In TitleMax of Delaware, Inc. v. Weissmann, the Third Circuit Court of Appeals rules that Pennsylvania's usury laws apply to out-of-state lenders who extend loans to Pennsylvania residents, even if the lenders do not have a physical presence in the state. 24 F. 4th 230 (3rd Cir. 2022).
TitleMax is a Delaware corporation that provides motor vehicle loans. TitleMax does not have any offices, employees, agents, or brick-and-mortar stores in Pennsylvania and is not licensed as a lender in the Commonwealth. TitleMax claims that it has never used employees or agents to solicit Pennsylvania business, and it does not run television ads within Pennsylvania, but its advertisements may reach Pennsylvania residents. Prior to 2017, TitleMax engaged in these activities with Pennsylvania residents and repossessed vehicles located in Pennsylvania when a Pennsylvania-resident borrower defaulted. In 2017, the Pennsylvania Department of Banking and Securities issued a subpoena requesting documents, regarding TitleMax's interactions with Pennsylvania residents, pursuant to the Consumer Discount Company Act ("CDCA"), 7 Pa. Stat. §§ 6201-6221, and the Loan Interest and Protection Law ("LIPL"), 41 Pa. Stat. §§ 101-605. Both statutes address lending activity. TitleMax refused to comply with the subpoena and filed suit in federal court.
The District Court granted TitleMax's motion for summary judgment, holding that Younger abstention did not apply but that the subpoena was invalid under the dormant Commerce Clause because it sought to regulate conduct that occurred wholly outside of Pennsylvania. TitleMax's loans are "completely made and executed outside Pennsylvania and inside TitleMax [brick-and-mortar] locations in Delaware, Ohio, or Virginia."
Reversed—The subpoena is valid because TitleMax's conduct did not occur wholly outside of Pennsylvania. The relevant laws do not violate the dormant Commerce Clause because they do not discriminate against out-of-state lenders and the burden on interstate commerce is not clearly excessive in relation to the local benefits.
A
The Commerce Clause provides that "Congress shall have Power ... To regulate Commerce ... among the several States." U.S. Const., art. I, § 8, cl. 3. This affirmative grant of authority to Congress "also encompasses an implicit or 'dormant' limitation on the authority of the States to enact legislation affecting interstate commerce." Instructional Sys., Inc. v. Comput. Curriculum Corp., 35 F.3d 813, 823 (3d Cir. 1994) (citing Healy v. Beer Inst., 491 U.S. 324, 326 n.1, 109 S.Ct. 2491, 105 L.Ed.2d 275 (1989)). When evaluating whether a state statute violates the Commerce Clause, we examine the statute's effect on interstate commerce. Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 579, 106 S.Ct. 2080, 90 L.Ed.2d 552 (1986). For example,
[w]hen a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, we have generally struck down the statute without further inquiry. When, however, a statute only has indirect effects on interstate commerce and regulates evenhandedly, we have examined whether the State's interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits.
Instructional Sys., 35 F.3d at 824 (quoting Brown-Forman, 476 U.S. at 579, 106 S.Ct. 2080). One way a challenged statute can "directly regulate" interstate commerce is if the statute has "extraterritorial effects that adversely affect economic production (and hence interstate commerce) in other states." Cloverland-Green Spring Dairies, Inc. v. Pa. Milk Mktg. Bd., 462 F.3d 249, 261-62 (3d Cir. 2006). A state law that directly controls commerce wholly outside its borders violates the dormant Commerce Clause, regardless of whether the state legislature intended for the statute to do so. Healy, 491 U.S. at 336, 109 S.Ct. 2491. If the state statute does not have such extraterritorial reach or discriminate against out-of-staters, then it will be upheld unless the burden on interstate commerce is "clearly excessive in relation to the putative local benefits." Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970). This examination is sometimes referred to as Pike balancing.
We thus follow a two-step approach in analyzing TitleMax's Commerce Clause claim here. Initially, we address the "territorial scope of the transaction that [Pennsylvania] has attempted to regulate" and whether such transactions occur "wholly outside" the state. A.S. Goldmen & Co., Inc. v. N.J. Bureau of Sec., 163 F.3d 780, 786 (3d Cir. 1999). If the transactions do not occur wholly outside of Pennsylvania, then "we determine whether the [regulation] is invalid under the [Pike] balancing test." Am. Exp. Travel Related Servs., Inc. v. Sidamon-Eristoff, 669 F.3d 359, 372 (3d Cir. 2012).
1
The CDCA regulates loans and collection activity. 7 Pa. Stat. § 6213(A). TitleMax's transactions with Pennsylvanians involve both loans and collection, and these activities do not occur "wholly outside" of Pennsylvania. TitleMax's transactions involve more than a simple conveyance of money at a brick-and-mortar store in a location beyond Pennsylvania's border. Rather, the loan creates a creditor-debtor relationship that imposes obligations on both the borrower and lender until the debt is fully paid. For instance, Pennsylvanians with TitleMax loans made payments to TitleMax while physically present in the state. See Quik Payday, Inc. v. Stork, 549 F.3d 1302, 1308 (10th Cir. 2008) (holding that a loan transaction is not "wholly extraterritorial" and thus not problematic under the dormant Commerce Clause where the "transfer of loan funds to the borrower would naturally be to a bank in [the consumer's state]"). In addition, TitleMax's loan agreements grant TitleMax "a security interest in the Motor Vehicle," which in the case of a Pennsylvania borrower is a Pennsylvania-registered automobile. App. 567-68. TitleMax records these liens with PennDOT and may repossess the vehicle if the consumer defaults on his loan. Thus, by extending loans to Pennsylvanians, TitleMax takes an interest in property located and operated in Pennsylvania.
