Originally Published in The Business Lawyer (Vol. 68, No. 2), by ABA Business Law Section - February 2013.
Native American tribes increasingly are engaging in consumer lending over the Internet.1 These “tribal loans” present unique legal questions and issues, including whether tribal sovereign immunity shields tribes and their service providers from state usury restrictions. This survey includes a brief introduction to the “tribal sovereign immunity” doctrine followed by an overview of recent actions brought by state officials, private class action litigation, and federal agency activities addressing tribal sovereign immunity as it relates to tribal lending.
Tribal Sovereign Immunity
The United States Constitution grants Congress the power to regulate commerce with the tribes.2 Early United States Supreme Court decisions explained that only Congress can grant states authority over tribes, and Congress must do so expressly.3 Sovereign immunity generally prevents suits against tribes in state or federal court by state residents, state agencies, or federal agencies, unless the tribe waives such immunity or unless Congress authorizes such suit.4
The leading U.S. Supreme Court case with respect to the commercial activity of tribal entities and sovereign immunity is Kiowa Tribe v. Manufacturing Technologies, Inc.5 In that case, the tribe defaulted on a promissory note, and the plaintiff sued the tribe and lost when the tribe asserted sovereign immunity.6 The plaintiff had argued that immunity should not apply when the tribal entity was involved in a commercial venture conducted off of the reservation.7 The Supreme Court disagreed, finding that it had never drawn a distinction between governmental and commercial activities of the tribe or between on-reservation and off-reservation activities.8 This case, along with those discussed below, form the basis of the law regarding tribal lending in the United States.
State Enforcement Actions
Colorado Attorney General
In State of Colorado v. Cash Advance, a state trial court held that two tribal-owned consumer lending businesses were entitled to tribal sovereign immunity.9 The court’s holding followed an eight-year contest between Colorado and the defendants,10 Miami Nations Enterprises, Inc. (MNE) and SFS, Inc. (SFS), which asserted immunity from subpoenas and enforcement orders as arms of federally recognized tribes.11
The matter made its way to the Colorado Supreme Court, which held that: (i) tribal immunity applies to administrative subpoenas directed at tribal commercial activities conducted off tribal lands; (ii) such immunity depends on whether the entity is an “arm of the tribe”; (iii) officers of tribal entities are immune for acts within the scope of their tribal authority; and (iv) the state has the burden of proving by a preponderance of the evidence that the tribal entities are not immune.12
The Colorado Supreme Court remanded the case for a determination of whether MNE and SFS were “arms” of their respective tribes under the following three-part test: (i) whether the tribes created MNE and SFS pursuant to tribal law; (ii) whether the tribes own and operate MNE and SFS; and (iii) whether MNE’s and SFS’s immunity protects the tribes’ sovereignty.13
On remand, the trial court found that MNE was owned and operated by a tribe because: (i) the Miami Tribe of Oklahoma’s Chief and its business committee appointed the MNE directors; (ii) two-thirds of MNE’s directors were required to be tribal members; (iii) MNE’s initial chief executive officer answered to the tribe’s council; and (iv) MNE’s employees worked on tribal land.14
The tribe owned and operated SFS, according to the court, because SFS was governed and regulated entirely by a director appointed by the Santee Sioux Nation.15 The court also noted that each loan was approved in accordance with the tribe’s lending criteria.16 Further, the court found that the Miami Tribe used the lending revenues to build a new headquarters for MNE, to employ tribal members, and to fund various tribal programs.17 The Sioux used the revenues to buy additional tribal lands, fund head-start programs, and fund educational activities.18 Ultimately, the court found that providing MNE and SFS with tribal immunity would protect the immunity of the respective tribes.19
