Civil Practice – Subject Matter Jurisdiction – Indian Tribe Member – Contract – Personal Jurisdiction – Usury – Preliminary Injunction

State ex rel. Cooper v. Western Sky Financial, LLC (Lawyers Weekly No. 15-15-0855, 38 pp.) (Gregory McGuire, J.) 2015 NCBC 84

Holding: Defendant Western Sky Financial, LLC’s loan contract is binding as soon as the borrower signs it, so when a borrower signs the contract in North Carolina, that contract is made in North Carolina.

Defendant’s motion to dismiss is granted as to defendant Reddam and as to usury claims based on notes signed and unlawful interest collected on or before Dec. 16, 2011. Otherwise the motion to dismiss is denied. Plaintiff’s motion for a preliminary injunction is granted insofar as it seeks to enjoin defendants from offering or entering into consumer loan contracts with North Carolina borrowers, collecting payments from North Carolina consumers, transferring any loans with North Carolina consumers, and destroying evidence relating to loans made to North Carolina consumers.

Background

Defendant Western Sky is a South Dakota company. Its sole owner is a member of the Cheyenne River Sioux Tribe (CRST).

Before it suspended its business operations in 2013, Western Sky offered consumer loans in amounts ranging from $850 to $10,000 and charged interest rates between 89.68 and 342.86 percent per annum.

The remaining defendants are California resident John Paul Reddam and his three California businesses: WS Funding, LLC; loan servicer CashCall, Inc.; and collection agency Delbert Services Corp. Once Western Sky made a loan, the loan was transferred to WS Funding, serviced by CashCall, and sometimes transferred to Delbert for servicing and collection.

Plaintiff alleges that defendants use a “rent-a-tribe” scheme, in which unlicensed lender CashCall makes usurious consumer loans by purporting to affiliate with an Indian tribe to claim federal tribal sovereign immunity.

Personal Jurisdiction

Defendant Reddam has never visited North Carolina, has no property here, and has never interacted directly with any North Carolina residents in relation to the activities of CashCall, WS Funding, or Delbert.

Reddam maintained at least some of the corporate formalities, and plaintiff’s allegations do not establish that he so dominated and controlled his three companies that they lost their separate corporate identities. The court declines to pierce the corporate veil and impute the companies’ acts to Reddam.

The court lacks personal jurisdiction over Reddam.

Tribal Sovereign Immunity

Defendants argue that the loan agreements were entered into on the CRST reservation when Western Sky approved the loans.

However, considering the steps in the process for obtaining a loan from Western Sky (a consumer submits an online loan application or supplies information over the phone; Western Sky requests additional information, if necessary, and communicates approval of the loan; and Western Sky sends the consumer a loan agreement, which the consumer signs), the court concludes that the contract is formed where the consumer signs the loan agreement and is not contingent on any further approval by Western Sky. Therefore, when a loan was made to a borrower in North Carolina, the contract was formed in North Carolina.

In addition, North Carolina’s usury statute provides, “For purposes of this Chapter, any extension of credit shall be deemed to have been made in this State, and therefore subject to the provisions of this Chapter if the lender offers or agrees in this State to lend to a borrower who is a resident of this State, or if such borrower accepts or makes the offer in this State to borrow, regardless of the situs of the contract as specified therein.” G.S. § 24-2.1(a).

Bundy v. Comm. Credit Co., 200 N.C. 511 (1931), held that a contract “made in a foreign State or country with the intent and purpose to evade the usury laws of this State” is invalid and “the interest laws of North Carolina are applicable.” Plaintiff alleges that defendants are attempting to evade North Carolina’s usury laws. Thus, even if defendants could prove that the loan contracts were formed on the reservation, this court could exercise jurisdiction and apply North Carolina law to the loans at issue.

Since plaintiff – the state attorney general – was not a party to the loan agreements, he is not bound by the contracts’ choice of law provision.

Furthermore, North Carolina will not enforce a choice of law provision where the chosen law would violate a North Carolina public policy. The North Carolina usury statute makes clear that it “is the paramount public policy of North Carolina to protect North Carolina resident borrowers through the application of North Carolina interest laws.” G.S. § 24-2.1(g).

The fact that Western Sky is owned by a Native American does not prevent North Carolina from asserting jurisdiction over defendants. Defendants voluntarily chose to do business in North Carolina with its citizens without regard for this state’s laws designed to protect North Carolina consumers. The state’s interests justify the exercise of jurisdiction over defendants.

Dormant Commerce Clause

Defendants argue that North Carolina is attempting to regulate defendants’ conduct outside of its borders by requiring defendants to abide by North Carolina laws.

However, the statutes at issue do not attempt to regulate conduct beyond North Carolina’s borders and do not unduly burden interstate commerce. The statutes do not purport to dictate the interest rates or other lending practices that defendants apply in any state other than North Carolina.

The state’s application of the relevant statutes to the loans at issue does not violate the Dormant Commerce Clause.

Usury

The complaint alleges a relationship among Delbert, CashCall, and WS Funding, particularly in light of their shared ownership and business address, that could support a conclusion that WS Funding is an instrumentality of CashCall and Delbert. Therefore, the court declines to dismiss the usury claim as to CashCall and Delbert.

The statute of limitations for claims for usurious loans is two years. The signing of a note calling for usurious interest initiates the limitation period. Furthermore, the statute of limitations on the recovery of double interest begins to run upon payment of the usurious interest.

Therefore, plaintiff’s usury claim should be dismissed insofar as it seeks forfeiture of interest for notes signed on or before Dec. 16, 2011, and insofar as it seeks double recovery of unlawful interest paid prior to Dec. 16, 2011. Otherwise, defendants’ motion to dismiss is denied as to this claim.

Unfair Trade Practices

The court relies on its conclusion that plaintiff has stated a viable usury claim to find that plaintiff may have alleged a violation of the North Carolina Unfair and Deceptive Trade Practices Act. Plaintiff need not have alleged actual reliance to bring this claim.

Preliminary Injunction

Although plaintiff has established a likelihood of success on the merits, it is not entitled to equitable relief to the extent it seeks monetary remedies on behalf of private citizens. The court denies plaintiff’s request for an injunction mandating the establishment of an escrow account and requiring defendants to produce certain financial information.

However, defendants are enjoined from creating new North Carolina loans, collecting payments on those that already exist, transferring the loans or destroying evidence.

Motions granted in part and denied in part.