Brown v. Western Sky Financial, LLC

Citations: 84 F. Supp. 3d 467; 2015 U.S. Dist. LEXIS 11026; 2015 WL 413774Docket: No. 1:13CV255

Court: District Court, M.D. North Carolina; January 29, 2015; Federal District Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Plaintiffs Thomas Brown and Monica Johnson initiated a lawsuit on March 28, 2013, against multiple defendants, including Western Sky Financial, LLC and CashCall, Inc. After amending their complaint on August 13, 2013, to remove one defendant and add others, they filed a Second Amended Complaint on January 23, 2014, involving a total of nine defendants. The court is currently addressing four pending motions: a Motion to Dismiss for Lack of Personal Jurisdiction by defendants Payday and Reddam, an Omnibus Motion to Dismiss by all defendants, a Motion Requesting Discovery on Preliminary Issues by the plaintiffs, and a Cross-Motion to Stay Discovery by the defendants.

A key consideration for the court is the forum selection clauses in the loan agreements, which primarily grant jurisdiction to the Cheyenne River Sioux Tribe (CRST). The court notes that previous litigation regarding these clauses has produced three outcomes: unenforceability, enforcement, or allowing the CRST to determine enforceability through tribal exhaustion. The court supports the latter approach, deciding that the determination of tribal court jurisdiction is essential before proceeding. As a result, the court denies the Motion to Dismiss for Lack of Personal Jurisdiction without prejudice and grants the Omnibus Motion in part, dismissing the proceedings pending tribal court exhaustion but not compelling arbitration at this juncture. Additionally, both the plaintiffs' motion for discovery and the defendants' motion to stay discovery are denied without prejudice.

Plaintiffs have initiated a class action lawsuit on behalf of North Carolina residents who took out payday loans from Defendants, alleging that these loans violate North Carolina law, which prohibits such high-interest lending practices. Each named Plaintiff is a North Carolina citizen who entered into loan agreements with Defendant Western Sky and related entities. Western Sky, which is no longer issuing loans, primarily advertised through television and facilitated transactions online and via phone, without in-person interactions. The lawsuit seeks restitution for amounts collected by Defendants in violation of both state and federal laws. A key legal question is whether the court has jurisdiction over the case or if the contracts between the parties grant jurisdiction to the Cheyenne River Sioux Tribe (CRST).

Western Sky, a South Dakota LLC, is owned by Martin Webb, who is also a South Dakota resident. The other defendants include Payday, another South Dakota LLC that was the sole member of Western Sky during the loan period, and CashCall, a California corporation that received many of Western Sky's loans. Reddam, who owns CashCall and other related entities, is named in the proceedings as well. Plaintiffs allege that each Defendant played a distinct role in the lending process, where loans ranging from $300 to $3,000 were applied for online or via phone, with funds transferred directly to borrowers' bank accounts. Following loan approval, the funds were transferred to CashCall, which also managed payments and collection efforts in case of defaults. The loans had terms between 12 to 84 months and annual percentage rates varying from 90% to over 300%.

Plaintiff Thomas Brown secured a $2,600 loan from Western Sky, receiving $2,525 after a $75 retention fee. He agreed to repay this through 40 monthly installments at a nominal APR of 139% and an effective APR of 273%, totaling $14,102.87. Defendants are seeking dismissal based on the enforceability of forum selection and arbitration clauses in the loan agreements. Plaintiff Monica Johnson’s loan agreement includes an arbitration provision mandating that disputes be resolved through arbitration conducted by the Cheyenne River Sioux Tribal Nation, using a panel of three Tribal Elders. Brown’s loan agreement, dated July 5, 2012, retains a similar arbitration clause but allows for the selection of various arbitration organizations, including the American Arbitration Association (AAA) and Judicial Arbitration and Mediation Services (JAMS).

Defendants present three arguments for dismissal: (1) the loan agreements contain a valid forum selection clause requiring the application of Cheyenne River Sioux Tribe (CRST) law, warranting dismissal under the doctrine of forum non conveniens; (2) the claims involve tribal court jurisdiction, necessitating dismissal per the tribal exhaustion doctrine; and (3) the arbitration provision mandates arbitration for all disputes under the Federal Arbitration Act (FAA), suggesting that the court should stay or dismiss the action. The court prioritizes the enforceability of the forum selection clause and tribal exhaustion issues at this stage, noting that all Plaintiffs' loan agreements specify that disputes will be governed by CRST law and rules. The determination of the forum selection clause's enforceability is a critical threshold issue for the court.

