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Solomon v. American Web Loan

United States District Court, E.D. Virginia, Newport News Division

March 26, 2019

ROYCE SOLOMON, et al., individually and on behalf of all others similarly situated, Plaintiffs,
v.
AMERICAN WEB LOAN et al., Defendants.

          OPINION & ORDER I

          HENRY COKE MORGAN, JR. SENIOR UNITED STATES DISTRICT JUDGE

         These motions arise out of complicated lending scheme that appears to weave tribal immunity, forced arbitration, and several layers of corporate entities together in an attempt to avoid liability for allegedly usurious interest rates. The Court granted the parties additional time to complete extensive jurisdictional discovery. On February 5 and 6, 2019, the Court held a lengthy hearing to hear evidence and arguments concerning the various jurisdictional and related motions filed by Defendants. The Court ruled from the bench but hereby ISSUES this Opinion and Order, along with a companion Opinion and Order, to further explain its decisions.

         At its core, this case involves a lending scheme envisioned by Mark Curry ("Curry"), whereby he and his corporate entities attempt to use the sovereign immunity of the Otoe-Missouria Indian Tribe (the "Tribe") to evade this lawsuit. Mindful of the strong federal policy favoring tribal immunity, self-governance, and a safe treasury, the Court cannot accept his arguments. Plaintiffs have produced enough evidence to show that Curry shifted all of the risk of his scheme to the Tribe and kept the lion's share of the revenue for himself, through a scheme that infringed upon the Tribe's self-governance and placed the Tribe's treasury at risk. In other words, Plaintiffs have made a sufficient showing that Curry was acting for himself, not for the Tribe.

         In this Opinion and Order I, the Court will address the following:

1) Defendants American Web Loan, Inc., AWL, Inc., and MacFarlane's ("AWL Defendants'" or "AWL's") joint Motion to Dismiss for Lack of Subject Matter Jurisdiction, Doc. 72;
2) Defendant Curry's Motion to Dismiss for Lack of Subject Matter Jurisdiction, Doc. 85;
3) Defendant Sol Partners' ("Defendant Sol's") Motion to Dismiss for Lack of Subject Matter Jurisdiction, Doc. 86;
4) AWL Defendants' Motion to Transfer Venue, Doc. 70;
5) Defendants Curry and Sol's Motion to Transfer Case, Doc. 83;
6) AWL Defendants' Motion to Compel Arbitration, Doc. 74; and
7) Defendants Curry and Sol's Motion to Compel Arbitration, Doc. 84;

         For the reasons stated herein, the Court DENIES each of these motions.

         I. BACKGROUND

         Plaintiffs are four individuals who obtained loans from American Web Loan. ¶¶ 10-13. Plaintiffs allege that Defendant, Mark Curry, with the assistance of defendants American Web Loan, Inc. AWL, Inc., MacFarlane Group, Medley Management, Inc., Medley Group, LLC, Medley LLC, Medley Capital Corp., Medley Opportunity Fund II, LP (collectively "Medley" or "Medley Defendants"), Brook Taube, Seth Taube (collectively "the Taubes"), Middlemarch Partners, Inc. ("Middlemarch"), DHI Computing Service, Inc. d/b/a GOLDPoint ("GOLDPoint"), Sol Partners, Inc. ("Sol"), and John Doe Defendants (1-100), have pleaded the sovereignty of the Otoe-Missouria Indian Tribe (the "Tribe") as a defense to allegedly imposing usurious interest rates on short-term loans issued to individuals throughout the United States. Am. Compl. ¶¶ 1, 6.

