An online payday loan provider facing litigation over allegations he tried to use his standing as a member of a Sioux Indian tribe to tailor loan agreement terms to skirt lending laws will need to continue to defend himself against another lawsuit brought by a customer who alleges he was charged illegal interest rates.
U.S. District Judge Robert W. Gettleman earlier this month rejected a request from Martin A. Webb, owner and operator of payday loan companies Western Sky Financial LLC and CashCall Inc., to dismiss an action Illinois resident Ben Scherr brought.
Scherr sued over claims Webb’s companies issued him a loan carrying interest rates so high --89 percent -- they ran afoul of Illinois usury law.
In seeking the suit's dismissal, Webb argued that it failed to state a valid claim and the court lacked jurisdiction over the matter because the loan was issued by his company within the Cheyenne River Sioux Reservation in South Dakota, making Illinois law inapplicable under the Dormant Commerce Clause doctrine.
Gettleman, however, easily brushed aside each of Webb’s arguments in his nine-page ruling that was handed down Jan. 6.
He said Webb erred in interpreting the precedent he cited to support his assertions regarding his Dormant Commerce Clause argument. A correct reading of the precedent, the judge said, would acknowledge courts have held loans are governed by the law of the state in which the borrower is located at the time the loan is completed.
In this case, Gettleman said that Scherr was located in Illinois during the loan completion process so the laws of the state can apply.
“The complaint alleges that defendants knew that the interest rate was usurious under Illinois law and, indeed, had been sued for the same actions previously,” he explained. “These allegations are sufficient to state a claim. This is particularly true because the loan documents appear to make every effort to avoid application of Illinois law.”
The suit, filed in 2013, stems from a $10,000 loan Scherr received from Western Sky in October 2012. After discovering the loan carried an 89 percent interest rate, Scherr made one payment of $1,000.
But he soon learned Webb’s companies had been sued over similar loans in other cases, including Jackson vs. Pay Day Financial, a class action three plaintiffs --James Binkowski, Linda Gonnella and Deborah Jackson -- filed in 2011.
That case remains pending in Chicago's federal court before U.S. District Judge Charles P. Kocoras following a ruling from the Seventh Circuit Court of Appeals in August, when the panel revived the suit and called the loan agreements' arbitration clause “unconscionable” and the process “a sham."
Western Sky and Webb’s other companies also face a federal racketeering class action suit and have agreed to pay almost $1 million in fines as part of a settlement with the Federal Trade Commission over “unfair and deceptive tactics to collect on payday loans.”
In Scherr's action, he asked the court to void his loan and allow him to keep the outstanding loan balance as the loan, he argues, is “usurious under Illinois law” and Webb issued it knowing “the loan was unenforceable because they had already been sued for similar conduct.”
While not ruling on the merits of Scherr’s case, Gettleman said in his recent opinion that the case should be allowed to go forward because nothing cited by Webb would shield him from the allegations.
“The instant complaint does not allege that Webb was simply following directions from his employer,” the judge wrote. “The complaint alleges that Webb is the employer, that he made all the decisions, including the decision to charge the usurious interest rates, knowing that those rates violated Illinois law.”
Scherr is represented in the action by Chicago attorneys Cathleen M. Combs, Daniel A. Edelman, James O. Latturner and Thomas Everett Soule of Edelman, Combs, Latturner & Goodwin. Webb and his companies are represented by attorneys Michael Timothy Brody and Daniel Thomas Fenske of Jenner & Block in Chicago.