The Supreme Court mandates the enforcement of forum selection clauses, recognizing their importance in establishing parties' expectations and contractual agreements. These clauses often influence negotiations and the terms of the contract itself. Courts typically uphold these clauses unless they are deemed unreasonable, which can occur under specific circumstances such as fraud, significant inconvenience to the complaining party, fundamental unfairness of the chosen law, or violation of strong public policy.

In the case discussed, both Plaintiffs and Defendants acknowledge that the loan agreements include a forum selection clause governed by the laws of the Cheyenne River Sioux Tribe (CRST). However, Defendants assert that this clause is valid and enforceable, warranting dismissal of the case. Conversely, Plaintiffs contest this, claiming that the CRST lacks jurisdiction, thus making the current court the appropriate venue for the action.

The forum selection and arbitration clauses in the current case are similar to those analyzed in various federal court decisions over the past year, with six cases highlighting differing judicial approaches. Two of these cases are from circuit courts, while four are from district courts; neither circuit court decision is binding on the present court but serves as persuasive authority, whereas the district court decisions are informative.

Judicial analysis of the forum selection clause has yielded three primary outcomes: 1) the clause has been deemed unenforceable; 2) it has been enforced; or 3) the Cheyenne River Sioux Tribe (CRST) has been given an opportunity to determine its enforceability using the tribal exhaustion doctrine. 

In two notable cases involving the CRST as the chosen forum, courts in the Seventh and Eleventh Circuits found the forum selection clauses unenforceable. Specifically, in *Jackson v. Payday Financial*, the plaintiffs argued that the clause was invalid due to its association with an illegal contract, their financial vulnerability, and its contradiction to Illinois public policy. Initially, the district court dismissed the challenge to the clause, which stipulated arbitration by the CRST. However, upon appeal, the Seventh Circuit ordered a remand for further factual findings regarding the availability of tribal law and the arbitration framework. The district court later determined that while tribal law could be accessed, the specified arbitration mechanism did not exist. Ultimately, the Seventh Circuit ruled that enforcing the clause was unreasonable, as the CRST lacked the infrastructure to conduct arbitration, rendering the stipulated forum illusory.

The Eleventh Circuit determined that the forum selection clause granting jurisdiction to the Cheyenne River Sioux Tribe (CRST) was integral to the arbitration agreement, emphasizing that the parties intended it to be a central element rather than a mere logistical detail. The arbitration clause specified that disputes would be resolved through arbitration conducted by the CRST according to its consumer dispute rules, with the Tribe referenced multiple times throughout the contract. However, the court found the forum unavailable, rendering the arbitration clause unenforceable. Evidence included a letter from the Tribe stating it does not authorize arbitration and a response from Tribal Elder CashCall indicating the Tribe's non-involvement in the arbitration process due to its nature as a private business deal. Additionally, the absence of established consumer dispute resolution rules further supported the conclusion of the Tribe's non-engagement in private arbitration.

In a separate context, the Eastern District of North Carolina upheld forum selection clauses in two cases involving Cashcall, where motions to dismiss were granted based on these clauses. In Milam, the plaintiff did not respond to the motion, leading to dismissal. In Spuller, the plaintiff contested the clause, citing fraud and public policy concerns, but the court found insufficient evidence to support these claims, reinforcing the validity of the forum selection clause. Although neither case addressed the jurisdiction of the selected forum, they influenced the current court's decision that dismissal was appropriate. Following the Eleventh Circuit's ruling in Inetianbor, a Southern District of Florida case compelled arbitration in the CRST, reaffirming the forum's role despite the prior unavailability finding.

The analysis focuses on the forum selection clause and the decision to compel arbitration, highlighting that the Plaintiff has not demonstrated the unavailability of the Cheyenne River Sioux Tribe as an arbitration forum, which is crucial to the case. The Plaintiff's reliance on case citations without providing specific evidence undermines his claim. The court's findings indicate similarity between the arbitration clauses in the Chitoff case and the current case involving the Plaintiff, with both allowing selection of arbitration organizations like AAA or JAMS. Additionally, the district court in Florida determined that the forum was available despite a prior ruling in a different case finding it unavailable.

