Midwest Title Loans, Inc. v. David H. Mills ( 2010 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 09-2083
M IDWEST T ITLE L OANS, INC.,
Plaintiff-Appellee,
v.
D AVID H. M ILLS, Director of the Indiana
Department of Financial Institutions,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 1:07-cv-1479-SEB-DML—Sarah Evans Barker, Judge.
A RGUED N OVEMBER 10, 2009—D ECIDED JANUARY 28, 2010
Before P OSNER and F LAUM, Circuit Judges, and D ER-
Y EGHIAYAN, District Judge.Œ
P OSNER, Circuit Judge. An Illinois loan company,
Midwest Title Loans, Inc., sued under 42 U.S.C. § 1983 to
Œ
Hon. Samuel Der-Yeghiayan of the Northern District of
Illinois, sitting by designation.
2 No. 09-2083
enjoin, as a violation of the commerce clause, the applica-
tion to Midwest of Indiana’s version of the Uniform
Consumer Credit Code (a model code, provisions of
which have been adopted in several states). Ind. Code
§§ 24-4.5-1-101 et seq. The district court entered a perma-
nent injunction, and the state appeals.
A provision added to the Indiana version of the
model code in 2007 and aptly termed the “territorial
application” provision states that a loan is deemed to
occur in Indiana if a resident of the state “enters into a
consumer sale, lease or loan transaction with a
creditor . . . in another state and the creditor . . . has
advertised or solicited sales, leases, or loans in Indiana
by any means, including by mail, brochure, telephone,
print, radio, television, the Internet, or electronic means.”
§ 24-4.5-1-201(1)(d). If the territorial-application pro-
vision is triggered, the lender becomes subject to the
code and must therefore get a license from the state to
make consumer loans and is bound by a variety of restric-
tions that include a ceiling on the annual interest rate
that a lender may charge. The ceiling is the lower of
21 percent of the entire unpaid balance, or 36 percent on
the first $300 of unpaid principal, 21 percent on the next
$700, and 15 percent on the remainder. § 24-4.5-3-508.
(There is an exception, inapplicable to this case, for
payday loans. § 24-4.5-7-101 et seq.) A lender required
to have a license who fails to obtain it or violates any
of the statutory restrictions exposes himself to a variety
of administrative and civil remedies. §§ 24-4.5-6-108, 24-
4.5-6-110, 24-4.5-6-113. The failure to obtain a license
also voids the loan—the borrower doesn’t have to repay
No. 09-2083 3
even the principal. And a borrower who has paid finance
charges in excess of those permitted by the code is
entitled to a refund. § 24-4.5-5-202.
Midwest Title is what is known as a “[car] title lender.”
“Cash loans, variously called car title pawn, car title
loans, title pledge loans, or motor vehicle equity lines of
credit, are the latest, fast-growing form of high cost, high
risk loans targeting cash strapped American consumers.
Storefront and online lenders advance a few hundred to
a few thousand dollars based on the titles to paid-for
vehicles. Loans are usually for a fraction of the vehicle’s
value and must be repaid in a single payment at the end
of the month. Loans are made without consideration of
ability to repay, resulting in many loans being renewed
month after month to avoid repossession. Like payday
loans, title loans charge triple digit interest rates,
threaten a valuable asset, and trap borrowers in a cycle
of debt.” Jean Ann Fox & Elizabeth Guy, “Driven into
Debt: CFA Car Title Loan Store and Online Survey,” p. 1
(Nov. 2005), www.consumerfed.org/pdfs/Car_Title_
Loan_Report_111705.pdf (visited Dec. 4, 2009); see also
Michael S. Barr, “Banking the Poor,” 21 Yale J. Reg. 121,
164-66 (2004).
