Sunday, October 26, 2014

FYI: 2nd Cir Affirms Denial of Motion for Prelimin Injunction Filed by Out-Of-State Short-Term High-Interest Lender Under Indian Commerce Clause

The U.S. Court of Appeals for the Second Circuit recently affirmed the denial of a lender’s motion for a preliminary injunction which sought to enjoin a state’s attempt to bar out-of-state lenders from extending short-term high interest loans to its residents.


A copy of the opinion can be found at:  Link to Opinion


The plaintiff Native American Tribes (“Lender”) are internet based lending companies, which extend short-term loans (the “Loans”) to borrowers who have difficulty obtaining credit through traditional means.  The Loans are made at high interest rates and allow Lender to recover interest and principle by making direct deductions from a respective borrower’s bank account. 


The defendant Department of Financial Services (“DFS”) is a New York State regulatory body that enforces New York’s usury laws in an attempt to “protect desperately poor people from the consequences of their own desperation.”


As you may recall, New York State’s usury laws prohibit lenders from lending money at an interest rate above 16 percent per year, and criminalizes loans with interest rates higher than 25 percent per year.  See N.Y. Gen. Oblig. Law § 5-501(1); N.Y. Banking Law § 14a (1); N.Y. Penal Law §§ 190.40-42.


DFS launched a campaign seeking to prevent out-of-state lenders from extending usury loans to New York residents, which included loans extended by Lender.  Specifically, DFS sent cease-and-desist letters to 35 payday lenders, which it identified as having made usurious loans to New York residents.  These letters targeted Lender, foreign lenders, and out-of-state lenders who did business in states with no interest rate cap.


DFS also sent letters to financial service companies affiliated with any lender DFS targeted.  The letters asked the financial service companies to cease doing business with any lender who extended usurious loans to New York residents.


Lender claimed DFS’ campaign had an immediate effect on it as banks and other financial institutions abruptly ended their relationship with Lender.  The resulting loss of revenue caused large gaps in tribal budgets as proceeds generated by the Loans allegedly accounted for close to half of the tribe’s non-federal income. 


Lender proceeded to file suit in district court claiming DFS violated the Indian Commerce Clause by infringing on a tribe’s fundamental right to self-government.  Lender subsequently moved for a preliminary injunction seeking to bar DFS from further interfering with Lender’s transactions in New York and elsewhere. 


In support of its motion for a preliminary injunction, Lender argued the Loans occurred on Native American reservations (the “reservations”), and thus DFS’ attempt to regulate the Loans violated the Indian Commerce Clause.  In support of its claim, Lender argued that: (1) the loan application process took place on websites owned and controlled by tribes; (2) the loans were reviewed and assessed by tribal loan underwriting systems; (3) the loans were administered and regulated by tribal authorities; (4) the loans were funded by tribally owned bank accounts; and (5) each loan application notified the borrower that it was exclusively governed by tribal and applicable federal law.


DFS opposed Lender’s injunction by arguing the Loans occurred off-reservation because: (1) the loans flowed across tribal borders to consumers in New York; (2) borrowers never traveled to reservations; (3) borrowers e-signed the loan applications by listing their New York addresses and provided routing numbers for personal bank accounts located in New York; (4) and Lender reached into New York to collect payments.  Thus, DFS claimed it was not regulating on-reservation activity and its efforts to bar usurious loans did not violate the Indian Commerce Clause.  


The district court denied Lender’s motion because Lender “built a wobbly foundation that the state is regulating activity that occurs on the Tribe’s land.”  The district court further held that DFS’ “action was directed at activity that took place entirely off tribal land, involving New York residents who never leave New York State.” 


This appealed followed. 


As you may recall, a “district court’s denial of a motion for a preliminary injunction is reviewed for abuse of discretion.”  WPIX, Inc. v. ivi, Inc., 691 F.3d 275, 278 (2d Cir. 2012).  District courts may grant a preliminary injunction where a plaintiff demonstrates “irreparable harm” and meets one of two of the following related standards: “(1) a likelihood of success on the merits, or (2) sufficiently serious questions going to the merits of its claims to make them fair ground for litigation, plus a balance of the hardships tipping decidedly in favor of the moving party.”  Lynch v. City of N.Y., 589 F.3d 94, 98 (2d Cir. 2009).


