On April 24, 2019, the U.S. Court of Appeals for the Second Circuit issued its decision in the case of Gingras v. Think Finance, Inc., 2019 WL 1780951 (2d Cir. April 24, 2019), a decision with far-reaching implications on Native American sovereign immunity and predatory lending practices.
From July 2011 through July 2013, plaintiff-appellees Jessica Gingras and Angela Given borrowed various amounts, ranging from $1,000 to $3,000, from Plain Green, LLC. Plain Green operates as a “tribal lending entity wholly owned by the Chippewa Cree Tribe of the Rocky Boy’s Indian Reservation, Montana.” Id. at *1. The interest rates applicable to the loans were as high as 376.13 percent per annum, amounts which are considered typical in the short-term payday loan industry.
In executing the loan agreements and receiving the funds, Gingras and Given were required to submit to arbitration in the event of a dispute with Plain Green. The arbitration provision in the contracts contained a delegation clause which provided that "any Dispute . . . will be resolved by arbitration in accordance with Chippewa Cree Tribal law." The agreements also provided that Chippewa Cree Tribal law governs the agreement itself, and also that "[n]either this Agreement nor the Lender is subject to the laws of any state of the United States." Id. at *2.
Gingras and Given filed a class-action lawsuit in federal court in Vermont alleging that the Plain Green loan agreements violated federal law. The named defendants were Plain Green, its CEO Joel Rosette, and two members of its board of directors in their official capacities for declaratory and injunctive relief. Additionally, the suit named Think Finance, Inc., an entity alleged to have been employed by Plain Green to fund the lending operation, Think Finance’s former president and CEO, and several of its subsidiaries. The suit sought injunctive relief to bar the defendants from continuing their lending practices. The defendants moved to dismiss the lawsuit on the grounds that they were entitled to tribal sovereign immunity and also moved to compel arbitration pursuant to the arbitration provision in the loan agreements.
The district court disagreed with the defendants, holding that they were not immune from suit and that the arbitration agreement was procedurally and substantively unconscionable. The defendants then appealed to the Second Circuit.
Native American tribes, while "subject to the plenary control [of] Congress," Michigan v. Bay Mills Indian Community, 572 U.S. 782, 788 (2014), are separate sovereigns pre-existing the U.S. Constitution. Santa Clara Pueblo v. Martinez, 436 U.S. 49, 56 (1978). The Second Circuit noted in its decision that one of the “core aspects of sovereignty” is the "common-law immunity from suit." Without some sort of waiver or an "unequivocal abrogation of tribal sovereign immunity by Congress, tribes are shielded from liability," which immunity extends to suits against tribes even for the tribe’s commercial activity off of designated Indian lands. Gingras, 2019 WL 1780951 at *3 (citing Santa Clara Pueblo v. Martinez, 436 U.S. 49, 56 (1978)). At issue in this case was whether this immunity operates to shield tribal officials from liability in their official capacities for conduct taking place off of the reservation which violates state law. The Second Circuit held that tribal sovereign immunity does not bar such an action.
In reaching its conclusion, the Second Circuit relied heavily on the precedent set forth by the U.S. Supreme Court in Ex Parte Young. 209 U.S. 123 (1908). Ex Parte Young created a notable exception to sovereign immunity, permitting plaintiffs seeking prospective injunctive relief to sue state government officials for violations of federal law. However, the case did not directly address whether officials are immune from suit for violations of state law. That being the case, the Second Circuit had to reconcile the holdings of other notable U.S. Supreme Court cases, namely Santa Clara Pueblo and Bay Mills.
In Santa Clara Pueblo, the U.S. Supreme Court held that an Indian tribe’s tribal immunity does not prohibit suit for injunctive relief against individuals, including officials of the tribe, who are responsible for unlawful conduct. 436 U.S. at 59. However, as in Ex Parte Young, the Court did not directly address whether immunity shielded the same individuals from suit for violations of state law.