Until it received a letter in August 2007 from Indiana’s
Department of Financial Institutions advising it of the
addition of the territorial-application provision to the
code, Midwest had made title loans to Hoosiers (as
Indianans like to call themselves) at annual percentage
interest rates almost ten times higher than the maximum
permitted by the code. They had a maturity of 12 to 24
4 No. 09-2083
months, were secured by the title to the borrower’s
motor vehicle, and were for no more than half the
vehicle’s estimated wholesale value. The loans were
made only in person, at Midwest’s offices in Illinois—it
had no offices in Indiana. The loan would be in the form
of a cashier’s check payable to the borrower, drawn on
an Illinois bank. The borrower was required to hand
over a set of his car keys at the closing to enable
Midwest to exercise self-help repossession of the car in
the event of a default, so that it wouldn’t have to go to
court to enforce its lien should the borrower default.
(In this respect, title lending is like pawnbroking—hence
the alternative name “car title pawns.”) A suit to enforce
the lien would be infeasible because of the small size of
the loans relative to the costs of litigation.
Midwest would notify the Indiana Bureau of Motor
Vehicles of the loan as soon as it was made, so that it
would be noted on the official record of the borrower’s
title, thus protecting Midwest’s rights as a creditor from
subsequent creditors to whom the debtor might grant
a security interest in the vehicle. Repossessions occurred,
naturally, in Indiana. Midwest would arrange with an
Indiana firm to auction off the repossessed vehicle, and
the auction would be held in Indiana.
Midwest advertised the loans on Indiana television
stations and through direct mailings to Indiana residents.
In 2006 it made more than two thousand such loans to
Hoosiers, amounting to 9 percent of its loans that year.
The two states adjoin and many Hoosiers live within a
short drive, or even a walk, of Illinois. Ten of Midwest’s
No. 09-2083 5
23 offices in Illinois are within approximately 30 miles of
the Indiana border. Midwest discontinued its lending to
residents of Indiana when it received the notice that
the Indiana code applied to that lending.
The state asserts an interest in protecting its residents
from what it describes as “predatory lending.” There is a
considerable body of thought that many consumers are
incapable of making sensible decisions about credit. E.g.,
Oren Bar-Gill & Elizabeth Warren, “Making Credit Safer,”
157 U. Pa. L. Rev. 1, 44-45 (2008); Paige Marta Skiba &
Jeremy Tobacman, “Payday Loans, Uncertainty, and
Discounting: Explaining Patterns of Borrowing, Repay-
ment, and Default” (2008), http://bpp.wharton.upenn.edu/
tobacman/papers/payday.pdf (visited Dec. 4, 2009); Ronald
J. Mann & Jim Hawkins, “Just Until Payday,” 54 UCLA L.
Rev. 855, 881-82 (2007); Amanda Quester & Jean Ann
Fox, “Car Title Lending: Driving Borrowers to Financial
Ruin,” pp. 6-7, Apr. 2005, www.consumerfed.org/pdfs/
driving_borrowers_rpt.pdf (visited Jan. 13, 2010); Lynn
Drysdale & Kathleen E. Keest, “The Two-Tiered
Consumer Financial Services Marketplace: The Fringe
Banking System and Its Challenges to Current Thinking
About the Role of Usury Laws in Today’s Society,” 51
S. Car. L. Rev. 589, 605-10 (2000). According to this litera-
ture, many consumers can’t make sense of the interest
rates and other fees charged by loan companies, in part
because of the complexity of most loan documents. They
end up paying absurdly high rates when they could
borrow at much lower rates from a bank or, without
having to borrow at all, could draw upon savings that earn
low interest. Many of the borrowers, lacking self-con-
6 No. 09-2083
trol—but unaware of this and therefore unable to take
countermeasures—are incapable of moderating their
desire for goods and services and end up overindebted.
