The U.S. Court of Appeals, Second Circuit has ruled that an online tribal lender must comply with state interest rate and licensing laws, allowing a pair of borrowers to move forward with their suit against tribal officials.
The decision affirms a district court ruling that tribal sovereign immunity did not bar the lawsuit, which seeks prospective, injunctive relief based on violations of state and substantive federal law occurring off tribal lands.
What happened
An online lending company holds itself out as a tribal lending entity wholly owned by the Chippewa Cree Tribe of the Rocky Boy’s Indian Reservation in Montana. In 2011, Jessica Gingras borrowed $1,050 from the lender at an interest rate of 198.17 percent per annum; after repaying that loan, she borrowed an additional $2,900 at an interest rate of 371.82 percent in 2012.
Angela Given took out four loans with the lender: a $1,250 loan at a rate of 198.45 percent, followed by loans of $2,000 at a rate of 159.46 percent, $250 at a rate of 376.13 percent and $3,000 at a rate of 59.83 percent. Both Gingras and Given signed loan agreements that provided for arbitration in the event of a dispute between the borrower and the lender.
Gingras and Given filed suit against the lender and three individuals (the company’s chief executive officer and two board members, referred to by the court as the tribal defendants) as well as the loan servicer, its former president, and its subsidiaries, which provide funding for the lending operation.
The plaintiffs alleged that the defendants violated Vermont and federal law by charging annual interest rates between 60 and 360 percent and setting a maximum loan amount of $2,500, establishing an arrangement between the parties to circumvent usury and consumer protection laws. Vermont laws prescribe a maximum interest rate of 24 percent per annum.
The tribal defendants moved to dismiss the suit, arguing that they were entitled to sovereign immunity. The district court disagreed and denied the motion, and the Second Circuit affirmed on appeal.
“[N]otwithstanding tribal sovereign immunity, federal courts may entertain suits against tribal officers in their official capacities seeking prospective, injunctive relief prohibiting off-reservation conduct that violates state and substantive federal law,” the federal appellate panel wrote, applying a theory analogous to the Supreme Court’s 1908 opinion in Ex parte Young.
That decision permits plaintiffs seeking prospective, injunctive relief to sue state government officials for violations of federal law. “Given that tribal immunity arises from tribes’ statuses as sovereigns, it is unremarkable that they too can be sued for prospective, injunctive relief based on violations of federal law,” the court said.
The justices themselves have already blessed Ex parte Young-by-analogy suits against tribal officials for violations of state law, the panel noted, allowing the state of Michigan to sue tribal officials or employees seeking an injunction to halt the opening of a casino outside Indian lands in Michigan v. Bay Mills Indian Community.
As for the tribal defendants’ arguments to the contrary, the Second Circuit did not find any of them persuasive. The extension of remedies available to Michigan in Bay Mills was not dicta, the panel said, as the ability to sue tribal officials for violations of state law was “critical to the Court’s analysis and necessary to its holding.”
Nor did the justices intend to limit Bay Mills to authorize only states to sue tribal officials for prospective, injunctive relief and not authorize individuals to bring the same suits, the court said, finding no validation in the Supreme Court cases that the action should turn on the identity of the plaintiff.
“Our holding balances the competing interests of tribes and states as separate sovereigns,” the panel wrote. “Absent this mechanism for a state to enforce its laws against out-of-state tribal officials, the state and its citizens would seemingly be without recourse. Tribes and their officials would be free, in conducting affairs outside of reserved lands, to violate state laws with impunity. Given the unique geographic and political position of Indian tribes, allowing such conduct by tribes is especially fraught.”
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, the court said.
The Second Circuit also allowed the plaintiffs’ the Racketeer Influenced and Corrupt Organizations Act claims to proceed, denying the defendants’ motion to dismiss those counts, and rejected the defendants’ efforts to compel arbitration, concluding that the arbitration agreements were both unenforceable and unconscionable.
“[The lender] is a payday lending entity cleverly designed to enable defendants to skirt federal and state consumer protection laws under the cloak of tribal sovereign immunity,” the panel wrote. “That immunity is a shield, however, not a sword. It poses no barrier to plaintiffs seeking prospective equitable relief for violations of federal or state law.” Tribes and their officers are not free to operate outside of Indian lands without conforming their conduct in these areas to federal and state law. Attempts to disclaim application of federal and state law in an arbitral forum subject to exclusive tribal court review fare no better.
To read the Second Circuit opinion, click here.
Why it matters
Courts have struggled with the issue of tribal sovereign immunity and off-reservation commercial activity with varying results, although the recent trend appears to be leaning more in favor of borrowers than the tribes, as demonstrated by the Second Circuit opinion. Other tribal lenders are facing similar suits across the country.