United States: California Supreme Court Finds Two Payday Lenders Not Immune From State Lending Laws

Last Updated: January 13 2017
Article by Keith J. Barnett

On December 22, the California Supreme Court in Owen v. Miami Nation Enterprises, held that payday lending companies failed to prove by a preponderance of the evidence that they were "arms of" Indian tribes. Therefore, the lenders were not immune from complying with a California state lending law. In its decision, the Court reaffirmed well-settled law holding that Indian tribes are immune from lawsuits. The defendant payday lenders, however, were not the tribes themselves. Rather, the defendants were companies created by federally-recognized Indian tribes under tribal laws, and the tribes hired non-tribal corporations to manage the payday lending businesses. The issue in the case was determining the circumstances under which a tribal-affiliated entity shares tribal immunity as an "arm of the tribe." The Court analyzed five factors before determining that the companies were not arms of the tribe. These factors were: (1) the entity's method of creation; (2) whether the tribe intended the entity to share in the 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. According to the Court, four of the five factors weighed against a finding of immunity based on the evidence.

Method of Creation

The Court stated that "[f]ormation under tribal law weighs in favor of immunity, whereas formation under state law has been held to weigh against immunity." Although Miami Nation Enterprises' lending entities were formed under tribal law and not state law, this factor did not weigh in their favor because the evidence revealed that non-tribes provided the initial capital for the lenders, registered their trademarks, and were significantly involved in the lending operations by writing checks on behalf of the entities and using the entities' money for their own purposes.


The Court stated that "the tribal ordinance or articles of incorporation creating the entity will express whether the tribe intended the entity to share in its immunity." While the Court stated that this factor weighs in favor of a finding for immunity, Miami Nation Enterprises' articles of incorporation "reveals little about 'whether the entity acts as an arm of the tribe so that its activities are properly deemed to be those of the tribe.'"


"If the entity was created to develop the tribe's economy, fund its governmental services, or promote cultural autonomy, its purpose pertains to tribal self-governance notwithstanding the entity's commercial activities." If, however, the entity was created solely for business purposes, this factor will weigh against immunity. The Court stated that its analysis with respect to the purpose does not stop with what is stated in the articles of incorporation. The entity must actually help the tribe, as would be established by evidence reflecting "the number of jobs it creates for tribal members or the amount of revenue it generates for the tribe." This factor is likely not satisfied if "the entity actually operates to enrich primarily persons outside of the tribe or only a handful of tribal leaders." The Court held that this factor weighed against a finding of immunity because the evidence revealed that non-tribes had virtually unfettered access and control over the lending operations and the companies' books and records.


The Court considered "the entity's formal governance structure, the extent to which it is owned by the tribe, and the entity's day-to-day management." Outsourcing management, which is what the tribes did in this case, does not undermine a finding that the tribe controls the entity. Rather, the Court will analyze more facts. For example, "[e]vidence that the tribe actively directs or oversees the operation of the entity weighs in favor of immunity; evidence that the tribe is a passive owner, neglects its governance roles, or otherwise exercises little or no control or oversight weighs against immunity." The Court held that this factor weighed against a finding of immunity because, although the tribes had formal management agreements providing them with control over the lending operations, the tribes did not exercise this control to the point where "[n]on-tribes had a high degree of practical control over the entities and the tribes were not enmeshed with the operations of the business."

Financial Relationship

The Court did not provide concrete guidance on this factor, revealing that an analysis of this factor is more subjective than the other factors. The Court acknowledged that other courts have considered percentage of revenues shared with the tribe and the manner in which a judgment against the entity will affect the tribe's finances. The Court, however, failed to state which of these considerations is more important, and the Court did not state the actual percentage of revenue or gross amount of money that will be sufficient to weigh in favor of immunity. Rather, the Court stated that "because any imposition of liability on a tribally affiliated entity could theoretically impact tribal finances, the entity must do more than simply assert that it generates some revenue for the tribe in order to tilt this factor in favor of immunity." The Court held that this factor did not weigh in favor of a finding of immunity. Although the entities "asserted that their profits go to support tribal operations and programs, they conspicuously omit any mention of how much revenue actually reaches each tribe's coffers or how that income was allocated among the tribal programs." The only evidence presented to the Court stated that 1% or $25,000 per month was sent to the tribes. That amount was not sufficient to the Court.

The California Supreme Court remanded the case to the trial court where Miami Nation Enterprises will have an opportunity to present the evidence that the Supreme Court stated was missing. This case, along with other cases that analyze whether an entity is an "arm of the tribe," are instructive to lenders who have tribal affiliations and payment processors when they are conducting due diligence examinations or audits on tribal lenders.

The Troutman Sanders' Consumer Financial Services Law Monitor blog offers timely updates regarding the financial services industry to inform you of recent changes in the law, upcoming regulatory deadlines and significant judicial opinions that may impact your business. To view the blog, click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Keith J. Barnett
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