On September 3, 2013, Western Sky Financial, a payday lender based in the Cheyenne River Indian Reservation in South Dakota, shut down amid lawsuits by several states alleging Western Sky engaged in usury and other illegal practices in making loans to their citizens. Maryland’s commissioner of financial regulation, for example, found that some Western Sky loans carried as much as 1,825% interest! In press releases and court filings, Western Sky claims that this is a case of regulatory overreach, and that it is immune from federal and state law due to tribal sovereign immunity. This would include federal and state law enacted to protect consumers and to regulate consumer debt collection, interest rates, and other lending practices.
This case has drawn academic interest from lawyers like me due to the jurisdictional issues involved, but it also carries some important lessons for consumers.
For one, the old adage, “Read the fine print!” may be more applicable today than it has ever been, particularly in the realm of consumer and small business finance. Many loan and credit agreements include what we call “forum selection” clauses and “choice of law” clauses. In these clauses, which often appear buried deep in the “fine print” of a contract, the parties agree that any lawsuit arising from the contract must be filed in a certain state or county, and that a certain state’s or country’s laws apply to the contract. American courts, from the U.S. Supreme Court down, have almost universally found these clauses to be enforceable, with few exceptions.
In this day and age where consumers and businesses often seek loans on the internet rather than going to their local bank, the states selected can be surprising. It would not be unusual, for example, for a small business owner in Texas to enter into a finance agreement with a company in New York but later be surprised to learn that he unwittingly agreed that any law suits under the contract be filed in Seattle and that the contract is governed by Nevada law. Despite the fact that Washington and Nevada have little or nothing to do with the contract or parties, these clauses will probably bind the Texas borrower unless there is a statute that renders it specifically unenforceable, such as certain consumer protection statutes.
In the case of Western Sky, borrowers agreed not only to be bound by the laws of the Cheyenne River Sioux Tribe and the Cheyenne River Indian Reservation, but also agreed that no other state or federal law or regulation applied to the loan. Borrowers also consented to the jurisdiction of the Cheyenne River Sioux Tribal Court.
It is questionable to say the least whether such sweeping language will be found enforceable by courts, but if they were to be given effect, the consequences could be profound. A Texas borrower defaulting on a Western Sky payday loan could potentially be sued by Western Sky in the Cheyenne River Sioux Tribal Court. If the Texas borrower does not file an answer or appear in court, Western Sky could take a default judgment against the borrower and then seek enforcement of the judgment in Texas court. The Texas borrower would then have very limited opportunity to contest the validity of the judgment, as many courts have held that the judgments of tribal courts are entitled to full faith and credit under the U.S. Constitution.
Under the federal Fair Debt Collection Practices Act (FDCPA), a lender or debt collector may normally only sue a consumer borrower in the place where the consumer lives or where he signed the contract. However, Western Sky’s borrowers have agreed that federal law does not apply, which would presumably include the FDCPA. Further, Western Sky is arguing that because the business is owned by enrolled members of the Cheyenne River Sioux Tribe and is operated on the Cheyenne River Indian Reservation, it is immune from state and federal law despite the fact that most, if not all, of its loans are made to consumers around the country who are not members of the tribe.
It seems unlikely that Western Sky will prevail on this argument. A consumer’s rights under the FDCPA and most state consumer protection statutes cannot be waived even with a written agreement. As to Western Sky’s tribal sovereign immunity argument, such immunity generally applies only to tribal governments and not to private businesses owned by tribal members. Further, under the “Commerce Clause” of Article I, Section 8 of the U.S. Constitution, Congress has the power to “regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” Western Sky will have a difficult time arguing that its loans to the citizens of multiple states do not constitute “commerce” subject to Congressional regulation.
Litigation over these and other issues will likely continue for some years to come, but it will probably be too late for borrowers who may have been harmed by Western Sky’s practices. The moral of the story is to always read the contract, always consider who you are doing business with, and always know what you are agreeing to before you sign on the dotted line or click “OK.”