Cfpb v. Cashcall, Inc.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

CONSUMER FINANCIAL PROTECTION Nos. 18-55407
BUREAU, 18-55479
Plaintiff-Appellant/
Cross-Appellee, D.C. No.
2:15-cv-07522-
v. JFW-RAO

CASHCALL, INC.; WS FUNDING,
LLC; DELBERT SERVICES OPINION
CORPORATION; J. PAUL REDDAM,
Defendants-Appellees/
Cross-Appellants.

Appeal from the United States District Court
for the Central District of California
John F. Walter, District Judge, Presiding

Argued and Submitted September 9, 2019
Submission Withdrawn October 21, 2019
Argued and Resubmitted September 23, 2021
Pasadena, California

Filed May 23, 2022

Before: John B. Owens, Ryan D. Nelson, and
Eric D. Miller, Circuit Judges.

Opinion by Judge Miller
2 CFPB V. CASHCALL

SUMMARY *

Consumer Financial Protection Act / Consumer
Financial Protection Bureau

The panel affirmed the district court’s judgment finding
CashCall, Inc., its CEO, and several affiliated companies
liable for a deceptive loan scheme; and vacated the district
court’s order imposing a civil penalty of $10.3 million and
declining to order restitution.

CashCall made unsecured, high-interest loans to
consumers throughout the country, and sought to avoid state
usury and licensing laws by using an entity operating on an
Indian reservation. The entity issued loan agreements that
contained a choice-of-law provision calling for the
application of tribal law. The Consumer Financial
Protection Bureau brought this action alleging that the
scheme was an “unfair, deceptive, or abusive act or abusive
practice.” 12 U.S.C. § 5536(a)(1)(B). The district court held
that CashCall violated the Consumer Financial Protection
Act (“CFPA”).

The panel first considered whether the Bureau lacked
authority to bring this action because it was
unconstitutionally structured. The panel held that pursuant
to Collins v. Yellen, 141 S. Ct. 1761 (2021), despite the
unconstitutional limitation on the President’s authority to
remove the Bureau’s Director, the Director’s actions were
valid when they were taken. Both the complaint and the
notice of appeal were filed while the Bureau was headed by
*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
 CFPB V. CASHCALL 3

a lawfully appointed Director, Richard Cordray. The panel
declined to consider CashCall’s new theory, offered months
after oral argument, that the Bureau’s structure violated the
Appropriations Clause of the Constitution.

The panel next considered CashCall’s argument that the
loans were valid because they were subject to tribal law, not
state law. The loans were valid under the law of the
Cheyenne River Sioux Tribe. CashCall did not dispute that
the loans were invalid under the laws of the States in which
the customers resided. The panel applied federal common
law choice-of-law principles. The panel held that the Tribe
had no substantial relationship to the transactions, and
because there was no other reasonable basis for the parties’
choice of tribal law, the district court correctly declined to
give effect to the choice-of-law provision in the loan
agreements. For the States at issue in this case, application
of the state law meant the loans were invalid.

CashCall also argued that CFPA liability for a deceptive
practice could not be predicated on a violation of state law.
The panel held that CashCall’s argument found no support
in the text of the CFPA. CashCall led borrowers to believe
that they had an obligation to pay, when in fact under their
States’ laws they did not. That is the deceptive act pursued
by the Bureau, and it fell within the prohibition of the statute.

The panel next considered the Bureau’s argument that
the district court should have imposed a tier-two civil
penalty, which requires a finding that CashCall acted
recklessly, rather than a tier-one penalty, which does not.
The district court determined that CashCall did not act
recklessly. The panel held that this was not clearly
erroneous – but only as it applied to the early stages of
CashCall’s scheme. From September 2013, CashCall’s
4 CFPB V. CASHCALL

conduct was reckless. The panel concluded that from
September 2013, the danger that CashCall’s conduct
violated the CFPA was so obvious that CashCall must have
been aware of it. The district court’s contrary conclusion
was clearly erroneous. The panel vacated the civil penalty
and remanded with instructions that the district court
reassess it, with the penalty for the period beginning in
September 2013 being based on tier two.

CashCall’s CEO Paul Reddam argued that the district
court erred in finding him personally liable. The panel held
that Reddam’s liability turned on whether he had the
requisite knowledge or acted recklessly. The panel rejected
Reddam’s argument that he lacked the necessary mental
state because he relied on the advice of counsel. The panel
held that continuing to collect loans after September 2013
was reckless, and the district court did not err in holding
Reddam personally liable.

The Bureau argued that the district court erred in denying
restitution. Agreeing with the Bureau that the district court’s
decision rested on a legal error, the panel vacated the order
denying restitution and remanded for further proceedings.
The panel left it to the district court to determine whether
restitution was appropriate in this case, and if so, in what
amount. The panel noted that any restitution award must be
consistent with the CFPA, and whether consumers received
the benefit of their bargain was not relevant.
 CFPB V. CASHCALL 5

COUNSEL

Kristin Bateman (argued) and Kevin E. Friedl, Senior
Counsel; Steven Y. Bressler, Assistant General Counsel;
John R. Coleman, Deputy General Counsel; Mary McLeod,
General Counsel; Bureau of Consumer Financial Protection,
Washington, D.C.; for Plaintiff-Appellant/Cross-Appellee.

Reuben Camper Cahn (argued), Reuben C. Cahn, and
Gregory M. Sergi, Keller/Anderle LLP, Irvine, California;
Allen L. Lanstra Jr. (argued), Caroline W. Van Ness, and
Kasonni M. Scales, Skadden Arps Slate Meagher & Flom
LLP, Los Angeles, California; Thomas J. Nolan, Pearson
Simon Warshaw LLP, Sherman Oaks, California; for
Defendants-Appellees/Cross-Appellants.

Robert M. Loeb and Analea J. Patterson, Orrick Herrington
& Sutcliffe LLP, Washington, D.C.; Christopher J. Cariello
and Ned Hirschfeld, Orrick Herrington & Sutcliffe LLP,
New York, New York; for Amicus Curiae Innovative
Lending Platform.
6 CFPB V. CASHCALL

OPINION

MILLER, Circuit Judge:

CashCall, Inc., made unsecured, high-interest loans to
consumers throughout the country. After attracting
unwanted attention from regulators, it sought to avoid state
usury and licensing laws by using an entity operating on an
Indian reservation. CashCall paid for that entity to issue
loans and then purchased the loans days later. The loan
agreements contained a choice-of-law provision calling for
the application of tribal law, so they would not be subject to
the law of borrowers’ home States, which would have
prohibited the loans. CashCall sought advice from a scholar
of federal Indian law, who opined that the scheme “should
work but likely won’t.”

