Sunday, September 29, 2019

FYI: 11th Cir Holds Lender's Forum Selection and Class Action Waiver Clauses Unenforceable

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed the denial of a lender's motions to dismiss and to strike a complaint filed on behalf of a class of borrowers who entered into loan agreements with the lenders.


In so ruling, the Eleventh Circuit held that the loan agreement's forum selection clause and class action waivers were unenforceable under Georgia's Payday Lending Act and Industrial Loan Act, as enforcement would undermine the purpose and spirit of Georgia's statutory scheme including to preserve class actions as a remedy.


A copy of the opinion is available at:  Link to Opinion


A class of plaintiff borrowers ("Borrowers") entered into identical loan agreements ("Agreements") with a lender and its affiliated entities ("Lenders").  The borrowers' loans were generally $3,000 or less, and were to be repaid from the borrowers' recoveries in separate personal injury lawsuits, and thus, were contingent upon the success of their lawsuits.


In February 2017, Borrowers filed a class action complaint against Lenders in Georgia state court alleging violations of Georgia's Payday Lending Act, O.C.G.A. § 16-17-1 et seq., the Industrial Loan Act, O.C.G.A. § 7-3-1 et seq., and usury laws, O.C.G.A. § 7-4-18.  The Lenders removed the class action suit to federal court and moved to dismiss and strike the complaint on the basis that the Agreement contained a forum selection clause requiring Borrowers to file suit in Illinois, and further waived their ability to file a class action. 


The trial court denied the Lenders' motions, holding that the forum selection clause and class action waiver were unenforceable and contravened public policy and the intent of Georgia Legislature because the Payday Lending Act and Industrial Loan Act include express provisions providing class action lawsuits as a vehicle for consumers aggrieved by payday lenders.  This appeal followed.


On appeal, the Eleventh Circuit was tasked with considering whether the trial court erred in concluding that the Agreements' forum selection clause and class action waiver were unenforceable.


Initially considering the validity of the forum selection clause, the Eleventh Circuit cited rulings by the Supreme Court of the United States, holding that such clauses "should be given controlling weight in all but the most exceptional cases," (Atl. Marine Constr. Co. v. U.S. Dist. Ct. for the W. Dist. Of Tex., 571 U.S. 49, 63 (2013)) and identifying four grounds on which a court can refuse to enforce such clauses: "(1) [if its] formation was induced by fraud or overreaching; (2) [if] the plaintiff effectively would be deprived of its day in court because of the inconvenience or unfairness of the chosen forum; (3) [if] the fundamental unfairness of the chosen law would deprive the plaintiff of a remedy; or (4) [if] enforcement of the [forum selection clause] would contravene a strong public policy."  Lipcon v. Underwriters at Lloyd's, London, 148 F.3d 1285, 1292 (11th Cir. 1998) citing M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15-18 (1972).


Here, the Eleventh Circuit considered the fourth ground—whether the forum selection clause "would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or judicial decision." Bremen, 407 U.S. at 15."  Noting that Georgia's public policy bar is built on its Constitution and state statutes, which provide that "[a] contract which is against the policy of the law cannot be enforced," and a nonexclusive list of such particular agreements (O.C.G.A. § 13-8-2), the Court acknowledged that it could look to other Georgia statutes (i.e., those in the case at bar) to determine whether the state has a strong public policy against enforcing forum selection clauses in favor of out-of-state payday lenders.


As you may recall, Georgia's Payday Lending Act provides, in relevant part, that "[a] payday lender shall not . . . nor shall the loan contract designate a court for the resolution of disputes concerning the contract other than a court of competent jurisdiction in and for the county in which the borrower resides or the loan office is located."  O.C.G.A. § 16-17-2(c)(1). The Georgia Legislature further explained that "[c]ertain payday lenders have attempted to use forum selection clauses contained in payday loan documents in order to avoid the courts of the State of Georgia, and the General Assembly has determined that such practices are unconscionable and should be prohibited."  § 16-17-1(d).  The district court found these provisions conclusive in its determination that the forum selection clause was unenforceable under Georgia public policy. 


On appeal, Lenders argued that subsection 16-17-2(c)(1) of the Payday Lending Act's use of the term "county" does not specify that the county must be in Georgia; thus, Lenders may select as forum the county where their "loan office is located"—in this case, Cook County, Illinois.  The Eleventh Circuit rejected Lenders' argument, noting that Georgia venue provisions commonly use the term "county" or "counties" in reference to Georgia counties, without explicitly saying so, while rendering the language in subsection 16-17-1(d) meaningless.  See Ga. Const., Art. VI, § 2, ¶¶ III, IV, VI; O.C.G.A. § 9-10-93.


