Two recent decisions provide support for the use of tribal sovereign immunity by tribally affiliated payday lenders as a defense to both state administrative proceedings and private class actions.

In Everette v. Joshua Mitchem, et al., the U.S. District Court for the District of Maryland granted the motion to dismiss filed by two payday lenders who, together with several individuals, were named as defendants in the plaintiff’s putative class action complaint. The complaint asserted claims for violations of various state laws and the Electronic Fund Transfer Act. The court ruled that the plaintiff’s claims were barred by the doctrine of tribal sovereign immunity because both lenders were “arms of the tribe.”

The Court found there was substantial evidence that the lenders were wholly owned by tribes and formed under tribal law to raise revenue for the tribes. To decide whether the lenders qualified as “arms of the tribe,” the Court applied the following six factors found in a 2010 10th Circuit decision: their method of creation, their purpose, their structure, ownership and management, including the amount of tribal control, whether the tribes intended the lenders to have immunity, the financial relationship between the tribes and the lenders, and whether the purposes of tribal sovereign immunity are served by granting immunity to the lenders. The Court found that all six factors led to the conclusion that the lenders were “arms of the tribe.” The Court noted there were declarations from tribal members involved in the lending businesses indicating that the tribes used revenue generated by the lenders to fund the provision of governmental services to tribal members and that extending immunity to the lenders would protect a significant source of the tribes’ revenue from suit.

In Great Plains Lending, LLC, et al. v. Connecticut Department of Banking, the state’s Commissioner of Banking had entered an initial order directing the plaintiffs, two tribally affiliated lenders and an individual who served as tribal chairman, to cease and desist from making payday loans without a small lender license and charging interest at a rate greater than the rate allowed by Connecticut usury law. Instead of requesting a hearing, the plaintiffs filed a motion to dismiss, alleging that tribal sovereign immunity barred a state enforcement action against them. The Commissioner denied the motion and issued a final decision ordering the plaintiffs to cease and desist from violating state law and ordering them to pay civil penalties.

The Connecticut Superior Court ruled that the state’s Commissioner of Banking, in denying the plaintiffs’ motion to dismiss, had incorrectly concluded that tribal sovereign immunity only applied to lawsuits filed in court, not to administrative proceedings. The Court concluded that because the Commissioner had authority to issue cease-and-desist orders, order restitution and disgorgement, and impose civil penalties, an administrative proceeding was similar to a suit in court since it was “a serious event that could offend the notion of a tribe as a sovereign entity.” Since the Commissioner had not ruled on whether the plaintiffs were “arms of the tribe” who qualified for tribal sovereign immunity, the Court remanded the case to the Commissioner to determine whether the plaintiffs had immunity.

Last year, a California Court of Appeal ruled that tribal sovereign immunity shielded two tribally affiliated entities that operated an Internet payday lending businesses from a state enforcement action because the entities qualified as “arms of the tribe.” In contrast, a federal court in New York last year rejected the attempt of several tribally affiliated lenders to assert tribal sovereignty to challenge New York’s authority to regulate online payday loans made by lenders to New York borrowers.

Tribal payday lending has also been a target of federal regulators. Currently pending before the Ninth Circuit is a case in which three tribally affiliated Internet payday lenders are challenging the Consumer Financial Protection Bureau’s authority to issue civil investigative demands (CIDs) to entities that are “arms of the tribe.” A California federal court rejected the lenders’ arguments that, as “arms of the tribe,” they were “sovereigns” and therefore not “persons” to whom the CFPB could issue CIDs under the Consumer Financial Protection Act, and held that the CIDs were not barred by tribal sovereign immunity. In an enforcement action alleging violations of the Federal Trade Commission Act and other federal laws by tribally affiliated Internet payday lenders, a Nevada federal court found that the FTC had authority to regulate Indian tribes, as well as “arms of tribes,” their employees, and their contractors.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

For more information, please contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky or the Ballard Spahr attorney with whom you work.

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