Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 1 of 14 PageID #: 1 )EP 21 2017 UNITED STATES DISTRICT COURT DISTRICT OF SOUTH DAKOTA CENTRAL DIVISION *** * * *** ** * * * * * * **** **** DOLLAR LOAN CENTER OF SOUTH * * * * * * * ** * **** * ** CIV 17-,^^^ DAKOTA, LLC, d/b/a DOLLAR * LOAN CENTER, * * Plaintiff, * * -vs- * * BRETT AFDAHL, individually and in his official capacity * * as director of the South * Dakota Division of Banking, * COMPLAINT * Defendant. * ** * * ** * **** *** ** ******* * The plaintiff. Dollar Loan Center of South Dakota, LLC, d/b/a Dollar Loan Center ("DLC"), for its Complaint, states and alleges as follows: THE PARTIES 1. DLC is a South Dakota limited liability company with headquarters-in Las Vegas,, Nevada. DLC does business in South Dakota as Dollar Loan Center. DLC and four of its branches were previously licensed by the South Dakota Division of Banking ("Division") as money lenders under SDCL Chapter 544. ' 2. Division. Brett Afdahl ("Afdahl") is the director of the The Division has jurisdiction over the licensing and regulation of persons and entities engaged in the business of {00195330.DOCX/1} 1 Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 2 of 14 PageID #: 2 lending money in South Dakota pursuant to SDCL § 51A-2-1, SDCL Chapter 54-4, and its implementing rules at A.R.S.D. 20:07:20 et seq. JURISDICTION AMD VENUE 3. This case arises under'the United States Constitution, 42 U.S.C. § 1983, and 42 U.S.C. § 1988. 4. This Court has jurisdiction over the case pursuant to 28 U.S.C. §§ 1331 and 1343. 5. This Court is an appropriate venue for this cause of action pursuant to 28 U.S.C. §§ 1391(b)(1) and 1391(b)(2). The defendant resides in this judicial district, the actions complained of took place in this judicial district, and the evidence and records relevant to the cause of action are located in this judicial district. FACTUAL BACKGROUND INITIATED MEASURE 21 6. Initiated Measure 21 ("IM 21") was approved by South Dakota voters on November 8, 2016. 7. IM 21 modified SDCL § 54-4-44 by restricting the type and amount of interest that a money-lender licensee, such as DLC, may charge. It prohibits all State-licensed money lenders licensed under SDCL Chapter 54-4 from making a loan that imposes finance charges and other charges or fees "incident to {00195330.DOCX/1} Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 3 of 14 PageID #: 3 the extension of credit" at an annual percentage rate greater than 36%. 8. In particular, SDCL 54-4-44 was amended by IM 21 by adding the bold language below: After procuring such license from the Division of Banking, the licensee may engage in the business of making loans and may contract for and receive interest charges and other fees at rates, amounts, and terms as agreed to by the parties which may be included in the principal balance of the loan and specified in the contract. However, no licensee may contract for or receive finance charges pursuant to a loan in excess of annual rate of 36%, including all charges for any ancillary product or service in any other charge or fee incident to the extension of credit. A violation of this section is a Class 1 misdemeanor. Any loan made in violation of this section is void and uncollectible as to any principal, fee, interest, or charge. 1 9. An additional statute, SDCL 54-4-44.1, was enacted as part of IM 21, and provides: No person may engage in any device, subterfuge, or pretense to evade the requirements of § 54-4-44, including, but not limited to, making loans disguised as a personal property sale and leaseback transaction; disguising loan proceeds as a cash rebate for the pretextual installment sale of goods or services; or making, offering, assisting, or arranging a debtor to obtain a loan with a greater rate of interest, consideration, or charge than is permitted by this chapter through any method including mail, telephone, internet, or any electronic means regardless of whether the person has a physical location in the state. Notwithstanding any other provision of this chapter, a violation of this section is subject to the penalties in § 54-4-44. 10. Although IM 21's prohibitions ostensibly apply to all money lenders licensed under SDCL Chapter 54-4, in fact, IM {00195330.DOCX/1} 3 - Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 4 of 14 PageID #: 4 21 does not apply to state and national banks, bank holding companies, other federally insured financial institutions, and state chartered trust companies, which are specifically exempted from IM 21's prohibitions under SDCL § 54-4-37. IM 21 also does not apply to businesses that provide financing for goods and services they sell pursuant to SDCL § 54-4-36(12) and SDCL § 543A-1(6). 