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Meade v. Avant of Colorado LLC

United States District Court, D. Colorado

March 1, 2018

JULIE ANN MEADE, Administrator, Uniform Consumer Credit, Plaintiff,
v.
AVANT OF COLORADO, LLC, d/b/a Avant, and AVANT, INC., Defendants.

          ORDER ADOPTING RECOMMENDATION AND REMANDING CASE

          William J. Martínez, United States District Judge

         Now before the Court in this financial regulation action is the Plaintiff's Motion to Remand for Lack of Subject Matter Jurisdiction (ECF No. 28 (the “Motion)), and the Recommendation entered by U.S. Magistrate Judge Scott T. Varholak that Plaintiff's Motion should be granted (ECF No. 62 (the “Recommendation”)). For the reasons explained below, the Recommendation is adopted, the Motion is granted, and this case will be remanded to Denver District Court.

         I. PROCEDURAL BACKGROUND

         This action seeking to enforce Colorado statutes is brought by Plaintiff, Julie Ann Meade, the Administrator of the Colorado Uniform Consumer Credit Code (the “Administrator”) against Defendants Avant of Colorado, LLC and Avant, Inc. (together, “Avant”).

         The Administrator filed this action in Denver District Court, alleging Avant had violated Colorado's statutory limits on excessive finance and delinquency charges Colorado Revised Statutes §§ 5-2-201 & -203, as to certain consumer credit loans further described below, and also that the terms of those loans included an unlawful choice of law provision, in violation of Colorado Revised Statutes § 5-1-201(8). (See generally ECF No. 6.)

         Avant removed the action on March 9, 2017 under 28 U.S.C. § 1441(a), arguing that this Court has federal subject matter jurisdiction under 28 U.S.C. § 1331 “because Congress has completely preempted the state law claims at issue in this case, ” specifically, that Section 27 of the Federal Deposit Insurance Act (as amended by the Depository Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No. 96-221 (“DIDA” or “DIDMCA”)), codified at 12 U.S.C. § 1831d, [1] “provides the exclusive cause of action for the harm alleged by the Administrator, ” and allows Avant to impose finance and delinquency charges in excess of what Colorado law would permit, because Avant's loans were initiated by WebBank, a federally insured bank chartered in Utah, where comparatively permissive usury laws would permit the charges and interest at issue here. (ECF No. 1 ¶¶ 13, 21-22.)

         The Administrator filed her Motion to Remand for Lack of Subject Matter Jurisdiction on March 31, 2017. (ECF No. 28 (the “Motion”).) The Motion has been fully briefed, including multiple briefs submitted by amici curiae in the banking and lending industry. (See ECF Nos. 41, 44-1, 49, 51, 58.)[2] The undersigned referred the Motion to United States Magistrate Judge Scott T. Varholak for a Recommendation. Judge Varholak held oral argument on the Motion (ECF Nos. 59, 61), and entered his written Recommendation that the Motion should be granted (ECF No. 62). Avant timely filed an Objection to the Recommendation pursuant to Federal Rule of Civil Procedure 72(b) (ECF No. 69); an additional amicus brief was filed by WebBank in support of Avant's Objection (ECF No. 68-1); and the Administrator has responded (ECF No. 73).

         II. FACTUAL BACKGROUND

         No party objects to the Recommendation's summary of the relevant factual background, which, in the interest of simplicity, the Court adopts in full and incorporates herein:

The Administrator is authorized to enforce compliance with the Colorado Uniform Consumer Credit Code (UCCC), see generally Colo. Rev. Stat. § 5-6-104, including conducting investigations of violations of the UCCC, id. §§ 5-6-106, 5-2-305, issuing cease and desist orders for violations of the UCCC, id. § 5-6-109, and initiating civil actions against creditors “for making or collecting charges in excess of those permitted by this code, ” id. § 5-6-114. In a civil action, the Administrator may seek injunctive relief “to restrain a person from violating” the code, id. § 5-6-111, and to prevent a creditor or person from “[m]aking or enforcing unconscionable terms or provisions of consumer credit transactions, ” or engaging in fraudulent conduct to induce consumers to enter credit transactions, id. § 5-6-112. The Administrator may seek civil penalties and refunds to consumers against creditors charging fees in excess of those allowed by the UCCC. Id. § 5-6-114.
Defendant Avant of CO, a limited liability company organized under the laws of Delaware, and a subsidiary of Defendant Avant, Inc., applied to the Administrator for a Colorado supervised lender's license in March 2013. [#6 at 2, 4] According to the Administrator, Avant of CO sought the license for the purpose of “making (i.e., originating) small installment loans of $1, 000 or less” and “making (i.e., originating) unsecured loans or loans secured by personal property and/or autos.” [Id. at 5] Avant of CO became a Colorado supervised lender. [Id. at 6]
Avant, Inc. entered into a lending program agreement with WebBank, a Utah-chartered industrial bank in 2014. [Id. at 25] Pursuant to the agreement, WebBank makes loans to consumers [id. at 27], who apply for and obtain loans through Avant, Inc.'s website (“Avant Loans”) [id. at 7-8]. Within two business days of when the Avant Loans are made, WebBank sells the loans to third-party purchasers, including Avant, Inc., or an Avant, Inc. non-bank affiliate. [Id. at 28; #41 at 4]
The Administrator argues that WebBank is “not the true lender of the Avant Loans” that it sells to Avant, Inc. or its affiliates because “WebBank does not bear the predominant economic interest in the loans.” [#6 at 33] For example, Avant, Inc. paid the implementation fee to initiate the lending program, paid all of WebBank's legal fees in the program, bears all of the expenses incurred in marketing the lending program to consumers, determines which loan applicants will receive Avant Loans and bears all costs of making these determinations, ensures the program complies with federal and state law, assumes responsibility for all servicing and administration of the Avant Loans “even during the period before WebBank sells the loans to Avant, Inc. or its affiliates, ” and assumes responsibility for all communications with loan applicants and consumers who receive Avant Loans. [Id. at 34(a)-(j)] Additionally, Avant, Inc. bears all risk of default, and indemnifies WebBank against all claims arising from WebBank's participation in the lending program. [Id. at 34(1)] Avant, Inc., along with the other non-bank entities, collects 99% of the profits on the loans while “WebBank's share in the profit is only approximately one percent.” [Id. at 34(o); see also #28 at 4]
The Administrator alleges that a primary purpose of WebBank's arrangement with Defendants “is to allow Avant, Inc. or other non-banks to circumvent state laws, including Colorado laws, that limit the interest rates and other finance charges that may be assessed on the Avant Loans.” [#6 at 29] Avant of CO and Avant, Inc. “have undertaken direct collection of payments from or enforcement of rights against consumers arising from” these loans [Id. at 19], and collect delinquency charges on the loans for late payments [Id. at 22-23]. Defendants “have made or collected charges from consumers” on these loans “which exceed the maximum finance charges that are permitted for supervised loans under Colorado Law.” [Id. at 20] The written agreements evidencing the Avant Loans also purport to apply Utah state law to the agreements. [Id. at 24]
In January 2016, the Administrator conducted a compliance examination of Avant of CO, pursuant to Colo. Rev. Stat. § 5-2-305. [Id. at 36] In the subsequent report of examination, the Administrator informed Avant of CO that it was charging finance and delinquency charges in violation of Colorado law, and that the loan agreements providing for the application of Utah law also violated Colorado law. [Id. at 37] The Administrator directed Avant of CO to issue refunds to consumers for the excess charges and fees, and to apply Colorado law to any loan agreements. [Id. at 38] Avant of CO responded that its relationship with WebBank preempted Colorado finance charge limits and choice of law restrictions. [Id. at 39] The Administrator rejected this position and again requested that Avant of CO take corrective action. [Id. at 40] Avant of CO refused. [Id. at 41]

(ECF No. 62 at 2-4 (citations as in original; footnote omitted).)

         III. LEGAL STANDARDS

         A. Review Under Federal Rule of Civil Procedure 72(b)

         When a magistrate judge issues a recommendation on a dispositive matter, Federal Rule of Civil Procedure 72(b)(3) requires that the district judge “determine de novo any part of the magistrate judge's [recommendation] that has been properly objected to.” An objection to a recommendation is properly made if it is both timely and specific. United States v. One Parcel of Real Property Known as 2121 East 30th St., 73 F.3d 1057, 1059 (10th Cir. 1996). An objection is sufficiently specific if it “enables the district judge to focus attention on those issues-factual and legal-that are at the heart of the parties' dispute.” Id. In conducting its review, “[t]he district court judge may accept, reject, or modify the recommendation; receive further evidence; or return the matter to the magistrate judge with instructions.” Id. Here, Avant filed a timely and sufficiently specific Objection (ECF No. 69), and the Court engages in de novo review.

         B. Federal Question Removal & Complete Preemption

         A case that has been removed to federal court pursuant to 28 U.S.C. § 1441 must be remanded back to state court if, at any time prior to final judgment, the federal court finds that it lacks subject matter jurisdiction. 28 U.S.C. § 1447(c). The party invoking federal jurisdiction via removal has the burden of showing that removal is proper. Lindstrom v. United States, 510 F.3d 1191, 1193 (10th Cir. 2007) (citing McNutt v. Gen. Motors Acceptance Corp. of Ind., 298 U.S. 178, 189 (1936)). Courts must strictly construe the requirements of removal jurisdiction and “all doubts are to be resolved against removal.” Fajen v. Found. Reserve Ins. Co., 683 F.2d 331, 333 (10th Cir. 1982).

         In the absence of diversity of citizenship, a case may be tried in federal court when the civil action arises “under the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331; see also Pan Am. Petroleum Corp. v. Superior Court of Del. In and For New Castle Cnty., 366 U.S. 656, 663 (1961) (there is no federal question jurisdiction “unless it appears from the face of the complaint that determination of the suit depends upon a question of federal law.”).