         Altogether, Plaintiffs' complaint alleges nine (9) different causes of action against the various defendants. In Count One, Plaintiffs allege that AWL, Curry, Sol, Medley and the Taubes engaged in the collection of unlawful debt in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Id. ¶¶ 209-22. In Count Two, Plaintiffs allege that the AWL, Curry, Sol, the Medley Defendants (which includes the Taubes), GOLDPoint, and Middlemarch engaged in a RICO conspiracy. Id. ¶¶ 223-27. In Count Three, Plaintiffs allege that the AWL Defendants, Curry, Sol, Medley, and GOLDPoint violated the Electronic Funds Transfer Act ("EFTA"). Id. ¶¶ 228-43. In Counts Four through Eight, Plaintiffs allege that Defendant AWL, Inc. committed several violations of the Truth in Lending Act ("TILA"). Id. ¶¶ 244-73. In Count Nine, Plaintiffs allege that Defendants have been unjustly enriched by their continued possession of funds illegally taken from Plaintiffs and members of the putative class. Id. ¶¶ 274-276. Plaintiffs define the putative class of Plaintiffs as:

All persons who took out loans from American Web Loan. Included in the Class are any persons who took out loans through the American Web Loan d/b/a entity known as Clear Creek Lending. The Class period begins on February 10, 2010 and continues through the present.

Am. Compl. ¶ 198.[1]

         II. PROCEDURAL HISTORY

         Plaintiffs initially filed their complaint on December 15, 2017. Doc. 1. An Amended Complaint was filed on March 9, 2018. Am. Compl. On April 9, 2018, the following motions were filed:

(1) Medley Defendants and the Taubes' Motion to Dismiss for Failure to State a Claim and Failure to Join a Necessary Party, Doc. 62;
(2) Medley Defendants and the Taubes' Motion to Dismiss for Lack of Personal Jurisdiction and Improper Venue, Doc. 64;
(3) AWL Defendants' Motion to Transfer, Doc. 70;
(4) AWL Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction, Doc. 72;
(5) AWL Defendants' Motion to Compel Arbitration, Doc. 74;
(6) AWL Defendants' Motion to Dismiss for Failure to State a Claim, Doc. 76;
(7) Middlemarch's Motion to Dismiss for Failure to State a Claim, Doc. 77;
(8) GOLDPoint's Motion to Dismiss for Failure to State a Claim, Doc. 81;
(9) Defendants Curry and Sol's Motion to Transfer Case, Doc. 83;
(10) Defendants Curry and Sol's Motion to Compel Arbitration, Doc. 84;
(11) Defendant Curry's Motion to Dismiss for Lack of Subject Matter Jurisdiction, Doc. 85;
(12) Defendant Sol's Motion to Dismiss for Lack of Subject Matter Jurisdiction, Doc. 86; and
(13) Defendants Curry and Sol's Motion to Dismiss for Failure to State a Claim, Doc. 87.

         On June 8, 2018, Plaintiffs opposed each of the defendants motions.[2] Docs. 109-115. On July 9, 2018, each defendant replied. Docs. 133-145.

         On August 2, 2018, the Court held a status conference regarding this matter and then consolidated this action with Hengle v. Curry, [3] which had recently been transferred from the Richmond Division. Doc. 160.

         Given the nature of the issues raised in the multiple jurisdictional and related motions, on August 2, 2018, the Court granted the parties time to conduct discovery on these issues. Id. The Court allowed the parties approximately three (3) months to conduct discovery on the jurisdictional and venue matters. Doc. 201 (setting the jurisdictional discovery deadline at October 30, 2018). During this time, the parties took extensive discovery, including document production and depositions. Thereafter, the parties fully briefed their positions, attaching documents and deposition transcripts. See Docs. 223, 224, 226, 232, 246, 257, 265, 319. On November 6, 2018, Plaintiffs filed a supplemental brief opposing AWL Defendants' and Defendants Curry and Sol's Motions to Transfer. Docs. 221, 222. On November 13, 2018, AWL Defendants and Defendants Curry and Sol filed a supplemental brief in support of their Motion to Transfer. Docs. 231, 232, 235. On November 20, 2018, AWL Defendants and Defendants Curry and Sol, each filed a supplemental briefs in support of their Motions to Dismiss for Lack of Subject Matter Jurisdiction, and Plaintiffs filed a supplemental opposition to Defendants' Motions. Docs. 245, 246, 256, 257, 264, 265, 272, 273. On November 29, 2018, Plaintiffs filed a corrected supplemental opposition without objection.[4] Doc. 298-1. On December 11, 2018, AWL Defendants, Defendants Curry and Sol, and Plaintiffs each replied with supplemental briefs regarding subject matter jurisdiction. Docs. 309, 310, 314, 315, 316, 317, 318, 319.

