Payday lenders can move forward with their suit against federal regulators challenging the controversial Operation Choke Point, a Washington, D.C., federal court judge has ruled.

What happened

A payday lender alleged that the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency violated its right to due process under the Fifth Amendment of the U.S. Constitution.

The plaintiffs alleged, among other things, that the federal banking regulators participated in a campaign to force banks to terminate their business relationships with payday lenders. As part of Operation Choke Point, the defendants engaged in pressure tactics such as threatening banks with painful examinations by supervisors or enforcement actions, the plaintiffs told the court.

The payday lender—now joined by other members of the industry—filed a motion for preliminary injunction to halt the financial regulators from harming their 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 the plaintiffs of their ability to pursue their line of business.

But U.S. District Court Judge Gladys Kessler denied the motion in February. According to the court, the plaintiffs’ evidence was too speculative and conclusory to justify an injunction. “Plaintiffs’ submissions do not establish a likelihood of success on the merits—or even a ‘serious legal question’ on the merits,” the court held. “[T]he fact that some discrete number of banks refuse to transact with [the plaintiffs] tells us almost nothing about how many banks remain willing to transact with payday lenders.”

Hoping for a similar victory, the federal regulators moved to dismiss the new payday lenders that were added to the suit, for lack of subject matter jurisdiction and failure to state a claim, and moved for summary judgment against the plaintiffs. In their motion to dismiss against the new plaintiffs, the defendants argued that the plaintiffs’ allegations regarding the potential for future loss of access to the banking system and a future preclusion from the payday lending industry are not a “real and immediate threat of injury” and, therefore, those plaintiffs lacked standing. Judge Kessler denied the motion, finding that with just one exception, all the new plaintiffs had standing. Moreover, the court held that the plaintiffs stated a claim upon which relief could be granted and that the evidence was insufficient to grant summary judgment to the defendants.

The plaintiffs’ allegations of future harm are not too uncertain to be implausible, the court said, noting that they have already lost bank accounts and that the plaintiffs have alleged sufficient facts to plausibly tie these losses to the actions of the defendants under the auspices of Operation Choke Point. “If those losses continue, it is certainly plausible that the [plaintiffs] will effectively be cut off from the banking system and/or put out of business,” the court held. “That is sufficient to state a claim.”

Rejecting the regulators’ argument that the statements identified by the defendants are not stigmatizing, or directed to individual plaintiffs, and, therefore, could not demonstrate a due process violation, the court held it was too early in the litigation for the court to resolve this issue.

The plaintiffs’ allegations contained a variety of statements, “some that can be labeled stigmatizing, and others that can be labeled as mere pressure; some that were made to regulated banks, and some that were made wholly within the agency; some that appear to be about individual banks, and others that apply generally to the payday lending industry as a whole,” Judge Kessler explained. “Ultimately, the Court finds that the totality of the statements presented make it plausible that [the defendants] stigmatized [the plaintiffs], resulting in a deprivation of a liberty interest.”

Why the different results in the motion for a preliminary injunction and the motion to dismiss? “[B]ecause of the different standards employed when reviewing a motion for preliminary injunction—‘likelihood of success on the merits’—and when reviewing a motion to dismiss—‘plausibility,’” the court explained. “The plausibility requirement is not a probability requirement. … Because [the plaintiffs’] allegations are sufficiently plausible, though just barely, [the defendants’] Motion to Dismiss must be denied.”

One of the new plaintiffs did not survive the dispositive motion, however. As it was not actually a payday lender, the court dismissed it from the suit for its failure to state a claim.

Turning to the summary judgment motion against the plaintiffs, the defendants argued that the plaintiffs cannot show that they have suffered a deprivation of liberty without due process. Judge Kessler rejected this argument, holding that the defendants’ evidence—“[h]owever compelling”—was insufficient.

“The crux of Plaintiffs’ argument is that if Operation Chokepoint continues unabated, they will be effectively cut off from the banking system or broadly precluded from the payday lending industry in the future,” the court said. “The fact that [the defendants] can definitely prove that those harms have yet to befall Plaintiffs does not refute this claim. Without knowing more fully Plaintiffs’ past ability to access the banking system, how that ability has changed, and whether those changes were the result of [the defendants’] actions, the Court is unable to definitely say that Plaintiffs will not be effectively cut off from the banking system. Similarly, the undisputed material facts identified by [the defendants] do not enable the Court to definitely conclude that Plaintiffs will not be put out of business by continued regulatory pressure from [the defendants].”

An alternative argument that some of the plaintiffs have not been broadly precluded from pursuing their chosen line of business because they were able to pursue other lines of business “has no merit,” the court added. “These plaintiffs may well have other lines of business that they are able to pursue should [the defendants] force the closure of their payday lending operations. However, the Due Process Clause protects one’s right to pursue a livelihood of one’s choice.”

Or as Judge Kessler noted, “[I]t would be of little consolation to an attorney, driven from his practice by improper governmental stigma, that McDonald’s is still hiring.”

Because the court could not say as a matter of law that the plaintiffs have no right to relief, the motion for summary judgment was denied.

To read the memorandum opinion, click here.

Why it matters

In a victory for the payday lenders, the opinion allows the case to proceed into discovery. While the litigation will move forward, Judge Kessler has made no secret of the fact that the court does not believe the plaintiffs can prevail based on their current allegations, both in her denial of the injunction (holding that the payday lenders not only did not establish a likelihood of success on the merits, they also failed to demonstrate “even a ‘serious legal question’ on the merits”) and the denial of the motion to dismiss (characterizing the plaintiffs’ allegations as “just barely” sufficiently plausible to survive dismissal).