Borrowers say interest is excessive

Trial Notebook

Steven P. Garmisa
By Steven P. Garmisa
Hoey & Farina
Three Illinois residents who agreed to pay 139 percent interest on $2,525 in loans from Western Sky Financial — a “payday loan” company chartered in South Dakota that advertises on television and operates on the Internet — filed a state-court class action in Chicago against its owner, eight affiliated firms and some debt collectors, alleging that the defendants violated the Illinois Interest Act and the “unfair practices” provision of the Illinois Consumer Fraud Act.

Western Sky and its affiliates allegedly lacked authorization from the Illinois Department of Financial and Professional Regulation to charge interest rates greater than the 9 percent maximum provided by the Interest Act.

The defendants used the Class Action Fairness Act to yank the case into federal court. Then the district judge dismissed the lawsuit based on a contract provision that required arbitration of disputes by “an authorized representative” of the Cheyenne River Sioux Tribal Nation in South Dakota. But the 7th U.S. Circuit Court of Appeals reversed because the arbitration provision was unreasonable and unconscionable. Jackson v. Payday Financial, 764 F.3d 765 (7th Cir.2014).

Back in the district court, the defendants filed a motion to dismiss, arguing among other things that the plaintiffs failed to allege valid claims under the Illinois statutes.

Although U.S. District Judge Charles P. Kocoras dismissed a count that was based on the Illinois Criminal Usury statute — because that statute “does not imply a private right of action for individuals subject to loans charging usurious interest rates” — he declined to toss the Interest Act and Consumer Fraud claims.Jackson v. Payday Financial, 11 C 9288 (Feb. 3).

Here are highlights of Judge Kocoras’ opinion (with omissions not noted in the text):

Defendants argue that plaintiffs’ allegations concerning a violation of the Illinois Interest Act must be dismissed because the complaint does not allege that the defendants had actual knowledge that their loans were unlawful.

Under the Illinois’ usury statutes, “whether a loan is usurious depends on whether the party intended to charge unlawful interest.” Saskill v. 4–B Acceptance, 117 Ill.App.3d 336, 453 N.E.2d 761 (1983).

Plaintiffs’ allege that defendants knowingly lent money to the plaintiffs and charged interest rates more than 130 percent, well over the 9 percent cap established by the Illinois Interest Act. The complaint further specifies that the defendants were aware that the interest rates charged were unenforceable under Illinois law.

The defendants counter that they were under the belief that their loans would be governed by Cheyenne River Sioux tribal law, as specified in the loan agreement.

Despite the defendants assertions of their subjective beliefs, the present posture of the case does not support determining the facts of the case. At this juncture, the plaintiffs’ well-pled allegations establish that the defendants knew that the loans were unlawful under Illinois law.

Additionally, defendants contend that the Illinois Interest Act solely applies to individuals and corporations actually in this state. Due to their lack of Illinois contacts, defendants argue that the Illinois Interest Act does not apply to them.

Defendants point to the language of the Illinois Interest Act which states, in pertinent part: “in all written contracts it shall be unlawful for the parties to stipulate or agree that 9 percent per annum, or any less sum of interest, shall be taken and paid … in any manner due and owing from any person to any other person or corporation in this state … except as herein provided.” 815 ILCS 205/4(1).

Defendants asserted limitation on the reach of the Illinois Interest Act is not persuasive.

The Illinois Interest Act and other Illinois usury laws exist to broadly protect a “necessitous borrower” from an “unscrupulous lender.” See Rogus v. Continental Illinois Nat. Bank & Trust Co. of Chicago, 4 Ill.App.3d 557, 281 N.E.2d 346 (1972).

The portion of the Illinois Interest Act relied on by the defendants merely enunciates the lawful nature of a 9 percent interest rate. If an individual or company wishes to exceed the cap interest rate, it must fall into one of the many established exceptions, which defendants do not argue that they fit into.

Furthermore, another section of the Illinois Interest Act provides:

“When any written contract, wherever payable, shall be made in this state, or between citizens or corporations of this state, or a citizen or a corporation of this state and a citizen or corporation of any other state, territory or country (or shall be secured by mortgage or trust deed on lands in this state), such contract may bear any rate of interest allowed by law to be taken or contracted for by persons or corporations in this state, or allowed by law on any contract for money due or owing in this state.” 815 ILCS 205/8.

