usury – Pete's Take

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

This one may seem obvious, but, in MacDonald v. Cashcall, Inc., the U.S. Court of Appeals for the Third Circuit held that a contractual arbitration provision that calls for arbitration in an "illusory forum" is not enforceable. So, if you were thinking about trying to compel arbitration in Wakanda or before the Jedi Council, better think twice.

In MacDonald, plaintiff entered into a loan agreement with a entity known as Western Sky in connection with a $5,000 loan. The loan agreement stated that it was "subject solely to the jurisdiction of the Cheyenne River Sioux Tribe," and "governed by the . . . laws of the Cheyenne River Sioux Tribe." It also contained an arbitration provision requiring that any disputes arising out of the agreement be "conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of [the agreement]." But the agreement also provided that either party, after demanding arbitration, could select an arbitrator from the American Arbitration Association ("AAA") or Judicial Arbitration and Mediation Services ("JAMS") to administer the arbitration, and, if it did, "the arbitration [would] be governed by the chosen arbitration organization's rules and procedures" to the extent that they did not contradict the "law of the Cheyenne River Sioux Tribe." The agreement also contained a severability clause, providing that, if any provision of the agreement was deemed invalid, the remaining provisions would remain in effect.

Although plaintiff originally borrowed $5,000, "[h]e was charged a $75 origination fee and a 116.73% annual interest rate over the seven-year term of the loan, resulting in a $35,994.28 finance charge." After paying approximately $15,493 on the loan, which included $38.50 in principal, $15,256.65 in interest, and $197.85 in fees, plaintiff filed a putative class action lawsuit against defendants, asserting federal RICO claims and state law claims for usury and consumer fraud. Defendants moved to compel arbitration. The district court denied the motion, holding that the loan agreement's "express disavowal of federal and state law rendered the arbitration agreement invalid as an unenforceable prospective waiver of statutory rights." Defendants appealed.

Continue reading “You Can’t Be Compelled To Arbitrate In A Nonexistent Forum” →

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Cloaking devices are common in sci-fi movies like Star Trek and Star Wars. They are used to render an object, usually a spaceship, invisible to nearly all forms of detection. Although scientists are apparently working to make real-life cloaking devices, at this point they exist only in the movies and, apparently, in New Jersey courts, at least according to the Appellate Division in Amelio v. Gordon.

In Amelio, plaintiff owed an apartment building in Hoboken. He approached defendants about obtaining a loan to finish renovations on three units in the building, along with the common areas. Plaintiff claimed that defendants instructed him to create a corporate entity to obtain the loan. Plaintiff did as he was instructed, and formed a limited liability company, which obtained the loan from defendants. Plaintiff, who was identified as the managing member of the limited liability company, signed the loan documents on behalf of the company.

Plaintiff later sued, arguing that the fees and interest payments under the loan exceeded the amounts allowable under New Jersey's usury laws. He also claimed that defendants fraudulently convinced him to create a limited liability company and have that entity obtain the loan, just so they could charge him usurious fees and interest. Plaintiff sued in his individual capacity, not on behalf of the limited liability company. On the day of trial, defendants argued that the complaint had to be dismissed because plaintiff lacked standing to sue since the company was the borrower, not plaintiff. With little explanation, the trial court granted the motion and dismissed the complaint. Plaintiff appealed.

Continue reading “On Cloaking Devices And Usury: Lender Can Be Sued If It Uses Corporate Shell To Cloak A Personal Loan As A Business Loan” →