Deborah Jackson v. Payday Financial, LLC

In the

United States Court of Appeals

For the Seventh Circuit

No. 12-2617

DEBORAH JACKSON, ET AL.,

Plaintiffs-Appellants,

v.

PAYDAY FINANCIAL, LLC, ET AL.,

Defendants-Appellees.

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 1:11-cv-09288 — Charles P. Kocoras, Judge.

ARGUED JANUARY 22, 2013 — DECIDED AUGUST 22, 2014

Before RIPPLE and ROVNER, Circuit Judges, and BARKER,

District Judge.*

RIPPLE, Circuit Judge. Deborah Jackson, Linda Gonnella, and

James Binkowski (collectively “the Plaintiffs”) initially brought

this action in Illinois state court against Payday Financial, LLC,

*

The Honorable Sarah Evans Barker, of the United States District Court for

the Southern District of Indiana, sitting by designation.

2 No. 12-2617

and other defendant entities owned by, or doing business with,

Martin A. Webb, an enrolled member of the Cheyenne River

Sioux Tribe and also a named defendant (collectively “the Loan

Entities” or “the Defendants”). The Plaintiffs alleged violations

of Illinois civil and criminal statutes related to loans that they

had received from the Loan Entities. After the Loan Entities

removed the case to the district court, that court granted the

Loan Entities’ motion to dismiss for improper venue under

Federal Rule of Civil Procedure 12(b)(3). It held that the loan

agreements required that all disputes be resolved through

arbitration conducted by the Cheyenne River Sioux Tribe on

the Cheyenne River Sioux Tribe Reservation, located within the

geographic boundaries of South Dakota. The Plaintiffs timely

appealed.

Following oral argument, we ordered a limited remand to

the district court for further factual findings concerning

(1) whether tribal law was readily available to the litigants and

(2) whether arbitration under the auspices of the

Cheyenne River Sioux Tribe, as set forth in the loan docu-

ments, was available to the parties. The district court con-

cluded that, although the tribal law could be ascertained, the

arbitral mechanism detailed in the agreement did not exist.

Based on these findings, we now conclude that the Plain-

tiffs’ action should not have been dismissed because the

arbitral mechanism specified in the agreement is illusory. We

also cannot accept the Loan Entities’ alternative argument for

upholding the district court’s dismissal: that the loan docu-

ments require that any litigation be conducted by a tribal court

on the Cheyenne River Sioux Tribe Reservation. As the

Supreme Court has explained, most recently in Plains Com-

No. 12-2617 3

merce Bank v. Long Family Land & Cattle Co., 554 U.S. 316 (2008),

tribal courts have a unique, limited jurisdiction that does not

extend generally to the regulation of nontribal members whose

actions do not implicate the sovereignty of the tribe or the

regulation of tribal lands. The Loan Entities have not estab-

lished a colorable claim of tribal jurisdiction, and, therefore,

exhaustion in tribal courts is not required. Accordingly, we

cannot uphold the district court’s dismissal on this alternative

basis.

I

BACKGROUND

A.

The Loan Entities maintain several websites that offer

small, high-interest loans to customers. The entire loan

transaction is completed online; a potential customer applies

for, and agrees to, the loan terms from his computer. Some

loan agreements are assigned to CashCall, Inc. (“CashCall”), a

California corporation, after they are executed and funds are

advanced.

Each plaintiff applied for and received a $2,525 loan

through one of the websites belonging to Mr. Webb’s entities.

Their loan agreements are nearly identical. Each agreement

indicates that the plaintiff will pay approximately 139% in

interest each year and that a $2,525 loan will cost approxi-

mately $8,392. The loan agreements recite that they are

“governed by the Indian Commerce Clause of the Constitution

of the United States of America and the laws of the

4 No. 12-2617

Cheyenne River Sioux Tribe” and are not subject “to the laws

of any state.”1 Under the terms of the agreement, unless the

plaintiff opts out within sixty days, any disputes arising from

the agreement “will be resolved by Arbitration, which shall be

conducted by the Cheyenne River Sioux Tribal Nation by an

authorized representative in accordance with its consumer

dispute rules and the terms of this Agreement.”2 Arbitration

will be conducted by either “(i) a Tribal Elder, or (ii) a panel of

three (3) members of the Tribal Council.”3 The loan agreements

further provide that the Loan Entities will pay the filing fee

and any fees charged by the arbitrator; the loan consumer does

not have to travel to the reservation for arbitration; and the

loan consumer may participate in arbitration by phone or

videoconference. The agreements with Ms. Jackson and

Mr. Binkowski also provide that the contract “is subject solely

to the exclusive laws and jurisdiction of the Cheyenne River

Sioux Tribe, Cheyenne River Indian Reservation.”4

Ms. Gonnella’s agreement does not contain similar language.

