US Court of Appeals for Fourth Circuit Declines to Apply Arbitration and Choice of Law Provisions Due to Onerous Loan Terms | Rosenberg Martin Greenberg LLP
Most of us have heard the expression âpigs get fat, pigs are slaughteredâ. The United States Court of Appeals for the Fourth Circuit did not slaughter lender officials in its November 16, 2021 opinion in Hengle vs. Treppa, but it almost certainly paved the way for the slaughterhouse.
Lenders in Hengle were “online lenders affiliated with a federally recognized Native American tribe.” However, they were reportedly exploited by non-tribal corporations owned by non-tribal defendants on non-tribal land, employing non-tribal employees and distributing most of their income to non-tribal entities and individuals.
The plaintiffs were residents of Virginia who had secured consumer, short-term, “low-value, high-interest” lenders online. The amounts of the loans at issue ranged from $ 300 to $ 1,575 and the interest rates ranged from 544% to 920%. The loan agreements they entered into online provided that their loans were governed “by applicable tribal law, including, but not limited to, the Tribal Consumer Financial Services Regulatory Ordinance Habematolel.” The loan agreements also provided for arbitration of all disputes and specified that the arbitrator was to apply “the laws of the Habematolel Pomo of the Upper Lake Tribe”. Although the loan agreements permitted arbitration in places other than on tribal lands, they specified that an election to arbitrate outside tribal lands “shall in no case … allow the application of any other law as the law of the Habematolel Pomo of Lake Superior.
After defaulting on their loans, the plaintiffs sued the tribal council members of the tribe with which the lenders were affiliated and the non-tribal agents of the lenders in the United States District Court for the Eastern District of Virginia. The plaintiffs alleged violations of Virginia’s usury and consumer credit laws and violations of the Federal Racketeer Influenced and Corrupted Organizations Act (âRICOâ). All of the defendants requested: (a) forced arbitration; and (b) reject because the loans were governed by Habematolel law under which they were legal, not Virginia law, and because the loans which were legal could not be the required “principal act”. under RICO. The tribal council defendants also requested a dismissal on the grounds of sovereign immunity.
The district court rejected the defendants’ petitions. However, the district court also allowed the defendants to file an interlocutory appeal, and the defendants appealed to the Fourth Circuit.
The Fourth Circuit recognized that, as a general rule, arbitration clauses are enforceable and that the question of whether a particular dispute is referred to arbitration should be determined by the arbitrator, not by the courts. However, the court noted that it has held in previous cases that an arbitration clause is not enforceable if it effects “a potential waiver of federal rights”. Since the loan agreements specified that the arbitrator was to apply only the law of the Habematolel Pomo of Upper Lake, the plaintiffs could not pursue their RICO claims if they were required to arbitrate. Therefore, the arbitration clause effected a potential waiver of federal rights and would not be enforced.
Turning to the issue of sovereign immunity, the Fourth Circuit recognized that âIndian tribes have a unique status in our federal systemâ. Tribes “exercise inherent sovereign authority” and enjoy “common law immunity from prosecution” in state and federal courts. However, tribal immunity does not preclude prosecution of “individuals, including tribal officers, responsible for unlawful behavior.” Therefore, members of the Triple Council who had been prosecuted in their individual capacity did not enjoy sovereign immunity.
Finally, the Court examined the provision relating to the choice of applicable law in loan agreements. The court recognized that, under Virginia law, “parties to a contract are free to specify the law that governs their agreement.” Therefore, the courts of Virginia give the contractual provisions on the choice of applicable law “full effect, except in exceptional circumstances”. One of those circumstances is when the law chosen “not only differs from the law of Virginia, but is contrary to the overriding public policy of the Commonwealth”. The question, then, was whether Upper Lake’s Habitatolel Pomo’s choice of law violated a compelling Virginia public policy.
The way in which the Court described the question it had to decide was a clear signal of the decision to follow. The Court began the discussion by noting that the plaintiffs were required to pay interest at rates “between 544% and 920% on principal amounts ranging from $ 300 to $ 1,575 over a ten month period” and that the specified tribal law provided no cap at all on interest rates. In contrast, under Virginia law, the maximum rate allowed was 12%. The Court then said that “the Virginia Supreme Court did not consider whether unregulated loan sharking of low-value loans with triple-digit interest rates violated Virginia’s compelling public policy to overcome a choice contract under foreign law. â With no precedent from the West Virginia Supreme Court, the court said, “So we have to apply Virginia law to predict how this court would rule.”
The Court noted that the Virginia legislature has regulated usurious loans on the basis of “public policy considerations” since 1734. Under Virginia law, a contract that violates the usury limit is “void” and the lender cannot collect “any principal, interest, charges or other charges in connection with the contract.” A borrower who has paid usurious interest “can sue to recover not only the excess interest paid but also double the total amount of interest paid in the two years preceding the trial, in addition to court costs and legal fees. ‘lawyer “. Finally, the Court stated that “the Virginia Legislature has signaled the importance it attaches to usury laws by enacting an anti-waiver provision” which provides that any waiver of rights agreement under the laws of usury ‘usury’ will be deemed contrary to public order and void. “Based on these provisions of Virginia law, the Fourth Circuit concluded that” the Supreme Court of Virginia would not enforce the applicable law clause because it violates Virginia’s imperative public policy against loans unregulated usurers. “
The accused in Hengle had the general principles according to which arbitration clauses and the provisions relating to the choice of applicable law must be applied in their favor. Yet they still lost because, as the Fourth Circuit said, their conduct “is unmistakably shocking.[s]â¦ His sense of entitlement. Oink.