On January 11, 2023, a federal court in Texas dismissed a class-action lawsuit against a leading financial technology company alleging that it violated Texas usury laws by charging interest on loans it made through a partnership with a state-chartered bank at rates above the maximum allowed under the Texas law. The plaintiff argued that the partnership constituted a “rent-a-bank” scheme designed to evade state law so that the financial technology company, rather than the bank partner, was the “true lender” on the loans. In dismissing the lawsuit, the district court issued an order accepting and adopting the magistrate judge’s report and recommendation, finding the arbitration clause in the plaintiff’s memo and disclosure statement (the “memorandum”) enforceable and recommending that the complaint be dismissed with prejudice. The district court also forced arbitration of the plaintiffs’ claims.
In opposition to the dismissal, the plaintiff argued blue the choice-of-law provision in the memorandum required the arbitrator to apply “the substantive law of Utah” and the arbitration clause stated that “the arbitrator shall enforce [the]appointments. . . as written.” Taken together, plaintiff argued that these provisions required the arbitrator to enforce the loan agreement as “valid under Utah law,” which would bar her RICO claim because a violation of state law is necessary to show a RICO violation. The magistrate disagreed. The court observed that the choice-of-law provision precluded the arbitration clause, and that the arbitration clause required the arbitrator to “apply substantive law consistent with the FAA.” As such, neither the choice-of-law provision nor the arbitration clause required the arbitrator to apply Utah law or barred plaintiff’s RICO claims .
Putting it into practice: This decision demonstrates the value of arbitration clauses as a tool to avoid potential class action lawsuits. Notably, however, the arbitration agreement did not eliminate the risk of “true lender” challenges brought by regulatory entities, as demonstrated by ongoing litigation between OppFi and California DFPI.
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