Siding with six consumers who filed suit asserting violations of state usury laws against online lenders, the U.S. Court of Appeals for the Eleventh Circuit has affirmed a decision by the U.S. District Court for the Southern District of Georgia, holding that the enforcement of forum selection clauses in payday loan agreements and the preservation of class actions as remedies for borrowers would contravene public policy in Georgia.

What happened

Six Georgia residents entered into identical loan agreements with a trio of related online lenders. The loans, which amounted to less than $3,000 each, were to be repaid from any recoveries that the plaintiffs received in their separate personal injury lawsuits.

The plaintiffs filed their suit in February 2017, alleging that the loan agreements violated state law—that is, the Georgia Industrial Loan Act (GILA), Payday Lending Act (PLA) and Georgia state usury law. In response, the lenders pointed to the forum selection clause found in the loan agreements that required the lawsuit be filed in Illinois, as well as the class action waiver that barred the plaintiffs from filing a class action.

A district judge rejected the lenders’ arguments, ruling that the provisions at issue were unenforceable as against Georgia public policy.

The Eleventh Circuit affirmed, finding that the PLA and GILA “articulate a clear public policy against enforcing forum selection clauses in payday loan agreements and in favor of preserving class actions as a remedy for those aggrieved by predatory lenders. If Georgia’s public policy regarding payday lenders is a horse, as [the district judge] suggested, it carries these borrowers safely to a Georgia courthouse.”

The Eleventh Circuit highlighted that the PLA specifically bans out-of-state forum clauses, which law states that “[c]ertain payday lenders have attempted to use forum selection clauses contained in payday loan documents in order to avoid the courts of the State of Georgia, and the General Assembly has determined that such practices are unconscionable and should be prohibited.”

Nor was the Eleventh Circuit persuaded by the lenders’ argument that the use of the term “county”—and not “Georgia county”—in the statute permitted suits to be moved out of state pursuant to a contract’s forum selection clause. The general condemnation of the use of such clauses doesn’t jibe with the idea that the legislature created a backdoor way for out-of-state forum selection clauses, the court said.

Further, the contention that out-of-state lenders are exempt from the PLA would render the prohibition on out-of-state forum selection clauses meaningless, the court said.

“Georgia statutes establish a clear public policy against out-of-state lenders using forum selection clauses to avoid litigation in Georgia courts,” the Eleventh Circuit wrote. “Enforcing a forum selection clause like the ones here ‘would [therefore] contravene a strong public policy of [using] the forum in which suit is brought,’ and the district court correctly denied the [lenders’] motion to dismiss on that ground.”

As for the class action waivers, the texts of the PLA and GILA both include explicit statements that “a civil action may be brought … on behalf of an ascertainable class of borrowers” and that claims “may be asserted in a class action,” respectively.

The lenders told the court that neither statute prohibits class action waivers or creates a statutory right to pursue one.

“These arguments miss the point,” the Eleventh Circuit said. The public policy bar exists as an independent basis to hold a contractual provision unenforceable, the court explained, and a contractual provision need not literally conflict with Georgia law to contravene public policy.

The court also distinguished cases where class action waivers in arbitration clauses were found not to be void as against public policy. Those cases concerned class action waivers in arbitration agreements, where the Federal Arbitration Act (FAA) creates a strong federal policy in favor of arbitration that overrides state statutes or common law, the court said.

“The PLA and the GILA establish the Georgia Legislature’s intent to preserve class actions as a remedy for those aggrieved by payday lenders,” the court wrote. “Enforcing the class action waiver here would undermine the purpose and spirit of Georgia’s statutory scheme. The class action waiver is therefore unenforceable, and the district court did not err in denying the [lenders’] motion to strike the plaintiffs’ class allegations.”

To read the opinion, click here.

Why it matters

The decision offers a cautionary tale for financial services companies that wish to enforce forum selection clauses and class action waivers in loan agreements with Georgia borrowers.

Courts have long refused to enforce contractual provisions that are deemed to contravene public policy, and the Eleventh Circuit decision is consistent in that regard. In so doing, the court is refusing to allow short-term lenders to enforce either the forum selection clause or class waiver provisions contained in the operative loan agreements in the context of such higher-priced loans. Georgia law is the key factor, however, and the ruling is therefore limited in that regard. Indeed, the court was careful to distinguish class waiver provisions found within arbitration agreements, where the FAA overrides state law or policy, leaving open a possible route for certain lenders to continue to bar class actions via mandatory arbitration provisions.