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James v. National Financial LLC

Court of Chancery of Delaware

December 5, 2014

GLORIA JAMES, on behalf of herself and all others similarly situated, Plaintiffs,

Submitted: November 3, 2014

Richard H. Cross, Jr., Christopher P. Simon, CROSS & SIMON, LLC, Wilmington, Delaware; Alexander J. Pires, Jr., Diane E. Cooley, PIRES COOLEY, Washington, D.C.; Attorneys for Plaintiff Gloria James and all others similarly situated.

Edward T. Ciconte, Daniel Christopher Kerrick, CICONTE, ROSEMAN & WASSERMAN, Wilmington, Delaware; Kenneth Dubrow, THE CHARTWELL LAW OFFICES, LLP, Philadelphia, Pennsylvania; Attorneys for Defendant National Financial LLC d/b/a Loan Till Payday LLC.


LASTER, Vice Chancellor.

In May 2013, plaintiff Gloria James obtained a short-term, high-interest-rate loan from defendant National Financial LLC ("National"). After defaulting, James sued National on behalf of herself and a class of similarly situated borrowers, alleging that National's loan practices were unconscionable and its loan terms unenforceable.

During discovery, James asked National to provide information about the loans it made between September 20, 2010, and September 30, 2013, including the annual percentage rates ("APRs"). After National moved for a protective order, the court ordered National to produce certain categories of information, including the APRs. National produced a spreadsheet containing some of the categories but not others. When James checked the APRs against the few loan documents she had, they differed. When James deposed National's principal, who created the spreadsheet, he agreed that the data contained errors, and he gave other testimony that called into question the reliability of the spreadsheet.

James amended her complaint to add a claim that, by making loans without disclosing accurate APRs, National had violated the federal Truth in Lending Act (the "TILA"), 15 U.S.C. §§ 1601-1667f. She also moved to compel production of an updated spreadsheet containing accurate information. The court granted the motion and ordered National to produce an updated spreadsheet. The court also ordered National to retain a qualified information technology ("IT") consultant to assist National in exporting the data from its computer system and to provide James with an affidavit from the IT consultant attesting to the procedures used to populate the spreadsheet.

National produced what purported to be an updated spreadsheet, but the spreadsheet omitted information required by the court, s order. National did not produce the affidavit. National instead provided James with a letter from an IT consultant that did not address the procedures used to populate the spreadsheet. The letter stated only that it would take many thousands of hours for the IT consultant to transfer paper records into electronic form. It thus answered a question that had not been asked, while failing to address the question that the court had ordered answered. After James objected to the form of the letter, National provided a notarized version.

James has moved for entry of a default judgment as a sanction against National for failing to comply with this court's order. Discovery taken in connection with the motion revealed that (i) National did not ask the IT consultant about populating the spreadsheet, (ii) the IT consultant did not know about the court's order or the requirement of an affidavit, (iii) the conversation with the IT professional about transferring records took about twenty minutes, and (iv) after James objected to the letter, National caused one of its employees to notarize the letter without the IT consultant's knowledge.

This decision holds that as a consequence of National's discovery misconduct, it is deemed established for purposes of trial that the APRs disclosed on the updated spreadsheet were incorrect and fell outside the tolerance permitted by the TILA. Because the positions National took in discovery were not substantially justified, this decision awards James the expenses, including attorneys' fees, that National's discovery failures caused her to incur.


The factual background is drawn from the pleadings and submissions made in connection with the earlier discovery motions and the current motion for sanctions. The discussion does not comprise findings of fact in the post-trial sense, but rather represents how the record appears at this preliminary stage.

A. The Loan

On May 7, 2013, James borrowed $200 from National, which does business in multiple locations in Delaware under the name Loan Till Payday LLC.[1] National is a Utah limited liability company that advertises, markets, and makes small-dollar, high-interest loans, which are referred to colloquially as "payday loans" because a borrower ostensibly repays the loan on the next payday.