The literature is mainly about payday loans but
appears applicable to title loans as well. (See the articles
by Fox & Guy and by Barr.) These and related forms of
lending have been called “fringe banking,” Ronald Paul
Hill, “Stalking the Poverty Consumer: A Retrospective
Examination of Modern Ethical Dilemmas,” 37 Journal of
Business Ethics 209, 214-15 (2002), but the pathologies
identified in the literature may extend to more conven-
tional forms of credit transactions. Bar-Gill & Warren,
supra, 157 U. Pa. L. Rev. at 26-43; Oren Bar-Gill, “Seduction
by Plastic,” 98 Nw. U. L. Rev. 1373, 1375-76, 1395-1401
(2004). Congress is considering enacting a statute, pro-
posed by the Treasury Department, that would create a
federal Consumer Financial Protection Agency em-
powered to adopt regulations designed not only to
prevent outright fraud in credit transactions but also to
protect consumers of financial products from their cogni-
tive limitations, limitations emphasized by behavioral
economists. Consumer Financial Protection Agency Act
of 2009, H.R. 3126, 111th Cong. (July 8, 2009); Adam J.
Levitin, “The Consumer Financial Protection Agency,” Am.
Bankr. Inst. J., Oct. 2009, pp. 10, 66-67; Joshua D. Wright &
Todd J. Zywicki, “Three Problematic Truths About the
Consumer Financial Protection Agency Act of 2009,”
Lombard Street, Sept. 14, 2009, pp. 29, 30-31; Editorial,
“The State of Financial Reform,” New York Times, Oct. 25,
2009, p. 7.
No. 09-2083 7
A contrary school of thought points out that people who
cannot borrow from a bank because they have poor
credit may need a loan desperately. If a ceiling is placed
on interest rates, these unfortunates may be unable to
borrow because the ceiling may be too low for the
interest rate to compensate the lender for the risk of de-
fault. As a result, they may lose their house or car or other
property or find themselves at the mercy of loan sharks.
See Todd J. Zywicki, “Consumer Welfare and the Reg-
ulation of Title Pledge Lending,” Mercatus Center Work-
ing Paper No. 09-36 (Sept. 2009), www.mercatus.org/
sites/d efault/files/pu b lic a tion/W P0 936_ C ons um er_
Welfare_and_Regulation_of_Title_Pledge_Lending.pdf
(visited Dec. 4, 2009); Jonathan Zinman, “Restricting
Consumer Credit Access: Household Survey Evidence on
Effects Around the Oregon Rate Cap,” 34 J. Banking &
Finance (forthcoming 2010); Donald P. Morgan & Michael
R. Strain, “Payday Holiday: How Households Fare after
Payday Credit Bans” (Federal Reserve Bank of New York
Staff Reports No. 309, Feb. 2008), http://ftp.ny.frb.org/
research/staff_reports/sr309.pdf (visited Dec. 4, 2009);
Mann & Hawkins, supra, 54 UCLA L. Rev. at 884-94 (2007);
Gregory Elliehausen, “Consumers’ Use of High-Price
Credit Products: Do They Know What They Are Doing?”
(Networks Financial Institute Working Paper No. 2006-
WP-02, May 2006), http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=921909) (visited Dec. 4, 2009). An annual
interest rate of 300 percent is astronomical. But a person
who borrows $5,000 at that rate and repays it two
weeks later pays only $577 in interest, and the loan
may have enabled him to avert foreclosure on his house,
8 No. 09-2083
or some other dire event that would have cost him
more than $577.
Against this benign view of “fringe banking” it has been
argued that many of the borrowers end up rolling over
their loans from month to month, which runs counter
to the theory that these are short-term loans rationally
incurred, despite their high cost, as a temporary
response to unexpected setbacks. See Michael A. Stegman
& Robert Faris, “Payday Lending: A Business Model That
Encourages Chronic Borrowing,” 17 Economic Development
Quarterly 8, 19-21 (2003); Quester & Fox, supra, at 6-7;
Drysdale & Keest, supra, 51 S. Car. L. Rev. at 605-10; and
the passage quoted earlier from Fox & Guy.
We need not take sides in the controversy over the
merits of “fringe banking.” It is enough that Indiana
has a colorable interest in protecting its residents from
the type of loan that Midwest purveys.
Article I, § 8, cl. 8 of the Constitution, which provides
so far as bears on this case that “Congress shall have
Power . . . to regulate Commerce . . . among the several
States,” has been interpreted to bar states from estab-
lishing tariff walls or other harmful barriers to trade
across state lines. E.g., West Lynn Creamery, Inc. v. Healy,
512 U.S. 186, 192-94 (1994); American Trucking Associations,
Inc. v. Scheiner, 483 U.S. 266, 280-87 (1987); Baldwin v.