Additionally, the trial court pointed out on remand that even if the State of Colorado’s allegations that the entities were “shams” proved true, it does not follow that the entities lose their immunity,20 as “immunity does not depend in any way on the type of business a tribal entity engages in, with whom, or for what ulterior purpose.”21 Five days after issuing its ruling, the trial court amended its opinion, noting that a third-party entity was entitled to 99 percent of the operational revenues, while the tribal businesses received the remaining 1 percent.22 Still, the court stated that while “this correction makes the ‘sham’ issue closer as a factual matter . . . the State has not proved that the tribal entities are currently sham owners” and “even if they were, that characterization would not displace their tribal immunity.”23
The trial court affirmed its previous ruling that the tribal entities were entitled to sovereign immunity, stating: “once they are arms of the tribes, [the entities] are clothed with the tribes’ immunity regardless of the particular business they operate or the manner of that operation.”24 Notably, however, the court indicated that while using a “sham” service provider would not affect the sovereign immunity of the tribe, the servicer was entitled to no such immunity, and the Colorado attorney general was free to pursue an action against it.25
West Virginia Attorney General
In November 2011, after years of litigation concerning whether several Internet payday lenders were entitled to sovereign immunity or were subject to the enforcement of subpoenas issued by the West Virginia attorney general,26 one of the lenders filed a petition for a writ of prohibition asking the West Virginia Supreme Court whether a circuit court had the “authority to exercise jurisdiction” over “a company wholly owned by an enrolled member of the Cheyenne River Sioux Tribe and operated on the Cheyenne River Indian Reservation.”27 The West Virginia Supreme Court refused the petition.
Missouri Attorney General
The Missouri attorney general brought suit against Payday Financial, LLC, Western Sky Financial, LLC, and others in state court, claiming that their Internet-based lending businesses violated Missouri laws.28 The defendants removed the case to federal court.29 On March 27, 2012, the district court remanded the case back to state court, holding that: (i) sovereign immunity assertions do not create a federal question for jurisdiction purposes;30 (ii) forum selection clauses provide no basis for federal jurisdiction;31 and (iii) the individual defendant’s tribal membership did not confer sovereign immunity on him or on the defendant South Dakota limited liability companies.32
Maryland Commissioner of Financial Regulation
The Maryland Commissioner of Financial Regulation (MCFR) issued a cease-and-desist order against Payday Financial, LLC, Western Sky Financial, LLC, and others.33 The defendants removed the case to federal court, and the MCFR moved to remand the case.34 On October 12, 2011, the district court granted the motion, noting that federal interests did not predominate over Maryland’s interest in regulating lending.35
The defendants filed a separate action against the MCFR, claiming the MCFR did not have any authority or power to prosecute the cease-and-desist order because they were entitled to sovereign immunity.36 Despite the defendants’ claims, the MCFR’s motion to dismiss was granted on October 13, 2011, on the ground that the lenders had not identified a treaty or statute that granted them immunity.37
After the lenders amended their complaint, the MCFR again moved to dismiss, which was also granted.38 Applying the abstention doctrine set forth in Younger v. Harris,39 the court found that: (i) the MCFR’s enforcement action qualified as a state-initiated enforcement action;40 (ii) Maryland’s interest in protecting its citizens from predatory loans made in Maryland, not on reservations, does not by its very nature conflict with an overwhelming federal interest;41 and (iii) the plaintiffs would have an adequate opportunity to present their constitutional concerns on appeal from the administrative proceeding.42 Therefore, the court held that it should abstain from interfering in Maryland’s enforcement of its lending laws.43
Georgia Attorney General
On May 18, 2012, the Georgia attorney general issued a press release indicating that Payday Financial, LLC, Western Sky Financial, LLC, and another payday lender had “agreed to cease making loans in Georgia.”44 According to the press release, state law prohibits making payday loans, including through the Internet.45
Class Action Litigation
At least two class action cases addressing purported tribal loans were filed in the last year, one in Illinois and one in Kansas. In both cases, the plaintiffs alleged that consumer loans were being coordinated by non-tribal entities and that this violated state law.
