Indian Tribes Aid Payday Lenders' Arbitration Escape From Bankruptcy Court

Several Indian tribes have formed tribal lending entities (TLE) that lend over the Internet to consumers nationwide, usually on terms that are unlawful under the internal laws of the states where the borrowers reside, according to a well-written piece by Hilary B. Miller in Business Law Today.

While states may be powerless to regulate TLEs, the Consumer Financial Protection Bureau has asserted publicly that it has authority to regulate tribal payday lending, according to Miller.

TLEs will certainly argue that they should not fall within the ambit of the Act. Specifically, TLEs will argue, inter alia, that because Congress did not expressly include tribes within the definition of "covered person," tribes should be excluded (possibly because their sovereignty should permit the tribes alone to determine whether and on what terms tribes and their "arms" may lend to others). Alternatively, they may argue a fortiori that tribes are "states" within the meaning of Section 1002(27) of the Act and thus are co-sovereigns with whom supervision is to be coordinated, rather than against whom the Act is to be applied.

The relevance of this to arbitration is that the CFPB has the power to regulate, or even ban, arbitration clauses in consumer financial services contracts.

The Fourth Circuit recently enforced an arbitration clause by a TLE, despite the borrower's bankruptcy.

The Loan Agreement provided, however, that it was "governed by the Indian Commerce Clause of the Constitution of the United States of America and the laws of the Cheyenne River Sioux Tribe" and that "no United States state or federal law applies to this Agreement."

The Loan Agreement also provided that any disputes relating to it were to be resolved by arbitration, "which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative" (emphasis added), and it gave Moses the right to designate either the American Arbitration Association or JAMS "to administer the arbitration" in accordance with its rules and procedures "to the extent that those rules and procedures do not contradict either the law of the Cheyenne River Sioux Tribe or the express terms of this Agreement to arbitrate." ... Courts that have considered loan agreements similar to the one at issue here have found that the Cheyenne River Sioux Tribe has no laws or facilities for arbitration and that the arbitration procedure specified is a "sham from stem to stern." 

One judge wrote "I do not hesitate to observe the odiousness of CashCall's apparent practice of using tribal arbitration agreements to prey on financially distressed consumers, while shielding itself from state actions to enforce consumer protection laws."

Moses v. Cashcall  is a complex case because it involves tension between the Federal Arbitration Act and the Bankruptcy Code, as well as issues of tribal sovereignty. Courts often find that the FAA yields to bankruptcy when the claim in question is a "core" bankruptcy matter but the arbitration agreement is enforced with respect to non-core claims.

The complexity of this case Moses v. Cashcall, is suggested by the fact that no pair of the three circuit judges agreed with each other. One judge wanted to enforce the arbitration clause with respect to both claims, another judge wanted to enforce the arbitration clause with respect to neither claim, and the third judge wanted to enforce the arbitration clause with respect to the non-core claim but not the core claim, which ends up being the ruling of the court.

So the “who decides?” issues include both whether to send the core and non-core claim to different adjudicators and whether a claim that could be sent to functioning arbitration should not be sent to Cheyenne River Sioux arbitration because as Judge Niemeyer wrote, “the Cheyenne River Sioux Tribe does not authorize arbitration and consequently has no authorized arbitrators or consumer dispute rules.”