Monday, July 1, 2019

FYI: 6th Cir Reverses Dismissal in Short-Term Cash Advance Class Action Involving Two Definitions of "APR"

The U.S. Court of Appeals for the Sixth Circuit recently reversed the dismissal of a breach of contract claim in a putative class action involving short-term cash advance loans, finding that the contract at issue was ambiguous because it provided two inconsistent definitions of "annual percentage rate ("APR")" that could not be reconciled.


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


The defendant bank ("Bank") created a short-term cash advance program for eligible customers who held checking accounts with Bank.  Specifically, Bank would deposit loans up to $1,000.00 directly into customers' accounts, and Bank would then automatically pay itself back along with a 10% transaction fee, after a customer's direct deposit posted or thirty-five days (35) passed, whichever occurred first (the "Program"). 


The Program's governing contract (the "Contract") disclosed the Program's APR as one hundred and twenty percent (120%) in all cases. 


The plaintiff borrowers ("Borrowers") held checking accounts with Bank and obtained loans through the Program, which they paid back in less than thirty days after receiving their respective loans. 


Borrowers proceeded to file a putative class action against Bank asserting, among other things, claims for breach of contract and violations of the federal Truth in Lending Act, 15 U.S.C. § 1601 ("TILA").  In support of their breach of contract claim, Borrowers alleged that Bank breached the terms of the Contract "by charging [Borrowers] and the other [c]lass members APRs in excess of 120% on Early Access Loans," and "by failing to provide an accurate APR summary for Early Access Loans on monthly bank statements."


Bank subsequently moved to dismiss Borrowers' complaint, which the trial court granted in part and dismissed their breach of contract claim.  In dismissing the breach of contract claim, the trial court held that the Contract "unambiguously disclosed the method for calculating APR despite admitting that the result 'may be misleading.'"


Borrowers thereby filed a motion for reconsideration, which the trial court denied without prejudice due to ongoing settlement negotiations.  However, settlement negotiations subsequently stalled, leading Borrowers to move for an entry of final judgment as to their dismissed breach of contract.  The trial court granted Borrowers' motion, certified the breach of contract claim for entry of a final judgment, and stayed the remainder of the litigation pending the instant appeal. 


After addressing various procedural arguments not relevant here, the Sixth Circuit reviewed whether the trial court correctly dismissed Borrowers' breach of contract claim.


Borrowers argued that Bank breached the Contract "by charging them APRs in excess of 120% on Early Access Loans" while Bank disagreed contending it adhered to the Contract's definition of APR. 


As a result, the Court examined the Contract's definition of APR and concluded the Contract defined APR in two separate ways.  First, the Contract stated that "APR is a measure of the cost of credit, expressed as a yearly rate," as the term APR is defined by Regulation Z (the "APR Definition").  See 12 C.F.R. § 226.14(a). 


However, the Contract separately provides a formula (the "APR Formula") whereby "[t]he Annual Percentage Rate is calculated by dividing the transaction fee by the Advance amount and multiplying the quotient by the number of statement cycles within a year…[f]or example, $100 Advance with a $10 transaction fee = $10/$100 = 0.1% X 12 cycles = 120% APR."


Borrowers argued the APR Definition and the APR Formula were inconsistent because the APR Formula could not produce an APR expressed as a yearly rate as required by the APR Definition.  Rather, Borrowers argued, the APR Formula produces an APR of 120% no matter the length of the loan meaning "it is untethered to a year or any other time period." 


The Sixth Circuit determined the APR Formula to be static, "and always the same regardless of the length of the loan."  Thus, the Court determined that any APR produced using the APR Formula could not be "expressed as a yearly rate."  Indeed, the Court noted the APR Definition could never be consistent with the APR Formula.


Bank separately urged the Court to find the Contract to be unambiguous as a matter of law because the Contract "unambiguously provided for a flat transaction fee of 10 percent" and the "calculation of the APR merely reflected, and did not change, the flat transaction fee."  The Sixth Circuit rejected this argument explaining it would require the Court to incorrectly ignore "the contract's definition of APR as 'a measure of the cost of credit, expressed as a yearly rate.'"


Because the APR Definition and APR Formula found in the Contract were inconsistent with each other and could not be reconciled, the Sixth Circuit found the Contract to be ambiguous raising a question of fact to be resolved by the trial court on remand.  See e.g., Roth Steel Prods. v. Sharon Steel Corp., 705 F.2d 134, 153–54 (6th Cir. 1983).


Accordingly, the Sixth Circuit reversed the trial court's judgment dismissing Borrowers' breach of contract claim and remanded the matter "for further proceedings consistent with this opinion."




Ralph T. Wutscher
Maurice Wutscher LLP
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