His concern proved well founded. The Consumer
Financial Protection Bureau brought this action against
CashCall, its CEO, and several affiliated companies,
alleging that the scheme was an “unfair, deceptive, or
abusive act or practice,” 12 U.S.C. § 5536(a)(1)(B), because
CashCall demanded payment from consumers under the
pretense that the loans were legally enforceable obligations,
when in fact they were invalid under state law. The district
court found the defendants liable and imposed a civil penalty
of $10.3 million, but the court declined to order restitution.

The Bureau appeals, arguing that the civil penalty should
have been larger and that the district court should have
ordered restitution. CashCall cross-appeals the finding of
liability. We conclude that the district court correctly found
liability but erred in assessing the penalty and in evaluating
whether to grant restitution. We therefore affirm in part,
vacate in part, and remand for further proceedings.
 CFPB V. CASHCALL 7

I

CashCall, Inc., is a California corporation that makes
high-interest consumer loans. Until 2006, California was its
primary market. CashCall sought to expand beyond
California, but it was concerned that complying with usury
laws in other States would make its operations unprofitable.
It decided to pay two federally insured state-chartered banks
to make loans, which it then purchased and serviced. Under
federal law, those banks were exempt from out-of-state
usury limits. See 12 U.S.C. § 1831d(a) (permitting a
federally insured state-chartered bank to charge interest “at
the rate allowed by the laws of the State . . . where the bank
is located”).

The arrangement drew regulatory scrutiny. In 2009,
Maryland authorities ordered CashCall to pay a civil penalty
of $5.6 million for what they characterized as a “rent-a-
bank” scheme, in which “a payday lender partners with a
federally insured bank to take advantage of the bank’s
exemption from state usury caps.” CashCall, Inc. v.
Maryland Comm’r of Fin. Regul., 139 A.3d 990, 995–96 &
n.12 (Md. 2016). West Virginia also imposed a large civil
penalty. CashCall, Inc. v. Morrisey, No. 12-1274, 2014 WL
2404300, at *1 (W. Va. May 30, 2014). Under pressure from
the Federal Deposit Insurance Corporation, the state-
chartered banks ceased their partnerships with CashCall.
CashCall’s last purchase of a loan from a bank was in
November 2008.

CashCall then decided to pursue a similar arrangement
with a lender operating under the laws of an Indian tribe. In
2009, a member of the Cheyenne River Sioux Tribe formed
Western Sky Financial, LLC, as a South Dakota limited
liability company with its offices located on the Cheyenne
River Sioux Reservation. CashCall and Western Sky entered
8 CFPB V. CASHCALL

into an assignment agreement and a service agreement.
Under the assignment agreement, CashCall used a
subsidiary, WS Funding, LLC, to set up an account with
funds that Western Sky used to make loans. CashCall agreed
to purchase all of the loans that Western Sky made; it did so
just days after the loans were made, before the borrowers had
made any payments. All economic benefits and risks then
passed to CashCall, which also agreed to indemnify Western
Sky for any expenses associated with legal or regulatory
action. CashCall serviced the loans, together with Delbert
Services Corporation, a company that CashCall created to
collect on defaulted loans.

Western Sky offered loans of up to $10,000 at interest
rates ranging from 89 to 169 percent. None of the borrowers
resided on the Tribe’s reservation. The borrowers did not
apply for loans on tribal land; instead, they applied online or
by telephone. At first, the calls were handled by CashCall
loan agents in California, but eventually those duties
transitioned to Western Sky loan agents on tribal land.
Borrowers signed the loan agreement electronically on
Western Sky’s website, which was hosted by CashCall’s
servers in California. Borrowers made all payments from
their home States.

Borrowers signed a loan agreement with Western Sky
that identified Western Sky as the lender. The agreement
contained a choice-of-law provision calling for the
application of tribal law:

This Agreement is governed by the Indian
Commerce Provision of the Constitution of
the United States of America and the laws of
the Cheyenne River Sioux Tribe. . . . Neither
this Agreement nor Lender is subject to the
 CFPB V. CASHCALL 9

laws of any state of the United States of
America.

By early 2011, several state authorities had initiated
enforcement actions against CashCall or Western Sky. In
September 2013, CashCall discontinued its purchase of
Western Sky loans; without CashCall, Western Sky ceased
its operations.

In December 2013, the Bureau brought this enforcement
action against CashCall, WS Funding, and Delbert Services
(collectively, “CashCall”). The complaint also named as a
defendant J. Paul Reddam, CashCall’s founder, CEO, and
sole owner.

The Bureau alleged a violation of the Consumer
Financial Protection Act (CFPA), which makes it unlawful
for any “covered person”—defined as anyone who “engages
in offering or providing a consumer financial product or
service”—or any service provider “to engage in any unfair,
deceptive, or abusive act or practice.” 12 U.S.C.
§§ 5481(6)(A), 5536(a)(1)(B). The complaint focused on
16 States (later narrowed to 13 States) in which CashCall,
using Western Sky, made loans to consumers that were
unlawful either because they had excessively high interest
rates or because CashCall lacked a license to operate in the
State. According to the complaint, CashCall engaged in
deceptive acts by “represent[ing], expressly or impliedly,
that the entire loan balance was owed . . . and that consumers
were legally obligated to pay the full amount collected or
demanded,” when in fact “the loans, or some parts thereof,
were void or not subject to a repayment obligation” under
applicable state law.

The parties filed cross-motions for summary judgment,
and the district court granted summary judgment to the
10 CFPB V. CASHCALL

Bureau on liability. The court observed that the Bureau’s
theory of liability “rests entirely on its argument that the
Court should disregard the tribal choice-of-law provision in
the loan agreements, and apply the law of the borrowers’
home states.” The court agreed that state law governed.
Although the loan agreements called for the application of
tribal law, the court found that provision to be unenforceable
because CashCall, not Western Sky, was the true lender and
real party in interest to the loan agreements, so the Tribe did
not have a substantial relationship to the parties or the
transactions. The court also concluded that applying tribal
law would violate the fundamental public policy of the
States involved. After determining that the choice-of-law
provision was unenforceable, the district court then
concluded that the borrowers’ home States had the most
significant relationships to the parties and the transactions,
so it applied the law of those States. And under state law, the
court determined that “the Western Sky loans are void or
uncollectible.”

