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Heldt v. Payday Financial, LLC

United States District Court, D. South Dakota, Central Division

January 8, 2016

CHAD MARTIN HELDT, INDIVIDUALLY AND ON BEHALF OF ALL SIMILARLY SITUATED INDIVIDUALS; CHRISTI W. JONES, INDIVIDUALLY AND ON BEHALF OF ALL SIMILARLY SITUATED INDIVIDUALS; SONJA CURTIS, INDIVIDUALLY AND ON BEHALF OF ALL SIMILARLY SITUATED INDIVIDUALS; AND CHERYL A. MARTIN, INDIVIDUALLY AND ON BEHALF OF ALL SIMILARLY SITUATED INDIVIDUALS, Plaintiffs,
v.
PAYDAY FINANCIAL, LLC, d/b/a LAKOTA CASH d/b/a BIG SKY CASH; WESTERN SKY FINANCIAL, LLC, d/b/a WESTERN SKY FUNDING, d/b/a WESTERN SKY, d/b/a WESTERNSKY.COM; CASHCALL, INC., A CALIFORNIA CORPORATION; AND WS FUNDING, LLC, A WHOLLY OWNED SUBSIDIARY OF CASHCALL, INC., Defendants. and THOMAS BROWN, MONICA JOHNSON, MELINDA LONG, RENEE HOLMES, KEVIN HAYES, LESLIE JON LYDON, ELIZABETH JACKSON, ABRAHAM INETIANBOR, JAMES BINKOWSKI, JEFFREY MOORE, LISA WALKER, DEBERA GRANT, AND JAMES HAYES, Intervenors.

OPINION AND ORDER LIFTING STAY AND DENYING WITHOUT PREJUDICE MOTION FOR PRELIMINARY APPROVAL OF CLASS SETTLEMENT

ROBERTO A. LANGE UNITED STATES DISTRICT JUDGE

The above-named Plaintiffs and Defendants (jointly "the Parties"), on November 4, 2015, have filed a Joint Motion to Lift Stay and for Preliminary Approval of Class Settlement. Doc. 64. At the Parties' request, this Court originally set a hearing to occur on November 20, 2015. Doc. 69. A number of governmental and private parties objected to the proposed class certification and requested that this Court delay consideration of the motion. Docs. 73, 74, 75, 76, 77, 82. This Court postponed the hearing and reset the hearing for December 18, 2015, in an effort to accommodate the Parties, objectors, and intervenors and to allow for fair consideration of the pending motion. Docs. 79, 88. Three days before the December 18 hearing, one of the named Plaintiffs-Christi W. Jones-filed her own objection to Preliminary Approval of Class Settlement through separate counsel and a supporting declaration. Docs. 96, 96-1. Also on December 15, the Parties filed a Notice of Amendments to Stipulation and Agreement of Settlement with two addenda altering the settlement terms in a manner designed to address misgivings that prompted objections from the Federal Trade Commission (FTC) and certain state officials. Docs. 97, 97-1.

On December 18, 2015, this Court conducted a lengthy hearing to consider argument from counsel for Plaintiffs Heldt, Curtis, and Martin; separate counsel for Jones; Defendants' counsel; and counsel for the Intervenors. Doc. 113. This Court lifted the stay it had entered, questioned each counsel to probe factual and legal issues, and ultimately provided some of its thoughts to counsel about the need for additional information to justify any possible order approving a national class and preliminary settlement. Doc. 113. Both before the December 18 hearing and afterwards, this Court has given considerable thought to the pending motion and believes it best to rule on the pending motion as a means of providing written guidance as to what might be necessary to justify grant of class certification and preliminary approval of any settlement.

I. Procedural History

Plaintiffs filed a Class Action Complaint in this case on July 11, 2013, seeking declaratory, injunctive, and monetary relief against the Defendants. Doc. 1. Plaintiffs alleged that Defendants had charged illegal and usurious interest rates and used deceptive and misleading marketing and loan documents as part of a program to make fast and low-barrier loans to financially weak and desperate people. Doc. 1. Plaintiffs alleged that Defendants charged effective annual percentage rates of between 89.68% and 342.86%. Doc. 1. The four named Plaintiffs-two of whom are from Texas, with the other two from Minnesota and Virginia-alleged a civil conspiracy, violation of usury laws of their home states, and violations of certain of their home state consumer protection laws. Doc. 1. The Plaintiffs sought certification of a national class and subclasses for the three states in which they reside. Doc. 1. Through an Amended Class Action Complaint, Plaintiffs added as a Defendant WS Funding, LLC, a wholly owned subsidiary of CashCall, Inc. Doc. 30.