         In addition to the extensive briefing, the Court held an evidentiary hearing that spanned two days. Docs. 338, 345. At this hearing, Defendants called two witnesses, John Shotton, the Chairman of the Otoe-Missouria Tribal Counsel, and Mark Curry. Hearing Transcript, Day 1, at 7:4-5, 7:13-16, 70:16-117 (February 5, 2019). While Plaintiffs did not call any witnesses, they did present evidence through cross examination. Id. at pp. 35-68, 82-112. On the second day of the hearing, counsel for AWL Defendants, Medley Defendants, Middlemarch Defendants, DHI, and Plaintiffs presented oral arguments. Hearing Transcript, Day 2, (February 6, 2019). Having reviewed the papers and considered the evidence and arguments in this case, the Court RULED from the bench. It now provides this Opinion and Order to further explain its ruling.

         III. MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION

         A. Legal Standard

         Federal district courts are courts of limited subject matter jurisdiction. Exxon Mobile Corp. v. Allapattah Servs.. Inc.. 545 U.S. 546, 552 (2005). Therefore, a court must generally dismiss a claim against a defendant if the Court lacks subject matter jurisdiction to hear the dispute. However, unlike a traditional motion to dismiss for lack of subject matter jurisdiction concerning diversity or federal question jurisdiction, a motion to dismiss based on sovereignty can be overcome by consent. Kiowa Tribe of Oklahoma v. Mfg Tech.. Inc. 523 U.S. 751, 757 (2014). An assertion of sovereign immunity is appropriately addressed through challenging the Court's subject matter jurisdiction.[5] Smith v. Washington Metro. Area Transit Auth.. 290 F.3d 201, 205 (4th Cir. 2002). The Court may accept evidence on any disputed jurisdictional facts without converting a motion to dismiss into a motion for summary judgment. See Richmond. Fredericksburg & Potomac R. Co. v. United States. 945 F.2d 765, 768 (4th Cir. 1991).

         B. Background of Curry's Relationship with the Tribe and Formation of Tribal Entities[6]

         i. The Tribe

         The Tribe is a federally-recognized Indian tribe located in Red Rocks, Oklahoma. Doc. 73-1 ("Shotton Decl.") ¶¶ 2, 13. Since the early 1700s, the Tribe has struggled to maintain its sovereignty due to western expansion, the spread of disease, and federal laws which forced the Tribe to relocate and alter its primarily hunter-gatherer lifestyle. Id. ¶¶ 9-13. Because of the rural location of the Tribe, the Tribe has faced challenges employing its members and generating enough revenue to fund its government operations and provide services to its members.[7] Id. ¶ 19-20.

         ii. Tribal Regulatory Structure

         As a separate sovereign, the Tribe operates under its own constitution. In 1984, the Tribe adopted and ratified its constitution to establish a seven-member governing body, called the Tribal Council, to perform executive and legislative functions for the Tribe. Id. at ¶ 16; Doc. 73-2 ("Tribal Const."). The Tribal Council members serve three-year staggered terms, and elections are held each November. Id. ¶ 17. The Tribal Council has the authority to "transact business and otherwise speak on behalf of the Tribe . . . [and] appoint subordinate committees and representatives and delegate to them any of the Tribal Council's powers." Tribal Const. Art. VIII, Sect. 1. In 2006, the Tribal Council passed an act creating the Otoe-Missouria Development Authority ("OMDA"). Doc. 294-4. One of the purposes for creating the OMDA was, in relevant part, to "provide for the orderly creation and management of tribal business enterprises." Id. at 6.

