4th Circuit: Tribal lenders must face usury claims
On November 16, the U.S. Court of Appeals for the Fourth Circuit upheld a district court’s ruling denying defendants’ bid to dismiss or compel arbitration of a class action concerning alleged usury law violations. The plaintiffs—Virginia consumers who defaulted on short-term loans received from online lenders affiliated with a federally-recognized tribe—filed a putative class action against tribal officials as well as two non-members affiliated with the tribal lenders, alleging the lenders violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and Virginia usury laws by charging interest rates between 544 and 920 percent. The defendants moved to compel arbitration under a clause in the loan agreements and moved to dismiss on various grounds, including that they were exempt from Virginia usury laws. The district court denied the motions to compel arbitration and to dismiss, ruling that the arbitration provision was unenforceable as a prospective waiver of the borrowers’ federal rights and that the defendants could not claim tribal sovereign immunity. The district court also “held the loan agreements’ choice of tribal law unenforceable as a violation of Virginia’s strong public policy against unregulated lending of usurious loans.” However, the district court dismissed the RICO claim against the tribal officials, ruling that RICO only authorizes private plaintiffs to sue for money damages and not injunctive or declaratory relief.
On appeal, the 4th Circuit concluded that the arbitration clauses in the loan agreements impermissibly force borrowers to waive their federal substantive rights under federal consumer protection laws, and contained an unenforceable tribal choice-of-law provision because Virginia law caps general interest rates at 12 percent. As such, the appellate court stated that the entire arbitration provision is unenforceable. “The [t]ribal [l]enders drafted an invalid contract that strips borrowers of their substantive federal statutory rights,” the appellate court wrote. “[W]e cannot save that contract by revising it on appeal.” The 4th Circuit also declined to extend tribal sovereign immunity to the tribal officials, determining that while “the tribe itself retains sovereign immunity, it cannot shroud its officials with immunity in federal court when those officials violate applicable state law.” The appellate court further noted that the “Supreme Court has explicitly blessed suits against tribal officials to enjoin violations of federal and state law.” The 4th Circuit ultimately affirmed the district court’s judgment, noting that the loan agreement provisions were unenforceable because “tribal law’s authorization of triple-digit interest rates on low-dollar, short-term loans violates Virginia’s compelling public policy against unregulated usurious lending.”
The appellate court also agreed with the district court that RICO does not permit private plaintiffs to seek an injunction. “Congress’s use of significantly different language” to define the scope of governmental and private claims under RICO “compels us to conclude” that “private plaintiffs may sue only for treble damages and costs,” the appellate court stated. While plaintiffs “urge us to consider by analogy the antitrust statutes,” provisions outlined in the Clayton Act (which explicitly authorize injunction-seeking private suits) have “no analogue in the RICO statute,” the appellate court wrote, adding that “nowhere in the RICO statute has Congress explicitly authorized private actions for injunctive relief.”