Court: District Court, E.D. Virginia; March 20, 2019; Federal District Court
The document outlines a court ruling concerning a lending scheme involving tribal immunity and alleged usurious interest rates. The case involves Mark Curry and various corporate entities, including American Web Loan, Inc. ("AWL, Inc.") and others, attempting to leverage the sovereign immunity of the Otoe-Missouria Indian Tribe to evade liability. The Court conducted extensive jurisdictional discovery and held hearings on multiple motions. It ultimately denied motions to dismiss for lack of subject matter jurisdiction and motions to compel arbitration from the defendants.
The plaintiffs, four individuals, claim they were subjected to unlawful debt collection practices in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), and they assert multiple other claims, including conspiracy under RICO, violations of the Electronic Funds Transfer Act ("EFTA"), and several violations of the Truth in Lending Act ("TILA"). They also allege unjust enrichment from defendants' retention of unlawfully obtained funds. The plaintiffs define a putative class of individuals who took loans from AWL, with the class period starting from February 10, 2010, to the present. The Court emphasizes that the evidence suggests Curry acted for his own benefit, not for the Tribe, undermining the claimed sovereign immunity.
Plaintiffs filed their initial complaint on December 15, 2017, followed by an Amended Complaint on March 9, 2018. On April 9, 2018, multiple motions were submitted by defendants, including motions to dismiss for failure to state a claim, lack of personal jurisdiction, improper venue, and lack of subject matter jurisdiction. Additionally, motions to compel arbitration and to transfer the case were filed. On June 8, 2018, plaintiffs opposed these motions, and defendants replied by July 9, 2018.
A status conference on August 2, 2018, led to the consolidation of this case with Hengle v. Curry, and the court granted time for discovery on jurisdictional and venue issues, allowing approximately three months. Extensive discovery was conducted, including document production and depositions. Subsequent to this, plaintiffs filed supplemental briefs opposing certain motions, and defendants responded with their own supplemental briefs regarding subject matter jurisdiction.
An evidentiary hearing took place over two days, where defendants presented witnesses, while plaintiffs provided evidence through cross-examination. Oral arguments were made by counsel from both sides. The court then ruled from the bench, providing an Opinion and Order to elucidate its decision.
The document also outlines that federal district courts have limited subject matter jurisdiction, necessitating the dismissal of claims if the court lacks jurisdiction. However, challenges to subject matter jurisdiction based on sovereignty can potentially be overcome by consent, indicating that sovereign immunity can be addressed through subject matter jurisdiction challenges.
The Court has the authority to consider evidence regarding disputed jurisdictional facts without changing a motion to dismiss into a motion for summary judgment.
The Tribe is a federally-recognized Indian tribe based in Red Rocks, Oklahoma, facing historical challenges to its sovereignty, including western expansion, disease, and federal relocations, which have hindered its economic development. The Tribe adopted its constitution in 1984, establishing a seven-member Tribal Council to handle executive and legislative functions, with members serving staggered three-year terms and elections held annually in November. The Tribal Council can conduct business on behalf of the Tribe, appoint committees, and delegate powers.
In 2006, the Tribal Council established the Otoe-Missouria Development Authority (OMDA) to manage tribal business enterprises. Following the creation of OMDA, the Tribe began generating revenue through casinos, although revenue declined due to increased competition. In early 2009, Tribal Chairman John Shotton learned about online lending from other tribes and was introduced to Mark Curry. This led to the formation of the Consumer Finance Services Regulatory Commission to oversee lending operations and the adoption of the American Web Loan Act (AWL I Act), which organized American Web Loan, Incorporated (AWL I) as a tribal corporation to generate revenue for tribal purposes.
