Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—DSD: FTC Claim that Lending Companies Sued Consumers in Tribal Courts Without Jurisdiction Proceeds, (Mar 29, 2013)

By Tobias J. Gillett, J.D., LLM.

Lending companies conducting business within an Indian reservation could not obtain summary judgment on FTC claims that they sued consumers in a tribal court that lacked jurisdiction and was distant from the consumers, the federal district court in Pierre, South Dakota has ruled (FTC v. Payday Financial, LLC, March 28, 2013, Lange, R.). The court found that the companies might not be tribal members and that the language of the lending contracts was unclear on whether disputes should be resolved under tribal jurisdiction.

Martin A. Webb is an enrolled member of the Cheyenne River Sioux Tribe and an “Indian” under federal Indian law. Martin wholly owns a range of short-term lending companies organized under the laws of South Dakota. The lending companies are licensed by the tribe to do business, but do not act as agents of the tribe.

The lending companies and their employees are located within the boundaries of the Cheyenne River Indian Reservation, while borrowers from the companies are located off the reservation, with all communication occurring through mail, the telephone, or the Internet. The loan decisions are made within the reservation, and the loans are funded through transfers from a bank within the reservation. Withdrawals from borrowers’ bank accounts are initiated within the reservation, and decisions to pursue collection procedures are made within the reservation.

The lending companies sometimes filed collection lawsuits in the Cheyenne River Sioux Tribal Court. The loan agreements contained provisions stating that the Tribal Court had exclusive jurisdiction over enforcement actions, although they also contained language requiring binding arbitration of all disputes.

The FTC filed against the lending companies, alleging that they had committed various unfair and deceptive trade practices in violation of the FTC Act, the Electronic Fund Transfer Act, and FTC rules. The lending companies filed a motion for partial summary judgment as to the FTC’s claim that the lending companies had “sued consumers in a distant court that lacks jurisdiction,” in violation of Section 5 of the FTC Act.

The court began its analysis of whether the tribal courts had jurisdiction over the borrowers by explaining that Indian tribes retain a limited sovereignty and that their adjudicatory authority “has been defined primarily by judicial decisions.” Tribes generally lack jurisdiction over people who are not members of the tribe. However, in Montana v. United States, 450 U.S. 544 (1981), the U.S. Supreme Court recognized two exceptions to this principle: (1) “A tribe may regulate, through taxation, licensing, or other means, the activities of nonmembers who enter consensual relationships with the tribe or its members, through commercial dealing, contracts, leases, or other arrangements,” and (2)“A tribe may also retain inherent power to exercise civil authority over the conduct of non-Indians on fee lands within its reservation when that conduct threatens or has some direct effect on the political integrity, the economic security, or the health or welfare of the tribe.”

In a later decision, Plains Commerce Bank v. Long Family Land & Cattle Co., 554 U.S. 316 (2008), the Supreme Court applied the Montana exceptions to a case involving actions of a nonmember bank on non-trust land within a reservation. The Court stated that tribal jurisdiction “may be fairly imposed on nonmembers only if the nonmember has consented, either expressly or by his actions. Even then, the regulation must stem from the tribe's inherent sovereign authority to set conditions on entry, preserve tribal self-government, or control internal relations.”

The court in the present case observed that the Plains Commerce Bank decision contained language that was “difficult to reconcile at times, both internally and with the Supreme Court’s prior jurisprudence.” However, the court noted that courts following the decision had not read the decision as narrowing the Montana exceptions. The court cited Eighth Circuit precedent stating that determining the scope of tribal jurisdiction was “ultimately a ‘proper balancing’ of the conflicting interests of the tribes and nonmembers.”

The court observed that in the present case the tribal court could have jurisdiction under the first Montana exception based on “the activities of nonmembers who enter consensual relationships with the tribe or its members, through commercial dealing, contracts, leases, or other arrangements.” However, that exception restricted itself to relationships involving the “tribe and its members,” while the lending companies were limited liability companies organized under the laws of South Dakota and were therefore citizens of South Dakota for diversity purposes. The record did not demonstrate “what it means for a business to be ‘licensed’ by the Cheyenne River Sioux Tribe.” Therefore, the court found summary judgment would not be warranted based on the first Montana exception.

Application of the Montana exception raised questions regarding whether the nonmember borrowers had engaged in on-reservation activities such that they could “reasonably have anticipated” that they would be subject to tribal authority. Nonmembers had been subjected to tribal jurisdiction under the Montana exception only where their conduct had occurred on the reservations. The FTC contended that tribal jurisdiction would require the borrowers to have engaged in conduct occurring physically within the reservation, while the lending companies contended that the contracts were formed on the reservation and other conduct related to the contracts was sufficiently connected to the reservation to satisfy the “on the reservation” requirement.

The court disagreed with the FTC. The contracts had been formed on the reservation, because the last act for their formation had occurred there, and the lending decisions and money transfers took place there. The contracts also specified tribal jurisdiction. Although a nonmember’s physical location was frequently “indicative” that its conduct did not occur there or have an effect on the tribe, looking only to physical location would “ignore the realities of our modern world,” in which the lending companies could conduct business over the telephone or the Internet in a manner that would affect the tribe without the borrowers physically entering the reservation. Therefore, reducing the Montana jurisdictional analysis to a determination of the nonmember’s physical location would be improper.

However, this conclusion did not end the analysis. The loan agreements claimed that the lending companies were “organized under and authorized by the laws of the Cheyenne River Sioux Tribe and Indian Commerce Clause of the Constitution of the United States.” However, the Indian Commerce Clause was merely a grant of authority to Congress, not to private entities or tribes, and the companies were actually organized under the laws of South Dakota.

Moreover, the loan contracts contained provisions requiring arbitration in “the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules, but a separate provision stated that the borrowers had “consent[ed] to the sole subject matter and personal jurisdiction of the Cheyenne River Sioux Tribal Court.” Therefore, the court concluded that the borrowers could not have foreseen whether they would be subject “to binding arbitration on the Reservation, to the exclusive jurisdiction of the tribal court, or, as the Lending Companies tried to reconcile these provisions, a bit of both arbitration and tribal court proceedings at the discretion of the Lending Companies.”

Therefore, the court concluded that the inconsistencies in the lending agreements’ language and the concern with respect to the lending companies’ status as tribal members made granting summary judgment to the landing companies “inappropriate.”

The case is No. 11-3017-RAL.

Attorneys: Cheryl Schrempp Dupris, U.S. Attorney's Office, for Federal Trade Commission. Cheryl F. Laurenz-Bogue (Bogue & Bogue, LLP) for Payday Financial, LLC.

Companies: Payday Financial, LLC

Cases: ConsumerProtection FederalTradeCommissionNews SouthDakotaNews