JUSTIN FAHY; JENNENE STOICESCU; KIMBERLY ADAMS; and WILLIAM NORTHCUTT; on behalf of Plaintiffs and the class members described herein, Plaintiffs, vs. MINTO DEVELOPMENT CORPORATION; BENHTI ECONOMIC DEVELOPMENT CORPORATION; DOUGLAS WILLIAM ISAACSON; MINTO FINANCIAL d/b/a Minto Money; and JOHN DOES 1-20, Defendants.
Case No. 23 C 3590
IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
03/14/24
MATTHEW F. KENNELLY, District Judge
Document #: 53; PageID #:463
MATTHEW F. KENNELLY, District Judge:
Justin Fahy, Jennene Stoicescu, Kimberly Adams, and William Northcutt have sued Benhti Economic Development Corporation (BEDCO), Minto Development Corporation (MDC), Douglas William Isaacson, and Minto Financial (Minto Money), on behalf of a class of similarly situated persons. The plaintiffs allege violations of the Illinois Interest Act, the Illinois Predatory Loan Prevention Act (PLPA), the Illinois Consumer Fraud Act (ICFA), and the Racketeer Influenced and Corrupt Organizations Act (RICO). The defendants have moved to compel arbitration of the plaintiffs’ claims and have filed a motion under
Facts
The Native Village of Minto (Minto Tribe) is a federally recognized Native American tribe located in Minto, Alaska. In 2018, the Minto Tribe established BEDCO, an economic development corporation. Shane Thin Elk, who apparently lives in Green Bay, Wisconsin and is alleged to be a member of a different Native American tribe, is the commissioner of the Minto Financial Services Licensing & Regulatory Commission (Commission). The Commission issued a tribal lending license to Minto Money, a wholly owned subsidiary of BEDCO, prior to 2021. The lending license was issued “pursuant to and in accordance with the Tribal Credit Code of the Minto Tribe” and authorizes Minto Money to “do business within the jurisdiction of the Minto
The plaintiffs are Illinois residents who obtained loans through the Minto Money website in 2022 or 2023. The plaintiffs each borrowed between $500 and $2730 through loans carrying annual interest rates ranging from 466.66% to 792.76%. Minto Money loan agreements provide that once a consumer submits a completed loan application, Minto Money will evaluate the application from an office “located on tribal land.” Compl., Ex. A at 1. After a consumer is approved for a loan, a Minto Tribe representative reviews the loan documents and provides final approval.
Each plaintiff electronically signed a Minto Money loan agreement. All of the agreements contain identical language unless otherwise noted. The plaintiffs’ loan agreements state that they are “governed by the laws of the Tribe.” Id. The loan agreements of three of the four plaintiffs include a governing law provision stating that:
The laws of the Tribe will govern this Agreement, without regard to the laws of any state or other jurisdiction, including the conflict of laws rules of any state. You agree to be bound by Tribal law, and in the event of a bona fide dispute between you and us, Tribal law shall exclusively apply to such dispute.
Id. at 4. The governing law provision in Adams’ loan agreement is different; it states:
The laws of the Tribe and applicable federal law will govern this Agreement, without regard to the laws of any state or other jurisdiction, including the conflict of laws rules of any state. You agree to be bound by Tribal law, and in the event of a bona fide dispute between you and us, Tribal law and applicable federal law shall exclusively apply to such dispute.
Compl., Ex. C at 4 (emphasis added).
Each agreement also includes a dispute resolution procedure and an arbitration provision. The agreements state that for any “disputes” that are not resolved through the provided internal dispute resolution process, Minto Money consents to a “limited waiver of sovereign immunity” that is “strictly limited to individual arbitration claims.” Compl., Ex. A at 4. Disputes are defined to include “all claims, disputes or controversies” arising from or related to “the validity and scope” of the arbitration provision. Id. Although the agreements state that arbitration “shall occur before the American Arbitration Association (AAA),” they also provide that the rules and procedures of the AAA apply to the arbitration only “to the extent those rules and procedures do not contradict the express terms” of the loan agreement or the Minto Tribal Code. Id. at 4-5. The agreements mandate that “[t]he arbitrator shall apply applicable substantive law consistent with the Governing Law set forth above, and the Federal Arbitration Act.” Id. at 5. Additionally, the agreements include a class-action/representative action waiver stating that the borrower waives any right to “pursue or participate in representative claims.” Id. at 4.
The plaintiffs dispute the validity of the partnership between Minto Money and the Minto Tribe and allege that Minto Money “operates primarily for the benefit of non-tribal members.” Compl. ¶ 78. The plaintiffs
Discussion
The parties dispute the sequence in which this Court should consider the pending motions. The defendants ask this Court to rule on their motion to transfer venue and, regardless of the outcome, also rule on their motion to compel arbitration. “The Federal Arbitration Act . . . states that if the parties have an arbitration agreement and the asserted claims are within its scope, the motion to compel cannot be denied.” Sharif v. Wellness Int‘l Network, Ltd., 376 F.3d 720, 726 (7th Cir. 2004). But section 4 of the Federal Arbitration Act (FAA) provides that arbitration proceedings “shall be within the district in which the petition for an order directing such arbitration is filed.”
The plaintiffs argue that before deciding on the defendants’ motions, this Court should address its subject matter jurisdiction because the defendants have indicated that they plan to assert tribal sovereign immunity. This argument is unpersuasive.