AWL I was created as a sub-agency of the Tribal Council, governed by a Board of Directors that included at least three tribal members. The Tribe contracted with American Web Loan Holdings (AWLH) for lending services, with AWLH sometimes engaging MacFarlane Group, both owned by Curry. As the contract with AWLH neared its end, the Tribe notified Curry of its intent to renegotiate. Curry proposed several options, one being the sale of MacFarlane Group to the Tribe through seller financing. After negotiations, the Tribe chose this option and created Red Stone to acquire MacFarlane Group, AWLH, and another company named Bullet Hole (collectively, the "Newcos") from Curry. Red Stone financed the purchase through a promissory note with three Delaware corporations controlled by Curry and a consulting agreement with Sol Partners, also controlled by Curry.
Red Stone entered into a Security Agreement with the Note Holders, granting them a priority security interest in all of Red Stone's current and future assets. After a merger, Red Stone transferred its rights and obligations under the Note and Security Agreement to the renamed entity, AWL II. The Promissory Note requires AWL II to pay $2,018,154.86 monthly over five years, with a 10% interest rate. It establishes "Governing Covenants" mandating a six-member board of directors, with three members appointed by the majority of the Note Holders and three by the Tribe. The Tribe can only appoint a majority after paying off 85% of the Note, ensuring Curry-owned entities maintain significant influence. Board actions require consent from at least four members, and any changes to the board structure, along with specific adverse events, constitute a default. The Note prioritizes the allocation of AWL II's net revenues to operating expenses, including Note-related payments and consulting fees from Sol Partners, which are approximately $199,333.33 monthly. The Tribe is restricted from increasing employee compensation, hiring certain employees, incurring debt, making large capital expenditures, or transferring significant assets without board consent. Under the consulting agreement, Sol Partners provides operational advice and receives $1,933,333.33 monthly for five years, related to tax purposes. AWL II's revenue distribution prioritizes operating expenses, with remaining funds split into monthly payments to the Note Holders and the Tribe, following a specified allocation ratio.
Payments exceeding a specified amount will be allocated to Monthly Holder Payments, which are capped at 1/12 of the Annual Threshold. These monthly payments support various Tribal initiatives including youth and language education programs, daycare, and government operations. In 2017, 22% of the Tribe's general fund and 78% of the OMDA funds were sourced from AWL, Inc.
Following the execution of the Note, Security Agreement, and Consulting Agreement, the Tribe appointed three board members, with Curry appointing three members including himself, and also serving as CEO of AWL II. The majority of AWL II's workforce consists of non-Tribal members, many previously associated with Curry's MacFarlane Group, although approximately ten Tribal members are employed, including one in management. A significant number of jobs at AWL II are performed by employees of RS LLC, a Red Stone subsidiary, operating out of Kansas.
In terms of lending activities, a Virginia resident, Royce Solomon, sought a loan from AWL II in December 2016, with an exorbitant annual percentage rate of 726.13%, far exceeding Virginia's 12% interest cap. Plaintiffs assert that neither American Web Loan nor any defendants hold a Virginia consumer finance license or an exemption from the interest rate cap. Absent sovereign immunity or applicable tribal law, the AWL defendants may face litigation for these violations, with Curry and Sol potentially liable for their roles as agents of AWL II.
Tribal sovereign immunity protects Indian tribes from lawsuits, covering commercial activities beyond tribal lands. This immunity can extend to tribal subdivisions engaged in economic activities if their connection to the tribe is sufficiently close. Courts assess this relationship using criteria established by the Tenth Circuit in Breakthrough Management.
AWL Defendants argue that there is a division among courts in the district regarding the evaluation of the Breakthrough factors, specifically whether to employ a formal or functional inquiry. They assert that the Howard and Everette cases use a formal approach, focusing on available documents such as articles of incorporation and financial records, while the Williams case applies a functional approach, considering both formal documents and the operational reality of the tribal entity. This functional perspective is supported by the California Supreme Court case, People ex re. Owen v. Miami Nation Enters., which suggests evaluating Breakthrough factors through both formal and functional lenses.
