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Marketplace Lending Update #3: Kabbage Heads to Court

A recently filed California lawsuit raises the stakes in the ongoing challenge to the “bank origination model.” The lawsuit, Barnabas Clothing, Inc. v. Kabbage, Inc., was filed on March 22, 2018 in Superior Court in Los Angeles and recently removed to the federal court.1 Barnabas alleges violations of state usury, false advertising, and unfair competition laws, and asserts two federal Racketeer Influenced and Corrupt Organizations (“RICO”) Act claims. Barnabas seeks to certify a class on behalf of all California-based Kabbage borrowers and requests various relief, including that the court void the Kabbage loans.

The presumptive lead plaintiff is a clothing retailer, Barnabas Clothing.2 Barnabas Clothing took out five loans from Kabbage, each designated as a six-month term loan. Barnabas claims the marketing materials accompanying these loans solicited borrowers by promising they could repay a six-month loan with monthly installments of one-sixth of the total loan, plus monthly fees. Barnabas alleges that the loan agreement created a different schedule, however—a schedule that front-loads interest so that borrowers’ payments primarily service interest on prior loans rather than principal.

Barnabas alleges that Kabbage “aggressively markets, underwrites, and services short-term loans to struggling small businesses” that “often substantially exceed California’s maximum legal interest rate.”  According to the complaint, Kabbage shields its activities from California usury laws by entering into an arrangement with Celtic Bank, a Utah-chartered bank able to “export” the rate of interest allowed under Utah law—which permits any rate agreed upon. Barnabas contends that, under the Kabbage loan agreements, Kabbage originates, underwrites, and funds the loans. Then, Barnabas alleges, Kabbage “enters into sham transactions with Celtic Bank, which acts as the lender in name only,” in order to circumvent California usury laws.  Barnabas characterizes this relationship between Kabbage and Celtic Bank as an illegal “rent-a-bank scheme” and levels two federal racketeering claims against the two entities.

The two California courts (both federal) that examined the “bank origination model” reached seemingly opposite conclusions. In Beechum et al. v. Navient Solutions, Inc. et al.,3 the court upheld a loan program in which student loans were originated through Stillwater National Bank & Trust Co. The court analyzed the “face of the transactions,” and concluded that the bank was the true lender because it originated the loans as a matter of fact. In Consumer Financial Protection Bureau v. Cash Call, Inc.,4 however, a case decided in the same district only three weeks earlier, the court granted summary judgment to the CFPB in a lawsuit against Cash Call, an alleged payday lender. The court disregarded that the loans were originated by a tribal entity exempt from usury restrictions, and instead determined that Cash Call was in fact the “true lender” and that the Cash Call loans were therefore void and uncollectible.

Kabbage recently moved to compel arbitration of this dispute (and to stay the federal case pending arbitration), relying on the loan agreements’ class-waiving arbitration clause. The court is scheduled to hear arguments on the motion to compel arbitration on June 18. If the case avoids arbitration, Judge Philip Gutierrez  will have the opportunity to seek to reconcile his colleagues’ seemingly conflicting decisions in Beechum and Cash Call.

1   Barnabas Clothing, Inc. et al. v. Kabbage, Inc. et al., No. 18-3414 (C.D. Cal. filed Apr. 24, 2018). As of publication, Plaintiffs have not moved to remand to state court—unsurprisingly, given the federal RICO claims alleged.

2   Barnabas and the other named plaintiff, Alexander Aquino, are represented by Benesch, Friedlander, Coplan & Aronoff LLP; White and Williams, LLP; and Marlin & Saltzman LLP.

3   No. 15-8239, 2016 WL 5340454 (C.D. Cal. Sept. 20, 2016).

4   No. 15-7522, 2016 WL 4820635 (C.D. Cal. Aug. 31, 2016).

© Copyright 2020 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume VIII, Number 130


About this Author

Scott Cammarn Financial Law Attorney Cadwalader Law Firm

Scott Cammarn has 28 years of experience in the banking industry and his legal career has spanned all areas of banking compliance and finance law. His practice focuses on regulatory matters, mergers & acquisitions, legislation, transactions, and training. He represents a number of national and international financial institutions and has practiced before the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and numerous state banking departments.

Jonathan Watkins, Charlotte, North Carolina, Cadwalader, partner, antitrust litigation, class action, white collar, global, merger, acquisition, New York

Jonathan Watkins represents public and private businesses and financial institutions in complex litigation and white-collar investigations. His practice covers securities, derivative, and other shareholder actions, M&A-related litigation, suits alleging breaches of fiduciary duties by corporate directors, disputes involving complex financial benchmarks and instruments, litigation arising out of commercial contracts and transactions, antitrust and other competition-related litigation, and government and internal investigations. Jonathan has represented clients at trial in federal and state courts across the country and before several federal and state appellate courts.

Jonathan’s white-collar practice focuses on representing financial institutions and other corporate clients in investigations by regulators, prosecutors, and enforcement agencies, including the Department of Justice and United States Attorneys’ offices, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency, and the Federal Reserve. He recently represented a financial institution in government inquiries into the alleged manipulation of an interest-rate benchmark.

Jonathan graduated magna cum laude from Fordham University School of Law, where he earned the Fordham Law School Prize, served as a Member of the Fordham Law Review, and was elected to the Order of the Coif. He received his undergraduate degree in Chemical Engineering from Lehigh University. Jonathan began his career with Cravath, Swaine & Moore LLP.

Jonathan’s securities, shareholder, and M&A-related litigation experience includes:

  • Defending Credit Suisse from Section 10(b) claims arising from the collapse of Enron, including the $40 billion lead securities class action, Newby v. Enron Corp., Cons. Action No. H-01-3624, MDL No. 1446 (S.D. Tex.), and the several coordinated and consolidated cases.

  • Representing Credit Suisse and Deutsche Bank in Texas and New York in litigation over the failed Hexion-Huntsman merger, including in Hexion Specialty Chemicals, Inc. v. Credit Suisse, Cayman Islands Branch, Index No.114552/08 (N.Y. Sup. Ct.), where Hexion sought specific performance of $15.4 billion of financing commitments, and at jury trial in Huntsman Corp. v. Credit Suisse Securities (USA) LLC, No. 08-09-09258 (9th Dist. Tex.), where Huntsman sought $4.65 billion in compensatory tort damages.

  • Representing The Fresh Market and its directors in several shareholder class actions targeting Apollo Global Management’s $1.36 billion acquisition of The Fresh Market.

  • Representing certain independent directors of Reynolds American before the North Carolina Business Court and the North Carolina Court of Appeals in shareholder class actions challenging Reynolds American’s $27.4 billion acquisition of Lorillard.

  • Representing Merrill Lynch’s independent directors in the Southern District of New York, New York Supreme Court, and Delaware Chancery Court in shareholder litigation over the Bank of America-Merrill Lynch merger.



James M. Fee is an associate in Cadwalader’s Global Litigation Group.  

Prior to attending law school, James worked as a legislative aide in the United States Senate with a portfolio covering financial services, energy, and tax issues.

James received his J.D. from Boston College Law School, where he was an executive editor of the Boston College International and Comparative Law Review and a B.A. from the University of Pennsylvania. James is admitted to practice in the State of New York and the Commonwealth of...

William Simpson, Cadwalader Law Firm, New York, Corporate and Financial Services Litigation Attorney
Law Clerk

William Simpson is a law clerk in the firm’s Global Litigation Group.

William received a J.D. from Boston University School of Law, where he was the Executive Articles Editor for the Review of Banking & Financial Law, a legal intern for a state attorney general’s office, and a Symposium Editor for the Harvard Journal of Law & Public Policy. Before law school, William earned a B.S.B.A. cum laude in Economics and Finance from the University of Arkansas, and worked for several nonprofit and public policy...

Chris Gavin, New York, Partner, Cadwalader, Structured Finance Attorney, Fintech, Mortgage Banking, Whole Loan Trading, Residential Mortgage-Backed Securities Securitization, Asset Based Finance Structured Products

Widely recognized as an active and innovative attorney in structured finance, Chris Gavin represents issuers, borrowers, sellers, buyers, lenders, official lenders, hedge funds, private equity funds and other investors in U.S. and international structured finance transactions.

The footprint and complexity of his financings span North America, South America, Europe, Australia and Africa, and individual securitizations reaching more than $20 billion. Chris represents and advises clients in a range of cross-border transactions and structured solutions involving:

  • Residential...