On July 3, 2019, in Williams v. Big Picture Loans, LLC (No. 18-1827), the Fourth Circuit ruled that a small dollar lender affiliated with the Lake Superior Chippewa Indian Tribe (Tribe) was entitled to tribal sovereign immunity from state interest rate laws as an “arm of the tribe,” dismissing a class action suit alleging that the Tribe’s activities violated Virginia usury law. The ruling is a potential watershed. Although the Supreme Court recognized that tribal immunity from state law extends to arrangements with third parties—to the extent that the arrangement benefits the tribe—the Williams case marks the first time that such an arrangement has been upheld at the federal appellate level.
The Tribe began lending in 2011 under the auspices of Red Rock Lending, LLC (Red Rock). Red Rock was wholly owned by the Tribe, managed from the Tribe’s reservation, and subject to the Tribe’s regulatory code, which was enforced by a tribal regulatory body. Red Rock contracted with Bellicose—a non-tribal LLC—which provided loan-related services to Red Rock. Two years later, the New York State Department of Financial Services (NYDFS) issued a cease and desist letter, claiming that Red Rock’s lending violated New York’s usury laws. The Tribe sought an injunction, claiming that the NYDFS violated the Tribe’s sovereign immunity by attempting to regulate its lending activities. However, the Southern District of New York disagreed (and was affirmed by the Second Circuit a year later) that lending to New York’s customers constituted off-reservation activity that New York can lawfully regulate.
In response to the Second Circuit’s decision, the Tribe changed the structure of its lending, in an attempt to take advantage of its sovereign immunity. The Tribe created Big Picture Loans, LLC (Big Picture) to serve as an independent lending entity and Ascension Technologies, LLC (Ascension) to provide loan-related services. Big Picture employed 15 members of the Tribe on the reservation, while Ascension employed 31 individuals, most of whom were not tribal members. The Tribe also formed Tribal Economic Development Holdings, LLC (TED) as a company to manage its lending operation, which became Big Picture and Ascension’s parent company. In early 2015, TED arranged for $300 million in financing to purchase Bellicose, such that all of the Tribe’s services would be provided by tribal-owned entities. Thereafter, TED would reinvest 2% of gross revenues into Big Picture’s loan portfolio, and distribute 2% (which later rose to 6%) to the Tribe.
The plaintiffs filed suit in the Eastern District of Virginia against the Tribe, claiming that Big Picture charged interest rates that are 50 times higher than allowed under Virginia usury law; the Tribe claimed sovereign immunity from Virginia state law. The district court found in favor of the plaintiffs, finding that the tribal entities were formed “to shelter outsiders [non-tribal members] from the consequences of their otherwise illegal actions.”
In overturning the district court’s decision, the Fourth Circuit agreed that the Tribal entities bore the burden of proof that immunity applies, but held that the Tribal entities met that burden. The court observed that the Supreme Court recognized that tribes can engage in commerce by using tribally-created entities, which act as “arms of the tribe,” but did not articulate a framework for making that determination. The court adopted a revised version of the Tenth Circuit’s “arm of the tribe” test to determine whether tribal immunity applied, considering: (1) the method of the entities’ creation; (2) their purpose; (3) their structure, ownership, and management; (4) the tribe’s intent to share its sovereign immunity; and (5) the financial relationship between the tribe and the entities. The extent to which a grant of arm-of-the-tribe immunity promotes the purpose tribal sovereign immunity informs the entire analysis.
Taking those factors together, the court concluded that the tribal immunity applied. The first factor was met because the entities were created by the Tribe, consistent with the Tribe’s constitution. With respect to the second factor, the plaintiffs argued that the purpose of the entities was to shield Bellicose from liability. The court disagreed. Although acknowledging that the Tribe restructured its lending arrangement in response to the Southern District of New York’s decision, it found that the ultimate purpose was to ensure that the Tribe could benefit from continued lending (even if Bellicose also incidentally benefited from the arrangement). The third factor was met by Big Picture—which was entirely controlled by the Tribe—but the court held that the management of Ascension weighed slightly against immunity, because the Tribe delegated substantial day-to-day management authority to Ascension’s non-Tribal president. The fourth factor was met because Tribe unequivocally stated its intention to share immunity in Big Picture and Ascension’s founding documents. Finally, as to the fifth factor, the court considered the impact of a potential adverse judgment on the Tribe’s treasury. Given that revenue from Big Picture’s lending made up 10% of the Tribe’s general fund, the court concluded that the fifth factor was also met. In considering the foregoing factors, the court concluded that the balance was in favor of extending sovereign immunity to the Tribe’s lending arrangement.
The Fourth Circuit’s decision shows that a carefully-considered arrangement with a tribe—in which the tribe retains substantial control of lending functions—can lead to courts’ recognition that tribal immunity extends to such arrangements. Time will tell whether other tribes will follow suit, and whether other courts will follow the Fourth Circuit’s lead.