1

R.14-1 at 2; see also id. at 2 (“By executing this Loan Agreement, you, the

borrower, hereby acknowledge and consent to be bound to the terms of this

Loan Agreement, consent to the sole subject matter and personal jurisdic-

tion of the Cheyenne River Sioux Tribal Court, and further agree that no

other state or federal law or regulation shall apply to this Loan Agreement,

its enforcement or interpretation.”).

2

Id. at 5.

3

Id.

4

Id. at 2 (emphasis added) (bolding in original omitted); see also R.14-8 at

23.

No. 12-2617 5

The Plaintiffs executed their loan agreements in 2010 and

2011, received loan funds and made payments on the loans.

The record does not indicate whether any of the Plaintiffs have

defaulted on the loans.

B.

The Plaintiffs initially brought this action in Illinois state

court and alleged violations of Illinois civil and criminal usury

statutes as well as the Illinois Consumer Fraud and Deceptive

Business Practices Act, 815 ILCS 505/1 et seq. They sought,

among other relief, restitution, statutory damages, litigation

costs, an injunction precluding the Loan Entities from further

lending to Illinois residents, and a declaration that the arbitra-

tion clauses contained in the loan agreements are not enforce-

able. The Loan Entities removed the action to federal court;

they then moved to dismiss for improper venue under Federal

Rule of Civil Procedure 12(b)(3) on the ground that the

agreements required arbitration on the reservation. In reply,

the Plaintiffs submitted that the agreements were void and

thus the arbitration clauses were unenforceable. They addition-

ally had argued that they executed the loan agreements under

duress and that Illinois public policy precluded enforcement of

the arbitration clause.

The district court dismissed the case for improper venue. It

determined that (1) “the alleged illegality of the Loan Agree-

ments has no bearing on the validity of the forum selection

clause”; (2) the Plaintiffs’ agreement to arbitrate was not made

under duress; and (3) the Plaintiffs failed to show “that Illinois’

strong public policy in favor of enforcing its usury and

6 No. 12-2617

consumer protection laws precludes enforcement of the forum

selection provision.”5

The Plaintiffs timely appealed. After oral argument, we

determined that several factual matters critical to our resolu-

tion of the issues on appeal should be addressed in the first

instance by the district court:

1. Whether the Cheyenne River Sioux Tribe has

applicable tribal law readily available to the

public and, if so, under what conditions; and

2. Whether the Cheyenne River Sioux Tribe has

an authorized arbitration mechanism available

to the parties and whether the arbitrator and

method of arbitration required under the con-

tract is actually available.[6]

In the subsequent proceedings before the district court, the

parties submitted arguments and documentary evidence in

support of their respective positions. After considering this

evidence, the district court found that the first inquiry could be

answered in the affirmative. The court observed that “[e]ach

party was able to secure a copy of the Tribal Law” and there-

fore concluded that “the law c[ould] be acquired by reasonable

means.”7 Addressing our second inquiry, the district court

concluded that “[i]t is abundantly clear that, on the present

5

R.65 at 6, 7.

6

R.95 at 1.

7

Id. at 2.

No. 12-2617 7

record, the answer to the second question is a resounding no.”8

The court noted that, other than its disagreement with the

Plaintiffs as to the availability of tribal law, the Plaintiffs’

submission had “fairly describe[d] what the facts show”;9

included within that submission was the statement that

“[t]ribal leadership … have virtually no experience in handling

claims made against defendants through private arbitration.”10

According to the court, “[t]he intrusion of the Cheyenne River

Sioux Tribal Nation into the contractual arbitration provision

appear[ed] to be merely an attempt to escape otherwise

applicable limits on interest charges. As such, the promise of

a meaningful and fairly conducted arbitration [wa]s a sham

and an illusion.”11

In reaching its conclusion, the district court examined the

manner in which an arbitrator had been selected in a similar

8

Id. at 5–6.

