California Supreme Court Declines to Extend Tribal Sovereign Immunity to Payday Lending Businesses

by Orrick, Herrington & Sutcliffe LLP
Contact

Orrick, Herrington & Sutcliffe LLP

[co-author: Ned Hirschfeld]

On December 22, 2016, the California Supreme Court issued People ex rel. Owen v. Miami Nation Enterprises. The decision found that certain tribal business entities that provided loans in California are not "arms of the tribe" entitled to immunity from California state law regulating payday loans.

In 2005, two federally recognized tribes, the Miami Tribe of Oklahoma and the Santee Sioux Nation, created business entities under tribal law for the purpose of offering online payday loans throughout the country. These tribal entities hired a series of management companies to operate their payday lending businesses. Although the tribal entities retained authority to set lending parameters and approve or disapprove any loan, they received only a small portion of lending-related income; under the agreements with one management company, for example, they were entitled to either 1% of gross revenue or a small guaranteed monthly payment.

In 2007, the State of California sued the tribal entities for violating state law by providing payday loans without a license and exceeding statutory limits on the size of the loans and related fees. The entities claimed that they were immune from suit under state law as arms of the Miami Tribe and Sioux Nation, both of which possess tribal sovereign immunity. A state Court of Appeal sided with the tribal entities, concluding that they shared the tribes' immunity because of several formal ties. In particular, the entities had been formed under tribal law for the purpose of tribal economic development, and their leadership—which nominally retained final authority over lending decisions—was put in place by the tribes.

The California Supreme Court reversed. The court first announced a five-factor test for determining whether a tribal business entity is entitled to sovereign immunity as an "arm of the tribe." California courts must consider "(1) the entity's method of creation, (2) whether the tribe intended the entity to share in its immunity, (3) the entity's purpose, (4) the tribe's control over the entity, and (5) the financial relationship between the tribe and the entity." Contrasting its approach with that of other states, the court explained that "this test takes into account both formal and functional considerations—in other words, not only the legal or organizational relationship between the tribe and the entity, but also the practical operation of the entity in relation to the tribe."

After weighing the relevant factors, the court concluded that the tribal entities do not qualify as arms of the tribes. The court acknowledged that they nominally served to further tribal economic development by conducting payday lending operations, over which they technically retained final authority. "Notwithstanding these formal arrangements," however, the tribal entities actually provided minimal economic benefits to the tribes and exercised scant control over the lending operations of the management companies. The court found significant that the tribal entities received only a sliver of gross revenue from the management companies, failed to supervise loan decisions, and allowed one of the management companies to spend business funds at its discretion. Moreover, although the tribal entities were formed under tribal law, their initial capital and intellectual property came from non-tribal corporations. In light of those functional considerations, the five-factor test cut decisively against a finding of tribal immunity.

The California Supreme Court's decision is notable for its potential impact on the marketplace lending industry and the body of law that governs the applicability of state usury and consumer protection law to marketplace lending models.

  • The comprehensive five-factor test for tribal immunity likely makes it more difficult for a tribal entity to establish its immunity from state law. Moreover, it may be more difficult for a tribal entity to establish immunity under this test than it is for a marketplace lender to demonstrate entitlement to federal preemption under the National Bank Act or Depository Institutions Deregulation and Monetary Control Act. If so, this could influence marketplace lenders either to pursue a special purpose national bank charter or to coalesce around a bank partnership model instead of a tribal lending model.
  • The California Supreme Court found it "instructive" to contrast its decision with one issued by the United States Court of Appeals for the Tenth Circuit in which the court found a tribal entity in the casino industry entitled to immunity. The court noted that in the Tenth Circuit case, the financial arrangement was such that "any shortfall in the business operations of the casino would mean reduced income for the Tribe." The payday lending arrangements, by contrast, eliminated part of that risk by guaranteeing a minimum monthly payment to the tribal entities. This suggests that an important touchstone in the tribal immunity analysis will continue to be the exposure to business-related risk the various parties bear in a lending arrangement.
  • The California Supreme Court's approach to tribal immunity arguably mirrors recent decisions applying the so-called "true lender" doctrine to analyze not just formal, but also functional aspects of a marketplace lending arrangement in determining the applicability of state law. Relevant to the court's decision in this case were the tribe's limited ongoing financial stake and limited actual control over lending decisions. This substance-over-form approach parallels the analysis in cases like Consumer Financial Protection Bureau v. CashCall (covered here) and diverges from the focus on the formal nature of the lending partnership in Beechum v. Navient Solutions, Inc. (covered here).

Orrick will continue to monitor developments related to the application of state lending regulations and provide updates as appropriate.

 

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.

© Orrick, Herrington & Sutcliffe LLP | Attorney Advertising

Written by:

Orrick, Herrington & Sutcliffe LLP
Contact
more
less

Orrick, Herrington & Sutcliffe 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.
Custom Email Digest
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.