First, although courts in other circuits consider tribal sovereign immunity to be a matter of subject matter jurisdiction, see, e.g., Miner Elec., Inc. v. Muscogee (Creek) Nation, 505 F.3d 1007, 1009 (10th Cir. 2007), the Seventh Circuit has stated that “the question of sovereign immunity is not jurisdictional.” Meyers v. Oneida Tribe of Indians of Wis., 836 F.3d 818, 820 (7th Cir. 2016). Instead, “sovereign immunity . . . is a waivable defense.” Id. at 822. Thus the defendants’ potential assertion of the defense of sovereign immunity, which they included in their answer to the plaintiffs’ complaint, has no bearing on this Court‘s authority to transfer the case. See Burton v. Ghosh, 961 F.3d 960, 964-65 (7th Cir. 2020) (discussing requirements for preserving affirmative defense). Additionally, the plaintiffs’ reliance on Jackson v. Payday Financial, LLC, 764 F.3d 765 (7th Cir. 2014), is misguided. In that case, the Seventh Circuit considered whether a tribal court, not a federal district court, had jurisdiction over the parties’ dispute. Id. at 782. Tribal court jurisdiction is not at issue in this case, and thus the Seventh Circuit‘s subject matter jurisdiction discussion in Jackson is immaterial.
Second, discovery has not taken place, and the tribal sovereign immunity issue
A. Motion to transfer
Section 1404(a) provides that “[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.”
“[U]nless the balance is strongly in favor of the defendant, the plaintiff‘s choice of forum should rarely be disturbed.” In re Nat‘l Presto Indus., Inc., 347 F.3d 662, 664 (7th Cir. 2003) (quoting Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947)). The party seeking transfer bears the burden of demonstrating that the proposed alternate forum is “clearly more convenient.” Coffey v. Van Dorn Iron Works, 796 F.2d 217, 220 (7th Cir. 1986). When assessing the convenience of the parties, “the Court should consider the parties’ respective residences and their ability to bear the expenses of litigating in a particular forum.” Allied Van Lines, Inc. v. Aaron Transfer & Storage, Inc., 200 F. Supp. 2d 941, 947 (N.D. Ill. 2002). The interest of justice factors pertain to the “efficient administration of the court system.” Coffey, 796 F.2d at 221.
1. Convenience
The “convenience” factors for a section 1404(a) analysis include (1) the plaintiff‘s choice of forum; (2) ease of access to proof; (3) the convenience to the witnesses and parties; and (4) the situs of material events. Amoco Oil Co. v. Mobil Oil Corp., 90 F. Supp. 2d 958, 960 (N.D. Ill. 2000).
A plaintiff‘s choice of forum is afforded “substantial weight . . . particularly where it is also the plaintiff‘s home forum.” Taylor v. Midland Funding, LLC, 94 F. Supp. 3d 941, 945 (N.D. Ill. 2015) (citation omitted). Various courts in this district have discounted the weight of a plaintiff‘s choice of forum in class action suits, see, e.g., Jaramillo, 664 F. Supp. 2d at 914, but others have rejected this approach, noting that “unnamed class members presumably benefit from a class representative who is able to aggressively litigate their claims without significant inconvenience due to travel.” Taylor, 94 F. Supp. 3d at 945 (quoting AL & PO Corp. v. Am. Healthcare Cap., Inc., No. 14 C 1905, 2015 WL 738694, at *3 (N.D. Ill. Feb. 19, 2015)); O‘Connor v. RealPage Inc., No. 21 C 6846, 2022 WL 1487374, at *2 (N.D. Ill. May 11, 2022) (Kennelly, J.) (retaining deference to class representative plaintiff‘s choice of forum).
This Court declines to discount the plaintiffs’ choice of forum on this basis. The Seventh Circuit has not adopted this approach, and any reasons for discounting a class representative‘s choice of forum are
The defendants also contend that the plaintiffs’ choice of forum merits less deference because “another forum has a stronger relationship to the dispute.” Defs.’ Mot. to Transfer at 6 (quoting Jaramillo, 664 F. Supp. 2d at 914). But the legal authority underlying the reasoning of the court in Jaramillo comes from Chicago, Rock Island & Pacific Railroad Co. v. Igoe, 220 F.2d 299 (7th Cir. 1955), a case where the plaintiff sued outside her home forum. Id. at 304. The Igoe case is of little value when, as here, the plaintiffs have sued in their home forum. See Ariel Invs., LLC v. Ariel Cap. Advisors LLC, No. 15 C 3717, 2015 WL 13653007, at *4 (N.D. Ill. Oct. 29, 2015) (Kennelly, J.), rev‘d on other grounds, 881 F.3d 520 (7th Cir. 2018); Qurio Holdings, Inc. v. Comcast Cable Commc‘ns, LLC, No. 14 C 7488, 2015 WL 535981, at *1 (N.D. Ill. Feb. 9, 2015) (Kennelly, J.). The plaintiffs’ choice of forum is entitled to deference and therefore weighs against transfer.
In evaluating the convenience of witnesses, “a court should look to the nature and quality of the witnesses’ testimony with respect to the issues in the case.” Vandeveld v. Christoph, 877 F. Supp. 1160, 1168 (N.D. Ill. 1995). The defendants assert the convenience of Minto and BEDCO employee witnesses that they contend all reside and work in Alaska. But “the convenience of employee-witnesses is given very little weight.” Hinc v. Lime-O-Sol Co., 231 F. Supp. 2d 795, 796 (N.D. Ill. 2002). And because the defendants have not identified with any particularity any Minto Tribe members who would serve as non-party witnesses or the contents of their potential testimony, the possible involvement of any such witnesses does not weigh in favor of transfer. Perma-Pipe, Inc. v. Liberty Surplus Ins. Corp., No. 13 C 2898, 2013 WL 5348382, at *3 (N.D. Ill. Sept. 24, 2013) (concluding defendant‘s identification of potential nonparty witnesses does not support motion to transfer absent information regarding proposed testimony). Similarly, the plaintiffs’ allegations regarding the involvement of non-tribal investors and servicers do not weigh against transfer because they have not provided details regarding the identities or potential testimony of these individuals. One potential non-party witness, Shane Thin Elk, resides in Green Bay, Wisconsin, which is over three thousand miles closer to Chicago than to Fairbanks; this, too, weighs against transfer. The plaintiffs have not, however, identified any non-party witnesses who reside in Illinois.
