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6. Commitments and Contingencies
The Company is involved in a number of active lawsuits, including lawsuits filed by private litigants and matters arising out of actions taken by state regulatory authorities. The Company is also involved in various other legal proceedings with state and federal regulators. In addition, the Company is obligated to advance expenses to, and, in certain circumstances, indemnify for damages, incurred by certain of its current and former officers and directors in responding to inquiries or defending against claims or proceedings that have arisen by reason of the fact that such person is or was an officer or director of the Company. Under certain circumstances, the Company may also be obligated to defend and indemnify other parties against whom claims have been asserted. Unless otherwise stated below, the Company is vigorously defending against these actions and will, when management believes appropriate in consideration of ongoing litigation expenses and other factors, evaluate reasonable settlement opportunities. The amount of losses and/or the probability of an unfavorable outcome, if any, cannot be reasonably estimated for these legal proceedings unless otherwise stated below. Accordingly, except as otherwise specified below, no accrual has been recorded for any of these matters as of June 30, 2011.
Kerri Stone v. Advance America, Cash Advance Centers, Inc. et al.
On July 16, 2008, Kerri Stone filed a putative class action complaint in the Superior Court of California in San Diego against the Company and its California subsidiary. Defendants removed the case to the United States District Court for the Southern District of California. The amended complaint alleges violations of the California Deferred Deposit Transaction Law and the California Unfair Competition Law and seeks an order requiring defendants to disgorge and/or make restitution of all revenue and loan principal, pay three times the amount of damages the class members actually incurred, reasonable attorneys’ fees and costs of suit, and punitive damages. The complaint also seeks certain injunctive relief. The Company anticipates that the case will proceed to trial in late 2011 or early 2012.
Betts and Reuter v. McKenzie Check Advance of Florida, LLC et al.
The Company and the Company’s subsidiary, McKenzie Check Advance of Florida, LLC (“McKenzie”), are defendants in a putative class action lawsuit commenced by former customers, Wendy Betts and Donna Reuter, on January 11, 2001, and a third named class representative, Tiffany Kelly, in the Circuit Court of Palm Beach County, Florida. This putative class action alleges that McKenzie, by and through the actions of certain officers, directors, and employees, engaged in unfair and deceptive trade practices and violated Florida’s criminal usury statute, the Florida Consumer Finance Act, and the Florida Racketeer Influenced and Corrupt Organizations Act. The suit seeks unspecified damages, and the named defendants could be required to refund fees and/or interest collected, refund the principal amount of cash advances, pay multiple damages, and pay other monetary penalties. Ms. Reuter’s claim has been held to be subject to binding arbitration. However, the trial court has denied the defendants’ motion to compel arbitration of Ms. Kelly’s claims. The appellate court affirmed the trial court’s decision, but certified a “Question of Great Public Importance” to the Florida Supreme Court. The Florida Supreme Court accepted the Company’s appeal and stayed the appellate court’s mandate pending the outcome of their review of the appellate court’s decision. The Company anticipates a final decision from the Florida Supreme Court regarding the enforceability of its arbitration clause sometime in late 2011 or early 2012.
Reuter and Betts v. Advance America, Cash Advance Centers of Florida, Inc. et al.
A second Florida lawsuit was filed on August 24, 2004, in the Circuit Court of Palm Beach County by former customers Gerald Betts and Ms. Reuter against the Company, the Company’s Florida subsidiary, Advance America, Cash Advance Centers of Florida, Inc., and certain officers and directors. The allegations, relief sought, and the Company’s defenses in this lawsuit are nearly identical to those alleged in the first Betts and Reuter lawsuit described above. The case is currently stayed, pending a decision from the Florida Supreme Court in Pendergast v. Sprint Nextel Corp., a separate case to which the Company is not a party, involving arbitration issues similar to those present in the Company’s case.
