The United States Court of Appeals for the Seventh Circuit recently upheld a District Court ruling in favor of an Illinois automobile tile loan company against the Indiana Department of Financial Institutions on the grounds that the Commerce Clause of the federal Constitution prevented Indiana from regulating the company’s transactions in Illinois with Indiana residents. Midwest Title Loans, Inc. v. Mills, No. 09-2083, 2010 WL 308967 (7th Cir. Jan. 28, 2010).

    Midwest advertised loans on Indiana television stations and by direct mailings to Indiana residents, but all loans were made in person at Midwest’s offices in Illinois. Midwest stopped lending to Indiana residents after receiving notice from the Department that the Indiana Uniform Consumer Credit Code (UCCC) applied to that lending. Midwest then sued the Department to enjoin application of the UCCC to its lending business.

    The UCCC generally governs loans “made in” Indiana and a transaction is deemed to have been “made in” Indiana if, inter alia, the creditor has advertised or solicited sales or loans in Indiana by any means. The UCCC requires lenders to obtain a license and limits interest rates, among other things. Violation of the licensing requirement renders loans void and violation of other provisions may result in administrative fines and criminal penalties.

    The United States District Court for the Southern District of Indiana granted a permanent injunction in favor of Midwest and the state appealed.

    In concluding that Indiana could not constitutionally regulate extraterritorial transactions as contemplated by the UCCC territorial application provision, the Seventh Circuit looked to United States Supreme Court precedent interpreting the Commerce Clause, which provides that “Congress shall have Power . . . to regulate Commerce . . . among the several States.”

    The Seventh Circuit relied in particular upon Healy v. Beer Institute, 491 U.S. 324 (1989). Healy struck down a Connecticut “price affirmation” law that required brewers to commit that the prices they charged for beer in Connecticut were no higher at the time of posting than the lowest prices charged in any state that bordered on Connecticut. The Supreme Court ruled this to be an impermissible attempt to force an out-of-state merchant to seek regulatory approval in one state before undertaking a transaction in another.

    Extrapolating from Healy, the Seventh Circuit found that the UCCC also impermissibly affects interstate commerce, notwithstanding that Midwest advertises in Indiana or that collateral was located in Indiana. The Seventh Circuit specifically rejected the state’s claim that the Due Process clause of the federal Constitution could support application of the UCCC to transactions that occurred in Illinois because, for example, Indiana had greater contacts with the transaction or Midwest’s contracts were contrary to Indiana’s public policy. Such an argument was disproven by Healy, according the Seventh Circuit, in that Connecticut’s interest in beer prices was insufficient to withstand the Commence Clause challenge. Moreover, after weighing the concerns behind the two Constitutional clauses, the Seventh Circuit decided that the Commerce Clause should prevail. “Midwest’s contracts were made and executed in Illinois, and that is enough to show that the territorial-application provision violates the commerce clause,” summarized Judge Posner.

    Other states that have adopted versions of the UCCC have territorial application provisions similar to Indiana’s. That is, a loan or credit sale will be deemed to be “made in” the state and thus subject to the UCCC if the lender or creditor has solicited in the state using any means. It will be interesting to see what impact Midwest might have in other jurisdictions. If you would like information about other state laws that could be vulnerable to a Midwest analysis, or would like to discuss the implication of Midwest for your credit programs, please contact us.

    • Judy Scheiderer