In Bay Mills, the U.S. Supreme Court addressed a lawsuit brought by the State of Michigan against an Indian tribe for opening a casino off of Indian lands. 572 U.S. at 785. Though the Court concluded that the Indian Gaming Regulatory Act did not overrule tribal sovereign immunity and that Michigan’s suit was barred, the Court specifically stated that "resort to other mechanisms, including legal actions against the responsible individuals" may have been available to pursue violations of Michigan state law. Id. Further, the Court held that "Michigan could bring suit against tribal officials or employees (rather than the Tribe itself) seeking an injunction." Id. at 796 (emphasis added). These critical statements, when construed together, gave the Second Circuit grounds on which to hold that tribal officials can, in fact, "be sued to stop unlawful conduct by a tribe." Gingras, 2019 WL 1780951, at *4.
The defendants offered several arguments to try to convince the Court to apply their sovereign immunity. First, they argued that the U.S. Supreme Court’s statements above were mere dicta which if held to be precedential, overruled other U.S. Supreme Court decisions. Id. at *5. Second, they argued that the U.S. Supreme Court only authorized suit against tribal officials in their individual capacities. Id. at *6. Finally, they argued that Bay Mills only authorized states to bring suit against tribal officials in their official capacities. Id. at *7.
The Second Circuit, however, was not convinced, holding:
An Ex Parte Young-type suit protects a state’s important interest in enforcing its own laws and the federal government’s strong interest in providing a neutral forum for the peaceful resolution of disputes between domestic sovereigns, and it fairly holds Indian tribes acting off-reservation to their obligation to comply with generally applicable state law. Id. at 7.
The Second Circuit reached two additional conclusions. The first was that the tribal officials could be sued for injunctive relief for violations of the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"). While the defendants argued that they could not be liable for RICO violations because tribal organizations and their officials (in their official capacities) were incapable of forming the requisite mens rea in order to establish a RICO violation, the Gingras court declined to accept this argument. Rather, it sided with other federal circuits in holding that individuals in their official capacities, as well as private organizations, are routinely held liable for RICO violations. Id. at *8.
The Second Circuit also held that the arbitration clauses in the defendants’ loan agreements were unconscionable and unenforceable. Id. at *10-11. It found that the arbitration provisions effectively forced the borrowers to disclaim the application of federal and state law in favor of tribal law, something that the Second Circuit noted may be "exceedingly favorable" to the tribe and its officials. Id. at 9. As arbitration agreements which waive a party’s rights to sue under federal law are prohibited, the court found that these provisions were procedurally unconscionable and could not stand. Id. at 10 (citing Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 235-36 (2013)).
The Gingras court further held that the arbitration provisions were substantively unconscionable. "While the agreements provide for arbitration to be conducted by an AAA or JAMS arbitrator at a location convenient for the borrower, the mechanism of tribal review hollows out these protections." Id. at *10. Specifically, the court took note of the possibility that corruption in tribal organizations could have serious detrimental effects on a non-tribe-member’s chances in tribal arbitration. "Not only have several tribal officers pleaded guilty to federal corruption crimes, but an FBI and Interior Department investigation uncovered tribal judges who felt intimidated enough to rule for the Tribe when they otherwise may not have." Id. at *11. As the arbitration agreements were clearly designed to side-step state and federal law and place litigants in a potentially-biased dispute resolution forum, the court held that they were unenforceable and affirmed the district court’s denial of the defendants’ motion to compel arbitration.
The Second Circuit’s holding, while seemingly confined to issues of sovereign immunity and the validity of arbitration agreements, represents another crackdown on the payday loan industry operating through partnerships with Native American tribes. It is clearly more important than ever that lenders ensure that their loan agreements comply with both state and federal law. Should a financial institution fail to heed this and other recent federal court decisions, its officers may be held liable for damages in their official capacities for violations of both federal and state law.