Tribal Sovereign Immunity Blocks Payday Lending Enforcement Action, Calif. Appellate Court Rules

by Ballard Spahr LLP
Contact

In a state enforcement action alleging violations of California’s lending law and seeking to enjoin continued lending to state residents, a California Court of Appeal has ruled that tribal sovereign immunity shielded the two tribally affiliated entities that operated the Internet payday lending businesses at issue.

In The People of the State of California v. Miami Nation Enterprises, et al., the appellate court affirmed the trial court’s order dismissing the enforcement action for lack of subject matter jurisdiction, based on the defendants’ entitlement to tribal sovereign immunity. One of the payday loan operators was a tribal entity “wholly owned and controlled” by a federally recognized Indian tribe. The other operator was a “chartered tribal corporation” that was wholly owned by a second federally recognized Indian tribe.

Both entities were formed for the stated purpose of funding governmental services provided by their respective tribes, including social welfare programs, and the articles of incorporation or tribal legislation underlying their formation provided that the entities would have sovereign immunity from suit.

The appellate court concluded that both tribal entities qualified for tribal sovereign immunity based on an “arm of the tribe” analysis. The court observed that the most significant factors in determining whether such immunity protects a tribal entity are “the tribe’s method and purpose” for creating the entity and that such factors “should be given predominant, if not necessarily dispositive, consideration.”

Refusing to be distracted by the state regulator’s pejorative characterization of online payday lending, the court noted that “tribal immunity does not depend on our evaluation of the respectability or ethics of the business in which a tribe or tribal entity elects to engage.” According to the court, absent “extraordinary circumstances,” a tribal entity functions as an “arm of the tribe” if it “has been formed by tribal resolution and according to tribal law, for the stated purpose of tribal economic development and with the clearly expressed intent by the sovereign tribe to convey its immunity to that entity, and has a governing structure both appointed by and ultimately overseen by the tribe.”

Most notably, the court rejected the state regulator’s attempt to characterize the tribal payday lending businesses as a “sham” or “rent-a-tribe” scheme based on the delegation of the businesses’ day-to-day operations to a third-party, non-tribal entity and the tribal entities’ receipt of only a modest percentage of the gross revenues. In the court’s view, a tribal entity’s entitlement to sovereign immunity should not be based on whether it contracted “with non-tribal members to operate the business” or “could have insisted on a higher percentage than they actually received.”

The court found it persuasive that the tribal entities were not “merely passive bystanders” and instead, under the management agreements with the third party, had final authority to approve or disapprove loans, and had oversight and control over day-to-day management. We note that the decision did not address the legality of the operators' conduct, merely whether they could be subject to a lawsuit.

In contrast to the California court, a federal court in New York recently refused to enjoin a New York regulator from taking direct and indirect actions that would impair the operations of online tribal lenders. The court rejected the tribal lenders’ attempt to assert tribal sovereign immunity as a sword against the state regulator in part on the ground that New York’s action was directed at activity that took place entirely off of tribal lands, involving New York residents who never left the state. It is unknown at this time whether the court would have reached a different decision if the New York regulator’s actions had included an attempt to sue them directly.

Tribal payday lending has also been a target of the Consumer Financial Protection Bureau, which rejected the request of tribal lenders to set aside civil investigative demands they received from the Bureau based on the argument that, as “arms of the tribes,” they were entitled to sovereign immunity against federal government suits. A key difference between the Bureau’s investigation and the California case is the identity of the enforcement agency—in one case a state agency and in the other case a federal agency.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP
Contact
more
less

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!