Update On Tribal Loans To State Residents

Article by Richard P. Eckman, Catherine M. Brennan, H. Blake Sims, and Justin B. Hosie


Native American tribes increasingly are engaging in consumer lending over the Internet.1These "tribal loans" present unique legal questions and issues, including whether tribal sovereign immunity shields tribes and their service providers from state usury restrictions. This survey includes a brief introduction to the "tribal sovereign immunity" doctrine followed by an overview of recent actions brought by state officials, private class action litigation, and federal agency activities addressing tribal sovereign immunity as it relates to tribal lending.

Tribal Sovereign Immunity

The United States Constitution grants Congress the power to regulate commerce with the tribes.2 Early United States Supreme Court decisions explained that only Congress can grant states authority over tribes, and Congress must do so expressly.3 Sovereign immunity generally prevents suits against tribes in state or federal court by state residents, state agencies, or federal agencies, unless the tribe waives such immunity or unless Congress authorizes such suit.4

The leading U.S. Supreme Court case with respect to the commercial activity of tribal entities and sovereign immunity is Kiowa Tribe v. Manufacturing Technologies, Inc.5 In that case, the tribe defaulted on a promissory note, and the plaintiff sued the tribe and lost when the tribe asserted sovereign immunity.6 The plaintiff had argued that immunity should not apply when the tribal entity was involved in a commercial venture conducted off of the reservation.7 The Supreme Court disagreed, finding that it had never drawn a distinction between governmental and commercial activities of the tribe or between on-reservation and off-reservation activities.8 This case, along with those discussed below, form the basis of the law regarding tribal lending in the United States.

State Enforcement Actions

Colorado Attorney General

In State of Colorado v. Cash Advance, a state trial court held that two tribal-owned consumer lending businesses were entitled to tribal sovereign immunity.9The court's holding followed an eight-year contest between Colorado and the defendants,10 Miami Nations Enterprises, Inc. (MNE) and SFS, Inc. (SFS), which asserted immunity from subpoenas and enforcement orders as arms of federally recognized tribes.11

The matter made its way to the Colorado Supreme Court, which held that: (i) tribal immunity applies to administrative subpoenas directed at tribal commercial activities conducted off tribal lands; (ii) such immunity depends on whether the entity is an "arm of the tribe"; (iii) officers of tribal entities are immune for acts within the scope of their tribal authority; and (iv) the state has the burden of proving by a preponderance of the evidence that the tribal entities are not immune.12

The Colorado Supreme Court remanded the case for a determination of whether MNE and SFS were "arms" of their respective tribes under the following three-part test: (i) whether the tribes created MNE and SFS pursuant to tribal law; (ii) whether the tribes own and operate MNE and SFS; and (iii) whether MNE's and SFS's immunity protects the tribes' sovereignty.13

On remand, the trial court found that MNE was owned and operated by a tribe because: (i) the Miami Tribe of Oklahoma's Chief and its business committee appointed the MNE directors; (ii) two-thirds of MNE's directors were required to be tribal members; (iii) MNE's initial chief executive officer answered to the tribe's council; and (iv) MNE's employees worked on tribal land.14

The tribe owned and operated SFS, according to the court, because SFS was governed and regulated entirely by a director appointed by the Santee Sioux Nation.15 The court also noted that each loan was approved in accordance with the tribe's lending criteria.16 Further, the court found that the Miami Tribe used the lending revenues to build a new headquarters for MNE, to employ tribal members, and to fund various tribal programs.17 The Sioux used the revenues to buy additional tribal lands, fund head-start programs, and fund educational activities.18 Ultimately, the court found that providing MNE and SFS with tribal immunity would protect the immunity of the respective tribes.19

Additionally, the trial court pointed out on remand that even if the State of Colorado's allegations that the entities were "shams" proved true, it does not follow that the entities lose their immunity,20as "immunity does not depend in any way on the type of business a tribal entity engages in, with whom, or for what ulterior purpose."21 Five days after issuing its ruling, the trial court amended its opinion, noting that a third-party entity was entitled to 99 percent of the operational revenues, while the tribal businesses received the remaining 1 percent.22 Still, the court stated that while "this correction makes the 'sham' issue closer as a factual matter . . . the State has not proved that the tribal entities are currently sham owners" and "even if they were, that characterization would not displace their tribal immunity."23

The trial court affirmed its previous ruling that the tribal entities were entitled to sovereign immunity, stating: "once they are arms of the tribes, [the entities] are clothed with the tribes' immunity regardless of the particular business they operate or the manner of that operation."24 Notably, however, the court indicated that while using a "sham" service provider would not affect the sovereign immunity of the tribe, the servicer was entitled to no such immunity, and the Colorado attorney general was free to pursue an action against it.25

West Virginia Attorney General

In November 2011, after years of litigation concerning whether several Internet payday lenders were entitled to sovereign immunity or were subject to the enforcement of subpoenas issued by the West Virginia attorney general,26 one of the lenders filed a petition for a writ of...

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