Illinois Class Action
In Illinois, the plaintiffs filed a class action alleging that the defendants issued loans at rates exceeding the state’s civil and criminal usury limits46 and that the loans mandated “individual arbitration” before a tribal arbitrator47 using arbitration clauses that were “unenforceable and racially discriminatory.”48 Upon removal to federal court, the plaintiffs restated similar claims in an amended complaint.49 In response, the defendants argued that the consumers had agreed to contractual choice-of-law, forum-selection, arbitration, and class-action waiver provisions, which made federal court the wrong forum for the dispute.50
On July 9, 2012, the court held that the loan agreements required arbitration on the tribal reservation, applying tribal law, and that borrowers could “litigate the dispute in person, by telephone, or by video conference.”51 The court noted that the transaction’s alleged illegality had “no bearing on the validity of the forum selection clause” and that the “threshold question” was simply whether venue was “proper in the first instance.”52 Regarding allegations of duress, the court found that the plaintiffs had not alleged that the defendants “applied any pressure” to have the plaintiffs sign the loan agreements and further noted that “difficult financial circumstances alone do not warrant invalidating the forum selection clause.”53 Finally, the court held that the plaintiffs failed “to demonstrate that Illinois’ public policy warrants invalidating their freely contracted choice to litigate their dispute in the Tribal forum.”54
Kansas Class Action
In the Kansas class action, the plaintiffs alleged that a lending operation violated various state and federal laws.55 The defendant moved to dismiss for several reasons, including that: (i) the plaintiffs failed to allege an actual injury; (ii) the plaintiffs failed to state a claim for relief; (iii) the plaintiffs failed to identify and join required parties; and (iv) the plaintiffs failed to allege loan repayment.56 The district court granted the motion, explaining that the plaintiff had failed to plead a concrete and particularized injury to the plaintiff ’s business or property and thus lacked standing to bring a RICO action.57 Accordingly, the court lacked original jurisdiction over the plaintiff ’s federal claim, and the case was dismissed without prejudice.58
Federal Agency Activity
The Federal Trade Commission (FTC) has also turned its attention to tribal lenders engaged in payday lending, filing enforcement actions under the Federal Trade Commission Act of 1914 (FTC Act)59 and various federal consumer protection laws. In these lawsuits, the FTC asserts that while tribal sovereign immunity may prevent certain state actions against tribes, it does not exempt tribal entities from complying with federal law.
In September 2011, the FTC sued Payday Financial, LLC, Western Sky, LLC, and other lenders for attempting to garnish consumers’ wages without a court order.60 The FTC alleged that this activity revealed borrowers’ alleged debts to their employers and deprived borrowers of their right to dispute the debts or make payment arrangements in violation of the FTC Act.61 The FTC also raised claims under the Credit Practices Rule,62 the Electronic Fund Transfer Act (EFTA),63 and Regulation E.64
According to the FTC’s allegations, the defendants sent documents to borrowers’ employers mimicking those used by federal agencies under the Debt Collection Improvement Act of 1996 (DCIA).65 The FTC alleged that the entities, as non-government creditors, should have obtained a court order before garnishing wages.66 The FTC complaint alleged that the entities misrepresented that they could garnish wages without such an order.67 Further, the entities also allegedly falsely represented that they had notified borrowers about the pending garnishment and provided an opportunity to dispute the debt.68 The defendants also allegedly unfairly disclosed the existence and the amounts of consumers’ supposed debts without the consumers’ knowledge or consent.69 The FTC complaint further alleged that the defendants violated the Credit Practices Rule by using wage assignment clauses with no right to revoke.70 Finally, the FTC asserted that the defendants required authorization for electronic payments as a condition to obtaining credit in violation of the EFTA and Regulation E.71
After the lawsuit was filed, the parties agreed to a stipulated preliminary injunction to halt the conduct alleged by the FTC.72 The FTC then expanded its case in March 2012 in an amended complaint alleging that: (i) requiring borrowers to travel to South Dakota for collection actions was unfair and that the credit agreements were deceptive in describing this process;73 (ii) the tribal court did not have jurisdiction over claims against state residents;74 and (iii) the tribal court had no jurisdiction to decide the debt collection complaints or to issue the garnishment orders.75 In addition to injunctive relief, the FTC sought civil penalties for every alleged Credit Practices Rule violation.76 At this writing, the litigation is still pending.