Next, the Lenders contended that the Payday Lending Act doesn't apply to the Agreements between Georgia Borrowers and the out-of-state Lenders because § 16-17- 1(d) states that "[p]ayday lending involves relatively small loans and does not encompass loans that involve interstate commerce."  This argument, too, was rejected by the Eleventh Circuit, because: (i) its argument contradicts its theory that the term "county" was meant to include counties outside the State of Georgia; (ii) other provisions of the Payday Lending Act make clear that the Act governs "any business" that "consists in whole or in part of making . . . loans of $3,000.00 or less" unless those entities are specifically exempted (W. Sky Fin., LLC v. Georgia, 793 S.E. 2d 357, 363 (Ga. 2016) and out-of-state lenders are not exempt (§ 16-17-2(a)(1)–(4)) and; (iii) excluding loans involving out-of-state lenders from coverage would render the Payday Lending Act's prohibition of out-of-state forum selection clauses meaningless (citations omitted). 


Because Georgia statutes establish a clear public policy against out-of-state lenders using forum selection clauses to avoid litigation in Georgia courts, the appellate court concluded that the district court correctly denied the Lenders' motions to dismiss and motion to strike on that ground.


Having rejected the Lenders' argument that the Agreements' forum selection clause was unenforceable, the appellate court turned to its review of the class action waiver.


As you may recall, both the Georgia Payday Lenders Act and Industrial Loan Act contain provisions expressly provided that claims under the respective statutes may be brought as class actions. § 16-7-3 ("a civil action may be brought on behalf of an individually borrower or on behalf of an ascertainable class of borrowers."); § 7-3-29(e) ("a claim for violation of this chapter against an unlicensed lender may be asserted in a class action.").  In denying the Lenders' motions to dismiss and strike the Borrowers' complaint, the district court stated that the Georgia Legislature "expressly contemplated a specific remedy—[a] class action—for persons aggrieved by predatory lending . . . [and] did not expressly create the class action remedy so that predatory lenders could effectively wipe away this consumer protection with a waiver . . . "


On appeal, the Lenders argued that the trial court erred by failing to consider whether the provisions were procedurally or substantively unconscionable, and that neither statute prohibits class action waivers or creates a statutory right to pursue a class action.


The Eleventh Circuit agreed with the trial court's reasoning that enforcing class action waivers in this context would allow payday lenders to eliminate a remedy expressly contemplated by Georgia Legislature and undermine the purpose of the statutes, thus rendering any such provision unenforceable whether or not it is also procedurally or substantively unconscionable (citations omitted). 


Acknowledging that Georgia courts may address whether a contractual provision is substantively unconscionable, they also "consider 'the commercial reasonableness of the contract terms, the purpose and effect of the terms, the allocation of the risks between the parties, and similar public policy concerns" (Jenkins v. First Am. Cash Advance of Ga., LLC, 400 F.3d 868, 876 (11th Cir. 2005)) which remain an independent basis to hold a contractual provision unenforceable.  Glosser v. Powers, 71 S.E.2d 230, 231 (Ga. 1952).


Lastly, the Lenders argued that the Payday Lending Act's fee-shifting provision eliminates risk that enforcing the class action waiver would effectively prevent plaintiffs from litigating their claims.  While acknowledging that it has held that certain class action waivers were not unconscionable, in part because fee-shifting provisions permitted plaintiffs to pursue their claims individually, the Eleventh Circuit distinguished those cases by noting that enforcement of those provisions would prevent the plaintiffs from having their day in court.  See Jenkins, 400 F.3d at 877-78. 


Here, the trial court did not conclude that the class action waiver was unconscionable or that the Borrowers were barred from litigating their claims individually.  Moreover, the authority cited by Lender concerned class action waivers in arbitration agreements, where the Federal Arbitration Act "create[s] a strong federal policy in favor of arbitration.  Picard v. Credit Solutions, Inc., 564 F.3d 1249, 1253 (11th Cir. 2019).  For these reasons, this argument, too, was rejected.


Because the Georgia's Payday Lending Act and Industrial Labor Act establish the state's legislatures intent to preserve class actions as a remedy, the Eleventh Circuit affirmed the trial court's denial of the Lenders' motion to dismiss and motion to strike.




Ralph T. Wutscher
Maurice Wutscher LLP
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