By Karrie S. Wichtman
On December 22, 2016, the California Supreme Court issued an opinion in People ex rel Owen v Miami Nation Enterprises (MNE), which demonstrates that careful considerations are required for tribes exploring alternate forms of economic development.
The MNE decision involves a dispute brought by California against five short-term loan lenders owned by two federally recognized tribes. These tribes created economic instrumentalities that offer short-term and installment loans over the internet to borrowers nationwide. The businesses relied on non-tribal financiers and contracted with non-tribal vendors for various services.
Claiming violations of its Deferred Deposit Transaction Law, the California Department of Business Oversight sought to block online short-term lending and issued a “desist and refrain” order to several online lenders. To enforce its laws, in 2007, California took directed action towards the two tribes alleging violations of the state law.
In their defense, the tribal entities claimed that, as arms of their respective tribes, California lacked jurisdiction over the sovereigns. Both the trial court and the California Court of Appeal agreed that the businesses were arms of their respective tribes and thus, protected by tribal sovereign immunity against state enforcement actions.
While the Court followed “arm of the state” case law in relation to burden of proof, it expressly declined to do so as it relates to arm of the tribe/tribal instrumentality. Instead, the Court relied on the factors-based test set forth in Breakthrough Management Group, Inc. v. Chukchansi Gold Casino and Resort—utilized by many courts across the country—effectively encapsulating and condensing the tests applied by those courts into five factors:
• the entity’s method of creation
• whether the tribe intended the entity to share in its immunity
• the entity’s purpose
• the tribe’s control over the entity
• the financial relationship between the tribe and the entity
Except for the burden of proof, the new MNE test does not change the law. In fact, the California Supreme Court acknowledged the fundamental component of Indian sovereignty precluding states from exerting regulatory jurisdiction over tribes and protecting tribes through the doctrine of tribal sovereign immunity, which extends to tribal “arms” and instrumentalities. But instead of placing the burden on the party seeking to invoke the Court’s jurisdiction—the state—to disprove the tribal entities’ sovereign status, the court, in a new requirement, placed the burden on the tribal entities to make such a showing.
In shifting the burden of proof requirement, California chose to depart from existing precedent which places the burden on those contesting immunity, instead relying on California law that requires a California state agency to prove it is entitled to immunity. The emphasis of this new California Supreme Court test is functional, examining operations and profits from the business, as well as the corporate structure and tribal resolutions: “Arm-of-the-tribe immunity must not become a doctrine of form over substance.”
Other than forcing Indian tribes to weigh potential litigation costs right along with fundamental business start-up costs, the ultimate outcome of the litigation and the fate of the tribal business entities in MNE is unknown. Practically speaking, at least in California, the case highlights the importance of extensive tribal involvement in economic development from creation to financing to operation.
But how much tribal investment or control will be enough? Does contracting services from outside vendors or seeking financing from outside sources diminish the sovereign status of the business? If the tribal business operates in the red for the first few years with no return to the Indian tribe, does it lose its sovereign status? The answers to these questions will likely be decided on a case-by-case basis.
However, MNE can be instructive now to Indian Tribes contemplating new economic development opportunities. Cases like MNE reflect the importance of documenting the development and operation of Tribal business entities to arm Indian Tribes with the tools necessary to stave off attacks from those who would seek to diminish their sovereign status. ♦