9

Id. at 6.

10

R.82 at 8. Although appearing in the Plaintiffs’ statement of relevant

facts, the documentation supporting this statement actually was supplied

by the Loan Entities. The Loan Entities submitted a letter from a Media-

tor/Magistrate of the Cheyenne River Sioux Tribe stating that “the

governing authority does not authorize Arbitration,” R.83-5 at 2 (Statement

of Magistrate Mona R. Demery, Cheyenne River Sioux Tribal Court), and

a later, clarifying statement from the same individual stating that

“[a]rbitration, as in a contractual agreement, is permissible. However, the

Court does not involve itself in the hiring of the arbitrator or setting dates

or times for the parties.” R.83-7 at 2.

11

R.95 at 6.

8 No. 12-2617

dispute being litigated in the United States District Court for

the Southern District of Florida. See Inetianbor v. CashCall, Inc.,

962 F. Supp. 2d 1303 (S.D. Fla. 2013). The district court ob-

served:

The arbitrator selected in the Inetianbor case was

Robert Chasing Hawk, a Tribal Elder. He was

personally selected by Martin Webb, the man who

owns and operates the Webb entities which are run

as a common enterprise. Mr. Webb is himself a

member of the Tribe. Although denying any preex-

isting relationship with either party in the case,

Robert Chasing Hawk is the father of

Shannon Chasing Hawk. Robert Chasing Hawk has

acknowledged that his daughter worked for one of

the companies run by Martin Webb.

Mr. Chasing Hawk is not an attorney and has not

been admitted to the practice of law either in

South Dakota or the court of the Cheyenne River

Sioux Tribal Nation. He has not had any training as

an arbitrator and the sole basis of his selection was

because he was a Tribal Elder.

Black’s Law Dictionary, DeLuxe Fourth Edition,

defines “arbitrator” as “a private, disinterested

person, chosen by the parties to a disputed question,

for the purpose of hearing their contention, and

giving judgment between them; to whose decision

(award) the litigants submit themselves either

voluntarily, or, in some cases, compulsorily by order

of a court.” Freedom from bias and prejudice is a

No. 12-2617 9

stated criteria of the American Arbitration Associa-

tion’s Criteria to serve as an arbitrator. Similar is

JAM’s Arbitrators Ethics Guidelines which require[]

freedom from any appearance of a conflict of inter-

est. Illinois Supreme Court Rule 62 states, in part,

that “a judge should respect and comply with the

law and should conduct himself or herself at all

time[s] in a manner that promotes public confidence

in the integrity and impartiality of the judiciary. A

judge should not allow the judge’s family, social or

other relationships to influence the judge’s judicial

conduct or judgment.” It should be no less for an

arbitrator.

The selection of Robert Chasing Hawk as the

arbitrator in the only comparable case is instructive.

No arbitration award could ever stand in the instant

case if an arbitrator was similarly selected, nor could

it satisfy the concept of a “method of arbitration”

available to both parties. The selection of

Chasing Hawk in the Inetianbor case was a purely

subjective selection by only one of the parties to the

arbitration. The process was not “methodized” in

any reasonable sense of the word. Webb and Chas-

ing Hawk are members of the same tribe. The

Plaintiffs are not. The employment by Webb of the

arbitrator’s daughter cannot be ignored. The con-

duct permitted by the arbitration provisions in this

10 No. 12-2617

case could never satisfy the straightforward defini-

tion in Black’s Law Dictionary.[12]

The parties submitted supplemental briefs in response to

the district court’s findings.13

II

DISCUSSION

A.

We now turn to the merits of the Plaintiffs’ appeal and

begin by examining our jurisdiction and the applicable

standard of review.

1.

The jurisdiction of the district court was premised on the

Class Action Fairness Act. See 28 U.S.C. § 1332(d). Under the

terms of that statute,

The district courts shall have original jurisdiction

of any civil action in which the matter in controversy

12

R.95 at 3–4.

