District Court (Ala.) Holds Vehicle Title Pawn Transactions Were “Loans” under Military Lending Act, Prohibiting Class-wide Arbitration

In Cox v. Community Loans of America, Inc., 2012 WL 773496 (M.D.Ga. 2012), the District Court held that automobile title pawn transactions were “loans” subject to the Military Lending Act, which itself prohibits arbitration enforcement. Accordingly, the petition to enforce arbitration in a class action alleging that the loan transactions were void at inception was denied because the MLA prohibits arbitration clauses.

In the present context, the Court must determine whether Plaintiffs have sufficiently alleged that their title pawn transactions violated the MLA, and thus the arbitration clauses in their agreements are unenforceable. Defendants argue that the transactions in question involve Plaintiffs actually selling their vehicles to Defendants while retaining the right to repurchase them by paying back the sale price plus a fee that is a percentage of the sale price. Defendants maintain that such title pawn transactions are not consumer credit transactions within the meaning of the MLA, and therefore, are not prohibited by the MLA. Plaintiffs contend that the transactions are loans that are secured by the titles to their vehicles, and as such, are prohibited consumer credit transactions under the MLA. At this stage of the proceedings, the Court examines Plaintiffs’ factual allegations in the Complaint along with any exhibits to the Complaint. Construing all reasonable inferences in Plaintiffs’ favor, the Court must determine whether Plaintiffs have sufficiently alleged that the transactions are credit transactions prohibited by the MLA.

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Given that Plaintiffs sufficiently alleged claims under the MLA, the arbitration provisions in their agreements are unenforceable. 10 U.S.C. § 987(e)(3). Accordingly, Defendants’ Motion to Dismiss based on the arbitration provisions must be denied. [Ed. It shall be unlawful for any creditor to extend consumer credit to a covered member or a dependent of such a member with respect to which . . . (3) the creditor requires the borrower to submit to arbitration or imposes onerous legal notice provisions in the case of a dispute;]