The Court concludes that a comprehensive understanding of Great Plains' operations and its financial ties to the Tribe is essential for a proper assessment of the Breakthrough factors. Consequently, the Court will apply both approaches to analyze arm-of-the-tribe immunity.
Regarding the first Breakthrough factor, which examines the legal basis for tribal entity formation, formation under tribal law favors immunity, while state law formation does not. AWL II, established by a Tribal resolution, absorbed several non-tribal entities prior to its creation, prompting scrutiny of whether this merger impacts its immunity status. The Hunter case illustrates that an entity's transformation from a business holding to an arm-of-the-tribe is critical, with prior purchases potentially undermining claims of sovereign immunity. The Court finds this factor neutral concerning sovereign immunity.
The second Breakthrough factor assesses the stated purpose of tribal entities versus their actual operational role. If an entity aims to promote the tribe's economic development, evidence supporting this—such as job creation for tribal members—can bolster its immunity claim. Conversely, if the entity primarily benefits external parties or a select few tribal leaders, it diminishes the argument for it being an arm-of-the-tribe.
The court in Williams evaluated whether the purpose of the entities' formation supports their claimed objectives, particularly focusing on revenue distribution. Testimony revealed that prior to acquiring certain groups, the Tribe received only 1% of the profits that Defendant Curry did, with Curry earning approximately $110 million compared to the Tribe's $8 million. This disparity suggests that AWL II primarily benefits Curry rather than the Tribe. AWL contends that its establishment aimed to create sustainable revenue for essential services to the Tribe, claiming that 50% of dividends support the Tribe's general fund and economic development activities. Despite this, it was noted that only 20% of AWL II's Oklahoma employees are affiliated with the Tribe. Plaintiffs argue that the entities have generated minimal revenue for tribal members compared to non-members, citing a similar case where a lending agency's revenue distribution limited tribal benefits. They claim that AWL II provides the Tribe only 3.6% of its revenue, while ensuring Curry and associated entities receive substantial payments. Furthermore, they highlight that among AWL II's 50 employees, only six are tribal members, and that the compensation for tribal board members is significantly higher than that of other employees. Ultimately, the court found the arguments persuasive, highlighting that the Tribe's revenue share is drastically lower than Curry's, leading to the conclusion that this factor weighs heavily against granting sovereign immunity.
The leadership structure and operational management of an entity claiming sovereign immunity are critical factors in determining the validity of that immunity. In the case of Williams, a lending agency was fully owned and operated by a tribal entity, which in turn was wholly owned by the Tribe. This structure, along with the co-management by tribal members and the requirement for tribal council approval for waiving sovereign immunity, supported a finding of immunity.
Conversely, if evidence shows that significant management tasks are outsourced to a non-tribal entity with minimal oversight, this may undermine claims to immunity. In the present situation, the governance model limits the Tribe's control, as Curry's entities hold equal operational power and require a majority vote for significant decisions. This structure means the Tribe cannot unilaterally effect changes without Curry's agreement.
Moreover, specific provisions in the Note diminish tribal autonomy, stipulating that the tribal entity must appoint members from Curry's entities until a loan is largely repaid, and deeming the tribal entity in default due to any adverse governmental action. Curry's roles as CEO and board member, along with ownership of loan-related entities, allow significant control over AWL II's daily operations, further limiting the Tribe's influence.
AWL contends that the Tribe maintains ownership and regulatory authority over AWL II, emphasizing the need for tribal member consent for board decisions and highlighting initiatives to support the Tribe. However, reliance on external managerial oversight raises questions about meaningful tribal control, paralleling the Tribe's historical challenges in managing its casino operations independently.
AWL claims that the Tribe has control over AWL II through its authority to amend AWL's Articles of Incorporation and enforce consumer-protection provisions via the Tribe's Financial Services Regulatory Commission. Plaintiffs counter this by presenting evidence suggesting the Tribe lacks meaningful control over AWL I, AWL II, or Red Stone, including: testimony from the former president of AWL I indicating no control by the Tribe, AWL II's lack of Tribe members in executive roles, and Red Stone’s operations occurring off-reservation without employing Tribe members. They argue that the board structure, including CEO Curry's dual roles and exclusion of Tribe members from high-level discussions, illustrates the Tribe's passive ownership. The Court finds this evidence weighs heavily against sovereign immunity, indicating that Curry exercises total control over AWL II.