In April 2012, the FTC filed a similar lawsuit in a federal court in Nevada against the Miami Tribe of Oklahoma’s AMG Services, Inc. and others that allegedly engaged in unlawful origination and collection tactics.77 The FTC alleged that the defendants’ loan agreements each represented a single payment obligation, but that they nonetheless assessed multiple finance charges and made multiple bank account debits without disclosing the true costs of the loan, thus violating section 5(a) of the FTC Act.78 The FTC also asserted that this conduct violated the Truth in Lending Act79 by failing to disclose the finance charge, the annual percentage rate, the payment schedule, and the total of payments in a manner reflecting the terms of the legal obligation between the parties.80
The defendants also allegedly falsely threatened arrest, prosecution, imprisonment, and lawsuits for failing to repay.81 Additionally, the FTC asserted that the defendants violated the EFTA by illegally requiring consumers to preauthorize electronic fund transfers from their accounts.82
The FTC also sought a preliminary junction to preserve effective final relief to remediate the allegedly ongoing deceptive and unlawful conduct of the defendants in extending and collecting payday loans.83 In May 2012, the defendant chief executive officer of defendant AMG Services filed a motion to dismiss on the ground that to hold an individual liable for a corporation’s deceptive practices the FTC must first prove an underlying corporate violation of section 5 of the FTC Act.84 The other defendants also moved to dismiss on various other grounds.85 At this writing, the motions are pending.
In addition to the FTC activity noted above, the Bureau of Consumer Financial Protection (CFPB) has signaled its desire to challenge tribal lending. At a speech before the National Association of Attorneys General, CFPB Director Richard Cordray stated that the CFPB would focus attention on the tribal lending model.86 In response to a question from the Colorado attorney general, Cordray reportedly responded that “[i]f there is, legitimately, a tribal entity that can oust a state of effective jurisdiction to enforce laws against that entity, it does not oust the federal government. So that may be one where when you’re having that problem you should turn to us, and let us work on it.”87
To date, state actions, class action cases, and federal agency actions have yielded mixed results. Most agree that federally recognized, sovereign tribes have the authority to engage in Internet lending to state residents without those tribes being subjected to state authority. However, the extent to which tribal sovereign immunity shields service providers that assist tribes engaging in this business remains to be seen, as does the proper role of federal agencies such as the FTC and CFPB. Ultimately, Congress may be asked to establish laws regulating various tribal lending practices and jurisdiction over them.
1. See, e.g., Jessica Silver-Greenberg, Payday Lenders Join with Indian Tribes, WALL ST. J., Feb. 10, 2011, at C1, available at http://online.wsj.com/article/SB10001424052748703716904576134304155106320.html.
2. U.S. CONST. art. I, § 8, cl. 3.
3. See, e.g., Worcester v. Georgia, 31 U.S. 515 (1832); Cherokee Nation v. Georgia, 30 U.S. 1 (1831); Johnson v. McIntosh, 21 U.S. 543 (1823).
4. See 42 C.J.S. Indians § 19 (2007) (citing Walton v. Tesuque Pueblo, 443 F.3d 1274 (10th Cir.), cert. denied, 549 U.S. 103 (2006)). The complete history of tribal sovereign immunity is beyond the scope of this survey. For more information on these issues, see STEPHEN L. PEVAR, THE RIGHTS OF INDIANS AND TRIBES (4th ed. 2012).
5. 523 U.S. 751 (1998).
6. Id. at 754.
8. Id. at 755.
9. No. 05CV1143, slip op. at 8 (Denver Cty. Dist. Ct. Feb. 13, 2012) (order) [hereinafter Colorado Order].
10. Id. at 2.
11. Id. at 5.
12. Cash Advance & Preferred Cash Loans v. State ex rel. Suthers, 242 P.3d 1099, 1102 (Colo. 2010).
14. Colorado Order, supra note 9, at 13–14.
15. Id. at 15.
16. Id. at 15–16.
17. Id. at 17.
19. Id. at 18.
20. Id. at 20.
21. Id. at 22.
22. State of Colorado v. Cash Advance, No. 05CV1143, slip op. at 20 (Denver Cty. Dist. Ct. Feb. 18, 2012) (amended order).
