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Williams v. Big Picture Loans, LLC

United States Court of Appeals, Fourth Circuit

July 3, 2019

LULA WILLIAMS; GLORIA TURNAGE; GEORGE HENGLE; DOWIN COFFY; FELIX GILLISON, JR., on behalf of themselves and all individuals similarly situated, Plaintiffs - Appellees,
v.
BIG PICTURE LOANS, LLC; ASCENSION TECHNOLOGIES, LLC, Defendants - Appellants, and DANIEL GRAVEL; JAMES WILLIAMS, JR.; GERTRUDE MCGESHICK; SUSAN MCGESHICK; GIIWEGIIZHIGOOKWAY MARTIN;MATT MARTORELLO, Defendants. NATIONAL CONGRESS OF AMERICAN INDIANS; NATIONAL INDIAN GAMING ASSOCIATION; NATIONAL CENTER FOR AMERICAN INDIAN ENTERPRISE DEVELOPMENT; CONFERENCE OF TRIBAL LENDING COMMISSIONERS; ONLINE LENDERS ALLIANCE, Amici Supporting Appellant. DISTRICT OF COLUMBIA; STATE OF CONNECTICUT; STATE OF HAWAII; STATE OF ILLINOIS; STATE OF IOWA; STATE OF MAINE; STATE OF MARYLAND; STATE OF MASSACHUSETTS; STATE OF MINNESOTA; STATE OF NEW JERSEY; STATE OF NEW YORK; STATE OF NORTHCAROLINA; STATE OF PENNSYLVANIA; STATE OF VERMONT; STATE OF VIRGINIA; CENTER FOR RESPONSIBLE LENDING, Amici Supporting Appellee.

          Argued: May 7, 2019

          Appeal from the United States District Court for the Eastern District of Virginia, at Richmond. Robert E. Payne, Senior District Judge. (3:17-cv-00461-REP-RCY)

         ARGUED:

          William H. Hurd, TROUTMAN SANDERS, LLP, Richmond, Virginia, for Appellants.

          Matthew W.H. Wessler, GUPTA WESSLER PLLC, Washington, D.C., for Appellees.

         ON BRIEF:

          David N. Anthony, Timothy J. St. George, TROUTMAN SANDERS, LLP, Richmond, Virginia; Justin A. Gray, ROSETTE, LLP, Mattawan, Michigan, for Appellants.

          Kristi C. Kelly, Andrew Guzzo, Casey S. Nash, KELLY & CRANDALL, PLC, Fairfax, Virginia; Alexandria Twinem, GUPTA WESSLER PLLC, Washington, D.C., for Appellees.

          Pilar M. Thomas, LEWIS ROCA ROTHGERBER CHRISTIE LLP, Tucson, Arizona; Derrick Beetso, NATIONAL CONGRESS OF AMERICAN INDIANS, Washington, D.C., for Amici National Congress of American Indians, National Indian Gaming Association, and National Center for American Indian Enterprise Development.

          Sarah J. Auchterlonie, BROWNSTEIN HYATT FARBER SCHRECK LLP, Denver, Colorado; Brendan Johnson, Sioux Falls, South Dakota, Luke A. Hasskamp, ROBINS KAPLAN LLP, Minneapolis, Minnesota, for Amicus Conference of Tribal Lending Commissioners.

          Brian Foster, Michael Nonaka, Luis Urbina, COVINGTON & BURLING LLP, Washington, D.C., for Amicus Online Lenders Alliance.

          William Corbett, Diane M. Standaert, CENTER FOR RESPONSIBLE LENDING, Durham, North Carolina, for Amicus Center for Responsible Lending.

