Bankwest, Inc. v. Baker

411 F.3d 1289

BANKWEST, INC., Advance America, Cash Advance Centers of Georgia, Inc., Plaintiffs-Appellants Community State Bank, First American Cash Advance of Georgia, LLC, Cash America Financial Services, Inc., Georgia Cash America, Inc., First Bank of Delaware, Creditcorp of Georgia, LLC, County Bank of Rehoboth Beach, Delaware, Express Check Advance of Georgia, LLC, Consolidated-Plaintiffs-Appellants, v. Thurbert E. BAKER, Attorney General of the State of Georgia, Cathy Cox, Secretary of State, for the State of Georgia, in their official capacities, Defendants-Consolidated-Defendants-Appellees.

No. 04-12420.

United States Court of Appeals, Eleventh Circuit.

June 10, 2005.

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Susan Verbonitz, Marc J. Zucker, Weir & Partners, LLP, Alan S. Kaplinsky, Jeremy T. Rosenblum, Mark J. Levin, Ballard, Spahr, Andrews & Ingersoll, LLP, Philadelphia, PA, William P. Eiselstein, Miller & Martin, PLLC, Christopher J. Willis, Richard H. Sinkfield, Daniel D. Zegura, Rogers & Hardin, LLP, John K. Larkins, Jr., Chilivis, Cochran, Larkins & Bever, LLP, Michael C. Russ, King & Spalding, Charles E. Campbell, Robert A. Bartlett, Long, Aldridge & Norman, Atlanta, GA, Larry Dwight Floyd, Jr., Parker, Poe, Adams & Bernstein, LLP, Columbia, SC, for Plaintiffs-Appellants and Consolidated-Plaintiffs-Appellants.

Thurbert E. Baker, Isaac Byrd, Sidney Ray Barrett, Jr., Atlanta, GA, for Defendants-Consolidated-Defendants-Appellees.

James T. McIntyre, Jr., Chrys D. Lemon, McIntyre Law Firm, PLLC, Washington, DC, for Community Financial Services Ass'n of America, Amicus Curiae.

Erin Glenn Busby, Bracewell & Patterson, L.L.P., Houston, TX, for Robert L. Clarke, Amicus Curiae.

Deborah M. Zuckerman, AARP Foundation Litigation, Washington, DC, for AARP, Atlanta Legal Aid Society, Inc., Consumer Federation of America, Georgia Legal Services Program, National Ass'n of Consumer Advocates, National Consumer Law Center, Amici Curiae.

Appeals from the United States District Court for the Northern District of Georgia.

Before CARNES, HULL and HILL, Circuit Judges.

HULL, Circuit Judge:

This case concerns payday loans, which are small loans with interest rates averaging 400-500% APR due on the next payday. This appeal presents the question of whether the State of Georgia may regulate a narrow segment of agency agreements between in-state payday stores and out-of-state banks or whether the Georgia Act in issue is preempted by § 27(a) of the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C. § 1831d(a).

The Georgia Act in issue, Ga.Code Ann. §§ 16-17-1 to 16-17-10 (2004), targets Georgia businesses and precludes in-state payday stores from directly making payday loans in Georgia. No one challenges Georgia's right to preclude in-state stores or even in-state banks from making payday loans at these high interest rates.

To avoid this direct prohibition, however, payday stores have entered into agency agreements whereby the stores procure such payday loans for out-of-state banks, but nonetheless, retain the predominate economic interest in the loans. To stop this practice, the Act restricts in-state payday stores from acting as agents for out-of-state banks in one, limited circumstance: where the agency agreement grants the in-state agent"the predominate economic interest" in the bank's payday loan, which the parties agree means that the payday stores hold more than 50% of the revenues from the loan. See Ga.Code Ann. § 16-17-2(b)(4). Georgia outlaws this one type of agency agreement to prevent in-state payday stores from circumventing Georgia's usury laws and reaping the enormous revenues from payday loans.

The district court denied the plaintiffs' motion for a preliminary injunction enjoining the enforcement of the Georgia Act. After review and oral argument, we conclude that the district court did not abuse its discretion in denying the plaintiffs preliminary-injunctive relief.

I. FACTUAL BACKGROUND

Given the complexity of this case, we first outline the principal players, the agreements at issue, and the relevant federal and state law.

A. The Principal Players

There are two distinct sets of plaintiffs in this case. The first set of plaintiffs is the out-of-state banks, such as Community State Bank and BankWest.¹ The out-of-state banks have no physical locations in Georgia. Rather, the out-of-state banks offer payday loans in Georgia by contracting with independent, local payday stores that form the second set of plaintiffs.