Regarding the Tribe's intent to share sovereign immunity, courts typically assess the governing ordinance. The Tribe's ordinance indicates an intention for AWL II to share its sovereign immunity as an arm of the Tribe. However, a functional inquiry reveals the intent may also be to protect Curry from legal repercussions for potential illegal actions, especially as Curry requested indemnification from the Tribe for legal fees. The Tribe's apparent waiver of sovereign immunity towards Curry further emphasizes this.
The financial relationship factor considers whether the Tribe could be liable for AWL II's legal obligations. A judgment against AWL II would likely not affect the Tribe's assets, as the Tribe only receives a small percentage (3.6%) of AWL II's revenue, similar to findings in prior cases. This suggests that any financial liability would primarily impact Curry and his entities rather than the Tribe.
AWL asserts that all profits from AWL II are directed to the Tribe, which is the sole shareholder, citing a precedent where tribal entities operated as arms of the tribe. They argue that the payment structure prioritizes operating expenses, then debt repayment, followed by distributions to the Tribe, characterizing the latter as "true profit." This, AWL contends, supports their claim for sovereign immunity. Conversely, plaintiffs argue that the Tribe's waiver of sovereign immunity and the small percentage of total revenues reaching the Tribe jeopardize tribal finances. The court finds this factor undermines claims of sovereign immunity.
Regarding the policies underlying tribal sovereign immunity, it is noted that such immunity aims to protect tribal finances and cultural autonomy, promote self-determination, and facilitate commercial interactions. The Curry Defendants, controlling the lending scheme, restricted the Tribe's ability to enact adverse government actions or change laws that could affect their rights, highlighting a waiver of tribal immunity in favor of Curry. Control over the Tribe's governance and financial agreements further illustrates this dynamic, as any exercise of tribal sovereignty would conflict with existing agreements. Additionally, a prior case indicated that a growing portion of the Tribe's general fund was derived from the lending entity's revenue.
Funds were allocated for social services and benefits to a tribe, with the lending entity aiming to support the tribe's self-determination through economic development. However, the court in Williams found it challenging to ascertain how granting sovereign immunity would protect the Tribe's treasury, a fundamental purpose of such immunity. The unclear connection between the tribe's use of the entity’s funds and the predominance of benefits to non-tribal individuals hindered the case. Although the tribe received some financial advantages from a Note and Loan Agreement, these arrangements limited the tribe's future business opportunities by influencing repayment terms unfavorably. The court noted a significant disparity in distributions to the tribe compared to outside entities, indicating that the tribe's financial benefits came at a high cost.
The current case mirrors Williams; while the tribe does gain some benefits, its annual distributions are restricted, with potential for increased revenue contingent upon payments to Curry’s entities. The structure of the agreements suggests a primary benefit to Curry rather than to the tribe, weighing against sovereign immunity. AWL argues that the tribe's pursuit of outside investment aligns with federal policies promoting tribal self-determination and economic development. Conversely, plaintiffs challenge this assertion, asserting that no congressional endorsement links online lending directly to tribal welfare, citing Otoe-Missouria Tribe of Indians v. New York State Dep't of Fin. Servs. to support their position.
The Second Circuit upheld New York's authority to prohibit the Tribe's lending activities outside its reservation, emphasizing that tribes do not possess a legitimate interest in facilitating evasion of state laws. The court determined that the Tribe's actions in promoting lending practices that circumvent state taxation undermine its sovereign authority. In evaluating the relationship between American Web Loan, Inc. (AWL) and the Otoe-Missouria Tribe, the court found that AWL II functions as an arm of the Tribe instead of the other way around. Key findings included:
1. The Tribe enacted laws favoring Curry and his related entities.
2. The Tribe waived its sovereign immunity in dealings with Curry, risking its financial resources.
3. AWL II agreed to indemnify Curry against litigation costs, further exposing Tribe's treasury.
4. The Tribe's agreement with Curry included provisions that restricted changes in Tribal Law detrimental to his interests, compromising self-determination.
