Judge McGuire’s opinion last week in Western Sky in State v. Western Sky Financial, LLC, 2015 NCBC 84 has a little bit of everything in it: choice of law, the U.S. Constitution, claims for usury (excessive interest rates) and American Indians. If that doesn’t impel you to read on, I don’t know what would.
The chances are good, if you live in North Carolina, that you’ve seen at least one commercial for Western Sky. It offered to loan you $10,000 in a day, with no collateral. All you had to do was call and fill out a few online forms, but those loans, which ranged from $850 to a maximum of $10,000, "carried interest rates between 89.68% and 342.86%." Op. ¶11.
NC Attorney General Roy Cooper came down hard on Western Sky for violating North Carolina’s usury laws and otherwise taking advantage of North Carolina consumers. The penalty for usury in North Carolina is forfeiture of all of the interest specified in the loan agreement, as well as recovery of twice the interest paid by the borrower. N.C. Gen. Stat. §24-2.
Wait. You are undoubtedly wondering, what do American Indians have to do with all this?. The Attorney General said that the Defendants were engaged in a "rent-a-tribe scheme, in which [an] unlicensed lender. . . makes usurious consumer loans . . . . by purporting to affiliate with an Indian tribe to claim federal tribal sovereign immunity." Op. ¶18.
Western Sky is a South Dakota LLC, whose offices are located on the Cheyenne River Indian Reservation. Its sole owner, Martin Webb, is a member of the Cheyenne River Sioux Tribe. Op. ¶7
Western Sky borrowers consented to loan agreements which said that the loan was "subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation." Op. ¶13. The loan agreements also provided that they were "governed by the Indian Commerce Clause of the Constitution of the United States of America and the laws of the Cheyenne River Sioux Tribe." Op. ¶14.
The Indian Commerce Clause
I’m assuming that none of you have ever heard of, or even thought about, the Constitution’s Indian Commerce Clause. Article I, Section 8, Clause 3 of the Constitution says that the United States Congress shall have power "[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."
Choice Of Law
The central issue of the case was whether North Carolina’s very strong restrictions on usurious loans could be applied to Western Sky’s business. Judge McGuire had to get past the argument that applying North Carolina’s jurisdiction and laws to the Plaintiff’s claims would infringe on the Cheyenne River Sioux Tribe’s sovereign immunity.
The Defendants had argued that because Webb, Western Sky’s sole owner, was a member of the Cheyennne River Sioux tribe, that Western Sky was exempt from the Court’s authority. And they also argued that Western Sky’s assignees of the loans — California corporations with no Indian connection — were entitled to the same immunity.
Judge McGuire found that he didn’t need to address that argument since even if Western Sky was a tribal member the Court’s jurisdiction would not be precluded. He put his focus on where the loan transactions had occurred and determined that "the last act necessary to formation of the loan agreements occurred in North Carolina," Op. ¶37, and that North Carolina law therefore applied.
The Court had many routes to get to the same conclusion that North Carolina law governed Western Sky’s loans notwithstanding the choice of law provisions in the loan agreements. One lay in the stringent nature of NC’s usury laws. Section 24-2.1(a) of the General Statutes provides that "[f]or purposes of this Chapter, any extension of credit shall be deemed to have been made in this state. . . if the lender offers or agrees in this State to lend to a borrower who is a resident of this State." The NC Supreme Court has held that "a contract ‘made in a foreign State or country with the intent and purpose to evade the usury laws of this State’ is invalid and ‘the interest laws of North Carolina are applicable." Op. ¶37 (quoting Bundy v. Comm. Credit Co., 200 N.C. 511, 517-18 (1931).
Also, since the Attorney General was not a party to the loan agreements, he was acting as "an enforcement arm of the State of North Carolina" and was not bound by the choice of law provision. Op. ¶38.
And last but not least, there is also the public policy consideration that "North Carolina will not enforce a choice of law provision in a contract where the chosen law would ‘violate a fundamental policy of [North Carolina] or otherwise applicable law." Op. ¶39. The usury statute itself says that "[i]t is the paramount public policy of North Carolina to protect North Carolina resident borrowers through the application of North Carolina interest laws." N.C. Gen. Stat. §24-2.1(g).
More U.S. Constitution
Western Sky also argued that subjecting its loans to North Carolina law would violate the Dormant Commerce Clause of the Constitution. The Dormant Commerce Clause? If you don’t remember that Clause and you can’t find it in the Constitution, that is because it is not only "explicit. it is implied in the grant of power to the federal government to "regulate commerce . . . among the several States."
Judge McGuire rejected the Dormant Commerce Clause argument, holding that:
[t]he statutes at issue do not attempt to regulate conduct beyond North Carolina’s borders and do not unduly burden interstate commerce. The statutes do not purport to dictate the interest rates or other lending practices that Defendants apply in any state other than North Carolina.
Op. ¶45. It also noted that "[C}ourts throughout the United States have consistently allowed states to regulate the content of loan contracts made by out-of-state lenders to resident borrowers." Op. ¶44 (quoting State of Minn. v. CashCall, Inc., 2013 Minn. Dist. LEXIS 31 (Minn. Dist. Ct. Sept. 6, 2013).
I think that this decision represents the first time that the Business Court has considered these provisions of the United States Constitution. I think the only other mention of the U.S. Constitution by the Business Court was its discussion of the Full Faith and Credit Clause earlier this year. Generally, you don’t need to know much about the Constitution to litigate in the Business Court.
The AG’s Request For A Preliminary Injunction Was Only Partly Successful
The Attorney General requested an extraordinarily broad preliminary injunction against Western Sky. Judge McGuire granted only part of what was requested: enjoining Western Sky from making further loans within the State and from collecting payments on the loans that had previously been made. Given that Western Sky had already ceased making loans in North Carolina even before the Complaint was filed, the Court said that "a restriction on Defendants’ ability to initiate new loans would not be a significant hardship." Op. ¶82
The part of the requested injunction which was denied was that Western Sky establish an escrow fund sufficient to provide full restitution of the usurious interest to those consumers who had paid Western Sky interest higher than the 16% maximum allowed by North Carolina law (N.C. Gen. Stat. §24-1.1(c) provides that for a loan of $25,000 or less, the maximum rate that may be charged is 16%).
That type of an injunction would amount to the seizure of the Defendants’ assets before the entry of a judgment and the Court refused to grant that relief. The Attorney General argued that the escrow account sought was necessary because of the potential financial impact of the substantial litigation facing Western Sky in other jurisdictions but the Court found no evidence that the escrow of funds was "necessary or appropriate." Op. ¶78.
Western Sky has shut down business in September 2013 due to what it referred to as "unwarranted overreach by state regulators." The company has faced lawsuits in multiple states, and is also was sued by the Federal Trade Commission and consented to a Permanent Injunction.