Each side alleges that it will be substantially inconvenienced if this case proceeds in the other side‘s preferred forum. The defendants have offered to take the plaintiffs’ depositions in their home state, but “if a trial were to occur this concession would not aid plaintiff[s].” Ballotti v. Oppenheimer Funds, Inc., No. 10 C 50116, 2011 WL 13382871, at *5 (N.D. Ill. Feb. 23, 2011). The plaintiffs assert that due to financial constraints they are “not in a
The plaintiffs argue that discovery “may well be concentrated in Minnesota and Wisconsin,” the locations of the offices of Lochen Thin Elk Denton. Pls.’ Resp. to Defs.’ Mot. to Transfer at 10. The defendants contend, by contrast, that the “most significant sources of evidence” are located in Alaska. Defs.’ Reply in Supp. of Mot. to Transfer at 6-7. But the defendants do not suggest that the documents they identify are “extraordinarily voluminous or otherwise difficult to ship.” Preston v. Am. Honda Motor Co., Inc., No. 17 C 3549, 2017 WL 5001447, at *4 (N.D. Ill. Nov. 2, 2017). And in any event, these days nearly all document production takes place electronically; “[m]odern technology has made it easy and cheap to transfer this kind of information between locations.” Ballotti, 2011 WL 13382871, at *4. “When documents are easily transferable, access to proof is a neutral factor.” First Nat. Bank v. El Camino Res., Ltd., 447 F. Supp. 2d 902, 912 (N.D. Ill. 2006). The Court deems this factor neutral.
The parties dispute whether Illinois or Alaska should be considered the situs of material events. The defendants argue that Alaska is the situs because all individual defendants either live and work there, and it is the location of “all decisions critical to Plaintiffs’ claims.” Defs.’ Reply in Supp. of Mot. to Transfer at 7. The plaintiffs counter that because Illinois is the site of collection of the allegedly usurious loans, a significant portion of the events that “form the basis of Plaintiffs’ claims occurred in Illinois.” Pls.’ Resp. to Defs.’ Mot. to Transfer at 9. But the plaintiffs’ allegations focus both on the conduct of the defendants and the financial injuries suffered by the plaintiffs.
The plaintiffs allege that the defendants “[k]nowingly participated in the making and collection of unlawful loans” and that “completed loan documents and details are transmitted to a Minto Tribe representative who may be physically located in Minto.” Compl. ¶¶ 5.a, 35. These allegations focus on the defendants’ corporate decisions, which presumably were at least partly made in Alaska. The plaintiffs also allege that “the actual lending operations were carried out, and continue to be carried out, in locations other than tribal lands by non-tribal persons.” Pls.’ Resp. to Defs.’ Mot. to Transfer at 4. Even taking plaintiffs’ allegations as true at this stage, there is no reason to believe that the Minto Tribe members involved in reviewing and approving the loans were not located in Minto.
The defendants cite multiple cases in support of their argument that the situs of material events is the site of the defendant‘s corporate decision-making, but none of these cases involve lending operations.2 In Jaramillo, the court found that the material
events in that case took place at the site of the defendants’ business decisions because the “focus” of the plaintiffs’
The Court finds that both the plaintiffs’ injuries and the defendants’ decision-making are material events. See AL & PO Corp., 2015 WL 738694, at *3 (concluding both injury and decision-making were material events in consumer protection case). The plaintiffs’ consumer fraud claims support the proposition that the situs, or at least a situs, of material events is where the defendants made the business decisions underlying the loan agreements, which in this case is likely Alaska. Preston, 2017 WL 5001447, at *3 (explaining both breach of contract and large-scale misrepresentation claims support finding situs of material events is where business decisions occurred). On the other hand, the plaintiffs’ allegations also involve loans that were disbursed to Illinois banks, payments that were debited from Illinois bank accounts, and allegedly usurious interest payments that were made by Illinois consumers. See Kadiyala v. Pupke, No. 16 C 3549, 2017 WL 2350454, at *6 (N.D. Ill. May 30, 2017) (concluding material events took place in both forums in financial fraud case); see also O‘Connor v. RealPage, Inc., No. 21 C 6846, 2022 WL 1487374, at *3 (Kennelly, J.) (“[T]he material events also include the injury that [plaintiff] suffered, which occurred in Illinois.“). The bottom line is that this factor is neutral.
In sum, the plaintiffs’ choice of their home forum weighs significantly against transfer, and the remaining convenience factors are effectively neutral. “Where the balance of convenience is a close call, merely shifting inconvenience from one party to another is not a sufficient basis for transfer.” Rsch. Automation, Inc. v. Schrader-Bridgeport Int‘l, Inc., 626 F.3d 973, 978 (7th Cir. 2010). “Shifting [the] inconvenience” would be the primary effect of transfer here. The defendants have not shown that the claimed inconvenience of an Illinois forum is sufficient to overcome the deference afforded to the plaintiffs’ choice of their home forum.
2. Interest of justice
The “interest of justice” factors include “docket congestion,” “likely speed to trial in the transferor and potential transferee forums,” “each court‘s relative familiarity with the relevant law,” “the respective desirability of resolving controversies in each locale,” and “the relationship of each community to the controversy.” Id.
The majority of the interest of justice factors in this case are neutral. The defendants contend that the average speed of civil litigation is faster in the District of Alaska. But the most recent data demonstrates that the median length of time from filing to disposition for civil cases in the Northern District of Illinois is 5.7 months, compared to 8.2 months in the District of Alaska. See Table C-5, U.S. District Courts–Median Time Intervals From Filing to Disposition of Civil Cases, by Action Taken, During the 12-Month Period Ending December 31, 2023, https://perma.cc/23YP-5E8R.