13

At our invitation, the Federal Trade Commission and the Attorney

General of Illinois submitted briefs as amici curiae. See Brief for the Federal

Trade Commission as Amicus Curiae [hereinafter FTC Br.]; Brief for the

Illinois Attorney General as Amicus Curiae Supporting Appellants

[hereinafter Illinois Att’y Gen. Br.]. The court deeply appreciates their

assistance in this matter.

No. 12-2617 11

exceeds the sum or value of $5,000,000, exclusive of

interest and costs, and is a class action in which—

(A) any member of a class of plaintiffs is a

citizen of a State different from any defendant;

(B) any member of a class of plaintiffs is a

foreign state or a citizen or subject of a foreign

state and any defendant is a citizen of a State; or

(C) any member of a class of plaintiffs is a

citizen of a State and any defendant is a foreign

state or a citizen or subject of a foreign state.

Id. § 1332(d)(2). Another provision of the Act forbids a district

court from exercising jurisdiction if the plaintiff class numbers

less than one hundred. See id. § 1332(d)(5).

In this putative class action, the Plaintiffs are all citizens of

Illinois who have borrowed money at usurious rates from the

Loan Entities. According to the Loan Entities’ removal papers,

they have made loans to over one hundred individuals in

Illinois.

Turning to the requirements for the Defendants, Mr. Webb

is an enrolled member of the Cheyenne River Sioux Tribe and

resides on its reservation. Mr. Webb is the sole member of the

majority of the named entities.14 Mr. Webb’s entities are all

14

The named defendants that belong to Mr. Webb are: Payday Financial,

LLC; Western Sky Financial, LLC; Great Sky Finance, LLC; Red Stone

Financial, LLC; Management Systems, LLC; 24-7 Cash Direct, LLC; Red

River Ventures, LLC; High Country Ventures, LLC; and Financial Solutions,

LLC.

12 No. 12-2617

limited liability companies organized under the laws of

South Dakota15 and have the same business address in

Timber Lake, South Dakota, which is within the reservation.

Defendant CashCall is a California corporation that purchases

loans from Mr. Webb’s companies, but is otherwise uncon-

nected to Mr. Webb.

The threshold amount in controversy also is met. In an

affidavit submitted with the Loan Entities’ removal papers,

Mr. Webb states that he “ha[s] knowledge of and ready access

to the business records of the [Loan Entities]” and that he

examined the data from those records.16 According to

Mr. Webb’s review of those records, there were “substantially

more than 100 individuals” making up the putative class and

“the total of all amounts collected from putative class members

15

The loan agreements state that Western Sky Financial is “authorized by

the laws of the Cheyenne River Sioux Tribal Nation.” R.14-1 at 2. In their

removal papers, however, the Defendants state that the Loan Entities “were

all formed under the laws of South Dakota.” R.1 at 4, ¶10. Similarly, the

Plaintiffs’ jurisdictional statement asserts that the lenders controlled by

Mr. Webb “are chartered under South Dakota law as limited liability

companies” and “are South Dakota Citizens,” Appellants’ Br. 1–2; for their

part, the Defendants agreed that the Plaintiffs’ jurisdictional statement was

“complete and correct,” Appellees’ Br. 1.

16

R.1-1 at 2, ¶5. Our case law requires that the removing defendant, as the

proponent of jurisdiction, show “by a preponderance of the evidence facts

that suggest the amount-in-controversy requirement is met.” Oshana v.

Coca-Cola Co., 472 F.3d 506, 511 (7th Cir. 2006). Here, Mr. Webb’s statement

is based both on personal knowledge and also on his review of the

applicable records. This evidence is not contested by the Plaintiffs.

No. 12-2617 13

and cancellation of all outstanding balances for these same

individuals significantly exceeds $5,000,000.”17

Our appellate jurisdiction is premised upon 28 U.S.C.

§ 1291, which gives us jurisdiction over the final decisions of

the district courts. It is clear that the decision of the district

court granting the Defendants’ motion to dismiss for improper

venue was a final decision of that court. Brady v. Sullivan, 893

F.2d 872, 876 n.8 (7th Cir. 1989) (“[W]hen the dismissal is for

want of jurisdiction, either of the person or subject matter, or

because of improper venue, the judgment is final and may be

appealed.” (internal quotation marks omitted)).

