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7th Circuit affirms permanent injunction

January 28, 2010

The 7th Circuit Court of Appeals upheld an injunction preventing the application of Indiana's Uniform Consumer Credit Code to an Illinois company because it violates the commerce clause of the U.S. Constitution.

In Midwest Title Loans Inc. v. David H. Mills, Director of the Indiana Department of Financial Institutions,  No. 09-2083, the state appealed the permanent injunction entered by the U.S. District judge in Indiana's Southern District against applying Indiana's UCCC against Midwest Title Loans, which is a "car title lender." Midwest had offices only in Illinois but had many Indiana residents travel to the state in order to obtain a loan. Midwest advertised in Indiana but stopped once it learned about the "territorial application" provision added to the Indiana UCCC in 2007. The provision says if an Indiana resident enters into a consumer sale, loan or lease with a creditor in another state and the creditor advertises in Indiana, the lender is subject to the code. That would require a license from Indiana to make consumer loans and would subject the company to restrictions on annual interest rates it can charge. The goal is to protect residents from predatory lending.

The 7th Circuit judges, who included U.S. District Judge Samuel Der-Yeghiayan of the Northern District of Illinois sitting by designation, agreed with the District Court's injunction. They likened the instant case to that of Healy v. Beer Institute, 491 U.S. 324, 337 (1989), and a hypothetical case of involving Indiana and out-of state casinos to rule the application of the state's UCCC to Midwest violates the commerce clause of the federal Constitution.

In Healy, Connecticut passed a "price affirmation" law that required brewers to commit that the prices they charged for beer in Connecticut wouldn't be any higher than the lowest prices charged in a bordering state. The U.S. Supreme Court invalidated the law because Connecticut would be regulating prices in another state, albeit indirectly.

The Circuit judges also used the hypothetical of Indiana banning casinos because of massive gambling problems but requiring out-of-state casinos to obtain Indiana licenses that would limit a Hoosier to gambling no more than $10 per day.

"A state law of that kind, however well intentioned and genuinely beneficial to the state imposing it, would burden interstate commerce by restricting travel and a firm's ability to deal with residents of a different state, even though the law treated out-of-state businesses no worse (in our example, even slightly better) than businesses located in the state," wrote Judge Richard Posner.

Allowing Indiana to apply its law against title loans when its residents obtain them in a different state that has a different law would arbitrarily exalt the public policy of one state over the other, he continued.

All of the commercial activity involved with the loans happened in Illinois - the offices are located there, car keys handed over there, and checks were drawn and could be cashed there. The contract was made in Illinois, and that is enough to show that the territorial-application provision violates the commerce clause, wrote the judge.

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