Fourth Circuit sides with Virginia borrowers in rent-a-tribe lending scheme

RICHMOND, Va. (CN) — A Fourth Circuit panel rejected a payday lender’s attempt to avoid liability Wednesday for illegal loans made through a rent-a-tribe scheme.

The three-judge panel sided with a lower court that ruled that Midwestern businessman Matt Martorello owes a class of Virginia borrowers nearly $44 million in damages for engaging in racketeering. Martorello, who has no claim to tribal affiliation, made loans online to Virginia borrowers with annual percentage rates above 700% — nearly 60 times Virginia’s legal limit of 12%.

In rent-a-tribe schemes, payday lenders partner with a Native American tribe to shield the lender through the tribe’s sovereign immunity, thereby precluding the enforcement of otherwise applicable usury laws that cap interest rates.

Martorello worked with the Lac Vieux Desert Band of Lake Superior Chippewa Indians in Michigan to facilitate lending schemes through tribal entities, including Big Picture Loans and Red Rock Tribal Lending. The lower court dismissed the tribal entities on grounds of sovereign immunity but ruled that Martorello is liable, as he handled the day-to-day operations and funding for the loans.

The panel denied Martorello’s three arguments against the lower court’s decision. First, the panel found that it did not need to dismiss the case for failure to join necessary and indispensable parties because the indigenous defendants had reached a settlement agreement with the borrowers, which resolved all the claims lodged against the tribe.

“All the interests Martorello now purports to assert on their behalf as a reason why they are indispensable to further adjudication of the claim against him — from tribal immunity and the ability of a separate sovereign to contract to the enforceability of the loans at the heart of this case — are matters that the tribal entities have separately resolved to their satisfaction as part of the settlement agreement,” U.S. Circuit Court Judge Steven Agee, a George W. Bush appointee, said.

When determining whether to dismiss a case for the absence of a necessary and indispensable party, the court considers whether a judgment would create prejudice against the tribal entities or Martorello, and whether the borrowers would have a remedy if the court dismissed the action for nonjoinder. The panel found dismissal would prejudice the borrowers.

“That course would leave the borrowers with no relief against Martorello, the principal participant and conspirator in the lending scheme at the heart of this case,” Agee said. “This is not a case where the same claims could be pursued against him, the tribe, and its entities in another forum.”

The panel further rejected the argument by ruling that joint tortfeasors are not automatically necessary parties in the context of a civil RICO claim.

Next, the panel rejected Martorello’s contention that relying on Virginia’s usury laws rather than the tribes violates the Indian Commerce Clause. The Indian Commerce Clause established that tribal law is subordinate only to federal law, not state law.

State laws, however, are generally enforceable against tribal entities for activities they undertake off the reservation. The panel relied on its circuit’s previous decision in Hengle v. Treppa , where the Fourth Circuit decided that online tribal lending activity that constitutes off-reservation conduct is subject to state law rather than tribal law.

Similar to Hengle , Martorello argued that online lending occurred on the reservation because the lender and the tribal lending entities were located on the reservation, and each loan agreement explicitly stated that it was made and accepted on the reservation.

Lastly, the panel found the lower court rightly rejected Martorello’s mistake-of-law defense. Martorello hoped to avoid liability by requiring the borrowers to prove he willfully collected the unlawful debt and that he should be able to present evidence that he acted under the good-faith — albeit untrue — belief that the loans at issue were not illegal because he believed that tribal law governed them, which permitted the high-interest rate charges.

That assertion is misguided, according to the panel, which agreed with the lower court that civil RICO claims, unlike criminal RICO claims, do not require the defendant to be aware that they are breaking the law for plaintiffs to hold them accountable.

“Congress knows how to demand proof of actual knowledge of unlawfulness when crafting civil statutes,” Agee said. “But Congress refrained from including such language in section 1962, and this absence matters for purposes of understanding what a plaintiff must prove to establish a civil RICO violation.”

Attorneys representing Martorello did not respond to requests for comment. Chief U.S. Circuit Court Judge Albert Diaz, a Barack Obama appointee, and U.S. Circuit Judge Roger Gregory, another Bush appointee, concurred with Agee.

“This is a landmark victory for consumers and a decisive blow against online payday lenders. The Fourth Circuit’s decision makes clear that online payday lenders cannot misuse tribal affiliations as a shield to evade state and federal laws,” Matthew Wessler of Gupta Wessler, representing the borrowers, said in a statement. “Today’s ruling affirms that legal loopholes won’t protect predatory lenders from accountability when they exploit vulnerable borrowers with illegal, sky-high interest rates.”