5. Curry and his entities are attempting to misuse the Tribe’s sovereign immunity to shield against borrower claims while simultaneously utilizing the lack of immunity in disputes with the Tribe.
As a result, the court denied the AWL Defendants' motion to dismiss based on sovereign immunity. Additionally, in official-capacity claims, relief is essentially sought against the government entity rather than the individual official, which the court assesses by examining the substance of the claims.
The determination of whether state officials acted in their personal interests, separate from the interests of the State, is underscored by several key factors. These include the connection of the officials' unlawful actions to their official duties, whether the relief sought would financially impact the sovereign if initially authorized, the institutional nature of any judgment, and whether the officials acted beyond their legal authority. Evidence indicates that Curry’s actions were primarily driven by personal interests rather than those of the Tribe, as demonstrated by the disproportionate profits he gained compared to the Tribe’s revenue from the scheme. The claims are against Curry personally, meaning any judgment would not be institutional and would not implicate the Tribe. The Tribe's potential indemnification of Curry is not currently under consideration, but it is likely that such indemnification would not apply to intentional wrongful acts or violations of law, as this would contravene public policy. Plaintiffs are pursuing individual claims against Curry due to his significant role in the lending enterprise and his conflicting duties. The relief sought from Curry would not burden the Tribe, as it could be structured to avoid affecting Tribe resources. Curry’s assertion of official immunity is challenged, as he claims to act within his authority as CEO of AWL II, managing its operations and finances. However, his control over the lending function raises questions about the enforceability of any indemnity.
Defendant Curry asserts that his interactions with the Plaintiffs' loans were solely in his capacity as CEO and Director of AWL, arguing that any judgment against him would financially impact the Tribe. He cites the AWL I Act, which indemnifies him for claims arising from his duties. However, the Court rejects this argument, stating that Plaintiffs have presented claims against Curry personally, including financial benefits he gained from AWL II, leading to the denial of his Motion to Dismiss based on jurisdictional sovereign immunity.
Similarly, Sol Partners claim sovereign immunity based on their contractor relationship with AWL II. The Court finds this argument unpersuasive for two reasons: AWL II is not an arm of the Tribe, and as independent contractors, Sol Partners cannot claim tribal immunity. Therefore, the Court denies Sol Partners' Motion to Dismiss for lack of jurisdiction.
Regarding venue transfer, the Court outlines the legal standard under 28 U.S.C. 1404(a), which allows transfer for convenience and justice if the claims could have been brought in the new venue. The Court must first establish proper venue and jurisdiction for each defendant in the transferee district, noting that venue is appropriate where a significant portion of the events or property related to the claim occurred, as per 28 U.S.C. 1391(b)(2).
Venue may be proper in the Western District of Oklahoma since the tribal entity was formed there and some operations occur in that district. However, the court finds insufficient justification for transferring the case despite this potential venue. Plaintiffs assert that key witnesses knowledgeable about the lending scheme are not based in Oklahoma, with significant individuals located in Puerto Rico and New York, and most employees of the lending operation situated in Kansas or Nevada. Only a few employees in Oklahoma perform non-substantive roles. The note holder entities, receiving substantial monthly payments, are Delaware corporations controlled by Defendant Curry. Additionally, board meetings for AWL II often occur outside Oklahoma, and only a minority of document custodians reside in Oklahoma. AWL argues that the plaintiffs' choice of forum should not be given much weight due to the class action nature of the lawsuit, citing precedent that suggests multiple potential plaintiffs may prefer different forums. This position is supported by the Supreme Court's decision in Koster v. American Lumbermens Mutual Casualty Co., where the choice of forum was considered in a class action context.