Defendants further argue that the claims relate to tribal court jurisdiction, invoking the tribal exhaustion doctrine, which necessitates that federal courts abstain from hearing claims until they have been exhausted in tribal court. The doctrine allows tribal courts to determine their jurisdiction over claims first. While the legal standard for a colorable claim of tribal jurisdiction remains unclear, federal courts have indicated that claims must have some merit, and frivolous claims should not be entertained. If there is a colorable question regarding tribal court jurisdiction, federal courts are advised to stay or dismiss the case to allow tribal courts to assert their jurisdiction. The tribal exhaustion doctrine is characterized as a matter of comity rather than a jurisdictional requirement.

The prudential doctrine of tribal court exhaustion applies regardless of whether an action is pending in a tribal court and is relevant even when claims are governed by state or federal law. Four exceptions to the exhaustion requirement are recognized: 1) when tribal jurisdiction is asserted in bad faith or to harass; 2) when actions violate clear jurisdictional prohibitions; 3) when exhausting remedies would be futile due to inadequate opportunities to challenge jurisdiction; and 4) when no federal grant allows tribal governance over nonmembers under Montana's main rule.

Plaintiffs contend that the forum selection clause is invalid because it assigns jurisdiction to a tribal court that lacks subject matter jurisdiction. This argument diverges from previous cases that challenged forum selection clauses in other jurisdictions. The question arises whether this court or the CRST court should decide jurisdictional issues. A South Dakota district court suggested that the only valid reason to reject a forum-selection clause would be if the chosen court lacked jurisdiction, as enforcing such a clause would be against public interest. The determination of tribal court jurisdiction must reference federal law rather than contractual forum-selection provisions. Generally, Indian tribes do not have authority over nonmembers, with the Supreme Court recognizing two exceptions known as the Montana exceptions. The question of a tribal court's authority over nonmembers is a federal issue, and it is suggested that tribal courts should initially examine jurisdictional challenges, supporting tribal self-governance and self-determination.

The Supreme Court clarified that exhaustion of tribal remedies is not mandatory when tribal jurisdiction is pursued in bad faith, is intended to harass, violates clear jurisdictional limits, or if exhaustion is futile due to inadequate opportunity to challenge jurisdiction. In the case of Heldt, the district court identified a plausible claim of Cheyenne River Sioux Tribe (CRST) jurisdiction based on loan agreements, despite the borrower not physically entering the reservation. In modern business transactions conducted online, requiring physical presence is deemed excessive, especially when there is a consent to jurisdiction clause. Plaintiffs argue that North Carolina is relevant because the payday loans were offered there. They contend that tribal jurisdiction can be asserted due to the involvement of tribal entities or members. The Heldt court mandated that Defendants file a declaratory judgment action in CRST court within thirty days to address the issue of tribal jurisdiction and arbitration availability outlined in the loan agreements. Plaintiffs can challenge jurisdiction and arbitration in that action without forfeiting their claims against tribal jurisdiction. In their Reply Brief, Plaintiffs express disagreement with the tribal court exhaustion ruling and argue that the court should allow discovery on the jurisdiction issues instead of enforcing tribal remedies. The Eleventh Circuit's decision in Inetianbor, which involved a plaintiff's actual attempt to arbitrate, contrasted with the present Plaintiffs who have not sought arbitration or initiated any action in a CRST court, despite researching CRST law.

Plaintiffs identified three sources of relevant tribal law: the Cheyenne River Sioux Tribe Commercial Code, the South Dakota Tribal Court Handbook, and the Law and Order Code of the Cheyenne River Sioux Tribe. They assert that the loans in question violate a usury statute within the Tribal Code. Plaintiffs argue that the Cheyenne River Sioux Tribal Nation's arbitration facility is a sham, lacking consumer dispute rules and being biased. They suggest that the Tribe benefits financially from the payday lending operations, which they claim compromises its role as an impartial arbitrator. 

Plaintiffs leap to the conclusion that the CRST arbitration forum is illegitimate without attempting to arbitrate there or properly litigate the jurisdiction of the forum selection and arbitration clause. They acknowledge that tribal courts typically lack authority over non-tribal members, but they recognize the tribal exhaustion doctrine, which requires federal courts to allow tribal courts the opportunity to assert jurisdiction over claims that are colorable. 