The district court concluded that CashCall “engaged in a
deceptive practice . . . [b]y servicing and collecting on
Western Sky loans, . . . [which] created the ‘net impression’
that the loans were enforceable and that borrowers were
obligated to repay the loans in accordance with the terms of
their loan agreements.” That impression, the court explained,
was “patently false.” CashCall objected that the Bureau’s
enforcement action improperly federalized state-law
violations by using them as the basis for identifying a
violation of the CFPA. The district court rejected that
argument, reasoning that “while Congress did not intend to
turn every violation of state law into a violation of the CFPA,
that does not mean that a violation of a state law can never
be a violation of the CFPA.”
 CFPB V. CASHCALL 11

The district court also determined that Reddam was
individually liable for CashCall’s violation of the CFPA. It
found that he had “participated directly in and had the
authority to control CashCall’s . . . deceptive acts.” In
addition, it concluded that the undisputed facts demonstrated
that “Reddam had the requisite factual knowledge to subject
him to individual liability” and that, “[a]t the very least,” he
“was recklessly indifferent to the wrongdoing.”

The district court then held a bench trial to determine the
appropriate remedy. The CFPA provides for three tiers of
civil penalties depending on a defendant’s level of
culpability. 12 U.S.C. § 5565(c)(2). A first-tier penalty
requires no showing of scienter; a second-tier penalty applies
to “any person that recklessly engages in a violation” of the
CFPA; and a third-tier penalty applies to “any person that
knowingly violates” the CFPA. Id. § 5565(c)(2)(A)–(C).
The district court concluded that CashCall’s violation was
neither knowing nor reckless, so it imposed a first-tier civil
penalty, which amounted to approximately $10.3 million.

The Bureau also sought a restitution award of
approximately $235.6 million, reflecting the total interest
and fees on the void loans. The district court declined to
order restitution because, in its view, the Bureau “did not
show that Defendants intended to defraud consumers or that
consumers did not receive the benefit of their bargain from
the Western Sky Loan Program.” The court observed that the
Bureau “did not present testimony from a single consumer
that suggests that a borrower would not have entered into a
loan transaction if they had known that CashCall—not
Western Sky—was the true lender.” The court also
determined that even if restitution were warranted, the
Bureau had not shown that the amount of restitution it sought
was appropriate. Noting that the requested amount did not
12 CFPB V. CASHCALL

account for expenses, the court concluded that it “would
create a windfall for borrowers, including those who may not
have made any payments on their loans.”

II

Before we consider whether CashCall violated the CFPA
or what remedy would be appropriate for any violation, we
must address a more fundamental issue. CashCall argues that
the Bureau lacked authority to bring this action because the
Bureau is unconstitutionally structured. By statute, the
Bureau is headed by a single Director, who is appointed by
the President with the advice and consent of the Senate, and
who serves a five-year term during which the President may
remove him only for “inefficiency, neglect of duty, or
malfeasance in office.” 12 U.S.C. § 5491(b)–(c). In Seila
Law LLC v. CFPB, 140 S. Ct. 2183, 2197 (2020), the
Supreme Court held “that the [Bureau’s] leadership by a
single individual removable only for inefficiency, neglect, or
malfeasance violates the separation of powers.”

Anticipating that decision, CashCall argued in the
district court and in its brief to us that the Bureau was
unconstitutionally structured. By the time we first heard oral
argument, this circuit had considered and rejected that theory
in CFPB v. Seila Law LLC, 923 F.3d 680 (9th Cir. 2019),
vacated, 140 S. Ct. 2183 (2020). But shortly after we heard
oral argument, the Supreme Court granted certiorari in Seila
Law, so we withdrew submission pending the Court’s
decision.

Seila Law involved a challenge to a civil investigative
demand issued by the Bureau. 140 S. Ct. at 2194. After
determining that the restrictions on the removal of the
Director were unconstitutional, the Supreme Court severed
the removal provision and remanded the case to this court to
 CFPB V. CASHCALL 13

determine whether the demand had been validly ratified “by
an Acting Director accountable to the President” and to
determine whether any such ratification would be “legally
sufficient to cure the constitutional defect in the original
demand.” Id. at 2208 (plurality opinion); id. at 2224 (Kagan,
J., concurring in the judgment with respect to severability
and dissenting in part).

Following the Supreme Court’s decision, then-Director
Kathleen Kraninger expressly ratified the civil investigative
demand. CFPB v. Seila Law LLC, 997 F.3d 837, 846 (9th
Cir. 2021). On remand, this court concluded that because
“[a] Director well aware that she may be removed by the
President at will [had] ratified her predecessors’ earlier
decisions,” any constitutional injury that Seila Law suffered
had been remedied. Id.

Here, as in Seila Law, Director Kraninger issued a
statement formally ratifying the Bureau’s “decisions to file
the original and amended complaints against Defendants,
and to file the notice of appeal to the U.S. Court of Appeals
for the Ninth Circuit.” We called for supplemental briefing
on the effectiveness of the ratification, and we set this case
for reargument. The Bureau argues that, just as in Seila Law,
the ratifications were effective and cured the constitutional
violation. But CashCall argues that Director Kraninger’s
ratification of the appeal was ineffective because it came
after the deadline for filing a notice of appeal had expired.
See 28 U.S.C. § 2107; FEC v. NRA Political Victory Fund,
513 U.S. 88, 98 (1994). Similarly, CashCall argues that her
ratification of the action was ineffective because it came
after the statute of limitations had expired. See 12 U.S.C.
§ 5564(g)(1).