2.

The loan agreements’ forum selection clause was the basis

for the district court’s dismissal for improper venue.18 An

agreement to arbitrate is a type of forum selection clause. See

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.

614, 630–31 (1985) (treating an arbitration clause in an interna-

tional agreement as it would other “freely negotiated contrac-

tual choice-of-forum provisions”); Sherwood v. Marquette

Transp. Co., 587 F.3d 841, 844 (7th Cir. 2009) (“An arbitration

agreement is a specialized forum-selection clause.”).

17

R.1–1 at 2, ¶7.

18

The loan agreements require that all “[d]ispute[s] … be resolved by

Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal

Nation by an authorized representative in accordance with its consumer

dispute rules and the terms of this Agreement.” R.14-1 at 5.

14 No. 12-2617

The parties agree that our review of the enforceability of a

forum selection clause is de novo. See Cont’l Ins. Co. v. M/V

Orsula, 354 F.3d 603, 607 (7th Cir. 2003). They disagree,

however, as to whether the Plaintiffs are entitled to inferences

in their favor. In Faulkenberg v. CB Tax Franchise Systems, LP,

637 F.3d 801, 806 (7th Cir. 2011), we stated that in reviewing a

district court’s grant of a Rule 12(b)(3) motion, reasonable

inferences from the facts should be construed in the plaintiffs’

favor. This approach is consistent with that of other courts of

appeals and commentators.19

19

See Petersen v. Boeing Co., 715 F.3d 276, 279 (9th Cir. 2013) (per curiam)

(stating that, in reviewing a Rule 12(b)(3) motion, a court “must draw all

reasonable inferences in favor of the non-moving party and resolve all

factual conflicts in favor of the nonmoving party” (internal quotation marks

omitted)); TradeComet.com LLC v. Google, Inc., 647 F.3d 472, 475 (2d Cir. 2011)

(“We review de novo a district court’s dismissal of a complaint pursuant to

Rules 12(b)(1) and 12(b)(3), viewing all facts in the light most favorable to

the non-moving party.”); Ambraco, Inc. v. Bossclip B.V., 570 F.3d 233, 237 (5th

Cir. 2009) (“Our de novo review under either Rule 12(b)(1) or Rule 12(b)(3)

requires us to view all the facts in a light most favorable to the plaintiff.”

(internal quotation marks omitted)); 5B Charles Alan Wright, et al., Federal

Practice & Procedure § 1352, at 324 (3d ed. 2004).

The Loan Entities argue that Faulkenberg v. CB Tax Franchise Systems, LP,

637 F.3d 801 (7th Cir. 2011), is “an outlier” and note that “Faulkenberg itself

cites Kochert v. Adagen Med. Int’l, Inc. for the standard of review, but Kochert

makes no mention of drawing facts or inferences in any party’s favor. 491

F.3d 674, 677 (7th Cir. 2007).” Appellees’ Br. 8. We are not persuaded.

Faulkenberg cites Kochert for the proposition that a district court’s dismissal

under Rule 12(b)(3) is subject to de novo review; the fact that Kochert does

not mention inferences in the non-moving party’s favor does not render

Faulkenberg’s statement an outlier, as demonstrated by the number of cases

from our sister circuits that clearly state this proposition.

No. 12-2617 15

B.

As the Supreme Court noted in Rent-A-Center, West, Inc. v.

Jackson, 561 U.S. 63, 67 (2010), the Federal Arbitration Act

(“FAA”) reflects the overarching principle that arbitration is a

matter of contract. As a general rule, courts must “‘rigorously

enforce’” arbitration agreements according to their terms. Am.

Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2309

(2013) (quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213,

221 (1985)). Having determined that our jurisdiction is secure

and having examined the standard of review question, we now

turn to an examination of the validity of the forum selection

clause, the contractual provision at issue in this case.

1.