This is not the first case before this Court involving the Defendants' subprime lending programs. This Court previously has authored two lengthy opinions in a case brought by the FTC against certain of these Defendants and other related parties. FTC v. Payday Fin., LLC (Payday I). 935 F.Supp.2d 926 (D.S.D. 2013); FTC v. Payday Fin.. LLC (Payday II). 989 F.Supp.2d 799 (D.S.D. 2013). In Payday II. this Court, among other things, held that certain loan agreements violated the Electronic Funds Transfer Act, that certain wage assignments violated the Credit Practices Rule although other assignments did not, that certain wage garnishment packets were deceptive, and that disgorgement of interest, finance charges, and fees was an appropriate remedy under the FTC Act. 989 F.Supp.2d at 799-822. Although this Court became very familiar with the loan program operated by Defendant Payday Financial, LLC through the FTC litigation, that case did not involve the role of CashCall, Inc. or WS Funding, LLC, or the effect of state usury laws.

This also is not the first time that this Court has considered legal and factual issues in this case. On March 31, 2014, this Court issued a lengthy Opinion and Order on Pending Motions, which discussed at length the venue selection provision in Plaintiffs' loan agreements selecting Cheyenne River Sioux Tribal Court, the issues of tribal court exhaustion and jurisdiction, and the varying arbitration provisions in the loan agreements. Heldt v. Payday Fin., LLC, 12 F . Supp. 3d 1170 (D.S.D. 2014). Although expressing skepticism about the existence of any tribal court jurisdiction over non-Indian borrowers and about the enforceability of certain arbitration provisions, this Court determined that the tribal court exhaustion doctrine justified allowing the tribal court to rule first. Id. at 1180-93. Accordingly, this Court denied Defendants' motion to dismiss, refused to compel arbitration at that time, stayed this case, and directed the Defendants to file a tribal court action within thirty days. Id., at 1193-94. This Court also ordered "that the parties keep this Court advised of proceedings in the Cheyenne River Sioux Tribal Court by filing upon the conclusion of any tribal court proceedings and/or appeals, all pleadings filed by any party and all rulings by the tribal court as an attachment to an affidavit or stipulation." Id. The parties have not filed any such pleadings, but have provided information on what has occurred since this Court entered a stay in this case.

II. Summary of Settlement Agreement Terms and Related Facts[1]

Defendants initiated a suit in the Cheyenne River Sioux Tribal Court to seek a declaratory judgment on whether there was tribal court jurisdiction over non-Indian borrowers like the Plaintiffs. The parties engaged in discovery, "during which [P]laintiffs have taken various depositions and received nearly 12, 000 pages of documents." Doc. 64 at 5. The parties participated in two mediation sessions, one on June 9, and the other on July 14, 2015. Doc. 64 at 5. The parties then reached a Stipulation and Agreement of Settlement ("Settlement Agreement"), which called for dismissal of the tribal court action and the filing of the motion now under consideration. Doc. 64 at 5.

The Settlement Agreement contemplated certification of a national class consisting of:
All individuals who obtained a loan from Western Sky that was subsequently purchased by WS Funding at any time between February 10, 2010, and September 8, 2013.

Doc. 64 at 14; Doc. 64-3 at 10. The proposed national class would include approximately 348, 000 individuals from 47 states and the District of Columbia. Doc. 64 at 15-16; Doc. 64-3 at 10. The primary benefits that class members would receive under the proposed Settlement Agreement are:

1. "Modification of interest rate on outstanding loans to 18%"[2] automatically for "Settlement Class Members with outstanding loan(s) at interest rates above 18%, " which is estimated to be a $32 million benefit to such individuals. Doc. 64 at 2, 6; Doc. 64-3 at 11-12.
2. Automatic "[c]redit history repair" for all Settlement Class Members. Doc. 64 at 2; Doc. 64-3 at 11.
3. Cash awards from a $7 million settlement fund established by CashCall, Inc. "tied to how much money the Settlement Class Member paid on her or his loan above 18% [interest], with a minimum payment of $15.00" on a claims made basis. Doc. 64 at 2; Doc. 64-3 at 12-13.