G.A.F. Seelig, Inc., 294 U.S. 511, 521-23 (1935) (Cardozo, J.).
This interpretation is controversial, in part because it
seems to do violence to the language of the clause. But
it does not. The clause is ambiguous. If emphasis is
placed on the first word—“Congress shall have Power”—
No. 09-2083 9
the clause implies that the states shall not have the
power to regulate commerce. Because of the politics
and workload of Congress, unless the courts recognized
and enforced the exclusive federal power to regulate
commerce the nation would be riddled with state
tariffs; and a nation with internal tariff barriers is hardly
a nation at all.
Tariffs seek to protect local producers from competi-
tion. Indiana, however, isn’t trying to protect its title
lenders from the competition of title lenders in other
states. The territorial-application provision does not
make Indiana law treat a title lender located in another
state, such as Midwest, any worse than it treats Indiana
lenders. All are subject to the same interest-rate ceilings
and other strictures of the consumer credit code. But as
the case law has long recognized, the commerce clause
can be violated even when there is no outright discrim-
ination in favor of local business. An earlier case of ours
gave the example of “a severance tax on a raw material,
such as oil or coal, of which the state (perhaps in con-
junction with other states) has a monopoly or near monop-
oly and which is almost entirely exported rather than
consumed locally. The incidence of the tax will fall on
the consumers in other states, who have no voice in the
politics of the producing state, and the result may be a
level of taxation and resulting price to consumers that
greatly exceeds the cost of the services that the state
provides to producers of the raw material and that by
doing so burdens the export of the raw material to
other states.” Cavel Int’l, Inc. v. Madigan, 500 F.3d 551, 555
(7th Cir. 2007). In such a case, where the regulation is
10 No. 09-2083
local but the consequences felt elsewhere, we ex-
plained that a plaintiff “has a steep hill to climb. ‘Where
the statute regulates even-handedly to effectuate a legiti-
mate 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 exces-
sive in relation to the putative local benefits.’ Pike v.
Bruce Church, Inc., 397 U.S. 137, 142 (1970) (emphasis
added); see also Minnesota v. Clover Leaf Creamery Co., 449
U.S. 456, 471-74 (1981).” See also Brown-Forman Distillers
Corp. v. New York State Liquor Authority, 476 U.S. 573, 579
(1986); National Paint & Coatings Ass’n v. City of Chicago, 45
F.3d 1124, 1130-32 (7th Cir. 1995).
But another class of nondiscriminatory local regula-
tions is invalidated without a balancing of local benefit
against out-of-state burden, and that is where
states actually attempt to regulate activities in other
states. “The Commerce Clause dictates that no State
may force an out-of-state merchant to seek regulatory
approval in one State before undertaking a transaction
in another.” Healy v. Beer Institute, 491 U.S. 324, 337 (1989);
see also Brown-Forman Distillers Corp. v. New York State
Liquor Authority, supra, 476 U.S. at 582-84; Baldwin v. G.A.F.
Seelig, Inc., supra, 294 U.S. at 521; Dean Foods Co. v. Brancel,
187 F.3d 609, 614-20 (7th Cir. 1999); Morley-Murphy Co. v.
Zenith Electronics Corp., 142 F.3d 373, 378-80 (7th Cir.
1998); IMS Health Inc. v. Ayotte, 550 F.3d 42, 62-64 (1st Cir.
2008); Carolina Trucks & Equipment, Inc. v. Volvo Trucks of
North America, Inc., 492 F.3d 484, 488-90 (4th Cir. 2007);
PSINet, Inc. v. Chapman, 362 F.3d 227, 239-41 (4th Cir.
No. 09-2083 11
2004); American Booksellers Foundation v. Dean, 342 F.3d 96,
102-04 (2d Cir. 2003); National Collegiate Athletic Ass’n v.