We find it unnecessary to consider ratification because a
more recent decision of the Supreme Court has made clear
14 CFPB V. CASHCALL

that despite the unconstitutional limitation on the President’s
authority to remove the Bureau’s Director, the Director’s
actions were valid when they were taken. In Collins v.
Yellen, 141 S. Ct. 1761 (2021), the Court considered a
statutory restriction on the President’s authority to remove
the Director of the Federal Housing Finance Agency. The
restriction paralleled that applicable to the Bureau’s
Director, and the Court held that it was unconstitutional
based on “[a] straightforward application of our reasoning in
Seila Law.” Id. at 1784. But the Court went on to hold that
the unconstitutionality of the removal restriction did not
invalidate any actions taken by the Director: “All the officers
who headed the [agency] during the time in question were
properly appointed,” and even though “the statute
unconstitutionally limited the President’s authority to
remove the confirmed Directors, there was no constitutional
defect in the statutorily prescribed method of appointment to
that office.” Id. at 1787 (emphasis omitted). The Court
explained that Seila Law’s holding does not mean that
actions taken by an officer unconstitutionally insulated from
removal “are void ab initio and must be undone.” Id. at 1788
n.24. It saw “no basis for concluding that any head of the
[agency] lacked the authority to carry out the functions of
the office.” Id. at 1788.

The same is true here. CashCall does not dispute that
both the complaint and the notice of appeal were filed while
the Bureau was headed by a lawfully appointed Director,
Richard Cordray. See CFPB v. Gordon, 819 F.3d 1179,
1185, 1190–91 (9th Cir. 2016). As in Collins, “the
unlawfulness of the removal provision does not strip the
Director of the power to undertake the other responsibilities
of his office.” 141 S. Ct. at 1788 n.23.
 CFPB V. CASHCALL 15

That is not to say that the unlawfulness of a removal
provision can never be a reason to regard an agency’s action
as void. See Collins, 141 S. Ct. at 1788. But at a minimum,
the “party challenging an agency’s past actions must . . .
show how the unconstitutional removal provision actually
harmed the party.” Kaufmann v. Kijakazi, No. 21-35344,
2022 WL 1233238, at *5 (9th Cir. Apr. 27, 2022); see also
Collins, 141 S. Ct. at 1788–89. For example, a party might
demonstrate harm by showing that the challenged action was
taken by a Director whom the President wished to remove
but could not because of the statute. Kaufmann, 2022 WL
1233238, at *5. No one suggests that anything of the sort
happened here. Under Collins, “there is no reason to regard
any of the actions taken by the [Bureau] in relation to the
[enforcement action] as void.” 141 S. Ct. at 1787.

Here, because Director Cordray exercised power that he
lawfully possessed, “there is no basis for concluding that
[he] lacked the authority to carry out the functions of [his]
office.” Collins, 141 S. Ct. at 1788. With or without Director
Kraninger’s ratification, this action was validly initiated, and
the notice of appeal was validly filed.

Finally, offering a new theory months after oral
argument—and more than eight years after this litigation
first began—CashCall asks us to hold that the Bureau’s
structure violates the Appropriations Clause of the
Constitution. See CFPB v. All Am. Check Cashing, Inc., No.
18-60302, 2022 WL 1302488, at *2 (5th Cir. May 2, 2022)
(Jones, J., concurring). CashCall forfeited that argument
twice over by failing to present it to the district court or in its
briefing before us on appeal. See Hawkins v. Kroger Co.,
906 F.3d 763 (9th Cir. 2018). CashCall suggests that the
argument somehow affects our subject-matter jurisdiction,
but that erroneously conflates “the [Bureau’s] authority to
16 CFPB V. CASHCALL

execute the laws (Article II) with the United States’ interest
in the case (Article III).” Gordon, 819 F.3d at 1189. Because
CashCall elected to wait until long after oral argument to
raise this theory, we decline to consider it.

III

The district court found that CashCall had engaged in a
deceptive practice by collecting payments on loans that were
invalid under state law. CashCall challenges that conclusion
in two ways. First, it argues that the loans were valid because
they were subject to tribal law, not state law. Second, it
argues that CFPA liability for a deceptive practice cannot be
predicated on a violation of state law. Because the district
court resolved the issue of liability on summary judgment,
we review de novo. Stephens v. Union Pac. R.R. Co.,
935 F.3d 852, 854 (9th Cir. 2019). We find neither of
CashCall’s arguments persuasive.

A

Although the loans were valid under the law of the
Cheyenne River Sioux Tribe, CashCall does not dispute that
they were invalid under the laws of the States in which the
customers resided, whether because the interest rates were
usurious or because neither CashCall nor Western Sky was
licensed in those States. The validity of the loans thus
depends on which law applies.

The district court determined that the choice-of-law
question is governed by federal common law because the
court’s jurisdiction was based on a federal question.
CashCall does not challenge that holding on appeal, nor does
it suggest that the application of state or tribal choice-of-law
rules would change the result. In the absence of any specific
guidance in the CFPA, we apply federal common law. See
 CFPB V. CASHCALL 17

Huynh v. Chase Manhattan Bank, 465 F.3d 992, 997 (9th
Cir. 2006) (explaining that when federal jurisdiction is not
based on diversity of citizenship, “federal common law
choice-of-law rules apply”); Harris v. Polskie Linie
Lotnicze, 820 F.2d 1000, 1003 (9th Cir. 1987). We have
looked to “the approach outlined in the Restatement
(Second) of Conflict of Laws” as a description of the federal
common law rule. Huynh, 465 F.3d at 997.

All of the loan agreements contained a choice-of-law
provision specifying the law of the Cheyenne River Sioux
Tribe. When parties contract for the application of a
particular jurisdiction’s law, their choice normally controls.
Restatement (Second) of Conflict of Laws § 187 (1971). But
where the “issue is one which the parties could not have
resolved by an explicit provision in their agreement,”
including, as here, because of substantive limits on their
ability to contract, federal common law recognizes two
circumstances in which the parties’ choice does not control:
(1) if “the chosen [jurisdiction] has no substantial
relationship to the parties or the transaction and there is no
other reasonable basis for the parties’ choice,” or (2) if
“application of the law of the chosen [jurisdiction] would be
contrary to a fundamental policy of a state which has a
materially greater interest than the chosen [jurisdiction]” and
which “would be the state of the applicable law in the
absence of an effective choice of law by the parties.” Flores
v. American Seafoods Co., 335 F.3d 904, 917 (9th Cir. 2003)
(quoting Restatement (Second) of Conflict of Laws
§ 187(2)). The district court determined that both exceptions
were satisfied. We agree with the district court that the first
exception is satisfied, so we do not consider whether
applying tribal law would be contrary to fundamental state
policies.
18 CFPB V. CASHCALL