         “[A] right or immunity created by the Constitution or laws of the United States must be an element, and an essential one, of the plaintiff's cause of action . . . and the controversy must be disclosed upon the face of the complaint, unaided by the answer or by the petition for removal.” Id. at 663 (quoting Gully v. First Nat'l Bank, 299 U.S. 109, 112-13 (1936)). This “well-pleaded complaint rule” provides that “the plaintiff is the master of the complaint, that a federal question must appear on the face of the complaint, and that the plaintiff may, by eschewing claims based on federal law, choose to have the cause heard in state court.” Caterpillar Inc. v. Williams, 482 U.S. 386, 398-99 (1987).

         “The fact that a court must apply federal law to a plaintiff's claims or construe federal law to determine whether the plaintiff is entitled to relief will not confer subject matter jurisdiction” Dunlap v. G&L Holding Grp. Inc., 381 F.3d 1285, 1291-92 (11th Cir. 2004) (emphasis in original); Felix v. Lucent Techs., Inc., 387 F.3d 1146, 1154 (10th Cir. 2004). Nor is it be enough that an asserted or anticipated defense “relies on the preclusive effect of a prior federal judgment, or the pre-emptive effect of a federal statute.” Beneficial Nat'l Bank v. Anderson, 539 U.S. 1, 6 (2003) (“Beneficial”) (citing Rivet v. Regions Bank of La., 522 U.S. 470 (1998)); Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U.S. 1 (1983); Devon Energy Prod. Co., L.P. v. Mosaic Potash Carlsbad, Inc., 693 F.3d 1195, 1204 (10th Cir. 2012) (“Ordinarily, neither the plaintiff's anticipation of a federal defense nor the defendant's assertion of a federal defense is sufficient to make the case arise under federal law.” (internal quotation marks omitted; alterations incorporated)); Felix, 387 F.3d at 1154 (“a federal defense, even one relying on the preclusive effect of a federal statute, is not enough to authorize removal to federal court.”).

         However, as a corollary to the well-pleaded complaint role, the complete preemption doctrine allows, in limited circumstances that “a state law cause of action may be removed to federal court on the theory that federal preemption makes the state law claim necessarily federal in character.” Devon, 693 F.3d at 1203 (internal quotation marks omitted).

         The doctrine of complete preemption should not be confused with ordinary preemption, which occurs when there is the defense of “express preemption, ” “conflict preemption, ” or “field preemption” to state law claims. Express preemption is limited to those situations where a federal statute expressly preempts state law. Arizona v. United States, 567 U.S. 387 (2012). Conflict preemption contemplates those situations where it is impossible to comply with both federal and state law, and state law creates an obstacle to the congressional intention in enacting a federal statute. Id. Field preemption occurs where a pervasive framework leaves no room for the state to act, or where the federal interest is so dominant that it precludes enforcement of state law on the same subject. Id. However, these concepts are distinct from complete preemption, Felix, 387 F.3d at 1156, providing only a federal “defense to the allegations, ” Caterpillar, 482 U.S. at 392. As a mere defense, however, the “preemptive effect of a federal statute . . . will not provide a basis for removal.” Beneficial, 539 U.S. at 6. “[A] state cause of action may not be viable because it is preempted by a federal law-but only if federal law provides its own cause of action does the case raise a federal question that can be heard in federal court.” Dutcher v. Matheson, 733 F.3d 980, 986 (10th Cir. 2013)

         “By contrast, when complete preemption exists, there is ‘no such thing' as the state action, since the federal claim is treated as if it appears on the face of the complaint because it effectively displaces the state cause of action.” Lontz v. Tharp, 413 F.3d 435, 441 (4th Cir. 2005) (quoting Beneficial, 539 U.S. at 11). Because this doctrine undermines a plaintiff's ability to plead claims under the law of his or her choosing, the Supreme Court has been “reluctant” to find complete preemption. Id. (citing Metro. Life Ins. Co. v. Taylor, 481 U.S. 58, 65 (1987)). Complete preemption has been characterized as “quite rare, ” Dutcher, 733 F.3d at 985 (internal quotation marks omitted), representing an “extraordinary pre-emptive power, ” that “should not be lightly implied, ” Devon 693 F.3d at 1204.

         Indeed, the Supreme Court has recognized complete preemption in only three areas, specifically, cases involving § 301 of the Labor Management Relations Act of 1947; § 502 of the Employee Retirement Income Security Act of 1974 (“ERISA”); and-as most relevant here-in actions for usury against national banks under the National Bank Act. See Beneficial, 539 U.S. at 10-11 (National Bank Act); Metro. Life, 481 U.S. at 66--67 (ERISA § 502(a)); Avco Corp. v. Aero Lodge No. 735, Int'l Ass'n of Machinists, 390 U.S. 557, 560 (1968) (Labor Management Relations Act § 301).

         For complete preemption to apply, the challenged claims must “fall within the scope of federal statutes intended by Congress completely to displace all state law on the given issue and comprehensively to regulate the area.” Hansen v. Harper Excavating, Inc., 641 F.3d 1216, 1221 (10th Cir. 2011). The Tenth Circuit has explained:

We read the term [“complete preemption”] not as a crude measure of the breadth of the preemption (in the ordinary sense) of a state law by a federal law, but rather as a description of the specific situation in which a federal law not only preempts a state law to some degree but also substitutes a federal cause of action for the ...

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