The corporate defendant sought to dismiss the case based on forum non conveniens, arguing that its directors, records, and witnesses were located in a different state. The Court noted that while plaintiffs have a substantial interest in derivative actions, they might also be considered merely "phantom plaintiffs" with limited stakes. AWL contended that the plaintiffs' choice of forum should not be given deference due to insufficient connections to the forum state, referencing a case where a class action plaintiff was denied deference because relevant evidence and a majority of the defendant's operations were not located in Virginia.
Plaintiffs countered that a significant portion of their commercial activity occurred within Virginia, emphasizing that the Virginia plaintiff conducted business online and did not need to leave the state. They provided statistics indicating that Virginia residents constituted 3.42% of AWL's loan portfolio in 2014, participated in a substantial marketing campaign, and received many loans from AWL compared to other states. Despite the general principle that a plaintiff's forum choice carries less weight in class actions, the plaintiffs argued for the appropriateness of Virginia based on the number of potential plaintiffs and their residency.
Convenience considerations were also addressed, with AWL asserting that Oklahoma was more convenient due to the Tribe and key witnesses being located there. However, the key defendants are not based in Oklahoma, and the Tribe's records are accessible from entities in other states. Although AWL cited key witnesses in Oklahoma and the Midwest, the Court's analysis suggested that Virginia remained a suitable forum for the litigation.
The Richmond Division transferred a related case to the Newport News division for potential joinder with Solomon, highlighting that the alleged acts constituting the RICO enterprise and unlawful debt collection occurred in multiple locations, with the most significant connection likely in the Western District of Oklahoma, where the AWL Defendants and the Tribe operate. The court assessed the "interests of justice," which consider public interest factors like local resolution of controversies and the court's familiarity with applicable law. Plaintiffs argued that Virginia has a substantial connection due to numerous loans made in the state and targeted marketing to Virginia customers. In contrast, AWL contended that Oklahoma has a greater interest due to its presence there and the Tribe's involvement, suggesting that a trial in Virginia would hinder Tribal council participation.
The Court determined that the interests of justice favor Virginia, noting its familiarity with the case's facts and the alleged scheme. Although some evidence indicated Oklahoma might be more convenient for certain witnesses, many key witnesses and documents are not located there. The Court concluded that Virginia has a stronger interest in the case, as AWL II appears to have targeted Virginia more than Oklahoma or other states. Consequently, the Court denied the motions to transfer venue from the AWL Defendants and Defendants Curry and Sol. Additionally, it referenced the legal standard under the Federal Arbitration Act regarding arbitration agreements within contracts.
Arbitration agreements are deemed valid, irrevocable, and enforceable unless legally or equitably revoked, as outlined in 9 U.S.C. § 2. A party can petition a United States District Court to enforce an arbitration agreement per 9 U.S.C. § 4. If the validity of such an agreement is challenged, the court must first address the challenge before enforcing it, as established in *Rent-A-Center, W. Inc. v. Jackson*. Grounds for invalidating an arbitration agreement include general contract defenses like fraud, duress, or unconscionability, but these must specifically relate to the arbitration agreement rather than the overall contract, per *Hayes v. Delbert Servs. Corp.* and *Prima Paint Corp. v. Flood. Conklin Mfg. Co.*.
The AWL Defendants assert that Plaintiffs are barred from class action lawsuits due to a binding arbitration clause in their loan agreements. They claim the arbitration provision in the agreement of Plaintiff Royce Solomon mirrors those in the agreements of all potential Plaintiffs. Each loan agreement contains a section titled "IMPORTANT DISCLOSURE," emphasizing the lender's tribal affiliation and immunity from lawsuits unless waived by the tribal council. It stipulates that disputes are subject to the tribe's consumer finance regulations and that the loan is governed by tribal law, not the law of the borrower's state. Furthermore, it states that the inclusion of disclosures does not imply consent to federal law. The arbitration clause is detailed in a section titled "WAIVER OF JURY TRIAL AND AGREEMENT TO ARBITRATE."