The district court correctly determined that the Cheyenne
River Sioux Tribe “has no substantial relationship to the
parties” to the loans. Restatement (Second) of Conflict of
Laws § 187(2)(a); see Industrial Indem. Ins. Co. v. United
States, 757 F.2d 982, 987–88 (9th Cir. 1985). To be sure,
Western Sky was nominally a party to the loans, and a
jurisdiction ordinarily has a substantial relationship to a
transaction if one of the parties has its principal place of
business there, as Western Sky did. Restatement (Second) of
Conflict of Laws § 187 cmt. f; see PAE Gov’t Servs., Inc. v.
MPRI, Inc., 514 F.3d 856, 860 (9th Cir. 2007); Ruiz v.
Affinity Logistics Corp., 667 F.3d 1318, 1323 (9th Cir.
2012). But assessing whether a jurisdiction has a “substantial
relationship” to a transaction requires looking at the
substance of the transaction, not merely its form. Cf.
Abramski v. United States, 573 U.S. 169, 184–85 (2014).
After all, the reason the parties’ choice of law is not always
controlling is that there are some issues “which the parties
could not have resolved by an explicit provision.”
Restatement (Second) of Conflict of Laws § 187(2). Parties
cannot circumvent substantive limits on their ability to
contract simply by applying the law of a jurisdiction that
does not have those limits. Id. cmt. d (“Permitting the parties
in the usual case to choose the applicable law is not, of
course, tantamount to giving them complete freedom to
contract as they will.”). Similarly, parties cannot circumvent
limits on their ability to specify the governing law simply by
structuring their agreement so that it has some nominal—but
entirely artificial—relationship to the desired jurisdiction.
Cf. Industrial Indem. Ins. Co., 757 F.2d at 987–88. We
therefore follow the “standard practice, evident in many
legal spheres . . . , of ignoring artifice when identifying the
parties to a transaction.” Abramski, 573 U.S. at 184–85.
 CFPB V. CASHCALL 19

In substance, all of the loan transactions at issue here
were conducted by CashCall, not Western Sky. As the
district court observed, “the entire monetary burden and risk
of the loan program was placed on CashCall.” Western Sky
was formed for the purpose of making loans for CashCall,
and it amounted to little more than a shell for CashCall’s
operations. Through a subsidiary, CashCall provided the
money with which Western Sky made loans. CashCall
agreed to purchase the loans that Western Sky made, and it
did in fact purchase all of Western Sky’s loans, just a few
days after they were made and before the borrowers had
made any payments. From then on, it bore all economic risk
and benefits of the transactions. It also agreed to indemnify
Western Sky for any legal or regulatory expenses. And even
in the act of originating the loans, Western Sky’s
involvement was limited: At least at the beginning of the
program, CashCall hosted Western Sky’s website and phone
number, and CashCall employees handled communications
with customers. In sum, Western Sky’s involvement in the
transactions was economically nonexistent and had no
purpose other than to create the appearance that the
transactions had a relationship to the Tribe.

Nor is there any other basis for finding a relationship
between the Tribe and the transactions. Western Sky was
organized under South Dakota law, not tribal law, and it was
neither owned nor operated by the Tribe. And the borrowers
applied online or over the phone, never set foot on tribal
land, and made payments from their home States, not the
reservation. The only reason for the parties’ choice of tribal
law was to further CashCall’s scheme to avoid state usury
and licensing laws.

Because the Tribe had no substantial relationship to the
transactions, and because there is no other reasonable basis
20 CFPB V. CASHCALL

for the parties’ choice of tribal law, the district court
correctly declined to give effect to the choice-of-law
provision in the loan agreements. Instead, the court applied
the law of the jurisdiction with “the most significant
relationship to the transaction and the parties,” which it
found to be the borrowers’ home States. Restatement
(Second) of Conflict of Laws § 188(1)–(2). And for the
States at issue in this case, application of state law means
that the loans were invalid.

CashCall does not dispute the district court’s
determination that the borrowers’ home States had the most
significant relationship to the transactions. Instead, it
invokes the rule that if a loan is valid when made, it does not
become usurious upon transfer to an assignee in a different
jurisdiction. See Nichols v. Fearson, 32 U.S. (7 Pet.) 103,
109 (1833). But these loans were not valid when made
because there was never any basis for applying the law of the
Tribe in the first place, and they were invalid under the
applicable laws of the borrower’s home States. CashCall
also objects that the district court phrased its conclusion in
terms of a determination that CashCall was the “true lender,”
a concept that CashCall says “would disrupt lending markets
and undermine the secondary loan market.” To the extent
that CashCall invokes cases involving banks, we note that
banks present different considerations because federal law
preempts certain state restrictions on the interest rates
charged by banks. See, e.g., 12 U.S.C. § 1831d (permitting
state-chartered banks to charge the interest rate allowed in
their home State). We do not consider how the result here
might differ if Western Sky had been a bank. And we need
not employ the concept of a “true lender,” let alone set out a
general test for identifying a “true lender.” To answer the
choice-of-law question, it suffices to examine the economic
reality of these loans. As we have explained, doing so reveals
 CFPB V. CASHCALL 21

that the Tribe had no substantial relationship to the
transactions.

B

CashCall does not dispute that if the loans were governed
by state law, they were void because (depending on the
State) the interest rates were usurious or CashCall and
Western Sky lacked required licenses. Nor does it dispute
that it demanded payment from consumers under the
pretense that the consumers had a valid obligation to pay.
Instead, it argues that a finding of a deceptive practice under
the CFPA is impermissible when the deception involves
state law.

CashCall’s argument finds no support in the text of the
CFPA. The statute grants the Bureau broad authority to
“enforce Federal consumer financial law consistently for the
purpose of ensuring that all consumers have access to
markets for consumer financial products and services and
that markets for consumer financial products and services
are fair, transparent, and competitive.” 12 U.S.C. § 5511(a).
It makes it unlawful for a covered person to “to engage in
any unfair, deceptive, or abusive act or practice.” Id.
§ 5536(a)(1)(B). The statute does not define “unfair,”
“deceptive,” or “abusive,” so we give those terms their
ordinary meaning. Wall v. Kholi, 562 U.S. 545, 551 (2011).
A “deceptive” practice is one “tending to deceive,” that is,
“to cause to believe the false”—a meaning that easily
encompasses leading a consumer to believe that an invalid
debt is actually a legally enforceable obligation. Webster’s
Third New International Dictionary 584–85 (2002)
(defining “deceive” and “deceptive”).