Additionally, the defendants’ assertion that the District of Alaska has more familiarity with tribal sovereign immunity and other tribal issues does not support their transfer motion. Sovereign immunity is an issue of federal law, and “[w]here a case is based on federal law, a judge in a particular district has no inherent advantage over [a] judge in other districts.” F.T.C. v. Am. Tax Relief LLC, No. 10 C 6123, 2011 WL 2893059, at *7 (N.D. Ill. July 20, 2011) (citation omitted). Just as importantly, the plaintiffs’ contention that a judge in the Northern District of Illinois would be more familiar with the application of Illinois state laws is not a significant consideration, because “federal courts have experience applying the law of foreign states.” Jaramillo, 664 F. Supp. 2d at 917. The plaintiffs have also raised choice-of-law concerns. But because the interest of justice factors relate to the “efficient functioning of the courts, not to the merits of the underlying dispute,” Coffey, 796 F.2d at 221, these contentions are immaterial.
The final two factors, the desirability of resolving the controversy in each forum and the relationship of each community to the dispute, are in the Court‘s view neutral or close to it. The parties disagree as to which forum has a stronger relationship to this case, and as indicated above, material events took place in both Alaska and Illinois. The plaintiffs suffered harm in Illinois and assert claims on behalf of an Illinois-based class, including claims based on an Illinois-specific statute, which demonstrates the state‘s interest in resolving the dispute. See Solomon v. Am. Web Loan, 375 F. Supp. 3d 638, 666 (E.D. Va. 2019) (concluding home forum of borrowers had stronger interest in tribal lending case). Alaska, however, has an interest in resolving the suit as well. The plaintiffs dispute the defendants’ assertion that Minto Money‘s offices and employees are located in Minto, see Compl. ¶¶ 38-40, and at this stage the Court accepts the plaintiffs’ well-pleaded allegations as true absent contrary evidence from the defendant. Plotkin v. IP Axess, Inc., 168 F. Supp. 2d 899, 900 (N.D. Ill. 2001). But Alaska is home to the Minto Tribe and BEDCO, which granted Minto Money the license to establish its lending business.
To sum up, neither the convenience factors nor the interest of justice factors weigh in favor of transfer. The defendants have not carried their burden of demonstrating that the balance is “strongly” in their favor such that the plaintiffs’ choice of forum should be disturbed. Sojka v. DirectBuy, Inc., No. 12 C 9809, 2014 WL 1089072, at *5 (N.D. Ill. Mar. 18, 2014) (citing In re Nat‘l Presto Indus., Inc., 347 F.3d at 664). The Court therefore denies the defendants’ motion to transfer venue.
B. Motion to compel arbitration
The FAA provides that an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
The plaintiffs do not dispute that they each signed a loan agreement including an arbitration provision, and they do not dispute that their claims fall within the scope of that agreement. They argue, however, that the arbitration provisions are unenforceable.
1. Delegation clause challenge
Threshold questions of arbitrability, including disputes regarding the enforceability of an arbitration agreement, are “presumptively for courts to decide.” Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 n. 2 (2013). A party can overcome this presumption by showing that the agreement terms “clearly and unmistakably” assign enforceability disputes to the arbitrator. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) (citation omitted). Unless a party “challenge[s] the delegation clause specifically,” courts must enforce a delegation clause and leave to the arbitrator any disputes regarding the enforceability of the arbitration agreement. Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 72 (2010).
The agreements provide that arbitration is mandatory for any disputes that are not resolved through Minto Money‘s dispute resolution procedure. Compl., Ex. A at 4. The disputes governed by this clause include any claims arising from or related to “the validity and scope of” the arbitration provision and any “attempt to set aside” the arbitration provision. Id. This language is sufficient to demonstrate a clear and unmistakable delegation of the issue of arbitrability. See Kemph v. Reddam, No. 13 CV 6785, 2015 WL 1510797, at *4 (N.D. Ill. Mar. 27, 2015) (collecting cases). The defendants argue that the Court must enforce the delegation clause because the plaintiffs have not properly challenged its validity. The Court disagrees.
The Seventh Circuit has not addressed the enforceability of delegation provisions in tribal lending contracts, but courts in other circuits have concluded that to challenge an agreement‘s delegation clause, “a party may rely on the same arguments that it employs to contest the enforceability of other arbitration agreement provisions.” MacDonald v. CashCall, Inc, 883 F.3d 220, 226–27 (3d Cir. 2018); Hengle v. Treppa, 19 F.4th 324, 335 (4th Cir. 2021) (“A party may contest the enforceability of the delegation clause with the same arguments it employs to contest the enforceability of the overall arbitration agreement.“). That said, a contract‘s delegation clause “must be challenged ‘specifically.‘” Bayer v. Comcast Cable Commc‘ns, LLC, No. 12 C 8618, 2013 WL 1849519, at *3 (N.D. Ill. May 1, 2013) (quoting In re Checking Acct. Overdraft Litig. MDL No. 2036, 674 F.3d 1252, 1256 (11th Cir. 2012)).