          Karl A. Racine, Attorney General, Loren L. AliKhan, Solicitor General, Caroline S. Van Zile, Deputy Solicitor General, Richard S. Love, Senior Assistant Solicitor General, OFFICE OF THE ATTORNEY GENERAL FOR THE DISTRICT OF COLUMBIA, Washington, D.C.; George Jepsen, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF CONNECTICUT, Hartford, Connecticut; Lisa Madigan, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF ILLINOIS, Chicago, Illinois; Janet T. Mills, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF MAINE, Augusta, Maine; Maura Healey, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE COMMONWEALTH OF MASSACHUSETTS, Boston, Massachusetts; Gurbir S. Grewal, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF NEW JERSEY, Trenton, New Jersey; Joshua H. Stein, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF NORTH CAROLINA, Raleigh, North Carolina; Thomas J. Donovan, Jr., Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF VERMONT, Montpelier, Vermont; Russell A. Suzuki, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF HAWAII, Honolulu, Hawaii; Tom Miller, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF IOWA, Des Moines, Iowa; Brian E. Frosh, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF MARYLAND, Baltimore, Maryland; Lori Swanson, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF MINNESOTA, St. Paul, Minnesota; Barbara D. Underwood, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE STATE OF NEW YORK, New York, New York; Josh Shapiro, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE COMMONWEALTH OF PENNSYLVANIA, Harrisburg, Pennsylvania; Mark R. Herring, Attorney General, OFFICE OF THE ATTORNEY GENERAL FOR THE COMMONWEALTH OF VIRGINIA, Richmond, Virginia, for Amici District of Columbia, State of Connecticut, State of Hawaii, State of Illinois, State of Iowa, State of Maine, State of Maryland, Commonwealth of Massachusetts, State of Minnesota, State of New Jersey, State of New York, State of North Carolina, Commonwealth of Pennsylvania, State of Vermont, and Commonwealth of Virginia.

          Before GREGORY, Chief Judge, AGEE, and DIAZ, Circuit Judges.

          GREGORY, CHIEF JUDGE

         The Lac Vieux Desert Band of the Lake Superior Chippewa Indians ("the Tribe") formed two business entities under tribal law. This appeal arises from a suit brought by five Virginia residents against those entities, Big Picture Loans, LLC and Ascension Technologies, LLC (collectively "the Entities"). In the underlying action, the Virginia residents claimed that they obtained payday loans on the internet from Big Picture and that those loans carried unlawfully high interest rates. The Entities moved to dismiss the case for lack of subject matter jurisdiction on the basis that they are entitled to sovereign immunity as arms of the Tribe. After concluding that the Entities bore the burden of proof in the arm-of-the-tribe analysis, the district court found that the Entities failed to prove that they are entitled to tribal sovereign immunity.

         The Entities now appeal that decision. Although the district court properly placed the burden of proof on the Entities claiming tribal sovereign immunity, we hold that the district court erred in its determination that the Entities are not arms of the Tribe. We therefore reverse the district court's decision and remand the case with instructions to dismiss the complaint.

         I.

         The Tribe entered the business of online lending in 2011 when it organized Red Rock Lending as a tribally owned LLC. Two members of the Tribe managed Red Rock, and the Tribe was its sole member. Red Rock provided loans to consumers from its offices on the Reservation and was subject to the Tribe's Tribal Financial Services Regulatory Code, which is enforced by the Tribal Financial Services Regulatory Authority. Red Rock contracted with Bellicose, a non-tribal LLC, to provide vendor management services, compliance management assistance, marketing material development, and risk modeling and data analytics development. Matt Martorello, a non-tribe member, was its founder and chief executive officer.[1]

         Two years after the formation of Red Rock, in February 2013, the New York Department of Financial Services sent cease and desist letters to several lending entities, including Red Rock, accusing them of "using the Internet to offer and originate illegal payday loans to New York consumers, in violation of New York's civil and criminal usury laws." Otoe-Missouria Tribe of Indians v. N.Y. State Dep't of Fin. Servs., 974 F.Supp.2d 353, 356 (S.D.N.Y. 2013). The Tribe and entities sought a preliminary injunction based in part on a claim that New York's regulation would infringe on tribal sovereignty. The district court denied the request, however, finding that the entities had not shown a likelihood of success on the merits because their online lending to New York customers constituted off-reservation activity and could thus be properly regulated under New York's anti-usury law. See id. at 360-61. The Second Circuit affirmed this decision in October 2014. Otoe-Missouria Tribe of Indians v. N.Y. State Dep't of Fin. Servs., 769 F.3d 105 (2d Cir. 2014).