These aspects of loan servicing make TitleMax's conduct different from that in the Healy line of cases, which largely involved transactions in goods that ended at the point of sale. See, e.g., Healy, 491 U.S. at 327, 109 S.Ct. 2491 (price of beer); Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 519-20, 55 S.Ct. 497, 79 L.Ed. 1032 (1935) (price of milk for producers); see also Pharm. Rschs. & Mfrs. of Am. v. Walsh, 538 U.S. 644, 669, 123 S.Ct. 1855, 155 L.Ed.2d 889 (2003) (noting the extraterritoriality rule in Healy is "not applicable" to cases where a statute does not tie prices of in-state products to out-of-state prices). Unlike the sale of a good, a TitleMax loan has a longer lifespan: it involves later payments and permits a physical taking (repossession) from inside another state. Because TitleMax both receives payment from within Pennsylvania and maintains a security interest in vehicles located in Pennsylvania that it can act upon, its conduct is not "wholly outside" of Pennsylvania.
For these reasons, applying the Pennsylvania statutes to TitleMax does not violate the extraterritoriality principle.
2
Having determined that TitleMax's conduct does not occur wholly outside of Pennsylvania, we must determine "whether the burdens [from the state law being applied] on interstate commerce substantially outweigh[ ] the putative local benefits." Cloverland-Green, 462 F.3d at 258; see also Pike, 397 U.S. at 142, 90 S.Ct. 844 (holding that where a statute addresses "a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits"). The only burdens to be considered in the balancing test are those that "discriminate against interstate commerce." Old Bridge Chems., Inc. v. N.J. Dep't of Env't Prot., 965 F.2d 1287, 1295 (3d Cir. 1992).
On the interstate commerce burdens side, application of Pennsylvania's usury laws to transactions with Pennsylvanians puts TitleMax in no different position than an in-state lender. See Instructional Sys., 35 F.3d at 826-27 ("[W]here the burden on out-of-state interests rises no higher than that placed on competing in-state interests, it is a burden on commerce rather than a burden on interstate commerce." (emphasis in original)). While it may be true that TitleMax could be subject to different interest rate caps depending on the borrower's state of residence, this result is not a "clearly excessive" burden on interstate commerce. First, a burden on a lender is not a burden on interstate commerce. Exxon Corp. v. Gov. of Md., 437 U.S. 117, 127-28, 98 S.Ct. 2207, 57 L.Ed.2d 91 (1978) ("The [Commerce] Clause protects the interstate market, not particular interstate firms, from prohibitive or burdensome regulations."). Second, a lack of uniformity in state interest rates is not an undue burden, as "Congress has deferred to the states on the matter of maximum interest rates in consumer credit transactions." Aldens, Inc. v. Packel, 524 F.2d 38, 45, 48-49 (3d Cir. 1975) (holding that application of Pennsylvania's installment contracts law to a mail-order creditor's business with Pennsylvania residents did not violate the Commerce Clause). Once it is clear that the laws do not discriminate between in-staters and out-of-staters, "the inquiry as to the burden on interstate commerce should end" and further analysis of the local benefits is unnecessary. Instructional Sys., 35 F.3d at 827.
Even if we consider the local benefits, we would conclude that they weigh in favor of applying Pennsylvania laws to TitleMax. The laws protect Pennsylvania consumers from usurious lending rates. Title-Max's interest rates may be as high as 180% but if the CDCA and LIPL applied, TitleMax's rates for Pennsylvania customers would be capped at 6%. Cash Am. Net of Nev., LLC v. Pa. Dep't of Banking, 607 Pa. 432, 8 A.3d 282, 285-86 (2010). "Pennsylvania's interest in the rates which its residents pay for the use of money for purchase of goods delivered into Pennsylvania is substantial enough to satisfy any due process objection to its attempt at regulating [credit on installment contracts]." Aldens, 524 F.2d at 43. The local interest in prohibiting usurious lending is equally important when evaluating a Commerce Clause challenge. See, e.g., Aldens, Inc. v. LaFollette, 552 F.2d 745, 751, 753 (7th Cir. 1977) (holding that "[p]rotecting... citizens from usurious credit terms imposed when they are residents of the state" is a local interest sufficient for due process and for interstate-commerce balancing); Cash Am., 8 A.3d at 292 ("It is well established that public policy in this Commonwealth prohibits usurious lending, and this prohibition has been recognized for over 100 years."). Thus, any burden does not clearly exceed the local benefits. Pike, 397 U.S. at 142, 90 S.Ct. 844.
Pennsylvania has a strong interest in prohibiting usury. Applying Pennsylvania's usury laws to TitleMax's loans furthers that interest, and any burden on interstate commerce from doing so is, at most, incidental. Pennsylvania may therefore investigate and apply its usury laws to TitleMax without violating the Commerce Clause.
B
For the foregoing reasons, we will reverse the judgment in favor of TitleMax and direct that the District Court enter judgment in favor of the Department.
THIS CASEBOOK contains a selection of U. S. Court of Appeals decisions that analyze and discuss Commerce Clause doctrine. Volume 1 of the casebook covers the District of Columbia Circuit and the First through the Fifth Circuit Court of Appeals. Volume 2 of the casebook covers the Sixth through the Eleventh Circuit Court of Appeals.