Miller, 10 F.3d 633, 638-40 (9th Cir. 1993); cf. BMW of
North America, Inc. v. Gore, 517 U.S. 559, 570-73 (1996).
In Healy, Connecticut had passed a “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 Connecticut. There was no dis-
crimination in favor of Connecticut brewers, because
there were no Connecticut brewers. Nevertheless the
Supreme Court invalidated the law. A brewer might
sell beer in New York and Connecticut and charge a
higher price in Connecticut because the people of that
state liked its beer more than New Yorkers did. Faced
with the Connecticut price-affirmation law and viewing
Connecticut as its more valuable market, the brewer
might decide to raise its price in New York to the level of
its price in Connecticut rather than reducing its Con-
necticut price. The state would thus be regulating prices
in another state, albeit indirectly. Commerce would be
impeded if states could regulate commercial activities
in other states. The Court held that Connecticut’s law
violated the commerce clause.
The present case is both stronger and weaker for Mid-
west than Healy was for the Beer Institute. It is stronger
because the effect of the territorial-application provision
on an out-of-state business selling to customers in that
state is more direct than in Healy; the provision forbids the
making of title loans in Illinois to residents of Indiana on
12 No. 09-2083
the terms agreed to by the parties. It is weaker because
there is no interference with transactions with residents
of another state—but that cannot be a complete defense.
Suppose Indiana decided that gambling had become a
serious problem for its residents—many of them were
becoming addicted and this was leading to bankruptcies
that were playing havoc with family life and the
Indiana economy. And so it decided to ban casinos in
the state and to require casinos in all other states, if they
wanted to do business with residents of Indiana, to
obtain a license from Indiana that would forbid their
allowing a Hoosier to bet more than $10 a day in a casino.
A state law of that kind, however well intentioned
and genuinely beneficial to the state imposing it, would
burden interstate commerce by restricting travel and a
firm’s ability to deal with residents of a different state,
even though the law treated out-of-state businesses no
worse (in our example, even slightly better) than busi-
nesses located in the state. In Quill Corp. v. North
Dakota, 504 U.S. 298, 314-18 (1992), the Supreme Court
held that a state whose residents purchased by mail
from sellers who had no office in the state could not
require the seller to collect the use tax that the state
imposed on sales to its residents. That is an example of
extraterritorial regulation held to violate the commerce
clause even though the entity sought to be regulated
received substantial benefits from the regulating state,
just as Indiana’s regulation of Illinois lenders furthers
a local interest—the protection of gullible or necessitous
borrowers.
This case may seem less extreme than our hypothetical
case of the gambling law. But that is only because the
No. 09-2083 13
parties have chosen to focus on the single out-of-state
firm that happens to be the plaintiff, and the firm
operates in a neighboring state, unlike a casino in Ne-
vada. Illinois is not the only state that borders on Indiana,
however. Title lenders in all four states contiguous to
Illinois may decide not to seek an Indiana license but
instead just to stop doing business with residents of
Indiana, as Midwest has done even though they account
for a significant part of the business of its Illinois offices.
Should we worry that Midwest may have distorted
the ordinary mode of doing business in its industry in
order to be able to invoke the constitutional prohibition
of extraterritorial state regulation? Might not Midwest,
were it not maneuvering to come under the umbrella
of Healy, have opened offices in Indiana to serve its numer-
ous Indiana customers? Had it done so, it would
have come within the reach of the Indiana law without
reference to the territorial-application provision.
But against this surmise is the fact that Midwest’s
practice of serving its Indiana customers exclusively
from offices located in Illinois predated Indiana’s
attempt to apply its consumer credit code extra-
territorially. Midwest prefers to deal with its customers
face to face so that it can size them up, inspect the car, and
check that the car keys that the customer gives it really
are the keys for that car. Since so many Hoosiers live
within a stone’s throw of Chicago, Midwest felt no need
to establish separate offices across the state line. There
may also be aspects of Indiana law unrelated to its con-
sumer credit code that deterred Midwest from opening
any offices in the state.