In addressing this question, we first must identify the law

that governs the validity of the arbitration clause, which, as we

have noted, is a specialized forum selection clause. Here, the

district court’s jurisdiction over the Plaintiffs’ claims is based

on the parties’ diversity of citizenship.20 As a general rule, “[i]n

diversity cases, we look to the substantive law of the state in

which the district court sits, Erie R. Co. v. Tompkins, 304 U.S. 64,

20

The Class Action Fairness Act requires “minimal diversity,” see, e.g., 28

U.S.C. § 1332(d)(2)(A) (permitting district courts to exercise jurisdiction over

class actions in which “any member of a class of plaintiffs is a citizen of a

State different from any defendant”); it therefore does not run afoul of the

constitutional diversity requirement, see State Farm Fire & Casualty Co. v.

Tashire, 386 U.S. 523, 531 (1967) (“Article III poses no obstacle to the

legislative extension of federal jurisdiction, founded on diversity, so long

as any two adverse parties are not co-citizens.”).

16 No. 12-2617

78 (1938), including choice of law rules, Klaxon Co. v. Stentor

Elec. Mfg., 313 U.S. 487, 496–97 (1941).” Wachovia Sec., LLC v.

Banco Panamericano, Inc., 674 F.3d 743, 751 (7th Cir. 2012)

(parallel citations omitted).

When applied to the circumstances here, however, we are

without clear guidance from the Supreme Court: It has not yet

decided “the Erie issue of which law governs when,” as here,

“a federal court, sitting in diversity, evaluates a forum selection

clause in the absence of a controlling federal statute.” Wong v.

PartyGaming Ltd., 589 F.3d 821, 826 (6th Cir. 2009). At present,

the majority of federal circuits hold “that the enforceability of

a forum selection clause implicates federal procedure and

should therefore be governed by federal law.” Id. at 827 & n.5

(collecting cases);21 see also 14D Charles Alan Wright, et al.,

Federal Practice & Procedure § 3803.1, at 107–12 (4th ed. 2014).

We have taken a different approach. In Abbott Laboratories v.

Takeda Pharmaceutical Co., 476 F.3d 421 (7th Cir. 2007), we

stated:

21

See, e.g., Doe 1 v. AOL LLC, 552 F.3d 1077, 1081 (9th Cir. 2009) (“We apply

federal law to the interpretation of the forum selection clause.”); Phillips v.

Audio Active Ltd., 494 F.3d 378, 384 (2d Cir. 2007) (“[T]he rule set out in M/S

Bremen [v. Zapata Off-Shore Co., 407 U.S. 1 (1972),] applies to the question of

enforceability of an apparently governing forum selection clause, irrespec-

tive of whether a claim arises under federal or state law.”); P & S Bus.

Machs. v. Canon USA, Inc., 331 F.3d 804, 807 (11th Cir. 2003) (“Consideration

of whether to enforce a forum selection clause in diversity suit is governed

by federal law … .”). Most of these cases rest, at bottom, on the premise that

“[q]uestions of venue and the enforcement of forum selection clauses are

essentially procedural, rather than substantive, in nature.” Jones v. Weibrecht,

901 F.2d 17, 19 (2d Cir. 1990).

No. 12-2617 17

Simplicity argues for determining the validity and

meaning of a forum selection clause, in a case in

which interests other than those of the parties will

not be significantly affected by the choice of which

law is to control, by reference to the law of the

jurisdiction whose law governs the rest of the

contract in which the clause appears, rather than

making the court apply two different bodies of law

in the same case.

Id. at 423 (citations omitted). In contracts containing a choice of

law clause, therefore, the law designated in the choice of law

clause would be used to determine the validity of the forum

selection clause. See id.; IFC Credit Corp. v. United Bus. & Indus.

Fed. Credit Union, 512 F.3d 989, 991 (7th Cir. 2008) (“Abbott

Laboratories … held that the validity of a forum-selection clause

depends on the law of the jurisdiction whose rules will govern

the rest of the dispute.”).

Applying the rule in Abbott Laboratories, we look to the

choice of law clause in the loan agreements, which provides

that the agreements are “governed by the Indian Commerce

Clause of the Constitution of the United States of America and

the laws of the Cheyenne River Sioux Tribe.”22 Assuming the

validity of this choice of law provision,23 the Defendants have

22

R.14-1 at 4; see also id. at 2.

23

Both the Plaintiffs and the Attorney General of Illinois maintain that the

choice of law provision and the forum selection clause work in tandem to

create an unconscionable result. See Appellants’ Br. 13, 25; Illinois Att’y Gen.