Pennsylvania Department of Banking v. NCAS of Delaware, LLC
On September 27, 2006, the Pennsylvania Department of Banking filed a lawsuit in the Commonwealth Court of Pennsylvania alleging that the Company’s Delaware subsidiary, NCAS of Delaware, LLC, was providing lines of credit to borrowers in Pennsylvania without a license required under Pennsylvania’s financial licensing law and charging interest and fees in excess of the amounts permitted by Pennsylvania’s usury law. In July 2007, the court determined that certain aspects of the Company’s Choice Line of Credit required the Company to be licensed under Pennsylvania’s Consumer Discount Company Act (“CDCA”) and enjoined the Company from continuing its lending activities in Pennsylvania for so long as the CDCA violations continued and from collecting monthly participation fees. The Company appealed to the Pennsylvania Supreme Court and, in May 2008, the Pennsylvania Supreme Court upheld the lower court’s ruling. The Pennsylvania Department of Banking subsequently amended its complaint to add the Pennsylvania Attorney General as a plaintiff, to name the Company as a defendant, and to seek damages, fines, and penalties under Pennsylvania’s CDCA, usury laws, and consumer protection laws. In April 2010, the Pennsylvania Commonwealth Court dismissed the alleged CDCA and usury allegations and partially dismissed the alleged consumer protection law violations. The remaining alleged consumer protection law claims will proceed before the trial court. These remaining claims could, under certain circumstances, total approximately $45 million in damages, plus civil penalties of $1,000 for each violation of the Pennsylvania Consumer Protection Law and an additional $2,000 for violations against customers over the age of 60, and attorneys’ fees and costs. The parties are currently engaged in discovery.
Sharlene Johnson, Helena Love and Bonny Bleacher v. Advance America, Cash Advance Centers, Inc. et al.
On August 1, 2007, Sharlene Johnson, Helena Love, and Bonny Bleacher filed a putative class action lawsuit in the United States District Court, Eastern District of Pennsylvania against the Company and two of its subsidiaries alleging that they provided lines of credit to borrowers in Pennsylvania without a license required under Pennsylvania law and with interest and fees in excess of the amounts permitted by Pennsylvania law. The complaint seeks, among other things, a declaratory judgment that the monthly participation fee charged to customers with a line of credit is illegal, an injunction prohibiting the collection of the monthly participation fee, and payment of damages equal to three times the monthly participation fees paid by customers since June 2006, which could total approximately $135 million in damages, plus attorneys’ fees and costs. In January 2008, the trial court entered an order compelling the purported class representatives to arbitrate their claims on an individual basis, unless determined otherwise by the arbiter. All parties appealed that order. On February 28, 2011, the U.S. Third Circuit Court of Appeals vacated the trial court’s order and remanded the case to the trial court for further proceedings on the validity of the class action waivers in the Company’s consumer arbitration clause. The parties are currently engaged in discovery relative to the enforceability of the arbitration provisions contained in the Company’s consumer agreements.
Raymond King and Sandra Coates v. Advance America, Cash Advance Centers of Pennsylvania, LLC
On January 18, 2007, Raymond King and Sandra Coates, who were customers of BankWest Inc., the lending bank for which the Company previously marketed, processed, and serviced cash advances in Pennsylvania, filed a putative class action lawsuit in the United States District Court, Eastern District of Pennsylvania alleging various causes of action, including that the Company’s Pennsylvania subsidiary made illegal cash advance loans in Pennsylvania in violation of Pennsylvania’s usury law, the Pennsylvania Consumer Discount Company Act, the Pennsylvania Unfair Trade Practices and Consumer Protection Law, the Pennsylvania Fair Credit Extension Uniformity Act, and the Pennsylvania Credit Services Act. The complaint alleges that BankWest Inc. was not the “true lender” and that the Company’s Pennsylvania subsidiary was the “lender in fact.” The complaint seeks compensatory damages, attorneys’ fees, punitive damages, and the trebling of any compensatory damages. In January 2008, the trial court entered an order compelling the purported class representatives to arbitrate their claims on an individual basis, unless determined otherwise by the arbiter. All parties appealed that order and in April 2010, the United States Supreme Court issued its opinion in Stolt-Nielsen S.A. v. Animal Feed, Int’l Corp. On February 28, 2011, the U.S. Third Circuit Court of Appeals vacated the trial court’s order and remanded the case to the trial court for further proceedings on the validity of the class action waivers in the Company’s consumer arbitration clause. The parties are currently engaged in discovery relative to the enforceability of the arbitration provisions contained in the Company’s consumer agreements.
Clerk v. NCAS of Delaware, LLC, d/b/a Advance America, Cash Advance Centers, Inc., of Pennsylvania, et al.
On April 21, 2009, Yulon Clerk filed a putative class action lawsuit in the Court of Common Pleas of Philadelphia County, Pennsylvania, against the Company’s subsidiaries, Advance America, Cash Advance Centers of Pennsylvania, Inc., and NCAS of Delaware, LLC, as well as BankWest, Inc., whose defense the Company is handling pursuant to an indemnification agreement, and other unrelated lenders and banks. The Company has settled this case for a de minimus amount and the underlying litigation has been dismissed with prejudice. The Company considers this matter closed.