The Arbitration Agreement includes specific subparagraphs, notably one stating that the agreement is governed by Tribal Law, which mandates that the arbitrator apply Tribal Law and the terms of the Agreement. Parties retain the right to judicial review in a Tribal court concerning the arbitrator's findings and conclusions. An individual may opt-out of the arbitration by notifying American Web Loan in writing within sixty days; however, disputes will still be governed by Tribal Law and must be brought within the Otoe-Missouria Tribe's court system. The arbitration location is specified to be within thirty miles of the borrower's residence, but this does not alter the application of Tribal Law. The Loan Agreement, particularly Paragraph 23, asserts it is governed solely by Tribal Law and applicable federal law under the Indian Commerce Clause, excluding other federal or state regulations unless mentioned. The Lender may voluntarily reference federal laws without accepting their jurisdiction. The ESIGN Provision in Paragraph 14 states that the federal Electronic Signatures in Global and National Commerce Act applies, affirming that electronic signatures have the same legal effect as handwritten ones. Plaintiffs contest the enforcement of the Arbitration Agreement on two grounds: they claim they were not provided with the loan documents or informed of essential terms, including arbitration provisions, before signing, and they argue that the Arbitration Agreement is invalid and unenforceable.
Plaintiffs contend that American Web Loan's Arbitration Agreement is unconscionable, referencing the Fourth Circuit's decisions in Hayes v. Delbert Servs. Corp. and Dillon v. BMO Harris Bank, where similar arbitration provisions were deemed invalid. They argue that, even if the Court finds the facts of these cases distinguishable, the Agreement is still procedurally and substantively unconscionable. In contrast, AWL Defendants assert that motions to compel arbitration should be granted because Plaintiffs electronically signed the Loan Agreement, thus consenting to the Arbitration Agreement, and the current dispute falls within its scope. The Court determines that the facts in this case closely mirror those in Hayes and Dillon, leading to the conclusion that the arbitration agreement is unenforceable. The Fourth Circuit in both cases refused to enforce arbitration agreements that attempted to apply tribal law exclusively, disregarding federal and state law. In Hayes, an arbitration clause in a payday loan agreement stated it was governed solely by the Cheyenne River Sioux Tribe's laws, explicitly excluding U.S. state or federal laws. This led the Fourth Circuit to rule the arbitration agreement unenforceable for renouncing the authority of applicable federal statutes. The Court noted that while arbitration agreements can delegate federal rights, they cannot substantively waive federally protected civil rights.
The Fourth Circuit, in Dillon, upheld the principle from Hayes that an arbitration agreement functioning as a waiver of statutory remedies contravenes public policy. This is supported by precedents like Mitsubishi Motors and Am. Express, which emphasize that arbitration agreements should not undermine federal rights. The Dillon court highlighted that the arbitration agreement's intent was to allow lenders to operate outside federal law constraints, evidenced by a disclaimer in the loan agreement stating that no U.S. law would apply.
AWL Defendants assert that their Arbitration and Loan Agreements differ from those in Hayes and Dillon, claiming they do not require plaintiffs to forgo federal law entirely. They reference a "Governing Law" clause stating the agreement is governed by Tribal Law and applicable federal law under the Indian Commerce Clause, arguing that this allows for the inclusion of federal law in arbitration. In contrast, Plaintiffs argue that the overall language of the agreements suggests an intention for the arbitrator to disregard federal substantive laws. Notably, the agreements specify that they are not subject to any federal or state laws unless explicitly stated, and any appeals must be directed to Tribal court, which will apply Tribal Law exclusively.
