No-Virtual-Prohibition Test: TitleMax of Texas v. City of Dallas Clarifies Pre-emption and Due-Course Limits on Challenges to Municipal Lending Ordinances

Introduction

TitleMax of Texas v. City of Dallas, No. 21-11170 (5th Cir. Jul. 1, 2025) presented a high-stakes clash between Texas’s burgeoning short-term lending industry and a home-rule city’s attempt to curb what it viewed as predatory loan practices.

• Parties: Plaintiffs–appellants TitleMax of Texas, Ivy Funding Company, and NCP Finance LP (collectively “TitleMax”) vs. Defendant–appellee City of Dallas.
• Procedural posture: District court denied TitleMax’s motion for preliminary injunction against a 2021 Dallas Amending Ordinance. TitleMax appealed; the Fifth Circuit affirmed.
• Key issues:
  • Whether the Amending Ordinance’s fee-cap and repayment requirements are pre-empted by Chapter 393 of the Texas Finance Code.
  • Whether the Ordinance violates the Texas Constitution’s Due Course of Law clause.
  • What showing of “likelihood of success on the merits” is necessary for a prohibitory (as opposed to mandatory) preliminary injunction.

Summary of the Judgment

The Fifth Circuit (Judge Richman, joined by Judge Wiener; Judge Willett dissenting in part) affirmed the denial of injunctive relief. The court:

1. Rejected the district court’s use of the heightened “mandatory injunction” standard but held that, even under the ordinary sliding-scale test, TitleMax failed to show a prima facie likelihood of success.
2. Held that the Ordinance is not pre-empted because TitleMax produced no evidence that it virtually prohibits the operation of all credit-services organizations (CSOs) or credit-access businesses (CABs) in Dallas.
3. Held that TitleMax lacks a constitutionally protected property or liberty interest in conducting its lending business free of new municipal regulation; therefore, the Ordinance does not violate substantive due course of law.
4. Because likelihood of success was absent, the court did not reach the remaining preliminary-injunction factors.

Analysis

Precedents Cited and Their Influence

• City of Fort Worth v. McDonald, 293 S.W.2d 256 (Tex. App. 1956) – stands for the rule that a city cannot outlaw a state-licensed occupation.
• Murphy v. Wright, 115 S.W.2d 448 (Tex. App. 1938) – ordinance held void because it effectively prohibited dance halls everywhere in the city. TitleMax leaned heavily on this case.
• City of Houston v. Bates, 406 S.W.3d 539 (Tex. 2013) – reiterated that unmistakable legislative intent is required for state-law pre-emption of a home-rule ordinance.
• Patel v. Texas Department of Licensing & Regulation, 469 S.W.3d 69 (Tex. 2015) and State v. Loe, 692 S.W.3d 215 (Tex. 2024) – modern Texas substantive due-course cases setting a two-step test (protected interest + non-oppressive regulation).
• Fifth Circuit “sliding-scale” preliminary-injunction cases: Seatrain International, Productos Carnic, Bluefield Water, etc.

The majority distinguished McDonald and Murphy because those ordinances rendered an occupation categorically impossible; TitleMax’s evidence only showed its own economic hardship, not industry-wide impossibility. This distinction birthed the decision’s key doctrinal contribution:

The “No-Virtual-Prohibition” Test: To prove state-law pre-emption, a challenger must demonstrate that the municipal ordinance virtually or categorically forbids the state-authorized activity for all participants, not merely that it prevents the plaintiff from turning a profit.

Legal Reasoning

1. Pre-emption
   • Presumption of validity. Home-rule ordinances stand unless clearly inconsistent with state law.
   • Express vs. implied conflict. TitleMax pointed to no statutory text in Chapter 393 that expressly bars municipal fee caps or installment limits.
   • No statewide occupation ban. Because other CSOs could theoretically still operate, the Ordinance is regulatory, not prohibitory.
   • Legislative silence. A “comprehensive” state scheme alone is insufficient for pre-emption without “unmistakably clear” intent to occupy the field.
2. Due Course of Law
   • No vested property interest. Licenses to operate as a CSO/CAB are privileges revocable under state regulation, not vested property rights.
   • Not a fundamental liberty. Historically, lending at interest has been heavily regulated; thus, freedom from fee caps is not “deeply rooted” liberty.
   • Rational basis satisfied. Protecting low-income borrowers from excessive fees is a legitimate governmental objective.
3. Preliminary-Injunction Standard
   • The district court mistakenly applied the more demanding standard used for mandatory injunctions.
   • Even under the ordinary “some likelihood” threshold, TitleMax’s failure on the merits doomed relief.

Impact of the Judgment

• Lending-industry regulation: Cities within the Fifth Circuit (and Texas in particular) now have clearer authority to tighten short-term lending rules—so long as they stop short of a virtual prohibition.
• Municipal powers vs. state pre-emption: The decision raises the evidentiary bar for businesses challenging city ordinances; plaintiffs must adduce industry-wide evidence, not firm-specific hardship.
• Litigation Strategy:
  • Future plaintiffs will likely commission broader economic studies to show city-wide unworkability.
  • Cities drafting ordinances may include findings expressing their intent not to extinguish but to regulate the affected industry.
• Preliminary-injunction jurisprudence: The court re-affirmed the Fifth Circuit’s sliding-scale approach and clarified that labeling an injunction “mandatory” or “prohibitory” matters; movants should articulate the nature of requested relief with precision.
• Constitutional economics: The ruling narrows substantive due-course protection for commercial enterprises in Texas, reinforcing that licenses are privileges subject to evolving regulation.

Complex Concepts Simplified

• Home-Rule City: A municipality that, under the Texas Constitution, may enact any ordinance not inconsistent with state law.
• Credit Access Business (CAB): A subset of Credit Services Organizations that broker vehicle-title loans, requiring state licensing.
• Credit Services Organization (CSO): An entity that assists consumers in obtaining loans and is subject to Chapter 393 registration.
• Pre-emption: Doctrine under which state law displaces inconsistent local law. In Texas, must be “unmistakably clear.”
• Virtual Prohibition: A regulation that, though facially allowing an activity, makes engaging in it practically impossible city-wide.
• Due Course of Law (Texas analogue to substantive due process): Protects certain vested property and fundamental liberty interests against arbitrary government action.
• Prohibitory vs. Mandatory Injunction: Prohibitory restrains a defendant from acting; mandatory compels affirmative action and demands a stronger merits showing.

Conclusion

TitleMax of Texas v. City of Dallas crystalizes a critical doctrinal boundary: city regulations that merely reduce profitability—even dramatically—do not trigger state-law pre-emption unless they virtually prohibit the entire regulated class from operating. Likewise, a license-dependent commercial enterprise enjoys scant substantive-due-course protection when faced with new regulatory burdens aimed at consumer welfare. The Fifth Circuit’s opinion thus equips municipalities with a roadmap for crafting robust, yet defensible, regulatory schemes while signalling to regulated industries that successful challenges will require comprehensive, market-wide evidence of crippling effects. In short, the case is a pivotal precedent in the ongoing tug-of-war between local consumer-protection initiatives and state-level economic deregulatory policies.