California payday lenders’ affiliation with federally recognized Indian tribes was insufficient to entitle them to the tribes’ sovereign immunity from complying with state licensing and consumer protection laws, the Supreme Court of California determined. The California high court set out a five-part analysis for determining when affiliated entities are rightfully entitled to a tribe’s sovereign immunity (The People ex rel. Jan Lynn Owen v. Miami Nation Enterprises, Dec. 22, 2016, Liu, G.).
"This ruling is an important win for California’s payday loan consumers," said the California Department of Business Oversight (DBO) Commissioner Jan Lynn Owen. "It strengthens our ability to enforce laws prohibiting excessive fees and unlicensed activity by denying payday lenders’ ability to inappropriately use tribes’ sovereign immunity to avoid complying with state law."
Affiliated payday lending entities. The Miami Tribe of Oklahoma and Santee Sioux Nation of Nebraska had formed affiliated payday lending entities that did business in California. Those entities contracted with a private firm run by brothers Scott and Blaine Tucker to operate the payday lending businesses. The businesses operated under the following names: Ameriloan, United Cash Loans, U.S. Fast Cash, Preferred Cash, and One Click Cash.
In 2006, the DBO issued an order against the five payday lending entities to stop them from engaging in unlicensed activity. After the businesses ignored the order, the DBO filed suit alleging that the businesses were violating several provisions of the state’s payday lending statute, the California Deferred Deposit Transaction Law (Fin. Code, § 23000 et seq.). The alleged violations included: charging unlawfully high fees, with some APRs reaching 845 percent; making transactions that exceeded the $300 statutory cap; using threats and harassment to collect payments; and unlicensed activity.
Lower court decision. The state Court of Appeal found in favor of immunity. Although the Tuckers signed all the businesses’ checks, and the tribes exercised little or no control over the day-to-day operations, the court concluded that, "Absent an extraordinary set of circumstances not present here, 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."
High court response. The high court determined that the lower court gave "inordinate weight" to formal considerations. Here, the court continued, the language of the management agreements is not, by itself, sufficient to warrant the lower court’s conclusion that the lending entities "are not merely passive bystanders to the challenged lending activities."
Test for immunity. The high court said the main legal question in the case is how to determine whether a tribally affiliated entity shares in a tribe‘s immunity from suit. It concluded that an entity asserting immunity bears the burden of showing by a preponderance of the evidence that it is an "arm of the tribe" entitled to tribal immunity. In making that determination, courts should apply a five-factor test that considers (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.
Applying those five factors, the court held that the affiliated lending entities did not show that they were entitled to tribal immunity as an arm of its affiliated tribe. "Having clarified the legal standard and burden of proof for establishing arm-of-the-tribe immunity," the court concluded, "we express no view on whether the parties have had the opportunity to fully litigate their claims under that standard. The trial court may examine that issue on remand."
For more information about payday lenders, subscribe to the Banking and Finance Law Daily.