         iii. Beginning of Tribal Lending Operations and Creation of American Web Loan

         After creating the OMDA, the Tribe began generating revenue by operating casinos. Doc. 250-5. However, the Tribe's revenue steadily dropped after other casinos, including one in a neighboring state, opened and began to increase competition. Doc. 246 at 3; Doc. 250-1 ¶ 37. The Tribe's chairman John Shotton ("Shotton") first learned about online lending through other tribes in Oklahoma. Doc. 250-3 ("Shotton Depo.") at 45-46, Depo. Tr. 176:15-177:8. In the beginning of 2009, Shotton was introduced to Mark Curry. Id. Approximately one year after his meeting with Curry, Shotton and the Tribal Council created the Consumer Finance Services Regulatory Commission to regulate the Tribe's lending operations. Doc. 249-7. Subsequently, the Tribal Council passed a resolution adopting the American Web Loan Act (the "AWL I Act"). Doc. 73-7 ("AWL I Act").

         The stated purpose of the Act was to organize American Web Loan, Incorporated ("AWL I") and operate AWL I as a tribal corporation "for the purpose of providing revenues with which the Tribe may address other pressing matters of public health, safety, and welfare, or other tribal purposes." AWL I Act, at 4, § 201. The AWL I Act described AWL I as a "sub-agency of the Tribal Council and an agency of the Tribe" and created a separate Board of Directors of five (5) members, at least three (3) of whom were required to be members of the Tribe. Id. at 5, §§ 202-03. The Tribe entered into a contract with American Web Loan Holdings ("AWLH") to procure services necessary for its lending operations, and AWLH sometimes contracted with MacFarlane Group to perform those services. Shotton Depo. at 7, 24:23-25:12. During this time, Curry owned both AWLH and MacFarlane Group.

         iv. Tribe's Acquisition of MacFarlane Group

         Toward the end of its contract with AWLH, the Tribe sent Curry a notice that they intended to renegotiate the contract. Shotton Depo. at 47, 181:4-9. Curry presented the tribe with three options, one of which included the sale of MacFarlane Group to the Tribe by way of "seller take back financing" by which "[t]he seller would structure the sale over a 5-year period and a 2nd [International Financing Entity] may provide debt funding for the tribe." Doc. 250-7. After lengthy negotiations, the Tribe elected this option and formed another tribal entity, Red Stone, to purchase MacFarlane Group, AWLH and a company named Bullet Hole (collectively the "Newcos") from Curry. Docs. 250-13 ("Promissory Note"). To obtain part of the funding for the purchase, Red Stone entered into a promissory note (the "Note") with three Delaware corporations, all controlled by Curry: First Infinity CM Holdings, Inc.; First CM Holdings, Inc.; and First Mountain Holdings, Inc. (collectively the "Note Holders"). Id. The other portion of funding was provided by entering a consulting agreement with Sol Partners (the International Financing Entity referred to above), again controlled by Curry. Doc. 250-15. Simultaneously, Red Stone also entered into a Security Agreement with the Note Holders to provide Note Holders with a priority security interest in all of Red Stone's "right, title and interest in and to all of [Red Stone's] assets . . . whether now or hereafter existing . . . tangible or intangible . . . now owned or hereafter acquired." Doc. 250-14 at 2. Each of the Note Holder entities and Sol Partners is owned by Curry. After the merger, the Tribe renamed American Web Loan Incorporated, AWL, Inc. ("AWL II"), and Red Stone transferred the Newcos along with its rights and liabilities under the Note and Security Agreement to AWL II. Doc. 250-16.

         v. Terms of Promissory Note

         The Note ensures that the Note Holders are paid $2, 018, 154.86 monthly over the five-year term of the Note, plus ten percent (10%) interest. Promissory Note at 24. The Note also sets forth "Governing Covenants" whereby the note requires the Purchaser (now AWL II) "to be managed by a board of directors or managers ... with six (6) members, "[8] of which three (3) are appointed by the majority of the Note Holders and the other three (3) are appointed by the Tribe. Id. at 13