The permissibility of charging “any rate of interest allowed by law” in a contract made by any individual of any state defeats the defendants limited interpretation of the Illinois Interest Act.

The defendants’ motion to dismiss plaintiffs’ Illinois Interest Act claim is denied.

Disagreement concerning the application of the ICFA

Defendants argue that the plaintiffs’ ICFA claim should be dismissed because there exists a legitimate disagreement about whether the alleged conduct is unlawful under the ICFA.

Defendants fortify their argument by relying on Stern v. Norwest Mortgage Inc., 284 Ill.App.3d 506, 672 N.E.2d 296 (1996), for the proposition that the existence of a “reasonable difference of opinion as to the meaning” of a statute cannot support a ICFA claim.

However, the Stern court went on to state that “there must be a claim seated in deceptive acts rather than a reasonable difference of opinion as to the meaning of an act of the Illinois General Assembly.” Id., 672 N.E.2d at 302.

Courts have held that an individual can pursue two types of claims under the ICFA: 1) a claim alleging that the conduct is unfair; and 2) a claim alleging that the conduct is deceptive. See Siegel v. Shell Oil Co., 612 F.3d 932 (7th Cir.2010); see also Saunders v. Mich. Ave. Nat’l Bank, 278 Ill.App.3d 307, 662 N.E.2d 602 (1996).

Plaintiffs have alleged that the defendants’ conduct was unfair for the purposes of pleading an ICFA claim.

To show that particularized conduct constitutes an “unfair practice” under the ICFA, the practice must offend public policy, be immoral, unethical, oppressive, unscrupulous or cause substantial injury to consumers. Robinson, 775 N.E.2d at 961.

“All three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three.” Id.

For present purposes, the plaintiffs have pled that the defendants engaged in unfair conduct in violation of the ICFA for “contracting for and collecting finance charges, interest, and fees, from Illinois residents, in excess of the amounts permitted by Illinois law.”

In light of Illinois’ enactment of several consumer protection statutes limiting the permissible interest charged to Illinois residents, the court finds that the alleged assessment of interest over 100 percent is unscrupulous and oppressive and sufficiently constitutes an unfair practice.

Defendants submit their argument concerning a “reasonable difference of opinion” as a guise for their ultimate contention that Illinois law should not be applicable to the loan agreements.

It is not the contention of the defendants that the ICFA is ambiguous or vague in defining the conduct it prohibits. Defendants go further and ultimately challenge the application of Illinois law to their conduct. Defendants have moved for dismissal based on plaintiff’s failure to state a claim.

Plaintiffs have sufficiently alleged a violation of the ICFA under Illinois law.

Basis for ICFA claim

Defendants argue that the ICFA does not allow recovery for a violation of the Illinois Interest Act.

Defendants contend that the ICFA prescribes numerous statutes that if violated give rise to a ICFA claim; the absence of the Illinois Interest Act from the delineated violations prohibits the application of the ICFA.

Despite the defendants’ protestations concerning the absence of the Illinois Interest Act from the list of statutes qualifying as a ICFA violation, plaintiffs do not elicit the particular portion of the ICFA which relies on other violations to serve as a basis for an ICFA claim.

Plaintiffs allege that the excessive interest and fees of the loans assessed by the defendants in their loans was an unfair practice in violation of 815 ILCS 505/2 of the ICFA, which does not rely on a violation of another statute.

Plaintiffs do not allege that a violation of the Illinois Interest Act represents a violation of 815 ILCS 505/2Z of the ICFA, which provides a remedy under the ICFA for violations of other Illinois consumer statutes.

Failure to establish the proximate cause of their injury

Defendants finally contend that plaintiffs have failed to establish that their deception proximately caused plaintiffs’ injuries.

To prevail under ICFA, a plaintiff must demonstrate that the defendant’s conduct is the proximate cause of the injury. Oliveira v. Amoco Oil Co., 201 Ill.2d 134, 776 N.E.2d 151 (2002).

Therefore, plaintiffs must allege that “but for” the defendants’ unfair conduct, they would not have been damaged.

Plaintiffs allege that the loans provided by the defendants unlawfully charged finance charges, interest, and fees that were not permitted under Illinois law. As a result of paying the charged interest of over 100%, as opposed to the Illinois cap of 9%, the plaintiffs were damaged.

Plaintiff sufficiently pled the proximate cause of their injury was the defendants conduct. Defendants’ motion to dismiss plaintiffs’ ICFA claim is denied.