The defendants cite Rent-A-Center, West in support of their contention that the plaintiffs’ arguments lack the “specificity” needed to constitute a challenge to the delegation clause. Defs.’ Reply in Supp. of Mot. to Compel Arb. at 4. But in that case, the plaintiff‘s arguments regarding the enforceability of the arbitration provision at issue were directed at two specific arbitration procedures: a cost-sharing arrangement and discovery limitations. Rent-A-Ctr., W., 561 U.S. at 74. The Supreme Court found that because the plaintiff had failed to argue that these procedures “as applied to the delegation provision rendered that provision unconscionable,” he could not use the arguments he had advanced regarding the unconscionability of the arbitration provision as
Unlike the plaintiff in Rent-A-Center, West, the plaintiffs challenge the validity of the governing law provision as applied to the delegation clause. In their brief opposing the defendants’ motion to compel arbitration, the plaintiffs contend that by disclaiming state and federal law, governing law provision “deprives the arbitrator from applying the body of law necessary to determine arbitrability.” Pls.’ Resp. to Defs.’ Mot. to Compel Arb. at 3. This argument clearly addresses the validity of the delegation clause specifically. And the plaintiffs’ arguments regarding the prospective waiver doctrine, discussed below, apply to delegation clauses specifically as well as arbitration agreements generally. See Gibbs v. Sequoia Cap. Operations, LLC, 966 F.3d 286, 292-94 (4th Cir. 2020) (holding choice-of-law provisions constituted prospective waiver and therefore rendered delegation clause unenforceable).
Because the plaintiffs have specifically challenged the enforceability of the delegation clause separate from the underlying arbitration provision, the Court must consider whether the loan agreement validly delegates the threshold question of arbitrability to an arbitrator.3
2. Arbitration provision
a. Prospective waiver
Under the prospective waiver doctrine, an arbitration provision that serves as a “prospective waiver of a party‘s right to pursue statutory remedies” is unenforceable as contrary to public policy. Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 236 (2013) (citation omitted). As indicated earlier, the Seventh Circuit‘s case law regarding arbitration provisions in the tribal lending context is limited. But courts in other circuits have held that under the “prospective waiver” doctrine, a choice-of-law provision that mandates the exclusive application of tribal law renders an arbitration provision unenforceable.4 See, e.g., Williams v. Medley Opportunity Fund II, LP, 965 F.3d 229, 238 (3d Cir. 2020) (“[A]rbitration
For example, in Hengle, the Fourth Circuit considered the enforceability of an arbitration clause within a tribal lending agreement. In that case, multiple Virginia consumers signed an online loan agreement with various online lending entities owned by the Habematolel Pomo of Upper Lake, a federally recognized tribe. Hengle, 19 F.4th at 331. The
loan agreements included multiple provisions that mandated the application of Habematolel Pomo of Upper Lake tribal law for the underlying loan agreement as well as any future arbitration. Id. at 332. Specifically, the loan agreements included a “governing law” provision that provided the agreement “shall be governed by applicable tribal law, including but not limited to the Habematolel Tribal Consumer Financial Services Regulatory Ordinance.” Id. The loan agreements also contained an arbitration provision that stated that disputes would be “governed by the laws of the Habematolel Pomo of Upper Lake” as well as the procedures of the “applicable arbitration organization,” but only to the extent those procedures “d[id] not contradict the express terms of this Arbitration Provision or the law of the Habematolel Pomo of Upper Lake.” Id. The agreements instructed the arbitrator to “apply applicable substantive Tribal law consistent with the Federal Arbitration Act (FAA).” Id.
The court in Hengle found that the prospective waiver doctrine applied to both the delegation clause and the arbitration provision in the Habematolel Pomo of Upper Lake loan agreements. Id. The Fourth Circuit concluded that the delegation clause “would require the arbitrator to determine whether the arbitration provision impermissibly waives federal substantive rights without recourse to federal substantive law” and thus was “unenforceable as a violation of public policy.” Id. at 338. Similarly, the court held that the overall arbitration provision “unambiguously attempt[ed] to apply tribal law to the exclusion of substantive federal law” and therefore “function[ed] as a prospective waiver of the borrowers’ rights to pursue federal statutory remedies.” Id. at 342. The court also noted that although the choice-of-law provisions did not explicitly disclaim the application of federal law, they operated as an implicit prospective waiver because by
“demand[ing] exclusive application of tribal law,” the provisions “thereby preempt[] application of other authority.” Id. at 339.
i. Fahy, Stoicescu and Northcutt loan agreements
The Court finds no significant distinction between the choice-of-law provisions in the Fahy, Stoicescu and Northcutt loan agreements and the provisions that have been found to constitute prospective waivers of federal rights in other cases. The governing law provision in these agreements states that “[t]he laws of the Tribe will govern this Agreement, without regard to the laws of any state or other jurisdiction.” Compl, Ex. A at 4. It also states that “[t]ribal law shall exclusively apply” to any “dispute” between the borrower and the lender. Id. (emphasis added). The arbitration provisions also instruct the arbitrator to “apply applicable substantive law consistent with the Governing Law set forth above, and the Federal Arbitration Act.” Id. at 5. Requiring the arbitrator to apply a governing law provision that explicitly excludes “the laws of any state or other jurisdiction” demonstrates a clear attempt to disclaim the application of state and federal law in arbitration proceedings.
The defendants direct the Court‘s attention to language in the loan agreements that provides that “[t]he arbitrator shall
The defendants argue that the governing law provision does not serve as a prospective waiver of federal rights because Minto Tribe law “incorporates federal statutes.” Defs.’ Reply in Supp. of Mot. to Compel Arb. at 7. But the section of the Minto Credit Code that the defendants highlight fails to establish that the exclusive application of tribal law would not bar claimants from pursuing federal rights and remedies.