11. Following passage of IM 21, the Division issued a November 10, 2016 Memorandum to all South Dakota Money Lenders, including DLC, and directed they indicate in writing to the Division whether they intended to surrender or not renew their South Dakota money lender licenses as a result of the passage of IM 21, or if they instead intended to maintain a South Dakota money lender license. 12. The Division's Memorandum also commanded that, no later than close of business on November 16, 2016, any South Dakota money lender that intended to maintain a South Dakota money lender license must provide a written business plan, with appropriate documentation, indicating how the lender intended to comply with the provisions of IM 21. 13. On November 15, 2016, DLC submitted a letter to the Division indicating that it reserved the right to lend money and service loans consistent with the lending licenses it held and the laws of the State of Dakota. {00195330.DOCX/1} 4 Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 5 of 14 PageID #: 5 14. The provisions of IM 21 became effective on November 16, 2016. South Dakota money lenders were required to be in full compliance with the provisions of IM 21 on that date. HOUSE BILL 1090 I 15. After IM 21 passed, money lenders asked the Division to identify the specific fees and services the Division considered "incident to the extension of credit" for the 36% rate calculation and.limit. 16. The Division's position was that all fees and expenses could constitute "fees incident to the extension of credit." 17. Absent additional clarification, lenders were therefore left with uncertainty about what would be included in the calculation of "fees incident to the extension of credit." 18. During the 2017 South Dakota legislative session, amendments to SDCL 54-4-44 were proposed in the form of House Bill 1090 ("HE 1090"). 19. Of particular relevance to this dispute. Section 4 of HE 1090 provides: For the purposes of § 54-4-44 for all loans, late fees, return check fees, and attorney's fees incurred upon consumer default are not fees "incident to the extension of credit." (Emphasis added.) {00195330.DOCX/1} 5 Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 6 of 14 PageID #: 6 20. The purpose of the amendment was not to enumerate every type of fee considered "incident to the extension of credit" but, rather, for ease of reference, to provide a limited list of fees not included within that definition. 21. Late fees, returned check fees, and attorney's fees are not "incident to the extension of credit," because when credit is extended, they are not certain to occur. They are not calculable when credit is extended, because they are all contingent on the borrower's behavior. 22. The intent of the amendments to SDCL 54-4-44 was, in part, to define "fees incident to the extension of credit" in a manner consistent with federal law. 23. Under federal law, the Truth in Lending Act r ("TILA") and Regulation Z define proper disclosures including what charges are included in the definition of "finance charge." 24. Regulation Z identifies fees that are and are not "finance charges" for purposes of an annual percentage rate ("APR") calculation under the TILA. 12 C.F.R. 226.4. Regulation Z specifically excepts bona fide "late fees" from the / calculation of the APR. 12 C.F.R. 226.4(c)(2). 25. Neither South Dakota law, the TILA nor Regulation Z impose any upper limit on the late fee that may be charged before a late fee is considered a disguised "finance charge." {00195330.DOCX/1} Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 7 of 14 PageID #: 7 26. HB 1090 passed, was signed by Governor Dennis Daugaard, and went into effect on July 1, 2017. DIVISION'S INVESTIGATION OF DLCs 2017 LENDING 27. In June 2017, DLC provided the Division advance notice that DLC intended to begin making loans using a new loan contract sometime after July 1, 2017, when the South Dakota Legislature's amendments to SDCL Chapter 54-4 went into effect. 28. DLC's attorney provided the Division with a copy of the tillable template of its intended "Signature Loan Product" loan contract on or about June 21, 2017. A true and correct copy of the June 21, 2017 correspondence and enclosure is attached as Exhibit 1. 29. The new Signature Loan Product, which DLC began offering July 3, 2017, had an APR that was capped at 36%. The Signature Loan Product also imposed late fees upon customer default. 30. The new Signature Loan Product, in all respects, complied with the amended version of SDCL 54-4-44. 