         Around the same time, the Tribe formed three entities central to this appeal. On August 26, 2014, months before the Second Circuit's decision in Otoe-Missouria, the Tribe organized Big Picture as an independent tribal lending entity that would ultimately consolidate the activities of its other lending entities, including Red Rock. On February 5, 2015, the Tribe Council formed another entity, Tribal Economic Development Holdings, LLC ("TED"), to operate the Tribe's current and future lending companies. Also on February 5, 2015, the Tribe formed Ascension as a subsidiary of TED for the purpose of engaging in marketing, technological, and vendor services to support the Tribe's lending entities. The Tribe was the sole member of TED, and TED became Big Picture's and Ascension's sole member.

         Also in early 2015, Martorello and the Tribe agreed on a basic framework for the sale of Bellicose: a seller-financed transaction with non-fixed payments over a seven-year term, with any outstanding amount due to be forgiven at the end of that term. Prior to that time, the Tribe and Martorello had engaged in multiple conversations about the potential sale of Martorello's consulting companies to the Tribe, which would allow the Tribe to engage in online lending without relying on outside vendors for support services. The seller-financier would be Eventide Credit Acquisitions, LLC, a company managed and majority-owned by multiple entities of which Martorello was the president. In short, Eventide would provide a $300 million loan to TED, which TED would then use to purchase Bellicose.

         After continuing negotiations, the parties reached a final agreement in September 2015, memorializing the terms of the deal in a loan agreement and a promissory note. Under those terms, Big Picture would first make a distribution to TED of its gross revenues. TED would then distribute 2% of those revenues to the Tribe and reinvest an additional 2% of gross revenues in growing Big Picture's loan portfolio. The parties agreed to increase the monthly distribution to the tribe from 2% to 3% in September 2016, and the agreement also provided that the percentage distribution would increase to 6% when half the loan had been repaid. In January 2016, the Tribe completed its purchase of Bellicose and acquired all of Bellicose's data and software. By September 2017, TED had distributed approximately $20 million in loan payments to Eventide and nearly $5 million to the Tribe.

         TED now oversees both Big Picture and Ascension, and all three entities have their headquarters on the Reservation. Big Picture currently employs 15 tribal members on the Reservation, and Ascension employs 31 individuals, most of whom work outside the Reservation. An Intratribal Servicing Agreement sets forth the relationship between Big Picture and Ascension, with Ascension handling certain day-to-day aspects of the loan operations for Big Picture. Michelle Hazen and James Williams, both Tribe Council members, co-manage all three companies. Hazen is also chief executive officer of Big Picture, but Ascension's president is a non-tribal member.

         In June 2017, Plaintiffs Lula Williams, Gloria Turnage, George Hengle, Dowin Coffy, and Felix Gillison, Jr. brought a putative class action against Big Picture and Ascension, as well as individual defendants who are not parties to this appeal. Plaintiffs sought declaratory and injunctive relief, alleging that Big Picture charges interest rates on its loans that are substantially-50 times-higher than would be allowed if Virginia law were applicable. Before the district court, the Entities appeared specially to claim that they are entitled to tribal sovereign immunity, submitting documentation in support of their assertion that they are arms of the Tribe.

         Following jurisdictional discovery, the district court rejected the Entities' invocation of arm-of-the-tribe immunity. In reaching its decision, the district court determined that the driving force behind the formation of Big Picture and Ascension was "to shelter outsiders from the consequences of their otherwise illegal actions." J.A. 222. The district court placed the burden of proof for the immunity issue on the Entities. The Entities timely appealed.

         II.

         On appeal from a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1), we review "the district court's factual findings with respect to jurisdiction for clear error and the legal conclusion that flows therefrom de novo." In re KBR, Inc., Burn Pit Litig., 744 F.3d 326, 333 (4th Cir. 2014). A factual finding is clearly erroneous if we are "left with the definite and firm conviction ...


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