14 No. 09-2083
There is no suggestion that Midwest located its offices
in Illinois where it did in order to poach Hoosiers. It’s not
as if the offices are in parts of eastern Illinois in which
the only consumer concentrations are in Indiana. Eight of
Midwest’s ten Illinois stores that are closest to the
Indiana state line are in the Chicago metropolitan area.
And it’s not as if Midwest had been an Indiana firm
operating only in Indiana, had relocated to Illinois, just
across the border, when the territorial-application provi-
sion was enacted, and had continued to lend to residents
of Indiana.
“Generally speaking,” the Supreme Court said in Healy,
“the Commerce Clause protects against inconsistent
legislation arising from the projection of one state regula-
tory regime into the jurisdiction of another State.” 491 U.S.
at 336-37; see also Morley-Murphy Co. v. Zenith Electronics
Corp., supra, 142 F.3d at 378-80; National Collegiate
Athletic Ass’n v. Miller, supra, 10 F.3d at 638-40. True, a
couple of cases in other circuits suggest that the only
relevant inconsistency is placing a firm under “incon-
sistent obligations.” Pharmaceutical Research & Manufactur-
ers of America v. Concannon, 249 F.3d 66, 82-83 (1st Cir.
2001); see also Instructional Systems, Inc. v. Computer
Curriculum Corp., 35 F.3d 813, 826 (3d Cir. 1994). And that
is not the situation here; Midwest can comply with Indi-
ana’s consumer credit code without (so far as appears)
violating the law of Illinois or any other state. But we took
a broader view of inconsistent state policies in the Morley-
Murphy case and we must do so in this one. Suppose
Illinois thinks title loans a good thing (and there is, as
we pointed out earlier, some basis for that belief)—or at
No. 09-2083 15
least, as the absence of an Illinois counterpart to the
Indiana law makes clear, thinks they shouldn’t be re-
stricted in the way that Indiana thinks they should be. To
allow Indiana to apply its law against title loans when
its residents transact in a different state that has a dif-
ferent law would be arbitrarily to exalt the public policy
of one state over that of another.
Indiana points out that despite this arguable
symmetry of state interests, its interest in regulating
credit may be great enough to allow its courts to apply
its credit law should Midwest sue a defaulting Indiana
borrower in an Indiana court. Not that such suits are
likely. The loans are too small to justify the expense of
suits to collect them if there is a default; hence the impor-
tance to Midwest of self-help repossession. Midwest
has yet to sue any of its title borrowers. But if there were
a suit, an Indiana court might rule that Indiana had
the “most intimate contacts” with the transaction and
therefore that its law applied even though the loan had
been made in Illinois. See, e.g., OVRS Acquisition Corp. v.
Community Health Services, Inc., 657 N.E.2d 117, 124 (Ind.
App. 1995); Dohm & Nelke v. Wilson Foods Corp., 531 N.E.2d
512, 513 (Ind. App. 1988); Eby v. York-Division, 455 N.E.2d
623, 626 (Ind. App. 1983). Or it might rule that Illinois’s
failure to limit the interest rates in title loans was so
offensive to the public policy of Indiana that the Illinois
law would not be enforced in Indiana—in which event
the Indiana courts might refuse to apply Illinois law even
if Midwest’s contracts contained a choice of law clause
directing that Illinois law govern a suit arising from the
16 No. 09-2083
contract—which they do. Moll v. South Central Solar
Systems, Inc., 419 N.E.2d 154, 162 (Ind. App. 1981); Wright-
Moore Corp. v. Ricoh Corp., 908 F.2d 128, 132-33 (7th Cir.
1990) (Indiana law). In short, “a particular set of facts
giving rise to litigation [can] justify, constitutionally
[that is, under the due process clause], the application of
more than one jurisdiction’s laws.” Phillips Petroleum Co.
v. Shutts, 472 U.S. 797, 818-19 (1985); see also Allstate
Ins. Co. v. Hague, 449 U.S. 302, 307-13 (1981) (plurality
opinion).