Other Matters
The Company is also involved in other arbitrations, litigation, and administrative proceedings that are incidental to its business, including, without limitation, regulatory enforcement matters, individual consumer claims, contractual disputes, employee claims for workers’ compensation, wrongful termination, harassment, discrimination, payment of wages due, and customer claims relating to collection practices and violations of state and/or federal consumer protection laws.
SEC Investigation
As previously disclosed in a Current Report on Form 8-K filed on July 29, 2009 and in subsequent quarterly and annual reports, Kenneth E. Compton, the former President and Chief Executive Officer and a current director of the Company, received a “Wells Notice” from the SEC in July 2009 relating to alleged violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. On May 26, 2011, the Company was informed that the SEC had delivered a letter to Mr. Compton dated May 23, 2011, informing him that the SEC did not intend to take any action. The Company did not receive a Wells Notice and does not believe it was ever a subject of this investigation. The Company considers this matter closed.
Changes in Legislation
Ohio Legislation
On November 24, 2008, the State of Ohio capped interest rates on cash advance loans and limited the number of cash advances a customer may take in any one year. As a result of this legislation, the Company began offering small loans pursuant to the Ohio Small Loan Act and check-cashing services. The small loan product and check-cashing services generate less revenue than the Company’s former cash advance product and, as a result, the Company has closed some of its centers in Ohio. In the third quarter of 2009, the Company stopped offering small loans and began offering cash advances pursuant to the Ohio Second Mortgage Act.
In the first quarter of 2010, the Ohio Division of Financial Institutions issued a rule restricting certain activities by licensed check cashers that would have a negative impact on the Company’s operations in Ohio. This rule was scheduled to become effective by May 1, 2010, but enforcement of the rule has been enjoined by the Court of Common Pleas of Franklin County, Ohio (the “Injunction”). For the purposed of establishing a clear rule of law pertaining to these matters, certain parties, including the Company, have agreed that any appeal of the underlying litigation which established this Injunction should be consolidated with any appeal of the outcome of a certain enforcement action between the State of Ohio and an unrelated third-party wherein the same issues of law are present (the “Enforcement Action”). On July 19, 2011, the Court of Common Pleas of Franklin County, Ohio, determined that the alleged violations in the Enforcement Action were legal under Ohio law. When this decision becomes final, the State of Ohio will have 30 days to appeal the Injunction and the outcome of the Enforcement Action to the Franklin County Court of Appeals.
Virginia Legislation
A Virginia law that went into effect in January 2009 substantially changed the terms for cash advance services in Virginia and severely restricted viable operations for short-term lenders. The Company continues to offer cash advances in Virginia in conformance with the new regulations. Between November 2008 and February 2010, the Company also offered an open-ended line of credit product. However, a subsequent Virginia Corporation Commission ruling limited the Company’s ability to offer the open-ended lines of credit effective March 1, 2010. As a result, the Company ceased offering new open-ended lines of credit in February 2010 and stopped providing new draws on existing lines of credit on September 30, 2010.
The elimination of the open-ended line of credit product may cause the Company to close or consolidate additional centers in Virginia. If the Company closes all of its centers in Virginia, the estimated closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $2.1 million to $6.2 million, and the collectability of advances and fees receivable in Virginia would most likely be impaired. As of June 30, 2011, the net advances and fees receivable balance in Virginia was approximately $9 million. The Company does not believe the cessation of operations in Virginia would result in an impairment of goodwill.
Washington Legislation
A law became effective on January 1, 2010, in the State of Washington that limits the number of cash advances a customer may take in any one year, limits the cash advance amount that can be taken out at any one time, and implements a statewide database to monitor the number of cash advances. As a result, the Company’s revenue and profitability in Washington have decreased. The Company may close or consolidate some or all of its centers in Washington if management determines that it is no longer economically viable to operate all of its Washington centers.
In 2010 the Company closed 45 centers in Washington. During the second quarter of 2011, the Company decided to close an additional 32 centers in Washington, two of which were closed in the second quarter of 2011. The estimated costs associated with these closures is approximately $0.7 million. Of that amount, approximately $0.3 million has been recognized during the second quarter of 2011.
