Banks May Face RICO Claims on Payday Loans

By Chris Bruce

Aug. 29 — An Aug. 29 federal appeals court ruling on arbitration means two banks may have to face claims they violated federal anti-racketeering laws by unlawfully facilitating high-interest payday loans ( Moss v. First Premier Bank, 2d Cir., No. 15-cv-02513, 8/29/16 ).

The U.S. Court of Appeals for the Second Circuit upheld a district court that refused to appoint a substitute arbitrator when the arbitrator designated in a contract became unavailable. The court, saying it's bound by a 1995 ruling on that question, said the federal circuits have come to different conclusions on what to do in such cases.

The decision, if it stands, allows plaintiff Deborah Moss to resume her putative class suit against First Premier Bank of South Dakota and Bay Cities Bank of Florida. The two banks served as the originating depository financial institutions for a payday loan that Moss obtained from SFS Inc., an online payday lender.

Moss alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) against the two banks, saying they “facilitate payday loans to consumers residing in states that banned the practice and collect usurious interest rates in violation of state law.”

The banks moved to compel arbitration, citing an arbitration agreement that named the National Arbitration Forum (NAF) as the arbitrator.

Arbitrator Unavailable

However, the NAF declined to handle the case, saying it was barred from doing so by a 2009 consent judgment reached with Minnesota authorities, which had alleged consumer fraud by the NAF.

The district court declined to appoint a substitute, saying the contract identified the NAF as the exclusive arbitrator, and the Second Circuit agreed, citing its own 1995 ruling in In re Salomon Inc. Shareholders’ Derivative Litig., 68 F.3d 554 (2d Cir. 1995).

According to the court, the arbitration agreement requires certain action by and involving the NAF, and makes no provision for appointment of a substitute arbitrator.

“In view of this mandatory language, the pervasive references to NAF in the agreement, and the absence of any indication that the parties would assent to arbitration before a substitute forum if NAF became unavailable, we conclude that, as in Salomon, the parties agreed to arbitrate only before NAF,” the Second Circuit said.

Circuits Split

The decision is the first on the question by the Second Circuit in recent years, according to Darren T. Kaplan of the Darren Kaplan Law Firm in New York, who represents Moss.

“It’s been a long time since the Second Circuit has looked at this issue, and in the meantime, a lot of other circuits have wrestled with it as well,” Kaplan told Bloomberg BNA Aug. 29. “In my mind, the majority view with which the Second Circuit joined is clearly the better view. You shouldn’t force someone to go somewhere else to arbitrate when they've already agreed to an exclusive arbitrator, because now you’re essentially rewriting the contract.”

Kaplan also said there's the possibility of a petition to the U.S. Supreme Court. But according to Kaplan, unless the Supreme Court grants a petition, the case returns to the district court where Moss will take up her lawsuit again.

CFPB Proposal Highlighted

The case highlights a May proposal by the Consumer Financial Protection Bureau (CFPB) that would prohibit arbitration provisions that bar class-action suits, Kaplan said.

“This is exactly the problem they’re looking at,” Kaplan said, referring to the CFPB. “You have allegations of major violations of federal and state law, but it’s not economically feasible for an attorney to represent just one of these borrowers in a lawsuit. On the other hand, as a class case, it becomes economically viable and borrowers can find attorneys willing to represent them in vindicating their rights.”

First Premier Bank and Home Bancshares, which acquired Bay Cities Bank in 2015, did not immediately respond to request for comment.

First Premier is represented by Bryan R. Freeman of Lindquist & Vennum in Minneapolis, and Bryan C. Meltzer, who worked on the case while at Herrick Feinstein in New York but has since joined Feuerstein Kulick.

Megan A. Pierson and Eric Rieder of Bryan Cave in New York represented Bay Cities Bank.

To contact the reporter on this story: Chris Bruce in Washington at

To contact the editor responsible for this story: Seth Stern at

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