23. Id. at 1.
24. Id. at 22.
26. State of West Virginia ex rel. McGraw v. Payday Loan Res. Ctr., LLC, No. 10-MISC-372 (Kanawha Cnty. Cir. Ct. Oct. 24, 2011) (order) [hereinafter West Virginia Order].
27. Petition for Writ of Prohibition at 1, SER Payday Fin., LLC v. Bloom, No. 11-1582 (W. Va. Nov. 22, 2011).
28. Complaint, State of Missouri v. Webb, No. 11SL-CC01680 (St. Louis Cnty. Cir. Ct. Apr. 25, 2011).
29. Petition for Removal, State of Missouri v. Webb, No. 4:11-cv-1237-AGF (E.D. Mo. July 18, 2011).
30. State of Missouri v. Webb, No. 4:11-cv-1237-AGF, slip op. at 8-9 (E.D. Mo. Mar. 27, 2012) (order).
31. Id. at 9.
32. Id. at 8.
33. Md. Comm’r of Fin. Regulation v. W. Sky Fin., LLC, No. CFR-FY2010-182 (Feb. 15, 2011).
34. Md. Comm’r of Fin. Regulation v. W. Sky Fin., LLC, No. 1:11-cv-0735-WDQ, 2011 U.S. Dist. LEXIS 117665, at *2 (D. Md. Oct. 12, 2011).
35. Id. at *15.
36. Complaint at 3, W. Sky Fin., LLC v. Md. Comm’r of Fin. Regulation, No. 1:11-cv-1256-WDQ (D. Md. May 10, 2011).
37. W. Sky Fin., LLC v. Md. Comm’r of Fin. Regulation, No. 1:11-cv-1256-WDQ, 2011 U.S. Dist. LEXIS 118241, at *11 (D. Md. Oct. 13, 2011).
38. W. Sky Fin., LLC v. Md. Comm’r of Fin. Regulation, No. 1:11-cv-1256-WDQ, 2012 U.S. Dist. LEXIS 107016, at *18 (D. Md. July 27, 2012).
39. 401 U.S. 37 (1971).
40. W. Sky Fin., 2012 U.S. Dist. LEXIS 107016, at *13.
41. Id. at *16.
42. Id. at *17.
44. Press Release, Ga. Attorney Gen., Attorney General Sam Olens Intervenes to Stop Illegal Payday Lending in Georgia (May 18, 2012), available at http://law.ga.gov/00/press/detail/0,2668,87670814_87670929_185081158,00.html.
46. Complaint at 1, Jackson v. Payday Fin., LLC, No. 2011 CH 5207 (Cook Cnty. Cir. Ct. Oct. 11,
47. Id. at 13.
48. Id. at 14.
49. Second Amended Complaint, Jackson v. Payday Fin., LLC, No. 11-cv-9288 (N.D. Ill. Jan. 26, 2012).
50. See Motion to Dismiss, Jackson v. Payday Fin., LLC, No. 11-cv-9288 (N.D. Ill. Feb. 3, 2012).
51. Jackson v. Payday Fin., LLC, No. 11-cv-9288, 2012 U.S. Dist. LEXIS 94095, at *4 (N.D. Ill. July 9, 2012).
52. Id. at *8.
53. Id. at *9 (citing CIT Grp./Credit Fin., Inc. v. Lott, No. 93-cv-0548, 1993 U.S. Dist. LEXIS 6669, at *5–6 (N.D. Ill. May 12, 1993)).
54. Id. at *11. This ruling was promptly appealed, and the appeal is pending. Jackson v. Payday Fin., LLC, No. 11-cv-9288, 2012 U.S. Dist. LEXIS 94095 (N.D. Ill. July 9, 2012), appeal docketed, No. 12-2617 (7th Cir. July 10, 2012).
