In United States v. Moseley, No.18-2003, 2020 WL 5523210 (2d Cir. Nov. 3, 2020) , the Second Circuit holds that the choice-of-law provisions in the defendant’s payday-loan agreements — which named 3 jurisdictions that don’t have usury laws — were unenforceable under New York law, so the usury laws of New York applied in the case of loans to New York residents. And, here, the RICO counts were based on New York domiciled borrowers . The agreements also didn’t sufficiently disclose the total payments the borrower would have to make on the loans, as required by TILA.
The loans
Richard Moseley operated a payday-loan business, between 2004 and 2014, in which he “lent money to borrowers in New York and other states at interest rates exceeding —by many multiples—the maximum legal interest rates allowed in those states; in its loan documents, it failed to meet TILA disclosure requirements; and it issued loans to borrowers without their consent and then falsely represented that borrowers had, in fact, consented to the loans.” 2020 WL 2020 WL 6437737 at *1.
A payday loan “is usually a short-term, high cost loan, generally for $500 or less, that is typically due on your next payday.” Id. at *1, n.2. Here, from offices in Kansas City, Missouri, Moseley’s business used the internet as its platform, obtained the borrower’s private banking information, and directly credited the borrower’s bank account with the loan principal. Id. at *1, *2.
But “[i]nstead of charging a traditional interest rate, Moseley’s business charged ‘fees’ that functioned, in effect, as interest payments.” And “[f]or each ‘loan period,’” — of two weeks – “Moseley charged a $30 fee (the ‘finance charge’) for each $100 of the borrower’s total loan amount.” Id. at *2. The fees were automatically debited from the borrower’s bank account. But “[u]nless the borrower affirmatively acted to pay off the principal by the end of the two-week loan term, the loan would be ‘refinanced’ and the term automatically extended.” Id. at *2.
“This meant that a $100 loan could—and on occasion did—cost the borrower $30 in fees charged every other week, or approximately 26 times over the course of a year: in other words, it could lead to total finance charges of $780 on the original $100 loan, in effect an approximate yearly interest rate of 780 %. Moseley’s business would credit none of these fees toward repayment of the loan principal.” Id. at *2.
But “many states cap the legal interest rate at a level far below the effective rates Moseley sought to charge.” New York, in particular, sets the “civil usury rate” at 16% for unlicensed lenders “and treats all usurious contracts (that is, contracts violative of that rate) as void.” Id. at *2 (citing N.Y. Gen. Oblig. Law §§ 5-501, 5-511; N.Y. Banking Law § 14-a(1)). And New York sets the “criminal usury rate at 25%—that is, at a rate exceeding 25%, lending becomes a crime in New York.” Moseley, 2020 WL 6437737 at *2 (citing N.Y. Penal Law § 190.40).
A jury convicted Moseley on the 6-count indictment that charged: (1) conspiracy to collect unlawful debts under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) (18 U.S.C. § 1962(d)); (2) collection of unlawful debts in violation of RICO (id. §§ 1962(c) & 2); (3) conspiracy to commit wire fraud (18 U.S.C. § 1349); (4) wire fraud (18 U.S.C. §§ 1343 & 2); (5) aggravated identity theft (18 U.S.C. §§ 1028A(a)(1), 1028A(b), & 2); and (6) making false disclosures under the Truth in Lending Act (“TILA”) (15 U.S.C. § 1611 & 18 U.S.C. § 2).
“The government focused on New York-domiciled borrowers for purposes of the RICO prosecution[.]” Id. at *4. It “had no geographic focus for the borrowers of concern in the wire fraud, identity theft, and TILA charges.” Id. at * 4.
I. On the RICO count, the jury was properly instructed that New York usury law applied, rather than the choice-of-law provisions in the payday-loan contracts.
On the RICO counts, Moseley argued that the district court erroneously instructed the jury that New York usury law governed his payday loans made to borrowers domiciled in New York, “rather than the laws of the jurisdictions specified in the loan agreements, which set no interest rate caps.” Id. at *1, *6. The payday-loan contracts stated that “their terms and enforcement were to be governed by the laws of the jurisdictions of Nevada, Nevis, and New Zealand, none of which has usury laws.” Id. at *6 (footnote omitted).
The Circuit concluded that the choice-of-law provisions in the loan agreements were unenforceable in New York. New York law governs the question whether the contractual provision was effective. Id. at *7. And under New York law, according to the Circuit, the choice-of-law provisions violated New York public policy regarding usurious loans to individual borrowers. Id. at *7-*9; id. at *9 (“In consumer loan contracts, choice-of-law provisions specifying foreign jurisdictions without usury laws are unenforceable in New York as against its public policy.”). Different rules apply in the case of “corporate” borrowers. Id. at *8.
With the loan contracts’ choice-of-law provisions (naming Nevada, Nevis, and New Zealand) rendered unenforceable, Moseley argued that “under New York conflict-of-law rules, the usury law of Missouri, not New York, should govern.” Id. at *9 (emphasis in original). “Missouri law is more lenient” than New York usury law. Id. The Circuit, however, concluded that “New York, not Missouri, was the ‘center of gravity’ of the transaction” and thus favored “applying New York law.” Id. at *10. For example, Moseley’s loan business was principally conducted on the net, and the source of the funds was not evident. So “borrowers had no way of knowing that Moseley’s business was based in Missouri.” Id. at *10.
The Circuit also rejected Moseley’s argument that “the government’s reliance on RICO’s ‘unlawful debt’ provision violated the fair warning guarantee of the Due Process Clause.” Id. at *10 (emphasis added). “The ‘unlawful debt’ provisions of RICO are straightforward and neatly apply here.” Id. at *11 (citing 18 U.S.C. §§ 1962(c), 1961(6)). And “Moseley cites no reasonably persuasive authority that would have given him reason to believe that his loans were not ‘unlawful debts’ under RICO.” Id.
The Circuit also concluded that the evidence was legally sufficient to show the requisite mental state for the RICO counts: “that is, that he was aware of the unlawful nature of the loans.” Id. at *11.
II. Sufficiency of evidence on the Truth in Lending Act (TILA) count
Moseley challenged the sufficiency of the evidence supporting his conviction under TILA, which requires a showing that the defendant, “willfully and knowingly,” has “give[n] false or inaccurate information or fail[ed] to provide information which he [was] required to disclose.” 15 U.S.C. § 1611(1). The statute and implementing regulations obligate the lender “to disclose the ‘payment schedule’” to borrowers. Id. at *12.
The indictment “focused on Moseley’s business’s allegedly inaccurate ‘total of payments’ disclosures to their borrowers.” Id. at *12. And in Moseley’s loan agreements, the “‘total of payments’ disclosure did not indicate in any way to the borrower … that no repayment of the principal was actually ‘scheduled’ to occur—that is, that no payment toward principal would occur automatically on a certain date or dates. Nor, conversely, did it indicate that indefinitely recurring finance charges were ‘scheduled’ to occur.” Id. at *13 (emphasis in original).
III. Evidentiary and sentencing issues
The Circuit also ruled against the defendant on his challenge to the district court’s evidentiary ruling allowing the “verbatim introduction of borrower complaints about Moseley’s business.” Id. at *13. Moseley argued that (1) they should have been excluded as hearsay under Fed. R. Evid. 801(c) and 802; (2) they were testimonial and their introduction violated his Sixth Amendment Confrontation Clause rights; and (3) they should have been excluded as unfairly prejudicial or cumulative under Fed. R. Evid. 403. Id. at *13-*14.
Regarding the sentence, the Court ruled against his challenge to the loss calculation under U.S.S.G. 2B1.1. Id. at *14.
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