UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF …

[Pages:29]Case 1:13-cv-05930-RJS Document 18 Filed 09/03/13 Page 1 of 29

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

THE OTOE-MISSOURIA TRIBE OF INDIANS; GREAT PLAINS LENDING, LLC; AMERICAN WEB LOAN, INC.; OTOEMISSOURIA CONSUMER FINANCE SERVICES REGULATORY COMMISSION; LAC VIEUX DESERT BAND OF LAKE SUPERIOR CHIPPEWA INDIANS; RED ROCK TRIBAL LENDING, LLC; LAC VIEUX DESERT TRIBAL FINANCIAL SERVICES REGULATORY AUTHORITY,

Plaintiffs,

? v. ?

NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES; BENJAMIN M. LAWSKY, in his official capacity as Superintendent of the New York State Department of Financial Services,

Defendants.

No. 13-cv-5930 (RJS) ECF Case

MEMORANDUM OF LAW IN OPPOSITION TO PLAINTIFFS' MOTION FOR A PRELIMINARY INJUNCTION

ERIC T. SCHNEIDERMAN Attorney for Defendants Attorney General of the State of New York 120 Broadway, 24th Floor New York, New York 10271

Garrett Coyle Linda Fang Assistant Attorneys General

of Counsel

Dated: September 3, 2013

Case 1:13-cv-05930-RJS Document 18 Filed 09/03/13 Page 2 of 29

TABLE OF CONTENTS

TABLE OF AUTHORITIES .......................................................................................................... ii PRELIMINARY STATEMENT .....................................................................................................1 FACTUAL BACKGROUND..........................................................................................................3

A. The Department's Responsibility to Enforce New York's Usury Laws..................3 B. The Department's Investigation into Online Payday Lending to New York

Consumers................................................................................................................3 C. Other Regulators' Online Payday Lending Investigations ......................................5 D. The Department Takes Action to Enforce New York's Usury Statutes ..................6 E. Third Parties' Actions ..............................................................................................7 STANDARD OF REVIEW .............................................................................................................8 ARGUMENT ...................................................................................................................................9 I. PLAINTIFFS ARE NOT LIKELY TO SUCCEED ON THE MERITS BECAUSE

THE DEPARTMENT'S ENFORCEMENT OF NEW YORK'S USURY LAWS IS A VALID EXERCISE OF THE STATE'S POLICE POWER AND DOES NOT INFRINGE PLAINTIFFS' CLAIMED TRIBAL SOVEREIGNTY .............................9 A. The Department's Enforcement Efforts Relating to Plaintiffs' Online Loans to

New York Consumers Does Not Interfere with Tribal Self-Governance..........9 B. Application of New York's Usury Prohibitions to Plaintiffs Is Not Preempted

by the Indian Commerce Clause, Dodd-Frank, or Any Other Federal Law ....12 C. The Department's Means of Ensuring Plaintiffs' Compliance with New

York's Usury Statutes Have Been Sanctioned by the Supreme Court ............14 D. Plaintiffs Lack Standing to Obtain Their Requested Injunctive Relief ...........15

1. Plaintiffs' Claimed Injuries Are the Direct Result of the Actions of Third Parties Not Before the Court and Thus Are Not "Fairly Traceable" to Defendants.....................................................................16

2. Enjoining the Department from Enforcing New York Usury Laws Is Not Likely to Redress Plaintiffs' Claimed Injuries Since Third Party Governmental Entities and Private Nongovernmental Entities Remain Free to Regulate Internet Payday Loans and Affiliated Third Parties .19

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Case 1:13-cv-05930-RJS Document 18 Filed 09/03/13 Page 3 of 29 II. PLAINTIFFS' GENERAL CLAIMS OF LOSS OR THREATENED LOSS ARE NOT

SUFFICIENTLY PARTICULARIZED TO ESTABLISH IRREPARABLE HARM .21 III. A PRELIMINARY INJUNCTION WOULD NOT SERVE THE PUBLIC INTEREST

AND IS NOT SUPPORTED BY EQUITABLE CONSIDERATIONS.......................24 CONCLUSION..............................................................................................................................25