31. DLC's Operations and Training Manual ("OTM") repeatedly emphasizes that the intent of the late fees associated with the Signature Loan Product is to spur prompt payment upon default, not generate late fees, and that no borrower, let alone a delinquent borrower, can obtain more credit until the Signature Loan is paid in full. v. {00195330.DOCX/1} 7 Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 8 of 14 PageID #: 8 32. On July 7, 2017, the Division wrote to DLC's attorney and notified him that the Division intended to conduct a "target" examination of DLC to evaluate the new Signature Loan Product being offered by DLC for compliance with applicable laws and regulations. A true and correct copy of the July 7, 2017 correspondence is attached as Exhibit 2. 33. The Division conducted the "target" examination on July 13, 2017, and reviewed Sioux Falls and Rapid City "Signature Loan Product" loans while on-site at the DLC's Sioux Falls location. 34. Before leaving DLC's Sioux Falls location on the date of the "target" examination, one of the Division's examiners, the Division's Deputy Director-Banking, John Crompton, stated (i) the Division may need more information on the new product, (ii) Crompton did not see anything really significant, following his review of DLC's records, in terms of lack of compliance with the law or DLC's policies, (iii) DLC had its policies and procedures in place before the new product was offered, (iv) DLC had clearly done its due diligence before offering the new product, and (v) DLC put thought into the I process of developing and offering the new product and the associated policies and procedures. 35. Following the target examination, the Division sent DLC's attorney a letter containing a series of follow-up {00195330.DOCX/1} 8 Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 9 of 14 PageID #: 9 questions concerning the Signature Loan Product. The letter did not state or imply that the Signature Loan Product was illegal or improper. A true and correct copy of the follow-up questions is attached as Exhibit 3. 36. DLC's attorney responded to the follow-up questions in letters dated July 26, 2017, and August 15, 2017. True and correct copies of these letters are attached as Exhibits 4 and 5, respectively. 37. The Division conducted a full-scope examination of DLC at DLC's Sioux Falls location on August 17 and 18, 2017. At no point during the examination did the Division state or imply that the.Signature Loan Product was illegal or improper. 38. DLC cooperated with both the target and the full scope examinations. CEASE AND DESIST AND LICENSE REVOCATION ORDER 39. On September 13, 2017, Afdahl signed a document entitled "Cease and Desist and License Revocation Order" ("Revocation Order"), and caused the same to be mailed to DLC's attorney and registered agent. A true and correct copy of the Revocation Order is attached as Exhibit 6 and incorporated by this reference. 40. {00195330.DOCX/1} The Revocation Order was effective immediately. Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 10 of 14 PageID #: 10 41. Upon information and belief, the Division provided the Revocation Order to media outlets immediately upon its issuance, and before it was provided to DLC or its counsel. 42. The Revocation Order required DLC to "immediately surrender all of its South Dakota money lender licenses and return them to the Division." 43. The Division did not provide DLC with a hearing before it revoked DLC's money lender licenses. 44. The Revocation Order requires DLC to notify all consumers to whom it loaned money between June 21, 2017, and the date of the Revocation Order, and advise them that their loans are void and uncollectible as to any principal, fee, interest, or charge pursuant to SDCL 54-4-44. 45. At the time of the Revocation Order, in addition to originating and servicing loans using the new Signature Loan Product, DLC was servicing loans that were made before June 21, 2017, and before the passage of IM 21, under loan contracts that complied with all requirements of SDCL Chapter 54-4 and met with the Division's previous approval. 46. The Division's attorney has since confirmed in a September 15, 2017 email to DLC's attorney that, due to the revocation of DLC's lender licenses, the Division's position is that DLC cannot service any loans, including loans DLC previously made with the Division's approval before IM 2.1 was {00195330.DOCX/1} 10 Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 11 of 14 PageID #: 11 passed. Specifically, the email states, in part: "The Cease and Desist and License Revocation Order requires that Dollar Loan immediately cease all lending activity, which includes servicing existing loans. added.) Dollar Loan is no longer licensed." (Emphasis A true and correct copy of the September 15, 2017 email correspondence is attached as Exhibit 7. 