Given the nature of subprime lending and the Defendants' lending program, many of the loans made by the Defendants proved to be altogether uncollectible. During the hearing, the Parties revealed that approximately 170, 000[3] individuals could qualify for a cash award from the $7 million settlement fund and that the Defendants had collected approximately $64 million in interest payments above 18% as of August of 2015 from those borrowers. Thus, at least 178, 000 class members did not pay interest above the 18% level. CashCall, Inc. was funding the loans, has been described as the "deep pocket, " and apparently is the only remaining Defendant with assets of significance. Despite being described "deep pocket, " CashCall, Inc. itself apparently was paying interest at 18% on money it borrowed to fund the program, presumably because of risks inherent in subprime lending.

The Settlement Agreement's 18% interest rate reduction on remaining loans[4] and for calculation of the cash awards, according to what counsel for the parties said at the hearing, came from the fact that the usury cap in several states is 18% interest and that is the rate CashCall, Inc. paid on certain monies it borrowed to fund the program. The Intervenors pointed out that the Cheyenne River Sioux Tribe's Law and Order Code made it unlawful to charge more than 18% interest on any loan for more than $100. The loan agreements selected Cheyenne River Sioux Tribal law to govern; ironically Payday Financial, LLC originated these loans from Timber Lake, South Dakota and is a South Dakota limited liability corporation, yet did not choose South Dakota law-where there is no usury restriction at all-to govern. Thus, Defendants appear to have little argument to support charging an interest rate greater than 18% on the loans at any rate.

The Settlement Agreement called for each of the four Plaintiffs to receive a $5, 000 payment for their time and trouble in participating in the litigation, subject to this Court's approval. Doc. 64-3 at 13. Plaintiffs' lawyers would receive up to $3.5 million under the Settlement Agreement, subject to this Court's approval. Doc. 64-3 at 13.

The Settlement Agreement had a broad release provision extending to all claims of class members "whether arising under local, state, federal or Indian tribal law, whether by statute, regulation, contract, common law, equity or otherwise, whether known or unknown . . . ." Doc. 64-3 at 14. After objections from the FTC and some state officials, an addendum modified the Settlement Agreement clarifying that the release is not intended to "affect any right of any Settlement Class Member to obtain any benefit in connection with any action by or with a federal or state entity." Doc. 97-1 at 5.

The Settlement Agreement naturally gives class members an opportunity to opt out of the settlement upon providing timely notice of an intent to do so, and Defendants preserved a right to withdraw from the Settlement Agreement for "excessive Opt Outs" under an "Opt-Out Limit" undefined by the Settlement Agreement but apparently negotiated between counsel for the parties. Doc. 64-3 at 21-22. For a borrower to opt out of the proposed settlement class is cumbersome:

Requests for Exclusion. Prospective Settlement Class Members shall be given the opportunity to opt out of the Settlement Class. All requests by Settlement Class Members to be excluded must be in writing and mailed to the Claims Administrator, postmarked no later than one hundred five (105) days after entry of the Preliminary Approval Order. An appropriate written request for exclusion must be personally signed by the Settlement Class Member and must include: (i) the Settlement Class Member's name, address, telephone number; (ii) the account number(s) of the Settlement Class Member's extension of credit; (iii) an affirmation that he or she is a Settlement Class Member; and (iv) the following statement: "I request to be excluded from the class settlement in this case." No Settlement Class Member, or any person acting on behalf of or in concert or participation with that Settlement Class Member, may exclude any other Settlement Class Member from the Settlement Class.

Doc. 64-3 at 20-21. For a borrower to object to the proposed settlement is even more cumbersome:

Right to Object. Any Settlement Class Member who has not previously opted out in accordance with the terms of this Settlement may appear at the Final Fairness Hearing to argue that the proposed settlement should not be approved and/or to oppose the application of Class Counsel for an award of attorneys' fees and costs and the service awards to Plaintiffs. Any Settlement Class Member who wishes to object to the Settlement must file a written objection with the District Court no later than the date specified by subsection b of this section. The Parties will have the same right to seek discovery from any objecting Settlement Class Member as they would if they objector was a party in the Action, including the right to take the objector's deposition. Such discovery will be conducted on an expedited basis, and the objecting Settlement Class Member is required to respond and must appear for deposition within 14 days, if a deposition is noticed. Settlement Class Members who fail to timely file and serve ...

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