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TABLE OF AUTHORITIES

Cases AFA Dispensing Group B.V. v. Anheuser-Busch, Inc., 740 F. Supp. 2d 465 (S.D.N.Y. 2005) .........................................24 Allen v. Wright, 468 U.S. 737 (1984) ....................................................................................................................................................17 Baur v. Veneman, 352 F.3d 625 (2d Cir. 2003)................................................................................................................................15 Borey v. National Union Fire Ins. Co., 934 F.2d 30 (2d Cir. 1991)...........................................................................................21 Butler v. Obama, 814 F. Supp. 2d 230 (E.D.N.Y. 2011) .................................................................................................................20 Cacchillo v. Insmed, Inc., 638 F.3d 401 (2d Cir. 2011)..................................................................................................................16 Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163 (1989) ...................................................................................................11 FTC v. Payday Fin., LLC, No. 11-cv-3017, 2013 WL 1309437 (D.S.D. Mar. 28, 2013).....................................................11 Heather K. v. City of Mallard, 887 F. Supp. 1249 (N.D. Iowa 1995) ........................................................................................22 Hedges v. Obama, ___ F.3d ___, 2013 WL 3717774 (2d Cir. July 17, 2013)...........................................................................21 JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75 (2d Cir. 1999)............................................................................................. 8 Kiowa Tribe v. Mfg. Techs., Inc., 523 U.S. 751 (1998) ...................................................................................................................15 Laird v. Tatum, 408 U.S. 1 (1972) ..........................................................................................................................................................21 Linda R.S. v. Richard D., 410 U.S. 614 (1973)....................................................................................................................................18 Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992).............................................................................................................. 15, 16 Manbeck v. Katonah-Lewisboro Sch. Dist., 403 F. Supp. 2d 281 (S.D.N.Y. 2005) .............................................................22 Maryland v. King, 569 U.S. ___, 133 S.Ct. 1 (2012)...........................................................................................................................25 Mashantucket Pequot Tribe v. Town of Ledyard, --- F.3d ---, 2013 WL 3491285 (2d Cir. July 15, 2013)..... 10, 13 Montana v. United States, 450 U.S. 544 (1981)................................................................................................................................10 Organized Vill. of Kake v. Egan, 369 U.S. 60 (1962)..................................................................................................................9, 10 Plains Commerce Bank v. Long Family Land & Cattle Co., 554 U.S. 316 (2008) ...............................................................11 Pope v. County of Albany, 687 F.3d 565 (2d Cir. 2012) ................................................................................................................. 8 Port Wash. Teachers' Ass'n v. Bd. of Educ., 478 F.3d 494 (2d Cir. 2007).............................................................................21 Puyallup Tribe, Inc. v. Dep't of Game, 433 U.S. 165 (1977) ........................................................................................................13 Rodriguez v. DeBuono, 175 F.3d 227 (2d Cir. 1999).....................................................................................................................21 Seneca Nation of Indians v. Paterson, No. 10-cv-687A, 2010 WL 4027795 (W.D.N.Y. Oct. 14, 2010) ....................24 Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26 (1976) ...............................................................................................16, 18, 19 Sprint Commc'ns Co., L.P. v. APCC Servs., 554 U.S. 269 (2008) ................................................................................................19 Town of Babylon v. Fed. Hous. Fin. Agency, 699 F.3d 221 (2d Cir. 2012) ...........................................................................20 Ward v. New York, 291 F. Supp. 2d 188 (W.D.N.Y. 2003) ...........................................................................................................12 Washington v. Confederated Tribes of Colville Indian Reservation, 447 U.S. 134 (1980).................... 11, 12, 13, 14 Water Wheel Camp Recreational Area, Inc. v. Larance, 642 F.3d 802 (9th Cir. 2011)...................................................11 White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980) ................................................................................................ 9 Winter v. Nat'l Res. Def. Council, Inc., 555 U.S. 7 (2008)..............................................................................................................23

Statutes 12 U.S.C. ? 5481(27).....................................................................................................................................................................................13 N.Y. Banking Law ? 14-a............................................................................................................................................................................... 3 N.Y. Gen. Oblig. Law ? 5-501....................................................................................................................................................................... 3 N.Y. Penal Law ?? 190.40?42..................................................................................................................................................................... 3

Constitutional Provisions U.S. CONST. ART. I, ? 8, CL. 3 ...........................................................................................................................................................................12

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Defendants the New York State Department of Financial Services (the "Department"), and Benjamin M. Lawsky, as Superintendent of the Department, respectfully submit this memorandum of law in opposition to plaintiffs' motion for a preliminary injunction.1

PRELIMINARY STATEMENT Plaintiffs in this action -- three Native American tribal lending companies and their respective tribes and tribal agencies -- seek to enjoin New York's top financial regulator from enforcing New York's validly enacted usury statutes to protect New York consumers from falling victim to usurious lending practices. The Department's investigation into the payday lending industry earlier this year revealed that, at present, out-of-state payday lenders like plaintiffs solicit and offer loans at interest rates of upwards of 888% per annum, over fifty times the usury caps set by New York law, directly to New York residents over the Internet. The Department seeks to stop these illegal and harmful payday loans from flowing into New York and has made efforts to do so by: (1) sending cease-and-desist letters to plaintiffs and other online payday lenders demanding that they stop making usurious loans to New York consumers in New York; and (2) sending letters to third-party banks and a private self-regulatory association requesting that they stop facilitating the flow of unlawful Internet-based payday loans into New York. Plaintiffs now ask this Court to enjoin those efforts, effectively silencing the Department and preventing it from communicating with these third parties, on the theory that the Department's letters somehow interfere with plaintiffs' claimed tribal sovereignty. Contrary to plaintiffs' assertions, the Department is empowered to protect vulnerable New York consumers from the serious economic harms caused by plaintiffs' online lending

1 Defendants also respectfully submit the accompanying Declaration of Debra C. Brookes, dated September 3, 2013 ("Brookes Decl."), and Declaration of Max J. Dubin, dated September 3, 2013 ("Dubin Decl."), along with the exhibits annexed thereto, in opposition to plaintiffs' motion.

