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3rd Cir. Holds Penn Regulator’s Actions Against Out-of-State Lender Did Not Violate Commerce Clause

auto financeThe U.S. Court of Appeals for the Third Circuit recently reversed a trial court’s ruling that the Pennsylvania Department of Banking and Securities violated the Commerce Clause by issuing and attempting to enforce a subpoena to an out-of-state vehicle title lender regarding the out-of-state lender’s interactions with Pennsylvania residents.

In so ruling, the Third Circuit held that:

  1. Applying the Pennsylvania statutes at hand to the lender did not violate the extraterritoriality principle.
  2. The Pennsylvania Department of Banking and Securities had a strong interest in prohibiting usury.
  3. Applying Pennsylvania’s usury laws to the lender’s loans furthered that interest.
  4. Any resulting burden on interstate commerce was, at most, incidental.

A copy of the opinion in TitleMax of Delaware Inc v. Robin Weissmann is available at:  Link to Opinion.

A vehicle title lender provided vehicle loans at interest rates as high as 180 percent. Borrowers would receive a check drawn on a bank outside of Pennsylvania and would grant the lender a security interest in the vehicle. The lender would record its lien with the appropriate state authority.

Borrowers could make payments from their home states. The lender did not have any offices, employees, agents, or brick-and-mortar stores in Pennsylvania and was not licensed as a lender in Pennsylvania. The lender claimed that it never solicited Pennsylvania business and did not run television ads within Pennsylvania.

Pursuant to the Consumer Discount Company Act (CFCA) and the Loan Interest and Protection Law (LIPL), Pennsylvania’s Department of Banking and Securities issued a subpoena requesting documents regarding the lender’s interactions with Pennsylvania residents. The lender then stopped making loans to Pennsylvania residents and asserted that it lost revenue.

The Department filed a petition to enforce the subpoena in the Pennsylvania Commonwealth Court (“Petition Action”) and the parties filed cross-motions for summary judgment based on Younger abstention and the dormant Commerce Clause. The trial court granted the lender’s motion and denied the Department’s.

The trial court held that Younger abstention did not apply, but found that, because the lender’s loans are completely made and executed outside Pennsylvania and inside the lender’s brick-and-mortar locations in Delaware, Ohio, or Virginia, the Department’s subpoena’s effect is to apply Pennsylvania’s usury laws extraterritorially in violation of the Commerce Clause. The Department timely appealed.

As you may recall, under the Younger abstention doctrine, federal courts must refrain from interfering with three types of state proceedings. One of these is civil enforcement proceedings. Sprint Commc’ns, Inc. v. Jacobs, 571 U.S. 69, 78 (2013).

A “civil enforcement proceeding” warrants Younger abstention when the proceeding is “akin to a criminal prosecution” in “important respects.” Id. at 79 (citation omitted). To determine if a civil enforcement proceeding is quasi-criminal in nature, federal courts consider whether (1) the action “was commenced by the state in its sovereign capacity,” (2) the action was “initiated to sanction the federal plaintiff for some wrongful act,” (3) there are “other similarities to criminal actions, such as a preliminary investigation that culminated with the filing of formal charges,” and (4) “the State could have alternatively sought to enforce a parallel criminal statute.” ACRA Turf Club, LLC v. Zanzuccki, 748 F.3d 127, 138 (3d Cir. 2014)

The Third Circuit here held that the Petition Action was not a civil enforcement proceeding because it was filed to enforce a subpoena, not to punish the lender. See Pa. Dep’t of Banking & Sec. v. TitleMax of Del., Inc., 1:17-cv-02112-JPW (M.D. Pa. Nov. 16, 2017), ECF No. 1-2.

Another type of case in which Younger abstention may apply is one that furthers the state court’s ability to perform its judicial function. Sprint, 571 U.S. at 78.