         The only way for the Tribe to appoint a majority of members on the board is for the Tribe to first pay off eighty-five percent (85%) of the Note. Id. This results in three (3) out of six (6) of the board members being appointed by the Curry-owned entities. Id. The Note also requires that actions taken by the board have the consent of at least four (4) members. Id. The Note considers any change to this leadership structure, except as otherwise provided, a "default" under the loan. Id. at 13. Other events of default include "Adverse Tribal Government Action" and an "Adverse Change of Tribal Law."[9] Id. The Note also requires, as discussed in more detail, infra, that AWL IPs Net Revenues are first paid toward operating expenses, which include the Note plus the amount due to Defendant Sol under the consulting agreement: $199, 333.33 per month, wages and payroll taxes. Id. at 9. Further, without consent of the Board, the Tribe is prohibited from: increasing compensation to any employee, hiring any new employee making more than $50, 000 a year, unless that employee is replacing someone who made less than $100, 000 annually; incurring, assuming, or guaranteeing any debt except as permitted by the Budget approved by the Board; making capital expenditures or commitments in excess of $100, 000 unless in accordance with the Budget; or assigning, transferring, or distributing any material portion of its assets or any of the Equity Interests as defined by the Merger Agreement. Id. at 7.

         vi. Tribe's Consulting Agreement with Sol Partners

         Under the consulting agreement, Sol Partners agreed to provide advice to AWL IPs executive management in regard to its operation of AWL II and other reasonable services, including engaging in lobbying and advocacy efforts on behalf of AWL II, providing guidance and expertise in AWL IPs lending operations, and advising AWL II's executive management team. Doc. 250-15 at 2. In exchange for their services, Sol Partners is paid a fee of $1, 933, 333.33 per month over the course of five years. Id. According to an e-mail sent by Mark Curry, the consulting agreement with Sol was "basically assigning part of the purchase amount to the SOL entity for tax purposes." Doc. 287-16 at 3.[10]

         vii. Revenue from AWL II

         The Note sets forth a structure for how revenues from AWL II would be disbursed. Specifically, priority for the use of net revenues shall be "to pay Operating Expenses for such Contract Month." Promissory Note at 10. These "operating expenses" include "fees payable pursuant to the consulting agreement; bad debt expense; lead verification costs; salaries, wages and payroll taxes." Id. at 7. The remaining money is split up in monthly tribal payments, and monthly holder payments, which are distributed in a manner such that "for every 60 cents ... paid to all Holders in the aggregate as Monthly Holder Payments for any Contract Month, 40 cents shall be paid to the Tribe as a Monthly Tribal Payment for such Contract Month until such time as the Monthly Tribal Payment for such contract month has been paid in full." Id. at 9-10. Any payments in excess of this amount "shall be applied to the corresponding Monthly Holder Payments." Id. The Monthly Tribal Payments are limited to 1/12 of the "Annual Threshold."[11] Id. at 10. These monthly payments enable the Tribe to fund many beneficial initiatives, such as youth programs, language-education programs, tribal daycare, and the tribal government. Doc. 73-1 ¶¶ 40-46. In 2017, twenty-two percent (22%) of the funds distributed into the Tribe's general fund and seventy- eight percent (78%) of the funds distributed into the OMDA came from revenue generated by AWL, Inc. Doc. 250-1 at 46-48, Tables 16, 17.

         viii. Current Management of AWL II

         After the Note, Security Agreement, and Consulting Agreement were executed, the Tribe adopted a resolution and appointed its three (3) board members. Curry also appointed his three (3) members, including himself. Doc. 73-9 ("AWL II Act") at 2. The Tribe also appointed Curry to serve as CEO of AWL II. Shotton Depo. at 5, 26:21-23. A majority of the employees and executives who work for AWL II are not members of the Tribe and are individuals who previously worked in some capacity with a Curry controlled entity, MacFarlane Group, before it was acquired by AWL II. However, AWL II's Oklahoma office does employ approximately ten (10) individuals who are members of the Tribe. Ex. 46. At least one tribal member has obtained a management position. Doc. 252-7 ("Hamilton Decl.") ¶ 5. Additionally, a large portion of jobs performed for AWL II are done by employees of RS LLC, a wholly owned subsidiary of Red Stone. However, these jobs are based in Kansas at the same address that was previously listed for MacFarlane Group. Doc. 280-2 at 7.

