Commerce Clause Does Not Prevent Minnesota from Regulating Internet Loans Made to State Residents, Minnesota Supreme Court Rules

The Minnesota Supreme Court has ruled that the Commerce Clause of the U.S. Constitution does not preclude Minnesota from applying its payday lending law to loans consummated in Delaware that are made to Minnesota residents over the Internet.

The Minnesota Supreme Court joins the 10th Circuit which, under similar facts in Quik Payday Inc. v. Stork, also rejected a Commerce Clause challenge to the application of the borrower’s home state law to Internet payday loans.

In State of Minnesota v. Integrity Advance, LLC, the Minnesota Attorney General (AG) filed a lawsuit against the lender in which she alleged that loans made by the lender to Minnesota residents over the Internet violated several provisions of Minnesota’s payday lending law, including interest rate and term limits. The lender argued that the application of Minnesota law to its loans violated the extraterritoriality principle of the Commerce Clause because Minnesota was seeking to regulate commerce that occurred wholly outside the state.

According to the lender, the “commerce” in question occurred outside of Minnesota because the loan contracts were signed by the lender in Delaware at its principal place of business. While not expressly stated in the opinion, the loan contracts presumably included a choice-of-law provision designating Delaware law.

The trial court granted summary judgment to the AG and its decision was affirmed by the court of appeals. In rejecting the lender’s Commerce Clause argument and affirming the appellate court, the Supreme Court characterized as “unjustifiably narrow” the lender’s view that where the loan contracts were signed by the lender was the sole determinant of where the challenged “commerce” occurred.

Instead, the Court found that the “commerce” regulated by the Minnesota law included “[t]he payment of funds to and from Minnesota borrowers, which for most of these loan transactions included electronic transfers into and out of Minnesota banks” and “the approximately 28,000 calls and emails between [the lender] and prospective borrowers in Minnesota by prescribing the terms and conditions of the loans [the lender] could offer.”

As a result, the Court concluded that the Minnesota law had only a “negligible” effect on commerce in other states and did not “control the terms on which companies lend money in other states.” Because the lender did not argue that the Minnesota law was discriminatory or excessively burdened interstate commerce, those issues were not considered by the Court.

In its opinion, the Supreme Court distinguished the Minnesota law from the Indiana Uniform Consumer Credit Code (UCCC) provision at issue in the Seventh Circuit’s decision in Midwest Title Loans v. Mills. Under that provision, a loan was deemed to be made “in” Indiana, and hence subject to regulation by Indiana, if the loan involved an Indiana resident solicited in the state by any means. The lender, which advertised in Indiana, made loans to Indiana residents, in person, in Illinois.

After the Indiana Department of Financial Institutions (DFI), based on the UCCC provision, demanded that the lender cease this activity, the lender sued the DFI in federal district court, arguing that the Commerce Clause prevented the extra-territorial regulation contemplated by the UCCC. The district court’s decision agreeing with the lender’s position was unanimously affirmed by the Seventh Circuit. (The lender, which was represented by Ballard Spahr, also obtained attorneys’ fees from the State of Indiana as a “prevailing party” in a federal Civil Rights Act lawsuit brought by the lender.)

The Minnesota Supreme Court observed that, in contrast to the UCCC, the Minnesota law’s jurisdictional provision limited the law’s application to loans that were completed while a Minnesota resident was physically located in that state.