(continued...)

18 No. 12-2617

23

(...continued)

Br. 22. We agree that a more-than-colorable argument can be made that the

loan agreements’ choice of law clause should not be enforced and that

Illinois law ought to govern the parties’ dispute.

The courts of Illinois will respect a choice of law clause if the contract is

valid and if the law chosen is not contrary to Illinois public policy. Thomas

v. Guardsmark, 381 F.3d 701, 705 (7th Cir. 2004). Here, the Plaintiffs and

amici maintain that several provisions of the loan agreements violate Illinois

public policy. First, the Attorney General argues that “Illinois has a strong

public policy against enforcing provisions requiring plaintiffs to adjudicate

claims in a distant, inconvenient forum where, as in this case, the clause is

embedded in contracts ‘involving unsophisticated consumers in small

transactions in the marketplace without any real opportunity to consider

[whether to accept the clause].’” Illinois Att’y Gen. Br. 12 (alteration in

original) (quoting IFC Credit Corp. v. Rieker Shoe Corp., 881 N.E.2d 382, 394

(Ill. App. Ct. 2007)); see also infra pp. 22–26. The Plaintiffs maintain that the

contracts violate Illinois public policy against usury because they exceed the

allowable interest rate under state law. See 815 ILCS 205/4(1) (stating that

“in all written contracts it shall be lawful for the parties to stipulate or agree

[to] 9% per annum, or any less sum of interest”). Small consumer loans,

however, are exempted from this requirement, to the extent that they

comply with the State’s Consumer Installment Loan Act. See id. (“It is lawful

to receive or to contract to receive and collect interest and charges as

authorized by this Act and as authorized by the Consumer Installment Loan

Act … .”).

The Defendants seize on this exception and note that, when the Plaintiffs

entered into the loan agreements, “Illinois law imposed no cap on the

interest rate allowed for small consumer loans,” and, when the General

Assembly amended the law, it imposed a maximum rate of ninety-nine

percent. Reply Brief of Defendants-Appellees to Briefs of Amici Curiae

[hereinafter Defendants’ Reply Br.] 21. Defendants cannot invoke this

exception, however, because they are not licensed providers as required by

205 ILCS 670/1; moreover, they do not maintain that they otherwise have

complied with the consumer-protection provisions of the Consumer

(continued...)

No. 12-2617 19

informed us in their supplemental briefing that they “have

been unable to locate tribal precedent addressing forum

selection clauses.”24 In such circumstances, they note, tribal

courts borrow from “federal law to stand in or amplify tribal

law where necessary.”25 We therefore turn to the federal

guidelines for determining the validity of a forum selection

clause.

We have held that “[t]he presumptive validity of a forum

selection clause can be overcome if the resisting party can

show it is ‘unreasonable under the circumstances.’” Bonny v.

Soc’y of Lloyd’s, 3 F.3d 156, 160 (7th Cir. 1993) (quoting M/S

Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972)). Relying on

the Court’s decisions in M/S Bremen and Carnival Cruise Lines,

Inc. v. Shute, 499 U.S. 585 (1991), we have identified three sets

of circumstances that will render a forum selection clause

“unreasonable”:

23

(...continued)

Installment Loan Act, see, e.g., 205 ILCS 670/14 (prohibiting a lender from

“pledg[ing], hypothecat[ing] or sell[ing] a note entered into under the

provisions of this Act by an obligor except to another licensee under this

Act”). The Loan Entities tacitly admit that the licensure requirements may

call the contract into question, but maintain that “[w]hether the licensure

requirements cited by Plaintiffs apply here must still be decided[ ]in the

forum the Parties agreed to.” Appellees’ Br. 19. n.12. We need not decide

the question of what law governs the validity and interpretation of the loan

agreements, however, because whether federal, tribal, or Illinois law

applies, the same result obtains. See infra pp. 19–26.

24

Defendants’ Reply Br. 22.

25

Id. (internal quotation marks omitted).

20 No. 12-2617

(1) if their incorporation into the contract was the

result of fraud, undue influence or overweening

bargaining power; (2) if the selected forum is so

“gravely difficult and inconvenient that [the com-

plaining party] will for all practical purposes be

deprived of its day in court[]”; or (3) if enforcement

of the clauses would contravene a strong public

policy of the forum in which the suit is brought,

declared by statute or judicial decision.

