Fight The Power - Loper Bright Enterprises v Raimando

Written By: Steven Kurtz, Partner, Levinson Arshonsky Kurtz & Komsky, LLP

Every so often an important legal decision comes down, which overrules an earlier U.S. Supreme Court Case, that can positively impact the commercial finance world, especially as state regulation increases.  Multiple states have issued various forms of regulations, mostly pertaining to licensing, financing disclosures and “junk fees”.  Many of the laws, especially in California and New York, are unclear and are being improperly enforced by unchecked state government regulators.  The past trend in the federal court system was to give deference to an administrative agency’s interpretation of an unclear law.  Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc. 467 U.S. 837 (1984) (“Chevron”).  The U.S. Supreme Court decided on June 28, 2024 in Loper Bright Enterprises v. Raimando, 603 U.S. ___ (2024) (“Loper”), that courts and judges should be the ones deciding questions of law and statutory interpretation and not government regulators.  The Loper decision will tip the balance of power away from the federal agencies and create a more level playing field.  The logic in the Loper case should also apply to state commercial finance laws enforced by state administrative agencies.

We are experiencing increased regulations against commercial finance companies.  The regulations in some states like California, Utah, Virginia, and New York have licensing laws for their covered businesses.  In addition, several states have financing disclosure laws and the trend towards regulation is increasing.  California also has a junk fee law that covers certain commercial financing deals.  The commercial financing regulatory trend is inconsistent and some schemes are confusing.  Although credit should be given to Florida for enacting a simple easy to use disclosure law, which was followed by Georgia and Kansas. 

Meanwhile, in California where regulation of non-bank commercial finance lenders has been going on for generations, things are in a state of flux.  Regulators in the California Department of Financial Protection and Innovation (“DFPI”) are reviewing agreements, imposing their “two cents” on the contracts, are reviewing marketing materials, and telling people that no business can be conducted when the decision makers on file with the state are not physically in the office, even though the regulator imposing this rule is most likely working remote.  For those with California licenses, there is the eventual audit where the state requests various information about your deals and finances, and always finds something “wrong”.  This tends to happen when an agency goes on a hiring spree for auditors.  Often the DFPI regulators do not follow the law or understand the law they are enforcing, and one is left with the agency’s interpretation of an unclear set of laws.  In fact, California has admitted to the California usury scheme, which is the driver behind most of the state’s regulation of commercial finance lenders, as “not a model of clarity”.  Wishnev v. The Northwestern Mutual Insurance Company, 8 Cal.5th 199 (2019) (“Wishnev”). This problem is not limited to California.   

The reason for the Loper decision is because federal agency officials went too far with their regulations which impeded small business operations.  However, due to the U.S. Supreme Court’s earlier decision in Chevron, the first instinct was for the federal court to give deference to the government agency’s interpretation of the law.  Courts started to chip around this rule over time, but the balance of power stayed with the federal agency’s rulings on the law.  The Loper court did a deep dive into administrative agency law, the old Chevron decision, and determined that enough is enough.  The U.S. Supreme Court majority of seven, including Justice Thomas who earlier signed on to the Chevron decision, recognized the problems of giving deference to federal agencies when interpreting federal law.  The rule is now that the federal courts will be the ones who interpret statutes and decide what the law is, and no longer give deference to the federal agency, whose job is policy.  The Loper decision is all about checks and balances within the federal government, with the judicial branch being the sole branch who interprets laws. 

So, how does a U.S. Supreme Court case that arose from how one manages fishing boats apply to commercial finance law?  The answer is checks and balances.  There is a concept of federalism, meaning that certain laws are determined local state governments and not at the federal level.  For now, non-bank commercial finance regulation falls within this concept as the industry is mostly governed by state and not federal law.  States create agencies which act to enforce and apply laws.  The U.S. Federal Government has the Administrative Procedure Act which is a body of law that addresses federal agencies, part of the executive branch of the government.  California also has an Administrative Procedure Act.  Every state has administrative agencies which carry out policies and enforce laws enacted by its state legislature.  Frequently when state laws track federal laws, the state law case decisions often cite to federal law.  An example of this are states which use the same tax lien priority rules as the IRS, which is very common.  Decisions at the state level on tax lien priorities will often site federal cases as authority.  The same logic may apply to the Loper decision and state administrative agencies, let the court decide and not give deference to the state agency’s interpretation of an unclear law.

In the real world, how does this work?  Threatening to sue a state government agency over its interpretation of the law is not going to make any immediate friends.  But whispering in that person’s ear to analyze the right way may get a different look.  Each state has its own set of rules on how one challenges an agency’s ruling.  Eventually a challenged ruling will get before a court and hopefully a proper record is made that the law is ambiguous, and that the agency’s interpretation should not be given deference because it’s the court’s job to interpret statutes and determine the law.  In California making the case for ambiguity in the laws governing finance lenders is pretty easy as the California State Supreme Court has already stated so in Wishnev when examining California’s labyrinth of usury laws and related statutes and regulations.  There are plenty of industries regulated by state law, so we may soon see state courts following the rationale in Loper.

There may be some redress in federal courts, but it’s a steep challenge.  Generally, the 11th Amendment to the U.S. Constitution prohibits suing state governments in federal courts.  When the state government or agency is violating a constitutional right or a federal law then sometimes one can bring in an individual state official in federal court under the Ex Parte Young Doctrine, which can allow suit against an individual state government official.  This is a loophole around the 11th Amendment, although the deck is stacked against you in this strategy.  However, an experienced federal litigator may find a way.  

My intent here is not to sound off and be political.  The Loper case was a seven to three decision with the three Democratic Party appointed justices dissenting.  Some of the news outlets on both sides of the aisle played up their coverage of the decision along party lines.  As one who has been deep in the trenches dealing with state government officials who interpret ambiguous law and take positions that are not favorable to our industry, it’s nice to see a change in the law addressing administrative agencies.  We should take the long view on this case and perhaps less deference will be given to administrative agencies at the state level, which will benefit the industry. 

The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.