However, the Third Circuit reasoned that the Petition Action presents only a possibility of contempt, akin to any other case where courts issue orders and a party’s noncompliance can lead to contempt. Thus, there was no judicial contempt process with which this federal case could interfere. See Malhan v. Sec’y U.S. Dep’t of State, 938 F.3d 453, 464-65 (3d Cir. 2019).

Therefore, the Third Circuit held that Younger Abstention did not apply to this case.

As you also may recall, when evaluating whether a state statute violates the Commerce Clause, federal courts examine the statute’s effect on interstate commerce. Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 579 (1986). One way a challenged statute can “directly regulate” interstate commerce is if the statute has “extraterritorial effects that adversely affect economic production (and hence interstate commerce) in other states.” Cloverland-Green Spring Dairies, Inc. v. Pa. Milk Mktg. Bd., 462 F.3d 249, 261-62 (3d Cir. 2006).

The Third Circuit here followed a two-step approach in analyzing the lender’s Commerce Clause claim. Initially, the Court addressed the territorial scope of the transaction that the Department attempted to regulate and whether such transactions occurred “wholly outside” the state. A.S. Goldmen & Co., Inc. v. N.J. Bureau of Sec., 163 F.3d 780, 786 (3d Cir. 1999). If the transactions did not occur wholly outside of Pennsylvania, then it would be upheld unless the burden on interstate commerce was “clearly excessive in relation to the putative local benefits.” Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).

The Third Circuit observed that, unlike the sale of a good, a loan from the lender has a longer lifespan: it involves later payments and permits a physical taking (repossession) from inside another state. Because the lender both received payments from within Pennsylvania and maintained a security interest in vehicles located in Pennsylvania that it could act upon, the Court held that its conduct was not “wholly outside” of Pennsylvania.

Thus, the Third Circuit also concluded that applying the Pennsylvania statutes to the lender did not violate the extraterritoriality principle.

On the interstate commerce burdens side, the Third Circuit determined that application of Pennsylvania’s usury laws to transactions with Pennsylvanians put the lender in no different position than an in-state lender. See Instructional Sys., Inc. v. Comput. Curriculum Corp., 35 F.3d 813, 826-27 (3d Cir. 1994). Although it may be true, the Court noted, that the lender could be subject to different interest rate caps depending on the borrower’s state of residence, the Court concluded that this result is not a “clearly excessive” burden on interstate commerce.

Additionally, when considering the local benefits, the Third Circuit held that they weighed in favor of applying Pennsylvania laws to the lender because the laws protect Pennsylvania consumers from usurious lending rates. The lender’s interest rates may be as high as 180 percent, but the Court found that if the CDCA and LIPL applied, the lender’s rates for Pennsylvania customers would be capped at 6 percent. Cash Am. Net of Nev., LLC v. Pa. Dep’t of Banking, 8 A.3d 282, 285-86 (Pa. 2010). Thus, the Court concluded that any burden did not clearly exceed the local benefits. Pike, 397 U.S. at 142.

Therefore, the Third Circuit held that the Department had a strong interest in prohibiting usury, applying Pennsylvania’s usury laws to the lender’s loans furthered that interest, and any burden on interstate commerce from doing so was, at most, incidental. The Department was thus allowed to investigate and apply its usury laws to the lender without violating the Commerce Clause.

Accordingly, the Third Circuit reversed the judgment in favor of the lender and directed the trial court to enter judgment in favor of the Department.

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Daniel Miller is an associate in the Chicago office of Maurice Wutscher LLP, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Daniel has substantial experience as a litigation attorney representing clients in both individual and class action cases involving the FDCPA, TCPA, FCRA, TILA, RESPA, Illinois Consumer Fraud Act, and various other federal and state statutes. He also has experience in representing corporate clients in commercial transactions and executive compensation agreements. Daniel earned his Juris Doctor from the University of Illinois College of Law, and his Bachelor of Arts in History from Durham University in the United Kingdom. He is admitted to practice law in Illinois and the U.S. District Courts for the Northern District of Illinois and the Southern District of Illinois.

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