In this case, of course, the reason that the debts were
invalid happens to involve state law. But we see no reason
22 CFPB V. CASHCALL

why that should make the statute inapplicable. In this
respect, the CFPA is similar to the Fair Debt Collection
Practices Act (FDCPA), which prohibits using “unfair or
unconscionable means . . . to collect any debt.” 15 U.S.C.
§ 1692f. In accord with the uniform view of other courts of
appeals, we have held that a debt collector violates the
FDCPA when it attempts to collect a debt that state law has
made invalid. See Kaiser v. Cascade Cap., LLC, 989 F.3d
1127, 1133–34 (9th Cir. 2021); see also Madden v. Midland
Funding, LLC, 786 F.3d 246, 254 (2d Cir. 2015); Currier v.
First Resol. Inv. Corp., 762 F.3d 529, 534–35 (6th Cir.
2014); Johnson v. Riddle, 305 F.3d 1107, 1121 (10th Cir.
2002). Likewise, other circuits have held that a debt collector
violates the FDCPA’s prohibition on threatening “to take
any action that cannot legally be taken,” 15 U.S.C.
§ 1692e(5), by threatening an action that is prohibited under
state law. See, e.g., LeBlanc v. Unifund CCR Partners,
601 F.3d 1185, 1192 (11th Cir. 2010) (per curiam); Picht v.
Jon R. Hawks, Ltd., 236 F.3d 446, 451 (8th Cir. 2001).

The Sixth Circuit’s analysis in Currier is particularly
instructive. There, the plaintiff alleged that a debt collector
had violated the FDCPA by filing a lien against her home
when the lien was invalid under state law. 762 F.3d at 532.
The debt collector argued that “a violation of state law is not
a per se violation of the FDCPA.” Id. at 536. The court
agreed with that proposition but explained that it “does not
mean that a violation of state law can never also be a
violation of the FDCPA.” Id. at 537. “The proper question
. . . is whether the plaintiff alleged an action that falls within
the broad range of conduct prohibited by” federal law, and
in answering that question, “[t]he legality of the action taken
under state law may be relevant.” Id.
 CFPB V. CASHCALL 23

CashCall asserts that the FDCPA is different from the
CFPA. Citing provisions of the FDCPA that refer to the
“legal status” of a loan and to collection activities that are
“permitted by law,” 15 U.S.C. §§ 1692e(2)(A), 1692f(1),
CashCall says that that statute, unlike the CFPA, “explicitly
incorporates state law.” The claim is puzzling. To explicitly
incorporate state law, Congress would need, at a minimum,
to explicitly reference state law, which the cited provisions
in the FDCPA do not do. Instead, courts have read the
general language of those statutory provisions to refer to
state law by accounting for the background principle that, in
our federal system, state law defines property and
contractual rights. See Richards v. PAR, Inc., 954 F.3d 965,
969–70 (7th Cir. 2020). That principle is equally applicable
to the provision of the CPFA at issue here.

CashCall points to other provisions of the CFPA that
mention state law, and it argues that they suggest, by
negative implication, that a deceptive-practice claim cannot
be based on a deception about state law. We find no such
implication in the statute, which creates a co-regulatory
regime between the States and the federal government. It
directs the Bureau to cooperate with state regulators, and
vice-versa. See 12 U.S.C. §§ 5495; 5552(b)(1)(A). Its
preemption clause does not modify or limit state law, except
to that extent that state law is inconsistent with the CFPA.
Id. § 5551(a)(1). Nothing in those provisions suggests that
deceptions involving state law are somehow exempt from
the prohibition on deceptive practices.

And although the CFPA prohibits establishment of a
federal usury rate, 12 U.S.C. § 5517(o), the Bureau has not
established a federal usury limit here. Each state’s usury and
licensing laws still apply, and lenders must fairly and
transparently represent to consumers the requirements of
24 CFPB V. CASHCALL

applicable state law. See id. § 5511(a). That is not
federalizing state usury law, as CashCall would have it; it is
simply applying the CFPA’s prohibition on deceptive acts.

CashCall argues that applying the CFPA here would
raise constitutional concerns because it would “federalize an
area of state regulation.” In the cases on which CashCall
relies, the Supreme Court applied a presumption that
Congress does not lightly interfere with State authority over
“punishment of local criminal activity.” Bond v. United
States, 572 U.S. 844, 858 (2014); see also Cleveland v.
United States, 531 U.S. 12, 25 (2000); Jones v. United
States, 529 U.S. 848, 858 (2000). But the CFPA is not a
criminal statute. More importantly, CashCall’s conduct was
hardly “local”—it was a multi-jurisdictional lending
scheme. That interstate commercial conduct is at the heart of
Congress’s regulatory authority under the Commerce
Clause, and applying the CFPA to cover it raises no
substantial constitutional questions. See United States v.
Lopez, 514 U.S. 549, 558 (1995).

CashCall worries that the Board will convert a “dizzying
array” of state-law violations into CFPA violations, offering
examples of state laws requiring “that contracts be bilingual,
in 12-point font, or notarized.” But we have already held that
a CFPA violation requires that a “representation, omission,
or practice” be not only “likely to mislead consumers acting
reasonably under the circumstances” but also “material.”
Gordon, 819 F.3d at 1192–93 & n.7 (quoting FTC v. Pantron
I Corp., 33 F.3d 1088, 1095 (9th Cir. 1994)); Currier,
762 F.3d at 534 (emphasizing that the conduct at issue “was
not a mere technical violation of Kentucky law”). CashCall’s
examples would not necessarily qualify, but CashCall’s
actual conduct clearly does. CashCall led borrowers to
believe that they had an obligation to pay, when in fact under
 CFPB V. CASHCALL 25

their States’ laws they did not. That is the deceptive act
pursued by the Bureau, and it falls within the prohibition of
the statute.

IV

We next consider the Bureau’s argument that the district
court should have imposed a tier-two civil penalty, which
requires a finding that CashCall acted recklessly, rather than
a tier-one penalty, which does not. The district court’s
assessment of whether a party acted recklessly is a factual
finding that we review for clear error. United States v. Luna,
21 F.3d 874, 884 (9th Cir. 1994).