The Eleventh Circuit defines a colorable claim as one that has some possible validity, which, if asserted, necessitates allowing tribal court exhaustion. Past cases indicate a trend of dismissing similar actions based on the validity of forum selection clauses without challenging the CRST's jurisdiction. In prior rulings, courts compelled arbitration in the CRST forum, affirming its availability as a legitimate jurisdiction. There is no evidence in the current record indicating that the Plaintiffs have taken steps to demonstrate the CRST as a fraudulent forum. Consequently, the court intends to uphold the tribal court's authority to determine its jurisdiction before intervening. Plaintiffs seek further discovery to clarify the CRST’s jurisdiction and its capacity to arbitrate, but the court finds that Defendants have presented a colorable claim of jurisdiction warranting tribal court exhaustion.

The court acknowledges prior rulings from the Seventh and Eleventh Circuits, which determined that the CRST forum was not an appropriate arbitration venue. This creates uncertainty about the CRST's jurisdiction in the current case, leading the court to dismiss the action without prejudice. Plaintiffs are permitted to refile if tribal court exhaustion indicates this court is the proper jurisdiction or proves futile. The motion to dismiss for lack of personal jurisdiction by Defendants Payday Financial, LLC, and John Paul Reddam is denied without prejudice, pending tribal court jurisdiction determination, allowing for re-filing post-tribal court actions. The court grants in part and denies in part the Defendants' Omnibus Motion to Dismiss, dismissing the current proceedings without prejudice while not compelling arbitration at this time. Plaintiffs' motion for discovery on preliminary issues and Defendants' motion to stay discovery are both denied. On November 15, 2013, Plaintiffs dismissed claims against several defendants, and references to the Plaintiffs' Complaint pertain to the Second Amended Complaint. Plaintiffs allege violations of various laws, including the North Carolina Consumer Finance Act and the Truth In Lending Act, among others.

Defendants assert that Western Sky is a licensed entity of the Cheyenne River Sioux Tribe (CRST) located on its reservation, while Plaintiffs contest this, arguing that Western Sky is organized under state law, not tribal law. The Defendants clarify that due to the absence of tribal business formation legislation, Western Sky operates as a South Dakota limited liability company (LLC). Plaintiffs also contend that Defendants cannot evade liability by requiring borrowers to agree that loans were issued outside North Carolina. The court concludes that determining whether any Defendant qualifies as a tribal entity should initially be addressed by the tribal court. The loan agreements of the named Plaintiffs contain relevant language supporting this assertion. The court emphasizes that a valid forum-selection clause is necessary for analysis, referencing the Supreme Court's stance in Atlantic Marine. Plaintiffs argue that enforcing this clause would be unreasonable due to alleged lack of tribal court jurisdiction, which the court deems insufficient for separate analysis. Additionally, Plaintiffs claim the clause violates state public policy, but prior case law from North Carolina indicated that similar arguments did not invalidate such clauses. The court plans to focus on the issue of tribal court jurisdiction, which was not previously raised in the Eastern District. Subsequently, Plaintiffs filed notices of supplemental authority citing relevant legal precedents, and Defendants responded by referencing a ruling compelling arbitration in a similar case. The Supreme Court's ruling in Montana v. United States established two exceptions where a tribe can regulate the activities of nonmembers involved in consensual relationships with the tribe or its members.

Tribes retain inherent civil authority over non-Indians on fee lands within their reservations if such conduct impacts the tribe's political integrity, economic security, or health and welfare, known as the Montana exceptions. In the current case, the court found no basis for tribal court jurisdiction, as the dispute does not involve nonmembers' actions on reservation land and does not threaten tribal integrity or self-governance. Thus, tribal exhaustion is not required. The Eastern District's previous order did not consider relevant developments in the Inetianbor case, where arbitration under a loan agreement was attempted unsuccessfully. The contracts involved designate the Cheyenne River Sioux Tribe (CRST) as the governing authority in disputes, but the court noted that a viable forum for such disputes does not exist according to Jackson v. Payday Fin. LLC. While Defendants did not challenge the CRST's jurisdiction over them, the court chose to defer ruling on personal jurisdiction challenges pending tribal court exhaustion. The court anticipates that either party will bring the matter before the CRST, and this ruling does not prevent the Plaintiffs from seeking remedies in the appropriate forums. If proceedings in the CRST do not resolve before any statute of limitations impacts the case, Plaintiffs may refile in this court. The court expects Defendants to maintain their position on the CRST as a proper forum and allows for adjustments if their stance changes.