47. The Division's attorney sent a follow-up email on September 18, 2017, seeking confirmation that DLC was not servicing any loans. A true and correct copy of the September ' 18, 2017 email correspondence is attached as Exhibit 8. That same day, a representative of the Division visited DLCs Sioux Falls office and demanded an explanation of why the store was still open. DLC's loan processors on duty told the Division representative that they were not making loans or taking payments; rather, they were simply notifying DLC customers that DLC could not accept any payments or make new loans. \ 48. Order. DLC has complied with the Division's Revocation Consistent with the directive of the Division, DLC has advised its customers seeking to make payments on outstanding loans that it cannot accept their payments or otherwise service their loans. DLC has so advised both its customers with loans made between June 21, 2017, and the date of the Revocation Order; and its customers with loans made under loan contracts prior to June 21, 2017, and prior to the passage of IM 21, which {00195330.DOCX/1} 11 Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 12 of 14 PageID #: 12 complied with all requirements of SDCL Chapter 54-4 and were approved by the Division. VIOLATION OF DLC^S RIGHT TO PROCEDURAL DUE PROCESS 49. DLC repeats and realleges paragraph 1 through 48 above as though fully set forth in this Count of the Complaint. 50. 42 U.S.C. § 1983 prohibits "deprivation of any rights, privileges, or immunities secured by the Constitution and law" by a person acting who acts "under color of any statute, ordinance, regulation, custom or usage of any State[.]" 51. The Fourteenth Amendment to the Constitution of the United States of America states in part that "no state shall . . . deprive any person of life, liberty or property, without due process of law, nor deny to any person within its jurisdiction the equal protectipn of the law." 52. DLC had a protected property interest in its money lending licenses, and in its right to collect debts lawfully owed to it pursuant to loans made with the approval of the Division. 53. DLC was entitled to procedural due process before the Division revoked DLC's money lending licenses. 54. SDCL 54-4-49 authorizes Afdahl to revoke money lending licenses, provided he adheres to the requirements of SDCL Chapter 1-26. {00195330.DOCX/1} 12 Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 13 of 14 PageID #: 13 55. SDCL Chapter 1-26 provides that Afdahl could not summarily revoke DLCs money lending licenses without a hearing. 56. On or about September 13, 2017, Afdahl, acting under color of state law, summarily revoked (not suspended) DLCs license without providing DLC a pre-deprivation hearing. 57. DLC's right to a pre-deprivation hearing before the Division could revoke its money-lending licenses was clearly established. See Freeman v. Blair, 862 F.2d 1330, 1332 (8^^ cir. 1988) (objectively reasonable officials could not have believed that summary suspension of license was constitutionally permissible). 58. Afdahl violated DLC's clearly-established right to procedural due process by revoking DLC's money-lending licenses without a pre-deprivation hearing. 59. Because of Afdahl's violation of DLC's clearly- established right to due process, DLC has suffered damages and will continue to suffer damages in an amount to be proven at trial. For example, the public at-large was immediately made aware that DLC's lending licenses were revoked. By order.of the Division, DLC has been forced to turn away paying customers on valid loans. Both DLC's loans made between June 21, 2017, and the date of the Revocation Order, and DLC's loans made under loan contracts prior to June 21, 2017, complied with all requirements of SDCL Chapter 54-4, but because of Afdahl's {00195330.DOCX/1} 13 Case 3:17-cv-03024-RAL Document 1 Filed 09/21/17 Page 14 of 14 PageID #: 14 actions, DLC's outstanding loans are now serially uncollectible. 60. Due to Afdahl's malicious, oppressive, intentional and/or willful and wanton or reckless disregard of DLC's rights, punitive damages are also appropriate. PRAYER FOR RELIEF WHEREFORE, DLC prays that this Court enter an Order and Judgment against Afdahl, granting the following relief: A. Providing Plaintiffs with general, special and other compensatory damages in an amount to be proven at trial; B. Providing for punitive damages as determined at trial; C. Providing pursuant D. for Plaintiffs' attorney's fees and costs to 42 U.S.C. § 1988; and Granting Plaintiffs such additional and further relief as this Court deems just and proper. PLAINTIFFS DEMAND TRIAL BY JURY Dated this 20'^'^ day of September, 2017. RICHARDSON, WYLY, WISE, SAUCK & HIEB, LLP Att(^neys for Plaintiff Jack H. Hieb Zachary W. Peterson Post Office Box 1030 Aberdeen, SD 57402-1030 Telephone No.(605)225-6310 E-mail: jhieb@rwwsh.com zpeterson@rwwsh.com {00195330.DOCX/1} 14