Western Sky and the Importance of Proper Legal Counsel in Online Lending
Last Tuesday, J. Paul Reddam, owner of the California-based lender, Cash Call, sued the law firm that previously helped him join forces with a private citizen living on tribal land to build his now-crumbling lending empire. Reddam alleges that attorneys at Katten Muchin Rosenman, including partner Claudia Callaway, aided Reddam in partnering with a member of the Cheyenne River Sioux Tribe to offer high interest payday loans through a company located on the reservation called Western Sky Financial. Under their scheme, Western Sky would sell the short term credit to Cash Call for collection shortly after funding the loans. According to his complaint filed in California State Court, Reddam was instructed that “Native American laws, rather than federal or state laws, would govern direct consumer loans consummated on a reservation and then assigned to [Cash Call].” As Reddam soon found out, this perverted interpretation of tribal law and sovereignty did not in fact give him carte blanche to ignore state and federal lending laws.
Although Western Sky Financial closed its doors in 2013, it remains a consistent part of the news cycle and a constant reminder of how bad business deals in Indian Country can create a stigma that harms legitimate tribal lenders even today.
First, Western Sky Financial was not a tribal lender. Tribal lending entities (TLEs) are economic subunits, or arms, of sovereign tribal governments. “Arms of the tribe” are afforded certain legal privileges, including sovereign immunity from suit. Courts look at many different aspects of a tribal business before determining if it should be afforded sovereign status. These aspects include how the business was created, operational control, financial responsibilities, and the entity’s purpose. Western Sky was not a creation of the Cheyenne River Sioux Tribe, but rather a wholly-owned business of one of its citizens. The tribe’s finances were not directly tied to the company- if the company was sued or performed poorly, the tribe was under no obligation to use government funds to defend the company or prop it up. Finally, Western Sky held no government purpose. It was a private company operated for the gain of a private citizen. Western Sky’s only connection to the tribal government was that it was issued a business license by the tribe and permitted to operate within the borders of the reservation. Originating from a certain location alone does not imbue that business with the privileges and protections of that location’s government. Western Sky was not a tribal lender in any sense of the term.
Without designation as an “arm of the tribe,” Western Sky Financial lacked the protection of sovereign immunity from lawsuit. Since the 1832 U.S. Supreme Court’s decision in Worcester v. Georgia, this has included immunity from state law. The high interest rates charged by Western Sky and enforced by Cash Call often violated state usury laws, and Reddam has paid the price for those illegal loans ever since.
A poor grasp of tribal law was not the only thing that doomed Reddam’s arrangement with Western Sky; the quick transfer of loans to Cash Call after origination called into question who exactly was the “true lender” in this business agreement. Analysis to determine the true lender for financial products typically takes place when a company attempts to use another business’s competitive advantage to do business in a way that would not normally be permitted in that place, either through federal preemption of state law or exporting a favorable rate to another location. (Read NAFSA’s recent discussion with Bloomberg on true lender issues here: https://nativefinance.org/nafsa-explains-our-best-practices-to-bloomberg-bna/). Any advantages Cash Call may have had on interest rate charges vanished last year when the Consumer Financial Protection Bureau (CFPB) successfully argued in federal court that Cash Call was the true lender of the loans originated by Western Sky, and thus state law, not tribal law, applied. Without tribal protections and laws, Western Sky folded and Cash Call continues to be hammered in courts across the United States for its loan practices.
For Indian Country to succeed, it is important that tribes learn from the business dealings and failings of others. All NAFSA member TLEs are arms of sovereign tribal governments, organized under tribal laws, financially accountable to the tribal government and its citizens, and operate with the purpose of improving the lives of tribal citizens within their communities. Regulatory commissions at each NAFSA member tribe ensure compliance with tribal and federal lending laws and NAFSA Best Practices add an extra layer of accountability and oversight. NAFSA is pushing its members toward a more sustainable future in lending, leaving Western Sky and its progeny in the past.