SANTA ANA, Calif. (CN) – Asserting damages of more than half a billion dollars, consumer lender CashCall has sued Katten Muchin Rosenman and a top partner for malpractice, claiming the law firm steered the company to partner with a Cheyenne tribal businessman in a scheme to avoid state lending laws – a scheme courts and regulators later struck down.
CashCall and its owner and sole shareholder, J. Paul Reddam, say they created a national lending program based on assurances from Katten Muchin and partner Claudia Callaway that “that Native American laws, rather than federal and state laws, would govern direct consumer loans consummated on a reservation,” which then would be purchased and collected by CashCall.
Instead, federal courts have ruled the loans, or parts of them, are not governed by tribal law and so are void and unenforceable.
Top among those decisions, the federal Consumer Financial Protection Bureau won a ruling this past August that CashCall violated federal consumer-protection laws by offering the loans and that Reddam was personally liable for the violations. The case is on appeal.
Katten Muchin’s and Calloway’s actions “destroyed an $870 million consumer-lending program, harmed plaintiffs’ other successful businesses, tarnished plaintiffs’ business reputation, and caused plaintiffs to suffer hundreds of millions of dollars in damages,” the company says in its 48-page state court complaint.
Calloway and the firm’s Chicago-based general counsel, Ted S. Helwig, did not respond to emails late Monday and phone calls Tuesday about the lawsuit. Two spokeswomen for Katten Muchin also did not respond to emails and phone calls Tuesday.
CashCall’s lead attorney, Jennifer L. Keller of Keller/Anderle in Irvine, declined to comment on the lawsuit.
An expert in financing law, Washington-based Calloway is chair of Katten Muchin’s consumer finance litigation practice and co-chair of its class action and multidistrict litigation practice, according to her firm biography. But in its complaint, CashCall says otherwise.
According to its April 14 lawsuit, CashCall built a successful business making unsecured loans to California consumers with poor credit. But when it tried to expand nationally, it was stymied by other states’ stricter usury laws and lender regulations. In 2006, it hired Callaway, then at Manatt, Phelps & Phillips, to help its expansion.
Callaway, who moved to Katten Muchin in 2009, recommended partnering with a few federally chartered banks outside California, which could make the loans to consumers and then sell them to CashCall to service and collect.
The company and attorneys called the approach the “bank model,” but others would later call it the “rent-a-bank” approach, according to the federal judge’s decision this past August.
When the 2008 economic collapse drove CashCall’s bank partners out of the field, Callaway recommended partnering instead with a Native American tribe or entity, which she said would be subject to tribal laws, not state laws, and would have the benefit of the doctrine of tribal immunity. She called it the “tribal model,” according to the lawsuit.
“Under the tribal model, a lender operating on a reservation would make loans to borrowers in any state over the internet or by phone,” CashCall says in its lawsuit.
CashCall says Callaway recommended working with a businessman member of the Cheyenne River Sioux Tribe named Martin “Butch” Webb. Eventually, Webb’s Western Sky Financial company – working with CashCall’s new subsidiary WS Funding, also a plaintiff in the lawsuit – made hundreds of millions dollars worth of loans.
The loans they sold included one for $2,600 with an annual interest rate of 134 percent, and a one for $700 loan with an interest rate of 318 percent, according to the August decision.
In its lawsuit, CashCall says Katten Muchin and Callaway endorsed Webb and the tribal model “even though they understood at the time that, among other things, borrowers did not physically visit the Cheyenne River Sioux Indian Reservation to make the loans, Western Sky was not a tribal entity, CashCall provided Western Sky with funding and acquired all interests in all loans and CashCall bore all of the risks of the loans once it purchased them from Western Sky.”
Trouble arose first in 2011 when Washington state brought an enforcement action against the company.
Then, at the beginning of 2013, CashCall lost out on an opportunity to sell its separate mortgage assets in a deal it says was worth a total of $750 million. The purchaser backed out because it “was concerned about plaintiffs’ dealings with Western Sky and the regulatory actions relating to CashCall’s use of the tribal model for consumer loans,” the lawsuit says.
By December that year, 16 states had brought enforcement actions against CashCall.
As U.S. District Judge John F. Walter would hold in August, many of the state regulators argued that CashCall was the “true lender,” not Western Sky. Therefore, state laws applied, and under those laws, the loans were void.
In March 2013, Katten Muchin and Callaway “abruptly reversed course, and disclaimed their earlier advice to plaintiffs regarding the tribal model and the Western Sky lending program,” CashCall says in its lawsuit. They said they never endorsed the Western Sky program and “falsely claimed that she and Katten never knew how Western Sky loans were made and administered.”
Further, Callaway said the lending program was collapsing “because Webb was a tribal member, not a tribal entity, and that they had misunderstood Webb’s status,” the lawsuit says.
But by that time, CashCall “had undertaken hundreds of millions of dollars in indebtedness,” and Katten Muchin had billed it more than $5 million.
CashCall seeks disgorgement of those fees as well as compensatory and punitive damages on claims of legal malpractice and breaches of contract and fiduciary duty.