The second set of plaintiffs are corporations, such as Advance America, First American Cash Advance of Georgia, Cash America Financial Services, and others that operate payday stores in Georgia. These payday stores are not banks or subsidiaries of banks. Rather, these payday stores are wholly independent businesses with physical locations in Georgia. For example, Advance America operates 89 payday stores in Georgia.

The payday stores operate not only in Georgia but in many states. In some states, there is no limit on the interest rate a payday store may charge a borrower. In such states, there is no need for these plaintiff payday stores to associate themselves with out-of-state banks. Rather, they are permitted to loan money directly to borrowers and charge any interest rate they wish.

In contrast, Georgia's usury laws present a serious problem for the plaintiff payday stores. In Georgia, the maximum legal annual percentage rate ("APR") for loans of $3,000 or less is 16%. See Ga.Code Ann. § 7-4-2(a)(2).² This means that a payday store is limited to the 16% APR provided under Georgia law if it attempts to loan money directly to its customers. However, under § 27(a) of the FDIA, a state-chartered bank is authorized to charge the rate of interest allowed under the laws of its charter state in any other state where it does business. Thus, an out-of-state bank is not limited by Georgia's 16% cap.

Accordingly, the local payday stores in this case have entered into arrangements with out-of-state banks to serve as their agents in Georgia. By doing so, the payday stores are marketing and procuring the high-interest rate loans in Georgia allowed in the charter states of the out-of-state banks.

The typical scenario is that a borrower goes to a payday store in Georgia, receives a single loan payment of up to $500, and signs a promissory note or loan agreement identifying the out-of-state bank as the lender. At the time of receiving the loan proceeds, the borrower often gives the payday store a post-dated check for the loan repayment plus finance charge. The loan matures within four to forty-five days, usually on the borrower's next payday. On that day, the borrower must repay the principal, plus a finance charge of 17% to 27% of the principal, depending on the term of the loan. When the finance charge is calculated as an APR, it far exceeds the maximum permitted under Georgia law. In fact, the charges on a typical two-week payday loan have an APR between 442% and 520%.

The payday stores maintain many physical locations in Georgia and pay all costs associated with maintaining those locations, including rent, equipment costs, staffing costs, taxes, and advertising. Although the out-of-state bank advances the initial loan funds, the payday stores market the loans, process applications, collect loans after maturity, submit reports about the loans to the out-of-state bank, and remit the loan payments to a local bank account in the out-of-state bank's name. As detailed later, the payday stores effectively do all the work and retain 81% of the loan revenues.

The defendant in this case is, essentially, the State of Georgia. As discussed below, the State of Georgia prohibits Georgia-licensed businesses, such as the plaintiff in-state payday stores from (1) making payday loans directly to borrowers, and (2) acting as agents when paid the predominate economic interest in the payday loan.

B. The Contracts

Just as there are two types of plaintiff in this case, there are two types of contract. First, there is the contract between the out-of-state bank and the borrower. The relationships between the out-of-state banks and the borrowers are governed by written loan contracts. In the consumer loan contract provided by plaintiff BankWest, which we have been led to believe is typical, BankWest is identified as "the Lender" and Advance America, the payday store, is identified as "the fiscal agent and loan marketer/servicer." The loan contract discloses the APR of the loan, the total finance charge, the amount of the loan, and the total amount that will have to be repaid by the borrower. The first page of the loan contract, which contains all of the financial terms of the loan, is signed by only the borrower and BankWest.³ Thus, BankWest, as the lender, sets the terms and features of the loans.

Second, there is also the entirely separate contract between the in-state payday store and the out-of-state bank. It is the in-state payday stores' agency relationships that the State of Georgia has attempted to regulate, but only when the payday store retains the predominate economic interest in the loan revenues.

The agreement between plaintiffs Advance America (an in-state payday store) and BankWest (an out-of-state bank) is in the record, and again we have been led to believe that it is typical. Under the agreement, Advance America pays for all costs related to its storefront locations and employees.⁴ Advance America procures the borrower and submits a loan application to BankWest. BankWest then approves (or denies) the application and advances all funds. BankWest uses a separate third-party "loan processing agent" (referred to as "Tele-Track" in the record) to electronically approve applications.⁵

In addition, if a borrower does not pay back the loan, the agreement transfers part of the loan loss to Advance America.⁶ Every three months, the total amount of BankWest loans that Advance...