         ix. A WL II 's Lending Activities in Virginia

         One of the plaintiffs, Royce Solomon ("Mr. Solomon"), is a resident of Virginia who applied online for a loan from AWL II on or about December 19, 2016. Doc. 79-1 ("Solomon Loan Agreement"). The annual percentage rate for Mr. Solomon's loan is 726.13%, which is well above the maximum interest rate cap of 12% provided by Virginia law. Id; Am. Compl. ¶¶ 139, 142. Plaintiffs allege that neither American Web Loan nor any other Defendant has obtained a consumer finance license from Virginia. They further allege that no Defendant has received an exemption from Virginia's interest rate cap. Am. Compl. ¶¶ 144. Therefore, unless AWL Defendants are entitled to sovereign immunity, or tribal law is applicable to the interest rate in the loan agreement, [12] they are subject to suit for the violations alleged in the Amended Complaint. Defendants Curry and Sol may also be subject to suit for their actions as agents of AWL II.

         A. Discussion

         i. Tribal Sovereign Immunity

         Indian tribes are federally recognized sovereigns that possess, subject to Congressional action, "common-law immunity from suit traditionally enjoyed by sovereign powers." Michigan v. Bay Mills Indian Cmty.. 572 U.S. 782, 788 (2014) (internal quotations omitted). This immunity applies to commercial activities, even when they take place off tribal lands. Id. at 790 (citing Kiowa, 523 U.S. at 758). "Tribal sovereign immunity may extend to subdivisions of a tribe, including those engaged in economic activities, provided that the relationship between the tribe and the entity is sufficiently close to properly permit the entity to share in the tribe's immunity." Breakthrough Met. Group. Inc. v. Chukchansi Gold Casino and Resort. 629 F.3d 1173, 1183 (10th Cir. 2010); see also Thomas v. Dugan. 168 F.3d 483 (4th Cir. 1998) (unpublished opinion) (table decision) ("Tribal entities and individual tribal officers acting within their representative capacity within the scope of their authority are also shielded by sovereign immunity.").

         To determine whether a commercial entity's relationship is sufficiently close to permit the entity to share the tribe's immunity, thereby acting as the "arm of the tribe," several courts have applied the factors set forth by the Tenth Circuit in Breakthrough Management. 629 F.3d at 1187; see also White v. Univ. of California. 765 F.3d 1010, 1025 (9th Cir. 2014) (applying Breakthrough factors); Williams v. Big Picture Loans. LLC. 329 F.Supp.3d 248, 269 (E.D. Va. 2018) (applying Breakthrough factors to determine whether tribal sovereign immunity extended to an alleged "arm of the tribe"); Howard v. Plain Green. LLC. 2017 WL 3669565 (E.D. Va. Aug. 7, 2017), report and recommendation adopted. 2017 WL 3669096 (E.D. Va. Aug. 24, 2017) (same). Among these factors are "(1) the method of creation of the economic entities; (2) their purpose; (3) their structure, ownership, and management, including the amount of control the tribe has over the entities; (4) the tribe's intent with respect to the sharing of its sovereign immunity ... (5) the financial relationship between the tribe and the entities;" and (6) "the policies underlying tribal sovereign immunity and its connection to tribal economic development, and whether these policies are served by granting immunity to the economic entities." Id. Put simply, the Court must determine whether a tribal entity is "analogous to a governmental agency, which should benefit from the defense of sovereign immunity" or whether it is more like "[a] commercial business enterprise, instituted solely for the purpose of generating profits for [its] private owners." Id. at 1184 (internal quotation and citation omitted).

         ii. Functional ...


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