Insights

Over the last few years, creditors eager to operate national lending programs while minimizing the compliance burdens associated with the individual nooks and crannies of state law have turned to a variety of models to avoid state laws that may hamper their businesses. Some of those models – such as the choice-of-law model and the bank exportation model – are well-known and have some case law that either disavows or reinforces their utility for creditors. Recently, more and more creditors have turned to partnering with Native American reservations so that they can rely on tribal sovereign immunity to protect them from intrusive state laws. Tribal sovereign immunity, a legal doctrine that precludes the filing of litigation against a sovereign government – that is, the tribe – without that government’s consent, protects a Native American tribe from a lawsuit in federal or state court. Some state courts have gone a step further to hold that that tribal sovereign immunity extends not only to the Native American tribes themselves, but also to those for-profit commercial entities that function as “arms of the tribes.” Although neither the U.S. Supreme Court nor any U.S. circuit court of appeals has yet addressed whether tribal sovereign immunity extends to Native American for-profit commercial entities that function as “arms of the tribes,” at least two state courts have reviewed the claim of tribal sovereign immunity in relation to a consumer lending program. The results provide a mixed bag for creditors in search of alternative lending models.

In the 2008 case of Ameriloan v. Superior Court, the California Department of Corporations delivered summonses to several payday loan companies that provided short-term loans to California residents over the Internet seeking to enforce the state payday lending laws. The DOC filed an action in state court to compel compliance with the summonses, and the trial court denied a motion by the companies to quash the summonses. The companies appealed claiming that, as business entities wholly owned by federally-recognized Native American tribes, they enjoyed protection from the state enforcement action under the doctrine of tribal sovereign immunity. The California appellate court agreed, holding that the doctrine of tribal sovereign immunity also protected a tribe’s off-reservation, for-profit commercial conduct. In its decision, the California Court of Appeals observed that the trial court did not address whether the payday loan companies, which were not themselves Native American tribes, operated as “arms of the tribe” for purposes of the tribal sovereign immunity doctrine. The appellate court vacated the order denying the motion to quash the summons and granting the DOC’s preliminary injunction and remanded the case to the trial court to determine whether the doctrine of tribal sovereign immunity applied to payday loan companies owned by a tribe.

In its order remanding the case to the trial court, the California Court of Appeals also rejected a public policy argument in favor of applying consumer protection laws to protect “vulnerable” consumers. The DOC argued that because payday loan companies “prey” on those unable to obtain credit elsewhere, their violations of the state payday lending law harm a particularly vulnerable part of the population. Although the appellate court declared itself “not unsympathetic to the [DOC]’s policy argument,” the court concluded that sovereign immunity presents a pure jurisdictional question not subject to policy arguments. Thus, the court declined to allow the state’s lawsuit to proceed – a win for tribal sovereign immunity.

In State ex rel. Suthers v. Cash Advance & Preferred Cash Loans, neighboring Colorado, through its Attorney General’s Office, initiated investigatory proceedings against two Internet payday lenders run by Native American tribes for potential violations of Colorado law. The state sought, through an administrative subpoena, documents describing the businesses’ corporate structures and detailing their lending activities in Colorado. The businesses claimed that, as tribal entities, sovereign immunity protected them from the investigation powers of the Colorado Attorney General. The Colorado Court of Appeals rejected this and determined that Colorado law regulated the lenders for at least the purpose of complying with the investigation requests, even if the businesses were part of a Native American tribe. This ruling means that, as an initial matter, such tribal businesses are subject to court orders compelling them to produce information about their eligibility for tribal sovereign immunity. Importantly, the Colorado Court of Appeals affirmed that if the investigation revealed that the businesses operated in a manner that made them “arms of the tribes,” they could claim immunity from the enforcement actions. The Colorado Supreme Court granted certiorari and heard argument on this appeal in January.

As these cases make clear, the road to minimal compliance burdens remains bumpy for lenders who rely on a tribal sovereign immunity lending model. For one thing, such immunity does not make the underlying activity at issue legal —it simply means that the state or other regulator cannot hale the tribe into court to make it account for its noncompliance with state law. A potential downside to this, of course, lies in the ability of the tribe to enforce its credit obligations in court. It is not inconceivable that a court would decline the tribe’s attempts to make a defaulting debtor pay when the tribe does not comply with the substantive consumer protection laws of the debtor’s state. We anticipate an increase in developments on this front as lenders seek creative ways to minimize the compliance burdens that come with operating a multistate or a national lending program.

Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or by email at cbrennan@hudco.com.