In general, “[a] person acts recklessly . . . when he
consciously disregards a substantial and unjustifiable risk
attached to his conduct, in gross deviation from accepted
standards.” Borden v. United States, 141 S. Ct. 1817, 1824
(2021) (quotation marks and citations omitted). We have
described reckless conduct “as a highly unreasonable
omission, involving not merely simple, or even inexcusable
negligence, but an extreme departure from the standards of
ordinary care, and which presents a danger . . . that is either
known to the [actor] or is so obvious that the actor must have
been aware of it.” Howard v. Everex Sys., Inc., 228 F.3d
1057, 1063 (9th Cir. 2000) (quoting Hollinger v. Titan Cap.
Corp., 914 F.2d 1564, 1569 (9th Cir. 1990) (en banc)).

The district court determined that CashCall did not act
recklessly because it “sought out highly regarded regulatory
counsel to assist [it] with structuring the Western Sky Loan
Program”; counsel opined that the program was lawful; and
“there was no case law that clearly established that the Tribal
Lending Model was not a lawful model.” Although that
conclusion is debatable, we conclude that it is not clearly
erroneous—but only as it applies to the early stages of
26 CFPB V. CASHCALL

CashCall’s scheme. From September 2013, CashCall’s
conduct was reckless.

From the beginning, CashCall understood that to expand
outside of California and make a profit, it would need to
avoid state licensing and usury laws. To that end, it sought
to work with state-chartered banks. But that approach
received significant regulatory scrutiny from authorities in
West Virginia and Maryland, leading to enforcement actions
and large civil judgments. CashCall then pursued a tribal
lending program that was nearly identical in structure to
CashCall’s state-chartered banking program that had already
landed it in legal trouble. And over time, CashCall faced
escalating regulatory scrutiny of the tribal program. In
January 2011, Colorado sued Western Sky; in February,
Maryland brought an administrative action against Western
Sky; and in August, Washington brought an enforcement
action against CashCall based on its servicing of Western
Sky loans. Of the 13 States at issue here, seven ultimately
brought enforcement actions against CashCall. In September
2013, CashCall stopped buying loans from Western Sky,
which then shut down.

None of this should have been a surprise: Counsel had
told CashCall that its plan faced “significant” risk, and one
expert advised that the plan “should work but likely won’t”
because the “lower courts will shun our model and . . . if we
reach the Supreme Court, . . . we will lose.” Nevertheless,
the district court was correct that CashCall had “secured
multiple formal and informal opinions” from legal counsel
stating “that the structure of the Western Sky Loan Program
was viable.” Given the uncertainty reflected in counsel’s
advice, the district court might have concluded that
CashCall’s conduct was reckless even at that point. But clear
error is a deferential standard, and we are unable to say that
 CFPB V. CASHCALL 27

the district court’s contrary determination was clearly
erroneous. See In re United States Dep’t of Educ., 25 F.4th
692, 698 (9th Cir. 2022).

By September 2013, however, things had changed. In
August, counsel recommended that the program cease
because “the regulatory and litigation environments have
risen from dangerous to near extinction.” That opinion
prompted CashCall to shut down the program and stop
buying new loans. But despite the intense regulatory
scrutiny, and despite shuttering the tribal lending program
for new loans, CashCall continued to collect on existing
loans. CashCall modified loans in States in which it had
already reached settlements with regulators. But otherwise,
even after this litigation began, CashCall continued
collecting fees and interest until it lost at summary judgment
in August 2016.

We conclude that from September 2013 on, the danger
that CashCall’s conduct violated the statute was “so obvious
that [CashCall] must have been aware of it.” Howard,
228 F.3d at 1063 (quoting Hollinger, 914 F.2d at 1569). The
district court’s contrary conclusion was clearly erroneous.
We therefore vacate the civil penalty and remand with
instructions that the district court reassess it, with the penalty
for the period beginning in September 2013 being based on
tier two.

V

Reddam argues that the district court erred in finding him
personally liable. We have held that an individual is liable
for a corporation’s violation of the CFPA if “(1) he
participated directly in the deceptive acts or had the authority
to control them and (2) he had knowledge of the
misrepresentations, was recklessly indifferent to the truth or
28 CFPB V. CASHCALL

falsity of the misrepresentation, or was aware of a high
probability of fraud along with an intentional avoidance of
the truth.” Gordon, 819 F.3d at 1193 (quoting FTC v.
Stefanchick, 559 F.3d 924, 931 (9th Cir. 2009)). Reddam
does not dispute that the first component of that test was
satisfied because, as CEO, he had authority to control
CashCall’s acts. Thus, Reddam’s liability turns on whether
he had the requisite knowledge or acted recklessly.

Reddam argues that he lacked the necessary mental state
because he relied on the advice of counsel. But as the district
court correctly observed, we have held that “reliance on
advice of counsel [is] not a valid defense on the question of
knowledge required for individual liability.” FTC v. Grant
Connect, LLC, 763 F.3d 1094, 1102 (9th Cir. 2014)
(quotation marks and citation omitted) (alteration in
original). In any event, even taking account of counsel’s
preliminary advice, continuing to collect loans after
September 2013 was reckless for the reasons we have
already explained. The district court did not err in holding
Reddam personally liable.

VI

The Bureau argues that the district court erred in denying
restitution. We review the district court’s order on restitution
for abuse of discretion, Gordon, 819 F.3d at 1187, and a
district court necessarily abuses its discretion if it makes an
error of law, Koon v. United States, 518 U.S. 81, 100 (1996).
We agree with the Bureau that the district court’s decision
rested on a legal error, so we vacate the order denying
restitution and remand for further proceedings. We
emphasize at the outset that we do not hold that restitution is
necessarily appropriate in this case, or if so, in what amount,
but leave those questions to be resolved by the district court.
 CFPB V. CASHCALL 29

The CFPA permits the Bureau to seek “any appropriate
legal or equitable relief with respect to a violation of Federal
consumer financial law,” which “may include, without
limitation . . . restitution; [and] disgorgement or
compensation for unjust enrichment.” 12 U.S.C.
§ 5565(a)(1), (2)(C), (2)(D). Restitution may be either legal
or equitable. “‘[R]estitution is a legal remedy when ordered
in a case at law and an equitable remedy . . . when ordered
in an equity case,’ and whether it is legal or equitable
depends on ‘the basis for [the plaintiff’s] claim’ and the
nature of the underlying remedies sought.” Great-W. Life &
Annuity Ins. Co. v. Knudson, 534 U.S. 204, 213 (2002)
(second and third alterations in original) (quoting Reich v.
Continental Cas. Co., 33 F.3d 754, 756 (7th Cir. 1994)).
Thus, restitution is legal when the plaintiff cannot “assert
title or right to possession of particular property” but is
nevertheless “able to show just grounds for recovering
money to pay for some benefit the defendant had received
from him.” Id. (citation omitted). “In contrast,” restitution is
equitable “where money or property identified as belonging
in good conscience to the plaintiff could clearly be traced to
particular funds or property in the defendant’s possession.”
Id.

