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Dreher Tomkies LLP
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NEW YORK ATTORNEY GENERAL SPITZER WINS REMAND OF “TRUE CREDITOR” CASE TO STATE COURT

The U.S. District Court for the Northern District of New York granted New York Attorney General Eliot Spitzer’s motion to remand in New York v. County Bank of Rehoboth Beach, No. 1:03-CV-1320 (N.D.N.Y. May 25, 2004). Spitzer sued County Bank, a Delaware-chartered bank, and two Pennsylvania-based companies, Cashnet, Inc. and TC Services Corporation d/b/a Telecash, in New York state court in October 2003, alleging that the defendants Cashnet and Telecash violated numerous provisions of New York law by making short-term “payday loans” to New York residents and that County Bank violated New York law in aiding and supporting their illegal efforts. According to the complaint, County Bank was the creditor on the payday loans in name only because Cashnet and Telecash, among other things, provided the capital to market, advertise, originate, service and collect the payday loans. Cashnet and Telecash also allegedly paid County Bank an annual fee to use the bank's name and charter to make loans, paid the bank a percentage of the finance charge received on each loan, and agreed to indemnify the bank for losses and liabilities (other than credit losses) arising out of the loan operation.

After Defendants Telecash and Cashnet successfully removed the case to federal court on grounds of federal preemption under Section 27 of the Federal Deposit Insurance Act, Spitzer filed a motion to remand. The District Court concluded that because (i) claims against County Bank include only allegations of criminal facilitation, fraudulent business conduct and deceptive business practices, none of which is preempted by federal law, (ii) the state law usury claims are against Cashnet and Telecash only and (iii) the weight of authority argues against federal preemption, the court lacks federal subject matter jurisdiction in this case. Accordingly, the District Court remanded the case to state court. In reaching its conclusions, the District Court distinguished Hudson v. Ace Cash Express, Inc., 2002 WL 1205060 (S.D. Ind. 2002), as well as Krispin v. May Dept. Stores Co., 218 F.3d 919 (8th Cir. 2000).

The District Court cited with approval another recent payday lending case, Flowers v. EZ Pawn Oklahoma, Inc., 307 F. Supp.2d 1191 (N.D. Okla. 2004), which also held that federal law did not preempt state law claims. A similar conclusion was reached recently on the issue of preemption as applied to agents of federally insured state-chartered banks in Bankwest, Inc. v. Baker, No. 1:04-CV-988-MHS (N.D. Ga. May 13, 2004) (denying motion for preliminary injunction against implementation of new Georgia payday lending law to in-state agents of out-of-state banks where instate agents were allegedly the true lenders on Georgia payday loans).

Mike Tomkies