But if the presence of an interest that might support
state jurisdiction without violating the due process
clause of the Fourteenth Amendment dissolved the consti-
tutional objection to extraterritorial regulation, there
wouldn’t be much left of Healy and its cognates. Connecti-
cut had an interest in the price of beer to its residents,
but that didn’t save its statute from being held to
violate the commerce clause. Wisconsin had an interest
in preventing its dairy farmers from obtaining “unjusti-
fied” volume discounts from food processors in Illinois,
yet we invalidated the prohibition in Dean Foods Co. v.
Brancel, supra, even though, while the aim of the
Wisconsin law was to protect small dairy farms from the
competition of large ones, the law did not discriminate
against out-of-state farmers or processors. See also
Carolina Trucks & Equipment, Inc. v. Volvo Trucks of North
America, Inc., supra.
The concerns behind the due process and commerce
clauses are different. Quill Corp. v. North Dakota, supra,504 U.S. at 312-13. The former protects persons from
No. 09-2083 17
unreasonable burdens imposed by government, including
extraterritorial regulation that is disproportionate to the
governmental interest. The latter protects interstate
commerce from being impeded by extraterritorial reg-
ulation. And imposing a state’s law on transactions in
another state has a greater extraterritorial effect (and
greater effect on commerce) than the state’s applying
its own law to suits in its courts. The difference is espe-
cially pronounced in this case, since quite apart from
Indiana’s consumer credit code Midwest has no inten-
tion of suing defaulting debtors in Indiana or anywhere
else. Maybe someday it will bring such a suit for the
in terrorem effect; or maybe someday one of its debtors
will sue it. But that potential for state judicial inter-
ference with Midwest’s transactions is trivial in compari-
son to the interference created by the application of Indi-
ana’s law to every loan that Midwest might make to a
resident of Indiana.
The interference was with a commercial activity that
occurred in another state. Each title loan that Midwest
made to a Hoosier was in the form of a check, drawn on
an Illinois bank, that was handed to the borrower at
Midwest’s loan office and could be cashed there. Illinois
was also where the conditional transfer of title to the
collateral was made (the handing over of the keys—the
“pawn”), and where the payments required by the
loan agreement were received by Midwest. The contract
was, in short, made and executed in Illinois, and that
is enough to show that the territorial-application pro-
vision violates the commerce clause. Of course the loan
proceeds were probably spent largely in Indiana, but the
same would be true of the winnings of a Hoosier at a
18 No. 09-2083
Nevada casino. The consequences of a commercial trans-
action can be felt anywhere. But that does not permit
New York City to forbid New Yorkers to eat in cities in
other states that do not ban trans fats from their restau-
rants.
Our conclusion is not altered by the fact that Midwest
advertises in Indiana. If Indiana cannot prevent Midwest
from lending money to Hoosiers in Illinois, it cannot
prevent Midwest from truthfully advising them of this
opportunity. A state may not “take the commercial
speech that is vital to interstate commerce and use it as
a basis to allow the extraterritorial regulation that is
destructive of such commerce.” Carolina Trucks & Equip-
ment, Inc. v. Volvo Trucks of North America, Inc., supra, 492
F.3d at 491; cf. Dean Foods Co. v. Brancel, supra, 187 F.3d
at 618-19.
Nor is the location of the collateral in Indiana a critical
difference between this case and the other cases that
have invalidated extraterritorial regulations. It just illus-
trates that a transaction made in one state can have re-
percussions in another. A firecracker bought by an Illi-
noisan in Indiana could cause an injury to the purchaser
in Illinois. That would allow an Illinois court, in a suit
by the injured purchaser against the Indiana seller, to
apply its own law. But it would not allow Illinois to
forbid Indiana to sell firecrackers to residents of Illinois in
Indiana merely because Illinois forbids firms in Illinois
to sell firecrackers and thus would not be discrim-
inating against an out-of-state business. A contract can
always go wrong and if it does the consequences will
No. 09-2083 19
often be felt in a different state from the one in which
the contract was made and executed.
A FFIRMED.
1-28-10