This ruling reverses a California Appellate Court decision that the affiliated entities functioned as “arms of the tribe” and were entitled immunity from the lawsuit. The Supreme Court of California affirmed that tribal sovereign immunity is a matter of federal law and “is not subject to diminution by the States.” While the Supreme Court of the United States previously ruled that a tribal enterprise or entity must be an “arm of the tribe” to claim sovereign immunity, the United States Supreme Court did not articulate a standard for lower courts to analyze the immunity of tribal enterprises and entities. As a result, number of state courts and federal appellate courts have developed their own “arm of the tribe” test.
In this case, the Supreme Court of California looked at formal and functional aspects of the relationship between the tribes and their affiliated entities and developed its own five factor “arm of the tribe” test, with the burden to prove a tribal affiliated entity’s immunity falls on the entity itself. The five factors of the California “arm of the tribe” test are: “(1) the entity’s method of creation, (2) whether the tribe intended the entity share in its 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.” Ultimately, the Supreme Court of California determined that these tribes had little to no control, oversight, or benefit, rejecting sovereign immunity for the online lending businesses in question.
This case underscores the growing collective unviability of tribal lending models without significant oversight, participation and benefit by the tribal lending entity itself.
Bottomline: California Supreme Court rules that “arms of the tribe” are protected by sovereign immunity but find that defendants’ lending enterprises lacked sufficient operational control to claim arm of the tribe status.
