr. 3, 2017).

5   401 U.S. 37 (1971).

6   The courts found that the enforcement action was pending in state court, it implicated an important state interest, and there was no showing that Avant or Marlette would not be able to raise their preemption challenges in state court. See WebBank at pp. 4-5; Cross River at pp. 4-5.

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.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP
Contact
more
less

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.