LOS ANGELES (Legal Newsline) – Two federally recognized tribes have been denied immunity protections from California payday lender regulations after a recent state Supreme Court decision.

The court found Dec. 22 that payday loan businesses created by the Miami Tribe of Oklahoma and Santee Sioux Nation tribes were not "arms of the tribe," and therefore are not protected under tribal sovereign immunity.

It reversed a previous decision by a state appellate court that said that the entities would be protected from a California lawsuit because of their formal ties to the tribes, according to Orrick attorney Christopher Cariello.

The California Supreme Court did not interpret the issue this way – instead, it applied a five-point test to determine not only the legality of the business entities, but also the practicality of the business in relation to the tribes, according to court documents. 

"The trend in the law has been toward a more holistic analysis of both form and function," Cariello told Legal Newsline. "That really, to me, is the heart of what the court did in this case."

According to the court, the test should consider the following five factors: "The entity's method of creation, whether the tribe intended the business entity to share its immunity, the entity's purpose, the tribe's control over the entity and the financial relationship between the tribe and entity."

It was found that the tribes' business entities did not satisfy all five points of the test, and therefore could not be recognized as arms of the tribe.

Most significantly, it was revealed that the financial impact from the tribal entities was minimal and that the entities were not sufficiently exercising control over their lending operations.

But minimal financial contributions and poor supervision in regards to loan decisions weren't the only factors at play – according to Cariello. One of the entities' hired management companies was allowed to spend business funds at will. These findings mean that points four and five of the test were not met. 

In addition, Cariello wrote in a blog post that the entities' initial start-up money and intellectual property did not come from the tribes themselves, but from non-tribal corporations. These items did not satisfy the functionality/practical aspect of the court's test, which led to the decision to deny tribal immunity from the state lawsuit.

Cariello said the test wasn't designed specifically for this case, and it's also not the first time these factors have been used in court decisions.

"This is the California Supreme Court's synthesis, I would say, of a number of rulings," Cariello said. "But there is some precedent for these particular factors."   

The ruling is different from those in similar, previous cases in other states, and Cariello said simply that different facts in different cases infer different interpretations of what may or may not constitute a business as an arm of a tribe.   

"The California Supreme Court has a broader understanding, in some ways, of the sources of information that bear on whether this is truly a tribal issue, or really just a business issue concerning an economic actor that has a connection to the tribe," Cariello said.  

While Cariello says the application of the five-point test won't be formally adopted in tribal arm cases around the nation, he also believes the court's ruling unearths a couple of general takeaways to know about going forward.  

"I think the first upshot is that it's going to be harder to establish tribal immunity," said Cariello. "If to the extent this decision suggests greater vulnerability in the tribal model, you may see marketplace lenders at least consider other models ... and think about which is more protected." 

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