Section 5.1 of the Minto Credit Code lists numerous federal laws that the Tribe requires business licensees to “comply with the spirit of.” Pls.’ Resp. to Defs.’ Mot. to Compel Arb., Ex. A at 12. As the plaintiffs point out, RICO, the federal statute that governs the plaintiffs’ claims in this suit, is not included in that list. See Pls.’ Resp. to Defs.’ Mot. to Compel Arb. at 10. The defendants counter that the list of federal statutes included in section 5.1 is “non-exhaustive” and assert that the Credit Code “requires compliance with the principles of all applicable federal laws without limitation.” Defs.’ Reply in Supp. of Mot. to Compel Arb. at 7. But even were the Court to accept this reading of section 5.1‘s language, requiring a licensee to “comply” with a particular law is not equivalent to allowing borrowers who contract with that licensee to vindicate their statutory rights under that law. See Harris, 2023 WL 5096295, at *5 (“[C]ompliance with federal law in lending is not the same as making available the vindication of federal and state statutory rights in an arbitral setting.“); Gibbs v. Haynes Invs., LLC, 967 F.3d 332, 343 (4th Cir. 2020) (explaining tribal ordinance requiring lenders to comply with all applicable federal laws does not bar application of prospective waiver doctrine). The Minto Credit Code contains no provision describing the penalties for a violation of federal law but instead provides that violations of the Code‘s provisions may result in business license suspensions/revocations, civil fines, and seizure of the licensees’ property. Pls.’ Resp. to Defs.’ Mot. to Compel Arb., Ex. A at 3, 18-19. These penalties are all imposed by the Commission directly upon the licensee; they do not suggest that an aggrieved claimant has the ability to assert a federal statutory claim under Minto Tribe law.
And because the Minto Credit Code does not outline a process or procedure by which a borrower can pursue claims for violations of its provisions, section 5.1 does not show that Minto Tribe law allows the
Furthermore, multiple provisions in the Minto Credit Code undermine the defendants’ assertion that it incorporates federal laws and regulations “without limitation.” The “enforcement” section of the Credit Code mandates that notwithstanding the Code‘s other provisions, “the Commission shall have exclusive jurisdiction over all violations of this Code.” Id. at 18. Additionally, the Credit Code‘s language demonstrates that the Minto Tribe intends primarily for its own laws, rather than federal laws, to apply to its lending operations. The Credit Code specifies the Minto Tribe‘s intention to use its “own sovereign governmental regulation and oversight” to “provide sufficient control and protection for both lenders and Borrowers.” Id. at 3. The Credit Code also provides that the Minto Tribe “recognizes that several state and federal agencies have an interest in this industry” but that it intends to “serve as its own regulator for all lenders operating from its sovereign lands.” Id.
The defendants contend that under Smith v. Board of Directors of Triad Manufacturing, Inc., 13 F.4th 613, 621 (7th Cir. 2021), the prospective waiver doctrine applies only when an arbitration provision “expressly forbids” the pursuit of federal statutory rights. Defs.’ Reply in Supp. of Mot. to Compel Arb. at 8 n. 5. In Smith, the Seventh Circuit found an arbitration agreement unenforceable because it precluded the type of relief that the plaintiff sought under the
Similarly, the plain text of the Minto Credit Code cannot be reconciled with the statutory rights and remedies available under RICO. The defendants assert that Minto Tribe law incorporates RICO‘s substantive rights, “including its private right of action and treble-damages remedy,” but they do not point to or provide any language in the Credit Code or other Minto Tribe laws to support that assertion. Defs.’ Reply in Supp. of Mot. to Compel Arb. at 7. In fact, the Credit Code does not mention any individual rights for consumers and instead provides only a process by which the tribe can penalize licensees for Code violations. For example, section 8.2 of the Credit Code provides that any licensee “who violates or fails to comply with any provision of this Code” may be subject to “civil fine to the Commission not to exceed Five Thousand Dollars ($5,000) for
The Court agrees that the exclusive application of Minto Tribe law would not allow the plaintiffs to effectively vindicate the federal rights and remedies they seek. Both the delegation clause and the arbitration provision operate as prospective waivers and are therefore unenforceable.
ii. Adams loan agreement
The governing law provision in the Adams loan agreement, worded slightly differently, states that “[t]he laws of the Tribe and applicable federal law will govern this Agreement, without regard to the laws of any state or other jurisdiction.” Compl., Ex. C at 4 (emphasis added). But even if this Court reads the governing law provision in the Adams agreement to allow for the vindication of federal rights, the delegation clause and arbitration clause remain unenforceable as a prospective waiver of state-law rights.
The defendants do not dispute that the arbitration provision does not allow the plaintiffs to vindicate their rights under any state law. Instead, the defendants assert that a prospective waiver of state rights would not render the arbitration provision unenforceable because the defendants are not subject to the state laws under which the plaintiffs seek relief. This argument lacks merit.
The plaintiffs seek damages for violation of the PLPA, among other state statutes. The PLPA, enacted in March 2021, is a “consumer protection law” aimed at “protect[ing] consumers from predatory loans.”
Furthermore, the only federal court to consider the applicability of the PLPA in the tribal lending context ruled that a prospective waiver of state rights rendered an arbitration agreement unenforceable specifically because it precluded the borrowers from obtaining relief under the PLPA. Harris, 2023 WL 5096295, at *7. This Court agrees with the analysis in Harris. Additionally, the defendants contend that as out-of-state lenders they are not subject to Illinois laws, but in the case they cite to support that argument, the court held that the plaintiff‘s state usury claims were preempted by the National Bank Act (NBA) and the Federal Deposit Insurance Act (FDIA). See Sawyer v. Bill Me Later, Inc., 23 F. Supp. 3d 1359, 1361, 1370 (D. Utah 2014). The NBA and the FDIA apply only to banks, not non-bank entities such as Minto Money. Eul v. Transworld Sys., No. 15 C 7755, 2017 WL 1178537, at *5 (N.D. Ill. Mar. 30, 2017); West Virginia v. CashCall, Inc., 605 F. Supp. 2d 781, 785 (S.D.W. Va. 2009). In addition, the PLPA provides that a person or entity may not
The defendants also contend that “by strictly engaging in conduct on Tribal land, Defendants are not subject to state law.” Defs.’ Reply in Supp. of Mot. to Compel Arb. at 10. The plaintiffs allege, however, that Minto Money‘s lending operations take place largely outside tribal land. See Compl. ¶¶ 34-40. And even putting these allegations aside, the defendants misstate federal law. In Mescalero Apache Tribe v. Jones, 411 U.S. 145 (1973), the Supreme Court held that absent special circumstances, states lack “authority for taxing Indian reservation lands or Indian income from activities carried on within the boundaries of the reservation.” Id. at 1270. But the Supreme Court has noted that state taxation of activities taking place on tribal land merits special consideration. Its decision in Mescalero Apache Tribe does not support the proposition that any conduct that occurs on tribal land is not subject to state law. County of Yakima v. Confederated Tribes & Bands of Yakima Indian Nation, 502 U.S. 251, 257-58 (1992). The defendants cite no supporting authority for the proposition that state usury laws are inapplicable to tribal lending entities located on tribal land—particularly in a situation like the present one where the entity makes loans to borrowers outside the tribal land—and multiple federal and state courts have rejected this proposition in the context of online lending. See Colorado v. W. Sky Fin., L.L.C., 845 F. Supp. 2d 1178, 1181 (D. Colo. 2011) (citation omitted) (“Business conducted over the Internet that would confer jurisdiction on a state court also demonstrates that the business activity constitutes off-reservation activity.“); Hengle, 19 F.4th at 349 (collecting cases).
The defendants also contend that the prospective waiver doctrine applies only to waivers of federal law. But the Supreme Court directly addressed this contention in Viking River Cruises, Inc. v. Moriana, 596 U.S. 639 (2022). In that case, the defendant argued in briefing that the prospective waiver doctrine applied only to waivers of federal statutes. Id. at 653 n.5. The Court rejected the defendant‘s argument as “erroneous” and highlighted its discussion of the prospective waiver doctrine in Preston v. Ferrer, 552 U.S. 346 (2008), a case that concerned state law claims. Id. The defendants attempt to downplay the significance of the Supreme Court‘s language by calling it “dicta.” Defs.’ Reply in Supp. of Mot. to Compel Arb. at 9. But the Seventh Circuit has stated that absent controlling precedent, considered Supreme Court dictum “provides the best, though not an infallible, guide to what the law is, and it will ordinarily be the duty of a lower court to be guided by it.” Reich v. Cont‘l Cas. Co., 33 F.3d 754, 757 (7th Cir. 1994).
This Court finds no reason to discount the Supreme Court‘s express rejection of the defendant‘s argument in Viking River Cruises, Inc. The only case the defendants cite in support of their argument here was decided before Viking River Cruises, Inc., and multiple federal courts that have considered the issue both pre- and post-Viking River Cruises, Inc. have concluded that the prospective waiver doctrine also applies to waivers of state rights and remedies. See Harris, 2023 WL 5096295, at *4 (considering federal and state statutory rights in prospective waiver analysis); Gingras v. Think Fin., Inc., 922 F.3d 112, 127 (2d Cir. 2019) (“[W]e conclude that the arbitration agreements are unenforceable
In view of the clear guidance from the Supreme Court, as well as the persuasive authority from courts in this district and other circuits, this Court holds that the prospective waiver of federal and state statutory rights and remedies renders the delegation clause and arbitration provision unenforceable in all of the plaintiffs’ agreements.
b. Unconscionability
Under Illinois law, a contract provision may be unenforceable where it is “unconscionable on either procedural or substantive grounds.” Jackson v. Payday Fin., LLC, 764 F.3d 765, 777 (7th Cir. 2014). “Procedural unconscionability refers to a situation where a term is so difficult to find, read, or understand that the plaintiff cannot fairly be said to have been aware he was agreeing to it, and also takes into account a lack of bargaining power.” Id. (quoting Razor v. Hyundai Motor Am., 222 Ill. 2d 75, 854 N.E.2d 607, 622 (2006)). Substantive unconscionability “concerns the actual terms of the contract and examines the relative fairness of the obligations assumed.” Jackson, 764 F.3d at 778 (quoting Kinkel v. Cingular Wireless LLC, 223 Ill. 2d 1, 857 N.E.2d 250, 267 (2006)).
i. Procedural unconscionability
“Factors to be considered in determining whether an agreement is procedurally unconscionable include whether each party had the opportunity to understand the terms of the contract, whether important terms were hidden in a maze of fine print, and all of the circumstances surrounding the formation of the contract.” Jackson, 764 F.3d at 777–78. “Procedural unconscionability consists of some impropriety during the process of forming the contract depriving a party of meaningful choice.” Cannon v. Burge, 752 F.3d 1079, 1102 (7th Cir. 2014).
The plaintiffs argue that the arbitration provision is procedurally unconscionable because it “evad[es] federal and state law” and “purports to apply tribal law which cannot be applied.” Pls.’ Resp. to Defs.’ Mot. to Compel Arb. at 17-18. But this is simply a variation of the plaintiffs’ argument that the arbitration provision deprives the borrower of federal and state statutory rights. And the plaintiffs’ contention that the application of tribal law forecloses certain federal or state remedies raises substantive, not procedural, unconscionability concerns. See ChampionsWorld, LLC v. U.S. Soccer Fed‘n, Inc., 890 F. Supp. 2d 912, 944 (N.D. Ill. 2012) (noting plaintiff‘s argument regarding unreasonable contract terms supported substantive rather than procedural unconscionability claim).
Furthermore, the legal authority that the plaintiffs provide does not support their procedural unconscionability allegations. For example, the plaintiffs cite Montana v. United States, 450 U.S. 566 (1981), in support of their proposition that the Minto Tribe has no “legislative or judicial jurisdiction” over conduct “committed by nonmembers against other nonmembers off the reservation.” See Pls.’ Resp. to Defs.’ Mot. to Compel Arb. at 17. In Montana, the Supreme Court held that a tribe did not have the authority to regulate the hunting and fishing activity of nonmembers on lands within its reservation. Montana, 450 U.S. at 544. But Montana did not involve an arbitration agreement, and the general principle that
The plaintiffs also cite Jackson and Harris in support of their argument that the defendants have not established tribal jurisdiction. See Pls.’ Resp. to Defs.’ Mot. to Compel Arb. at 17. In both cases, a court held a tribal lending agreement procedurally unconscionable under Illinois law. Jackson, 764 F.3d at 777-81; Harris, 2023 WL 5096295, at *5. But those cases are distinguishable.
The court in Jackson found an arbitration agreement procedurally unconscionable because the tribe had not established the existence of the arbitration procedure or consumer dispute rules referenced in the agreement. Jackson, 764 F.3d at 778. The Seventh Circuit found that the inclusion of an “illusory” arbitration forum in the agreements rendered the plaintiffs unable to “ascertain the dispute resolution processes and rules to which they were agreeing.” Id. at 776, 778. And the court in Harris concluded that the loan agreement was procedurally unconscionable because it “applie[d] tribal arbitration law which d[id] not exist.” Harris, 2023 WL 5096295 at *6. Here, however, the plaintiffs have not claimed that the loan agreement applies illusory tribal law or relegates the dispute to an illusory tribal forum. See generally Pls.’ Resp. to Defs.’ Mot. to Compel Arb. at 17-18. And because the loan agreements authorize the AAA, rather than a Minto Tribe judicial forum, to oversee the arbitration proceedings, the Court need not consider the plaintiffs’ arguments regarding whether the defendants’ conduct is subject to tribal court jurisdiction.
The Court concludes that the plaintiffs have not demonstrated that the arbitration provision in the loan agreements is procedurally unconscionable.
ii. Substantive unconscionability
“Substantive unconscionability concerns the actual terms of the contract and examines the relative fairness of the obligations assumed, asking whether the terms are so one-sided as to oppress or unfairly surprise an innocent party.” Cannon, 752 F.3d at 1102. The plaintiffs argue that the loan agreements are substantively unconscionable because the governing law provision prohibits the application of state laws such as the PLPA and therefore violates Illinois public policy.5 This Court determines
This Court concludes that the governing law provision violates Illinois public policy, for three reasons. First, the Illinois Supreme Court has not addressed whether an agreement that bars relief under the PLPA violates Illinois public policy. But recently, a court in this district found that choice-of-law terms that waive protection under the PLPA are sufficient to render an arbitration agreement substantively unconscionable. Harris, 2023 WL 5096295, at *7. This Court agrees with the analysis in Harris.
Second, the PLPA contains a provision that expressly forbids a waiver of its provisions.
Third, the Minto Credit Code authorizes licensees to charge and collect interest at any rate “as the agreement governing such extension of credit provides.” Pls.’ Resp. to Defs.’ Mot. to Compel Arb., Ex. A at 14. Consequently, applying the loan agreements’ governing law provisions would foreclose the plaintiffs’ PLPA, ICFA and Illinois Interest Act claims arising from illegally high interest rates. Federal and state courts have found that the denial of protections provided under Illinois law evidences a violation of Illinois public policy. Patterson v. Respondus, Inc., 593 F. Supp. 3d 783, 812–13 (N.D. Ill. 2022) (“Because applying Washington law would leave Plaintiffs without recourse under BIPA or any analogous right of action, it would undermine the fundamental Illinois public policy of protecting individual privacy rights over biometric data.“); Del Monte Fresh Produce, N.A., Inc. v. Chiquita Brands Int‘l Inc., 616 F. Supp. 2d 805, 816 (N.D. Ill. 2009) (finding Florida law violated Illinois‘s public policy by providing weaker protections for workers subject to restrictive covenants); Turner v. Concord Nursing & Rehab. Ctr., LLC, 2023 IL App (1st) 221721, 218 N.E.3d 456, 463 (2023) (holding arbitration agreement substantively unconscionable for limiting recovery authorized by the Illinois Consumer Fraud Act). The arbitration provisions in the plaintiffs’ loan agreements undermine the Illinois public policy of “protect[ing] consumers from predatory loans.”
The defendants cite Mori v. East Side Lenders, LLC, No. 11 C 1324, 2015 WL 13654184 (N.D. Ill. Mar. 24, 2015), in support of their contention that the plaintiffs must first establish that they are entitled to protection under Illinois law before they show that a waiver of these protections renders the agreements unconscionable. But Mori is distinguishable from the instant case. In Mori, the court had granted the defendant‘s motion to compel arbitration and was considering the plaintiff‘s argument that the arbitrator must not enforce the loan agreement‘s choice-of-law provision “because the chosen law (Delaware) is contrary to the fundamental public policy of Illinois.” Id. at *5. Here, the
The Court concludes that the governing law provision‘s waiver of protections under state statutes, including the PLPA, renders the arbitration provision substantively unconscionable.
c. Class action waiver
The parties dispute whether the loan agreements’ class action waiver is enforceable. This dispute is premature. Because the plaintiffs have not filed a motion for class certification, this Court will defer consideration of the enforceability of the class action waiver.
Conclusion
For the reasons stated above, the Court denies the defendants’ motion to transfer venue [dkt. no. 23] and their motion to compel arbitration [dkt. no. 25]. The telephonic status hearing set for March 18, 2024 is vacated and reset to March 25, 2024 at 9:15 a.m., using call-in number 888-684-8852, access code 746-1053. The parties should confer regarding a discovery and pretrial schedule and are directed to file a joint status report with a proposed schedule (or alternative proposals if they cannot agree) by March 22, 2024.
Date: March 14, 2024
MATTHEW F. KENNELLY
United States District Judge