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practices. State laws like New York's usury statutes may validly be applied to economic transactions between Native Americans and New York consumers when those transactions have significant and injurious off-reservation effects -- as is the case here, given the crippling debt that payday loans cause to New Yorkers. Moreover, the means that the Department has chosen to enforce New York's usury laws similarly are valid. The Supreme Court has explained that States may directly regulate third-party facilitators to ensure Native Americans' compliance with state law. Thus, plaintiffs are not likely to succeed on the merits. See Section I.A?C, infra.

Plaintiffs also cannot show a reasonable likelihood of success on the merits because they lack Article III standing. See Section I.D, infra. The supposed threat to the continued viability of plaintiffs' online payday lending businesses is not "fairly traceable" to the Department's efforts to ensure their compliance with New York law -- namely, the letters requesting the voluntary cooperation of the third-party banks and private self-regulatory association -- but rather to the independent decisions of those third parties. See Section I.D.1, infra. In addition, plaintiffs' requested injunction would not likely redress their claimed injuries since other federal and state governmental entities remain free to regulate them -- and indeed are actively seeking to do so. See Section I.D.2, infra.

Moreover, plaintiffs are not entitled to a preliminary injunction because they have failed to set forth sufficiently particularized and concrete harms resulting from defendants' actions and therefore cannot demonstrate the requisite irreparable injury. Plaintiffs have identified only a single bank which has indicated that it intends to terminate its relationship with a single plaintiff, and contrary to the statements in their brief, plaintiffs have not provided evidence that any thirdparty payment processors have actually sought to terminate their business with plaintiffs. See Section II, infra.

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Finally, the balance of the equities and the public interest militate against granting a preliminary injunction here. Plaintiffs' requested injunction would deprive New York consumers of the benefit of the duly enacted usury laws aimed at protecting them from the serious economic harm caused by exploitative lending, and in return, the injunction would confer no corresponding benefit on plaintiffs because other regulators would remain free to continue their regulatory efforts against the online payday loan industry. See Section III, infra.

Accordingly, plaintiffs' motion should be denied in its entirety. FACTUAL BACKGROUND

A. The Department's Responsibility to Enforce New York's Usury Laws The Department is responsible for regulating and supervising the provision of financial

products and services in the State. Brookes Decl. ? 4. Included among the Department's myriad responsibilities is the duty to investigate and prosecute consumer complaints of financial fraud, to protect and assist users of financial products and services in the State, to ensure the enforcement of provisions of the State's insurance, banking and financial services laws, and to regulate and supervise the many state chartered banks which do business in New York. Id.

Like many other States, New York has long-since enacted laws limiting the maximum interest rates on certain small denomination loans. Under those laws, making a loan below $250,000 with an annual interest rate above 16% constitutes civil usury. See N.Y. GEN. OBLIG. LAW ? 5-501; N.Y. BANKING LAW ? 14-a. Charging an annual interest rate above 25% is a criminal violation. See N.Y. PENAL LAW ?? 190.40?42. B. The Department's Investigation into Online Payday Lending to New York

Consumers In early 2013, the Department, in response to a number of consumer complaints, commenced an investigation into certain usurious loans that were and are being offered and

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issued to New York residents over the Internet. Brookes Decl. ? 5. These loans are frequently referred to as "payday" loans because they are often advertised as a short-term advance on a future paycheck or other anticipated income. Id. ? 3.

Through its investigation, the Department learned that these loans were being offered over the Internet to New York residents, whereby the prospective borrower fills out an online application on the lender's website, or calls the lender directly to apply over the phone. Dubin Decl. ?? 6-7. In the typical online payday loan scenario, a New York consumer obtains a lumpsum from the lender, which is electronically credited to the consumer's bank account in New York. Id. ? 8. In exchange, the consumer authorizes the lender to regularly debit his bank account going forward for certain, fixed amounts, corresponding to the consumer's anticipated payday schedule. Id. ? 7. The consumer is led to believe that these debits would go towards repayment of the loan and the accompanying finance charges, and thus would extinguish the debt; in actuality, however, what the lender obtains is an open-ended authorization to debit the borrower's account, which is generally applied only to the interest portions of the loan obligations, without any reduction in principal for several months. Id. ? 3. The result of this practice is that consumers would continue to incur exorbitant interest obligations on their loans, turning these purportedly short-term loans into long-term obligations and thereby trapping the borrowers in a cycle of debt. Id.

To learn more about the mechanics of how these loans worked, in March 2013 the Department sent informal surveys to approximately 20 New York state-chartered and national banks, and followed up with interviews and meetings with these financial institutions. Id. ?? 4-5. Through these efforts, the Department learned that the payday lender generally initiates the electronic transfer of funds through its bank (the "Originating Depository Financial Institution"

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