Katten Muchin Sued By Bottom-Feeding Former Client

Payday lender feels they were taken advantage of.

gavel money cash bonus litigation financeThere are few entities that generate less sympathy than payday lenders. Targeting desperate people looking for immediate cash flow with happy commercials where some schlub sets everything in his world right by scoring a quick $5,000 loan while ignoring the fine print laying out the 200 percent interest rate. After the bottom fell out of the economy, state governments and the CFPB started tightening restrictions on this lending.

And that created problems for CashCall. So they — at the risk of oversimplifying — moved a substantial segment of their operations to Native American land. It was the fashionable thing to do in the industry at the time, and really, when have Native Americans ever been exploited by powerful monied interests looking to use their land? Now that that’s fallen through for CashCall, they’re turning their aim on Katten Muchin, suing for malpractice, breach of contract, and breach of fiduciary duty.

Like most pre-collapse consumer lenders, CashCall made its money partnering with banks around the country who would issue loans to customers and then immediately sell the loan to CashCall, who would accept the collection risk in exchange for charging “interest rates that are higher than secured loans.” And by that, they mean way higher.

You know what, apropos of nothing in particular, please enjoy this moment of Simpsons history:

Simpsons

Claudia Calloway, a partner at Katten Muchin (formerly of Paul Weiss and Manatt), represented CashCall in these deals, and for many years, the company seemed pleased with Calloway’s work finding them willing partners for spreading their unique brand of mirth. But when the banks started fleeing the loan shark consumer-lending industry, CashCall alleges that Calloway and Katten recommended working with a Native American tribe. After all, these pesky regulations don’t apply on the reservation!

CashCall wasn’t alone. Back in 2014, the Consumer Federation of America estimated that half of this business was conducted by entities claiming tribal immunity to skirt banking regulations, and Biglaw firms were deeply embroiled in helping companies use the unique sovereign status of tribal governments to their advantage.

Sponsored

Where CashCall differed from other lenders is in their chosen partner. In one model, a consumer lender partners with an entity set up by the tribal government itself. In the other, companies like CashCall pair with a private tribal member operating an entity in Indian territory.

CashCall partnered with a member of the Cheyenne River Sioux Indian nation who set up a company called Western Sky to issue loans from the Cheyenne River Sioux Indian Reservation over the phone or internet that could be immediately purchased — through an intermediary — by CashCall. CashCall thought this, along with some language in lending agreements, granted their whole lending regime tribal sovereignty. Courts disagreed.

That’s why you don’t build anything on ancient Indian burial grounds, figuratively or literally.

As CashCall alleges:

But Katten and Callaway knew, or should have known, that an entity is subject to immunity as an “arm of the tribe” only if the entity is owned or controlled by the tribe itself, was created for and operates for the benefit of the tribe or serves a tribal function, or can bind the tribe or endanger the tribe’s assets. Merely incorporating an enterprise owned and controlled by an individual, even if a member of a tribe, does not make that enterprise an “arm of the tribe.”

Sponsored

Well… no. But wouldn’t it be great if we all got to claim the immunities of our governments? As a citizen of New York, I want state immunity so I can totally trash New Jersey the next time I’m forced to pass through that rotting cesspool.

CashCall claims Katten and Calloway knew all along that their tribal partner was wholly owned by a mere member of the tribe without any official tribal government ties and led CashCall along in believing that the “member of the tribe” model carried immunity. Which even if they did understand the structure fully, frankly, they may have had reason to believe that would hold up to scrutiny based on the state of play when they offered that advice.

Putting aside whether or not Katten and Calloway appropriately advised CashCall of the risks of their model — or even knew the precise details of the model to begin with — CashCall has an even bigger problem that they pin on the firm. The feds are arguing that CashCall was the “true lender” in these cases, thus stripping the lending agreements of the pretense of a tribal relationship. Which is ridiculous, because obviously Western Sky was a bona fide Native American lending institution, just look at their commercial:

Drums and teepees galore! How can there be any doubt?

Regardless, CashCall’s blaming Katten for not advising them of the “true lender” risk either, but to be fair, what in the preceding decades of jurisprudence would lead anyone to think courts might stop letting companies shield their actions behind fig-leaf transactions? Delaware has to pay its bills somehow.

CashCall claims that all these failures they’re laying at Katten’s feet add up to more than $500 million in damages. A Katten spokeswoman told the Orange County Register, “We will vigorously defend our firm against this matter, and we expect to prevail.”

In the meantime, if CashCall needs money now, I know of several companies that can get you the cash you need today. Bad credit no problem!

(Check out the whole complaint on the next page…)

Earlier: The Legal Trick Payday Lenders Are Using To Skirt The Law


HeadshotJoe Patrice is an editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news.