If the Company closes all of its remaining centers in Washington, excluding closures and planned closures previously noted, the estimated closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $0.3 million to $1.1 million, and the collectability of advances and fees receivable in Washington would most likely be impaired. As of June 30, 2011, the net advances and fees receivable balance in Washington was approximately $4.5 million. The Company does not believe the cessation of operations in Washington would result in an impairment of goodwill.
South Carolina Legislation
A law in South Carolina became effective January 1, 2010 that, among other things, prohibits consumers from having more than one cash advance outstanding at any time and implements a statewide database to monitor the number and dollar amount of cash advances made to customers within that state. Although this law has had a negative effect on revenue and profitability in South Carolina, the Company currently believes operations will remain economically viable in this state.
Kentucky Legislation
A law in Kentucky became effective on April 30, 2010 that, among other things, prohibits any consumer from having more than two cash advances outstanding at any time, establishes a maximum aggregate advance amount of $500, and implements a statewide database to monitor the number and dollar amount of cash advances made to customers within that state. Although this law has had a negative effect on revenue and profitability in Kentucky, the Company currently believes operations will remain economically viable in this state.
Rhode Island Legislation
A new law became effective in Rhode Island on July 1, 2010 that reduced the maximum allowable fees to be charged on a cash advance from $15 per $100 to $10 per $100. Although this law has had a negative effect on its revenue and profitability in Rhode Island, the Company currently believes operations will remain economically viable in this state.
Colorado Legislation
A new law became effective in Colorado on August 11, 2010 that expands the minimum term of cash advances to six months, allows repayment in multiple installments, and creates a new regime of permitted finance, interest, and other charges. This law has negatively impacted the Company’s revenue and profitability in Colorado. If management determines that it is no longer economically viable to operate these centers, the Company may close or consolidate some or all of its centers.
On December 29, 2010, unrelated third-parties filed a lawsuit in the Denver District Court challenging certain refund rules established by the Administrator of the Colorado Uniform Consumer Credit Code. These rules require a pro-rata refund of origination fees and sought retroactive application even though previously enacted rules did not require such refunds. On July 22, 2011, the District Court ruled that the Administrator’s rules were enforceable and applicable beginning on September 1, 2010. The Company has been paying refunds in accordance with the Administrator’s rules since November 29, 2010, and expects to pay approximately $161,000 for refunds which accrued during the time period from September 1, 2010 through November 29, 2010.
If the Company closed all of its remaining centers in Colorado, the estimated closing costs, including severance, center tear-down costs, lease termination costs, and the write-down of fixed assets would range from $0.7 million to $1.9 million, and the collectability of advances and fees receivable in Colorado most likely would be impaired. As of June 30, 2011, advances and fees receivable, net of allowance for doubtful accounts, in Colorado was approximately $4.5 million. The Company does not believe the cessation of its operations in Colorado would result in an impairment of goodwill.
Montana Legislation
Due to a recent law change in Montana that became effective January 1, 2011, the Company closed its two centers in this state during the fourth quarter of 2010. The cost of closing these centers was approximately $38,000.
Wisconsin Legislation
A new law became effective in Wisconsin on January 1, 2011, that limits the total dollar amount of cash advances a customer may have outstanding and implements a statewide database to monitor the number of cash advances. Although this law has had a negative effect on its revenue and profitability in Wisconsin, the Company currently believes operations will remain economically viable in this state.
Illinois Legislation
A new law became effective in Illinois on March 21, 2011, that changed the terms of the installment loan product currently offered in Illinois and negatively affects the profitability of this product. However, the new law created a longer term product with multiple installments and applicable fees, and the Company began offering products in conformance with the new legislation. Although this law has had a negative effect on the Company’s revenue and profitability in Illinois, the Company currently believes operations will remain economically viable in this state.
Mississippi Legislation
A new law becomes effective on January 1, 2012 in the State of Mississippi that increases the maximum amount of a cash advance from $400 to $500 and, for advance amounts in excess of $250, allows higher fees but also requires a longer term. Although the Company believes this law may have a temporary negative impact on our operations in Mississippi, management currently believes operations will remain economically viable in that state.
Federal Financial Reform
In July 2010, the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). This new federal legislation creates the Consumer Financial Protection Bureau (the “CFPB”), which will have authority to regulate consumer finance companies. Under Dodd-Frank, the Company will be a “supervised” entity but the extent to which this legislation affects the Company and its business will not be fully known until such time as the CFPB promulgates regulations, which is anticipated to occur later in 2011. |