RICO claims lacked viable enterprise in alleged payday-loan racket


July 10, 2017

In a putative class action against a bank that processed payday loans issued by non-party lenders, a consumer failed to allege a plausible claim under the federal RICO statute or New York’s Deceptive Acts and Practices Law, the federal district court in Central Islip, New York, has ruled. The plaintiff failed to plead either a viable association-in-fact enterprise or the bank’s participation in the affairs of that enterprise, the court explained, and thus failed to allege a plausible claim under the federal RICO statute. In addition, the plaintiff did not allege "consumer-oriented, misleading conduct" by the bank, and thus failed to allege a claim under Section 349 of New York’s General Business Law. Dismissal of both claims was warranted (Moss v. BMO Harris Bank, N.A., July 7, 2017, Bianco, J.).

The consumer applied for and received two payday loans: one for $350 and one for $400. SFS Inc. was the lender for those transactions, and defendant First Premier Bank Defendant was the Originating Depository Financial Institution (ODFI) for the $350 transaction. The consumer sued First Premier for unjust enrichment and violations of the federal RICO statute and New York’s Deceptive Acts and Practices Law. According to the consumer, the bank received a benefit for processing her payday loan: an origination fee that was collected from her bank account.

"ACH" enterprise. The consumer alleged that the Automated Clearing House (ACH) Network constituted an association-in-fact enterprise that comprised: (1) "Originators" that "initiate entries into the ACH Network"; (2) ODFIs that include "all financial institutions participating in the ACH Network that originate ACH entries"; (3) Receiving Depository Financial Institutions (RDFIs) that include "all depository financial institutions participating in the ACH Network that receive ACH transaction instructions"; (4) "ACH Operators" that include "two central clearing facilities, the Federal Reserve Banks and Electronic Payments Network"; and (5) "Third Party Service Providers" that include other entities that "perform any function on behalf of the Originator, ODFI, or RDFI with respect to the processing of ACH entries."

The court concluded that the complaint failed to allege that the Originators, ODFIs, RDFIs, ACH Operators, and Third Party Service Providers in the ACH Network had "joined together with the goal of collecting unlawful debt." Moreover, because NACHA represented more than 10,000 entities, it was implausible that each of those entities possessed the requisite "unlawful intent" to "transform that cooperative into an association-in-fact enterprise" for the purpose of RICO. The consumer’s attempt to infer one pleading standard for "legitimate" enterprises and another standard for "illegitimate" enterprises lacked legal support.

According to the court, the bank’s purportedly illicit ACH transactions did not render the entire ACH Network a RICO enterprise absent a "common purpose" among the other network participants. Moreover, the consumer provided only conclusory statements to support its assertion that the participants in the ACH Network had: (1) formed an ongoing organization or (2) functioned as a continuing unit. The consumer merely alleged that the participants in the ACH Network Enterprise preserved "close business relationships" and maintained "established and defined roles" within the enterprise. That, however, was insufficient to state a viable claim.

Ultimately, the consumer failed to allege any facts that supported an inference that the entities of the ACH Network were acting outside of their own independent interests. At best, the inclusion of non-defendants in the alleged enterprise created a hub-and-spokes enterprise, a structure that other courts had consistently rejected. In essence, the consumer alleged that the bank had contracted with different payday lenders to process usurious loan transactions. In the court’s view, those allegations were insufficient to support the conclusion that the participants in the ACH Network were associating with each other for a common purpose.

Debt collection enterprise. In the alternative, the consumer alleged that the bank and the lender had "associated together to use their respective roles in the ACH Network for the common purpose of profiting through the collection of unlawful debt." Although the plaintiffs alleged that the defendants had "worked together in some respects to steal [the] plaintiffs’ funds," they failed to plausibly allege that that they had done so to advance the agenda of the debt-collection enterprise, or to further a "shared purpose."

Ultimately, the consumer failed to allege that the bank and the lender had acted on behalf of the enterprise, and they failed to provide any basis for inferring that the bank and the lender had formed an ongoing organization or a "coherent entity" that was separate and apart from the allegedly fraudulent scheme. At best, the consumer had alleged that the bank and the lender had engaged in a single fraudulent transaction. The pleadings thus lacked sufficient factual allegations that the bank and the lender had worked together as part of a "cohesive criminal enterprise."

Participation. Even if the consumer had articulated a cognizable theory to support a RICO enterprise, she failed to adequately allege that the bank had conducted the affairs of the enterprise, according to the court. According to the consumer, the defendant provided professional services to the lender and ACH Network by: (1) originating ACH transactions into the Network and (2) entering into an agreement with the lender to facilitate the ACH transactions. She did not allege that the bank had played a role in devising the payday loans, or in determining which individuals to debit; nor did she allege that the bank possessed control over the lender or the entities in the ACH Network. Instead, she merely stated that the bank had engaged in "arms length commercial transaction[s]" with those parties.

The court noted that other courts had routinely held that those types of relationships did not constitute "conducting or participating" in the affairs of a RICO enterprise, even if the defendant was aware of the enterprise’s unlawful activity. Although the bank’s role as an ODFI may have been essential in enabling the consumer’s payday loan—by allowing the lender to access the ACH Network—the important role it played did not, without more, constitute "conduct" within the meaning of RICO.

Deceptive Acts and Practices Law. The plaintiff also asserted a state law claim under Section 349 of New York’s General Business Law (GBL), which prohibited deceptive acts or practices in the conduct of business, trade, commerce, or the furnishing of a service. Under that provision, the gravamen of the consumer’s complaint had to be a "consumer injury" or "harm to the public interest." The critical question thus became whether the alleged conduct affected the public interest in New York, not whether the suit was brought by a consumer or competitor.

In this case, the consumer did not allege that the defendant had engaged in any "deceptive or misleading practices." Because the consumer failed to allege that the bank had made an "actual misrepresentation or omission to a consumer," she failed state a viable claim under the GBL.

The case is No. 13-CV-5438 (JFB) (GRB).

Attorneys: Darren T. Kaplan (Darren Kaplan Law Firm, P.C.), Jeffrey Ostrow (Kopelowitz Ostrow P.A.), Hassan Zavareei and Jeffrey D. Kaliel (Tycko & Zavareei LLP), and John A. Moore, Norman Siegel, and Stephen N. Six (Stueve Siegel Hanson LLP) for Deborah Moss. Barry Werbin (Herrick, Feinstein LLP) and John C. Elkman, Bryan Freeman, and James P. McCarthy (Lindquist & Vennum) for First Premier Bank.

Companies: First Premier Bank

MainStory: TopStory RICO StateUnfairTradePractices NewYorkNews

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