However, a plaintiff cannot rely on the “fair ground for litigation” alternative to challenge “governmental action taken in the public interest pursuant to a statutory or regulatory scheme.” Plaza Health Labs, Inc. v. Perales, 878 F.2d 577, 580 (2d Cir. 1989) (internal citations omitted).   This exception reflects the idea that governmental policies “are entitled to a higher degree of deference and should not be enjoined lightly.”  Able v. United States, 44 F.3d 128, 131 (2d Cir. 1995).


In an attempt to avoid the “fair ground for litigation” exception, Lender argued that tribes are independent nations, and DFS’ regulatory action interfered with their “ability to provide for their members and manage their own internal affairs.”  The Court dismissed Lender’s argument stating, “a party seeking to enjoin governmental action taken in the public interest pursuant to a statutory or regulatory scheme cannot rely on the fair ground for litigation alternative even if that party seeks to vindicate a sovereign or public interest.”  Oneida Nation of N.Y. v. Cuomo, 645 F.3d 154, 164 (2d Cir. 2011). 


Accordingly, the Court held that the “fair ground for litigation” exception applied, and thus Lender had to establish a likelihood of success on the merits concerning its claim that DFS’ regulations violated the Indian Commerce Clause.


The Court began its “likelihood of success on the merits” analysis by examining a state’s ability to regulate tribal activities.  It explained the “Supreme Court has held that states may regulate tribal activities, but only in a limited manner, one constrained by tribes’ fundamental right to self-government, and Congress’s robust power to manage tribal affairs.”  White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 142-143 (1980).


The ability of a state to regulate tribal activities depends on the location of the targeted conduct and the citizenship of participants in the regulated activity.  Native Americans “going beyond the reservation boundaries” must comply with state laws as long as those laws are “non-discriminatory and . . . otherwise applicable to all citizens of that State.”  Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148-49 (1973).  However, once a state reaches across “a reservation’s borders its power diminishes and courts must weigh the interests of each sovereign--the tribes, the federal government, and the state--in the conduct targeted by the state’s regulation.”


Thus, a court must determine “who” a challenged regulation targets and where the targeted activity occurs.  Only after making this determination, can a court “either test for discriminatory laws” or “balance competing interests.”  


The Court then examined where the Loans were originated and where other loan related activity occurred.  Lender argued that the Loans were “on-reservation” activity because they originated and were approved on tribal land.   The Court dismissed this argument stating that Lender failed to present evidence supporting their assertion that the Loans were “on-reservation” activity.


Specifically, the Court determined that Lender failed to provide evidence: (1) that a specific portion of a lending transaction took place on a facility physically located on reservations; (2) failed to provide the citizenship of Lender’s personnel, where they worked, or where the website hosts were located; (3) whether the loan underwriting system involved actuaries working on reservations; (4) and whether any “tribally held bank accounts” were held by or funded by tribal banks.  The Court also noted that a majority of the Loan’s commercial activity took place in New York because credit extensions and subsequent collection activities clearly took place within state borders and away from tribal land.


Lender next argued that the traditional “on-or-off reservation” analysis was too simplistic of an approach to modern e-commerce.   Specifically, Lender claimed “tribes bear the legal burden of the regulation,” and thus the Court should proceed directly to balancing the interests of each respective sovereign. The Court disregarded this argument stating that no precedent allowed it to dismiss the initial test of determining the regulated activity’s location.  The Court explained that even if it could move directly to interest balancing, Lender failed to provide sufficient evidence concerning what should be weighed when balancing each sovereign’s  respective interest. 


Lender further argued that DFS “infringed upon tribal sovereignty by launching a national campaign with the express purpose of destroying out-of-state business.”  However, the Court determined that DFS’ efforts could not be seen as singling out tribal lending companies as DFS encouraged financial service companies to cease doing business with any online lender who made usurious loans to New York State residents.


Thus, DFS’ attempt to discourage banks and other financial institutions from cooperating with Lender did not violate the Indian Commerce Clause


Therefore, the district court’s denial of Lender’s preliminary injunction was proper because the district court reasonably determined that Lender failed to prove a likelihood of success on the merits. 


Accordingly, the Court affirmed the district court’s denial of the preliminary injunction.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
(312) 551-9320
(312) 284-4751
(312) 493-0874


Admitted to practice law in Illinois



          McGinnis Wutscher Beiramee LLP





NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at: