Borrowers must arbitrate 'rent-a-tribe' payday lending case, 9th Circuit rules

The James R. Browning U.S. Court of Appeals Building, home of the 9th U.S. Circuit Court of Appeals, is pictured in San Francisco, California February 7, 2017. REUTERS/Noah Berger
  • 9th Circuit splits with three circuits in tribal internet payday loan case
  • Borrowers alleged they were charged interest rates of over 400%

(Reuters) - A divided federal appeals court on Thursday ruled that a private equity investor in an online payday lending enterprise could force borrowers to arbitrate claims they were charged illegal annual interest rates of more than 400% via a so-called "rent-a-tribe" scheme.

The 9th U.S. Circuit Court of Appeals' 2-1 ruling for Haynes Investments, which provided capital to lender Think Finance capital, diverged from decisions by three other appeals courts that have declined to compel arbitration in similar tribal internet payday loan cases.

U.S. Circuit Judge William Fletcher noted that fact in a sharply worded dissent, saying the majority's first-of-its-kind reading of payday lending arbitration agreements will "improperly force vulnerable borrowers into arbitration."

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The majority said that a provision of the arbitration agreement contained in the borrowers' loan documents that delegated to an arbitrator, rather than a court, the ability to decide whether the claims should be arbitrated was enforceable.

The borrowers had argued that the delegation provision and the agreement as a whole were unenforceable, because it made consumers waive any claims they brought under federal law by dictating that tribal law would govern any damages or remedies.

The decision stems from a 2018 proposed class action brought by California consumers who said they had borrowed from entities owned by two Native American tribes that in turn received funding from Think Finance.

They accused the lender, its owner and investors such as Haynes of engaging in a "rent-a-tribe" scheme, in which, to evade consumer protection laws, loans were made through Native American tribes that could claim sovereign immunity.

The lawsuit accused them of violating federal racketeering law and California interest rate limits. Haynes moved to compel arbitration, but a judge found the agreement effectively waived borrowers' rights to pursue federal claims.

U.S. Circuit Judge Danielle Forrest, writing for the majority, disagreed, saying nothing in the contract prevented the borrowers from arguing the agreement was unenforceable under federal law before the arbitrator, though she acknowledged that may seem "absurd" and an arbitrator may find they cannot.

"Though courts may deem arbitration agreements distasteful or unjust in certain contexts, particularly where they limit consumer rights and remedies, both Congress and the Supreme Court have instructed us to respect agreements to arbitrate just as any other contractual agreement," she wrote.

Forrest and U.S. Circuit Judge Lawrence VanDyke, who joined her decision, were appointed by former Republican President Donald Trump. Fletcher was a nominee of former Democratic President Bill Clinton.

Richard Scheff, a lawyer at Armstrong Teasdale who argued for Haynes, said it was "grateful for the careful consideration given to this matter by the entire panel."

Matthew Wessler, a lawyer for the borrowers at Gupta Wessler, declined to comment.

Think Finance filed for bankruptcy in 2017. It was facing lawsuits at the time by borrowers and Pennsylvania's attorney general, and the U.S. Consumer Financial Protection Bureau later that year also sued Think Finance.

Several cases have since settled nationally against Think Finance and other defendants, resulting in settlements worth about $100 million.

The 2nd, 3rd and 4th Circuits have refused to compel arbitration in cases involving similar tribal internet payday loans involving provisions delegating the enforcement question to arbitrators, finding such clauses are invalid.

The case is Brice v. Haynes Investments, 9th U.S. Circuit Court of Appeals, No. 19-15707.

For the plaintiffs: Matthew Wessler of Gupta Wessler

For Haynes Investments: Richard Scheff of Armstrong Teasdale

Related stories:

Think Finance must face CFPB lawsuit over tribal loans - ruling

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Nate Raymond reports on the federal judiciary and litigation. He can be reached at nate.raymond@thomsonreuters.com.