On December 22, 2016, the California Supreme Court unanimously held that two tribally-controlled businesses established for the purpose of payday lending are not protected by the Tribes’ sovereign immunity. The ruling in People v. Miami Nation Enterprises stems from a 2006 cease and desist order and a 2007 complaint filed by the Commissioner of the California Department of Corporations (now Business Oversight) against a number of payday lending companies that were operated by Miami Nation Enterprises and SFS Inc., which are tribally-chartered corporations of the Miami Tribe of Oklahoma and Santee Sioux Nation of Nebraska, respectively. The Commissioner alleged that the businesses were charging loan rates and fees in amounts larger than allowed by State law.
The tribal enterprises successfully defended their sovereign immunity in the lower courts. The California Court of Appeals ruled in 2014 that the lending companies were sufficiently related to the Tribes to be protected by tribal sovereign immunity and dismissed the Commissioner’s complaint. The California Supreme Court, however, reinstated the Commissioner’s complaint.
First, the court made an admittedly unusual conclusion that sometimes the defendant in a sovereign immunity case bears the burden of showing that it is entitled to immunity. The burden usually rests with the plaintiff. But the court held that in an “arm-of-the-tribe” immunity case, the entity raising the immunity defense bears the burden of showing by a preponderance of the evidence that it is an arm of the tribe. The court wrote that “Arm-of-the-tribe immunity must not become a doctrine of form over substance.”
Second, the court created a five-factor test to make that determination. The five factors are:
(1) the entity’s method of creation;
(2) whether the tribe intended the entity to share in its immunity;
(3) the entity’s purpose;
(4) the tribe’s control over the entity; and
(5) the financial relationship between the tribe and the entity.
The court gave great weight to the last three factors, writing that “evidence that the entity engages in activities unrelated to its stated goals or that the entity actually operates to enrich primarily persons outside of the tribe or only a handful of tribal leaders weighs against finding that the entity is an arm of the tribe.” The court concluded that the tribal businesses “relied heavily on outsiders.” The court also gave great weight to the lack of evidence that the Tribes received a majority of the profits as well as lack of evidence that the tribal businesses exercised significant control over loan approvals. The court remanded the case back to trial court for further proceedings in order to give the tribal business entities the opportunity to provide evidence that they meet the newly created standards under the five-part test.
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