55. See Complaint, Robinson v. Tucker, No. 12-cv-2200 (D. Kan. Apr. 6, 2012).
56. See Memorandum of Law in Support of Motion to Dismiss at 11, Robinson v. Tucker, No. 12-cv-2200 (D. Kan. June 4, 2012).
57. Robinson v. Tucker, No. 12-cv-2200 (D. Kan. Nov. 13, 2012) (order).
58. Id. at 6.
59. Ch. 311, 38 Stat. 717 (1914) (codified as amended at 15 U.S.C.A. §§ 41–58 (West, Westlaw through Pub. L. No. 112-173)).
60. Complaint, FTC v. Payday Fin., LLC, No. 3:11-cv-03017-RAL (D.S.D. Sept. 6, 2011) [hereinafter FTC Complaint], available at http://www.ftc.gov/os/caselist/1123023/110912paydaycmpt.pdf.
61. Id. at 11.
62. 16 C.F.R. §§ 444.1–444.5 (2012).
63. Pub. L. No. 90-321, 92 Stat. 3728 (1978) (codified as amended at 15 U.S.C.A. §§ 1693–1693r (West, Westlaw through Pub. L. No. 112-173)).
64. 12 C.F.R. pt. 1005 (2012).
65. FTC Complaint, supra note 60, at 10 (citing Pub. L. No. 104-134, 110 Stat. 1321 (1996)).
67. Id. at 11.
68. Id. at 12.
69. Id. at 12–13.
70. Id. at 13.
71. Id. at 14–15.
72. Press Release, Fed. Trade Comm’n, FTC Action Halts Allegedly Illegal Tactics of Payday Lending Operation that Attempted to Garnish Consumers’ Paychecks (Sept. 12, 2012), available at http://ftc.gov/opa/2011/09/payday.shtm.
73. Amended Complaint at 14, FTC v. Payday Fin., LLC, No. 3:11-cv-03017-RAL (D.S.D. Mar. 1, 2012), available at http://www.ftc.gov/os/caselist/1123023/120307/paydaycmpt.pdf.
74. Id. at 15.
75. Id. at 13.
76. Id. at 17.
77. Complaint, FTC v. AMG Servs., Inc., No. 2:12-cv-00536 (D. Nev. Apr. 2, 2012) [hereinafter AMG Complaint], available at http://www.ftc.gov/os/caselist/1123024/120402amgcmpt.pdf.
78. Id. at 10 (citing 15 U.S.C. § 45(a)).
79. Pub. L. No. 90-321, 82 Stat. 246 (1968) (codified as amended at 15 U.S.C.A. §§ 1601–1667f (West, Westlaw through Pub. L. No. 112-173)).
80. AMG Complaint, supra note 77, at 11–14.
81. Id. at 14.
83. See Memorandum in Support of Motion for Preliminary Injunction, FTC v. AMG Servs., Inc., No. 2:12-cv-00536 (D. Nev. Apr. 2, 2012), available at http://www.ftc.gov/os/caselist/1123024/120402amgmemo.pdf.
84. Motion to Dismiss of Defendant Brady, FTC v. AMG Servs., Inc., No. 2:12-cv-00536 (D. Nev. May 25, 2012).
85. See, e.g., Motion to Dismiss of Defendant LittleAxe, FTC v. AMG Servs., Inc., No. 2:12-cv-00536 (D. Nev. May 25, 2012); Motion to Dismiss of Defendant AMG Servs., Inc., FTC v. AMG Servs., Inc., No. 2:12-cv-00536 (D. Nev. May 25, 2012).
86. See Carter Dougherty, Payday Lenders and Indians Evading Laws Draw Scrutiny, BLOOMBERG BUS. NEWS ( June 5, 2012), available at http://www.bloomberg.com/news/2012-06-04/payday-lenders-andindian-tribes-evading-laws-draw-scrutiny-1-.html.
87. See Alan S. Kaplinsky, The Native American Tribes Respond to Director Cordray, CFPB MONITOR (Mar. 8, 2012), available at http://www.cfpbmonitor.com/2012/03/08/the-native-american-tribesrespond-to-director-cordray/.