James needed the $200 to pay for rent and groceries. The loan agreement, which consisted primarily of boilerplate provisions, imposed onerous terms. It contemplated twenty-six bi-weekly payments of $60 with a final balloon payment of $260. The total repayments add up to $1, 620, for a cost of credit of $1, 420 and an APR of 838.45%. James did not negotiate the terms of the loan. She avers that she did not understand the loan agreement fully.

James broke her hand on the day after she took out the loan, which limited her ability to work. She made the first $60 payment but missed the second. On June 14, 2013, National withdrew $63 from her bank account, comprising the agreed-to bi-weekly payment of $60 plus a $3 late fee. Ever since, James' inability to work has prevented her from making the bi-weekly payments.

B. James Files Suit

Under National's standard loan agreement, which James signed, a borrower agrees to mandatory arbitration and waives any right to arbitrate on a class-wide basis. The loan agreement gives a borrower sixty days after signing the agreement to opt out of the mandatory arbitration provision.

On June 14, 2013, James sent National a letter opting out of mandatory arbitration. On September 20, 2013, James filed a verified class action complaint in this court against National on behalf of herself and similarly situated borrowers. She alleged that National's lending practices were unconscionable in light of the inequality of bargaining power between National and its customers, the use of boilerplate provisions in the loan documents, and the practice of charging delinquency payments and excessive interest rates. Count I sought a permanent injunction barring National from collecting on the loans made to James and other class members. Count II sought a declaration that the terms of National's loan documents were unenforceable. Count III alleged that National breached the implied covenant of good faith and fair dealing inherent in the loan agreements. Count IV alleged that National unjustly enriched itself at the expense of the class members. Count V alleged violations of the Delaware Consumer Fraud Act, 6 Del. C. §§ 2511-2527.

On October 10, 2013, National moved to compel arbitration and to dismiss the Complaint under the creative theory that James could not state a claim for a class action under Rule 23. This court denied the motion to dismiss, noting that James had opted out of arbitration and that National's arguments against class certification were premature.

At the time National moved to compel arbitration, National and its counsel[2] knew that James had opted out of arbitration. National and its counsel had made that point affirmatively as grounds for dismissal of an earlier action under the TILA that James filed in federal court. Because National and its counsel knew that their motion to compel arbitration had no factual basis, James moved for sanctions under Rule 11. The court granted the motion.

C. The First Discovery Order

After the denial of the motion to dismiss, James served document requests and interrogatories. Among other things, the discovery requests sought documents and information relating to the loans offered by National since September 20, 2010, including an electronic copy of the data from any database containing the loan information. National moved for a protective order, contending that the discovery was overbroad.

Although the court partially granted National's motion, finding that certain of James' requests were overbroad, the court's ruling required National to provide discovery in response to other requests or narrowed versions of the requests. See Dkt. 44 (the "First Discovery Order"). Most pertinently, the First Discovery Order required National to provide the following information for the loans made between September 20, 2010, and September 30, 2013:

• The disbursement date of the loan.
• The type of contract.
• Where the loan was initiated (e.g., online, store location, etc).
• The APR.
• The finance charges (as identified on the loan agreement).
• The amount financed.
• The total amount of payments.
• The schedule for payments (weekly, bi-weekly, or monthly).
• The amount of money actually given to the customer, such that if the loan was a refinancing and the customer only received a portion of the funds, the amount the customer received.
• Whether the loan was a rollover or refinancing.
• Whether the customer had borrowed from National before.
• The total payments made by the customer on the loan.
• Whether the loan was paid off.
• Whether the loan was written off.
• Whether the loan was in default.

This decision refers to these categories as the "Loan History Information."

The court rejected National's argument that providing the Loan History Information was overly burdensome given National's failure to support its claim of burden, the standardized nature of the loans, and the need for National to maintain and access loan data in the ordinary course of business and to meet regulatory requirements. The court noted that National could provide the Loan History Information in the form of a spreadsheet. The court ...

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