Plaintiffs reference a Third Circuit case where a choice of law provision citing the Indian Commerce Clause was deemed irrelevant, arguing similarly that this clause does not affect their claims since it merely indicates Congress's authority over commerce with Indian tribes. They assert that the Loan Agreement's primary governance is by Tribal Law, as explicitly stated in the "Applicable Law and Judicial Review of the Arbitrator's Award" section. This section clarifies that the arbitrator must apply Tribal Law and that parties can seek judicial review in Tribal court regarding the arbitrator's findings and legal conclusions. Even in the event of opting out of arbitration, any disputes must still adhere to Tribal Law and be addressed within the Otoe-Missouria Tribe's court system.
The Plaintiffs contend that they were compelled to forgo any federal legal application, similar to the situation in Hayes. They outline three additional grounds challenging the arbitration clause's validity:
1. The Court has determined that AWL II and its controlling entity, Curry, do not qualify as arms of the Tribe, indicating that Curry's control undermines the Tribe's sovereign status in the lending operations.
2. The agreement's assertion of exclusive Tribal law contradicts its adoption of federal ESIGN statutes for electronic signatures, illustrating Curry's inconsistent use of sovereign immunity.
3. There is a conflict between the arbitration clause and the promissory note's provision that any change in Tribal law or adverse governmental action constitutes a default condition. A favorable decision for borrowers could trigger this default, thereby creating a conflict of interest within the Tribal arbitration process.
The Court denies the Motion to Compel Arbitration, ruling that the Arbitration Provision is unconscionable according to Fourth Circuit standards, interferes with tribal governance, and presents a conflict of interest. The findings indicate that Curry and his entities exploited the Tribe's immunity, demonstrating that the scheme was primarily controlled by Curry rather than the Tribe. Furthermore, Curry's actions in seeking to leverage tribal immunity against the Plaintiffs were deemed improper and a circumvention of federal and state law. The Court also denies several motions: 1) Motions to Dismiss for Lack of Subject Matter Jurisdiction, 2) Motions to Transfer, and 3) Motions to Compel Arbitration. The Clerk is instructed to distribute the order to all counsel, and responses to the Plaintiffs' Motion for Class Certification are due in fifteen days. The case has been consolidated under the primary docket number 4:17-cv-145. The Court rejected the Plaintiffs' argument that the issue of tribal sovereign immunity should be assessed like a motion to dismiss, emphasizing that the factual findings relevant to subject matter jurisdiction may not apply to other aspects of the case. An expert report noted high unemployment among Tribal Members, and changes to governance structures stipulated that Curry would select members of the board, altering the Tribe's decision-making processes. Additionally, the Note outlines conditions under which changes in Tribal Law would negatively impact the rights of the Note Holders.
Demands or impositions of taxes, fees, or regulatory requirements against Holders or their Affiliates are prohibited under the Note and Transaction Documents, except as necessary to comply with future federal law changes. The term "Adverse Tribal Government Action" includes any forcible takeover disrupting the Tribal Council. Transactions must have a legitimate business purpose beyond tax avoidance. The Annual Threshold for payments is established at $6,000,000 in the first year, with a monthly payment cap of $500,000, which includes a $25,000 bonus for board members post-merger. Congress sets revenue-sharing benchmarks for Native American enterprises, limiting management contract fees to 30% of net revenues to promote tribal economic development and ensure tribes benefit primarily from their operations. The Ninth and Tenth Circuits highlight the importance of protecting tribal treasuries under sovereign immunity. Despite the majority of relevant events occurring outside Virginia, the conduct of AWL in Virginia supports the Plaintiffs' position. Defendants Curry and Sol align their arguments with those of the AWL Defendants regarding motions to compel arbitration. Plaintiffs claim they were unaware of the Loan Agreement until after agreeing to it, but this issue is moot as the Arbitration Agreement is deemed invalid. The Loan Agreement specifies that it is governed by the laws of the Otoe-Missouria Tribe, explicitly excluding state or federal law. Any agreements made disavow the applicability of state or federal laws, affirming the tribal law's jurisdiction over the transactions.