The Bureau argues that while equitable restitution may
be discretionary, the district court lacked discretion to deny
legal restitution. See Curtis v. Loether, 415 U.S. 189, 197
(1974). CashCall responds that the Bureau waived this
theory by arguing below that restitution was discretionary.
CashCall also relies on the Supreme Court’s recent decision
in Liu v. SEC, 140 S. Ct. 1936 (2020), which CashCall says
limited the scope of equitable restitution by establishing
“that equitable remedies—whether labeled disgorgement,
restitution, accounting, or otherwise—must be limited to a
30 CFPB V. CASHCALL

wrongdoer’s ‘net profits,’” not the larger award sought by
the Bureau.

We do not decide whether the Bureau has waived a claim
to legal restitution or how, if at all, Liu might limit equitable
restitution. The district court may consider those issues on
remand; we confine ourselves to the issues it has already
addressed. The district court relied on its conclusion that the
Bureau did not show that CashCall “intended to defraud
consumers or that consumers did not receive the benefit of
their bargain.” First, noting that CashCall had relied on the
advice of counsel, it saw “no evidence that [CashCall]
decided to embark on an unlawful scheme to structure the
Western Sky Loan Program to defraud borrowers.” Second,
it found that “consumers received the benefit of their
bargain—i.e., the loan proceeds.” Neither of those
considerations was an appropriate basis for denying
restitution.

First, while a district court may award restitution when
“appropriate,” 12 U.S.C. § 5565(a)(1), its decision must be
made consistent with the statute. See Pantron I, 33 F.3d at
1103; see also Albemarle Paper Co. v. Moody, 422 U.S. 405,
416 (1975) (holding that a court deciding whether to award
backpay under Title VII “must exercise this power in light
of the large objectives of the Act” (quotation marks and
citation omitted)). One of the statute’s express objectives is
to ensure that “consumers are protected from unfair,
deceptive, or abusive acts and practices.” 12 U.S.C.
§ 5511(b)(2). Another is to promote transparency in the
markets for consumer financial products and services. Id.
§ 5511(b)(5). The statute authorizes the Bureau to initiate
civil litigation and seek remedies to achieve those objectives.
See id. §§ 5531, 5564(a). Restitution is one of those
remedies, and it serves to ensure that consumers are made
 CFPB V. CASHCALL 31

whole when they have suffered a violation of the statute. See
id. § 5565(a)(2).

Significantly, although scienter is required for an award
of heightened civil penalties under the CFPA, 12 U.S.C.
§ 5565(c)(2)(B)–(C), it is not required for an award of
restitution. Id. § 5565(a)(2). In giving dispositive weight to
CashCall’s lack of bad faith, the district court employed an
approach that would make the restitutionary remedy
“punishment for moral turpitude, rather than a
compensation” for consumers’ injuries. See Albermarle
Paper, 422 U.S. at 422. That approach would frustrate
Congress’s objective of compensating consumers who
suffered harm on account of CashCall’s deceptive practices.

Second, whether consumers received the benefit of their
bargain is not relevant. The Bureau did not allege that the
consumers were denied the loan proceeds or that they
entered into the loan agreements against their will. Rather,
the Bureau alleged that CashCall harmed consumers by
deceiving them about a major premise underlying their
bargain: that the loan agreements were legally enforceable.
The district court misunderstood the nature of CashCall’s
deceptive practice when it treated consumers’ receipt of the
benefits of that bargain as a reason to deny restitution.

The district court also determined that the Bureau did not
establish the amount of restitution that would be appropriate.
Specifically, the court stated that the “proposed restitution
amount [should be] netted to account for expenses.” That
statement is inconsistent with our precedent, which
establishes a two-step burden-shifting framework for
calculating restitution. See Gordon, 819 F.3d at 1195. At
step one, the Bureau “bears the burden of proving that the
amount it seeks in restitution reasonably approximates the
defendant’s unjust gains.” Id. (citation omitted). If the
32 CFPB V. CASHCALL

Bureau makes that threshold showing, then “the burden
shifts to the defendant to demonstrate that the net revenues
figure overstates the defendant’s unjust gains.” Id.

Applying that framework, we have held that
“[r]estitution may be measured by the ‘full amount lost by
consumers rather than limiting damages to a defendant’s
profits.’” Gordon, 819 F.3d at 1195 (quoting Stefanchik,
559 F.3d at 931). In other words, “[a] district court may use
a defendant’s net revenues as a basis for measuring unjust
gains.” Id. Net revenues are “typically the amount
consumers paid for the product or service minus refunds and
chargebacks.” FTC v. Commerce Planet, Inc., 815 F.3d 593,
603 (9th Cir. 2016), abrogated on other grounds by AMG
Cap. Mgt., LLC v. FTC, 141 S. Ct. 1341 (2021). An award
of net revenues differs from an award of net profits, which
allows a defendant to “deduct legitimate expenses.” Liu,
140 S. Ct. at 1950. We have held that “there are instances in
which a defendant does not ultimately reap any profits from
his wrongful conduct, and others where even though the
defendant obtained some profit, the ‘loss suffered by the
victim is greater than the unjust benefit received by the
defendant.’” CFTC v. Crombie, 914 F.3d 1208, 1216 (9th
Cir. 2019) (quoting FTC v. Figgie Int’l, Inc., 994 F.2d 595,
606 (9th Cir. 1993) (per curiam)); see also Stefanchik,
559 F.3d at 931.

Perhaps net revenues would overstate CashCall’s unjust
gains, but if so, that was CashCall’s burden to prove. On
remand, if the district court determines that an award of
restitution is appropriate, it should take these principles into
account in calculating the award.

AFFIRMED in part, VACATED in part, and
REMANDED.