Bonny, 3 F.3d at 160 (first alteration in original) (citations

omitted) (quoting M/S Bremen, 407 U.S. at 18).

Applying this standard, we believe enforcement of the

forum selection clause contained in the loan agreements is

unreasonable. The loan agreements specify that disputes

arising from the agreement “will be resolved by Arbitration,

which shall be conducted by the Cheyenne River Sioux Tribal

Nation by an authorized representative in accordance with its

consumer dispute rules and the terms of this Agreement.”26

Arbitration will be conducted by “either (i) a Tribal Elder, or

(ii) a panel of three (3) members of the Tribal Council.”27 The

record clearly establishes, however, that such a forum does not

exist: The Cheyenne River Sioux Tribe “does not authorize

Arbitration,”28 it “does not involve itself in the hiring of …

26

R.14-1 at 5.

27

Id.

28

R.83-5 at 2.

No. 12-2617 21

arbitrator[s],”29 and it does not have consumer dispute rules.30

We have no hesitation concluding that an illusory forum is

unreasonable under M/S Bremen.31

29

R.83-7 at 2.

30

Defendants’ Reply Br. 4 (“Nor does it matter that the CRST does not have

any ‘consumer dispute rules,’ which the Agreements presuppose.”).

31

Cf. BP Marine Ams. v. Geostar Shipping Co. N.V., No. 94–2118, 1995 WL

131056, at *4 (E.D. La. Mar. 22, 1995) (applying M/S Bremen and refusing to

enforce a forum selection clause on the ground that the designated forum,

“High Court in New York,” did not exist).

In their supplemental submission, the Defendants try to characterize the

Illinois Attorney General’s amicus brief as stating that “under federal law

(and thus tribal) law, the forum selection clause is valid.” Defendants’ Reply

Br. 23. The Defendants misread the Attorney General’s submission. In her

brief to this court, the Attorney General reviewed our decision in IFC Credit

Corp. v. Aliano Brothers General Contractors, 437 F.3d 606 (7th Cir. 2006),

which noted that

“Illinois law on validity is more lenient toward the [party

challenging the forum selection clause] than the federal

law when there is significant inequality of size or commer-

cial sophistication between the parties, especially if the

transaction is so small that the unsophisticated party might

not be expected to be careful about reading boilerplate

provisions that would come into play only in the event of

a lawsuit, normally a remote possibility.”

Illinois Att’y Gen. Br. 13 (alteration in original) (quoting IFC Credit Corp.,

437 F.3d at 611). The Attorney General then proceeds to argue that, under

Illinois law, the choice of forum provision is invalid. The Attorney General

does not analyze the choice of forum provision under federal law, nor does

(continued...)

22 No. 12-2617

If, however, the choice of law provision is invalid,32 Illinois

law would govern the question of the validity of the choice of

forum provision. Illinois, like many states, has used M/S

Bremen and its touchstone concept of reasonableness to

evaluate the enforceability of a forum selection clause. See

Calanca v. D & S Mfg. Co., 510 N.E.2d 21, 23 (Ill. App. Ct. 1987).

Under Illinois law, “[a] forum selection clause in a contract

is prima facie valid and should be enforced unless the opposing

party shows that enforcement would be unreasonable under

the circumstances.” IFC Credit Corp. v. Rieker Shoe Corp., 881

N.E.2d 382, 389 (Ill. App. Ct. 2007). This is true, however, only

of “agreement[s] reached through arm’s-length negotiation

between experienced and sophisticated business people”; “a

forum selection clause contained in boilerplate language

indicates unequal bargaining power, and the significance of the

provision is greatly reduced.” Id.

In an effort to make more concrete the standard of reason-

ableness articulated in M/S Bremen, Illinois courts typically

have looked to six factors:

(1) the law that governs the formation and construc-

tion of the contract; (2) the residency of the parties;

(3) the place of execution and/or performance of the

contract; (4) the location of the parties and their

witnesses; (5) the inconvenience to the parties of any

31

(...continued)

she make any predictions about what the outcome of such an analysis might

be.

32

See supra note 23.

No. 12-2617 23

particular location; and (6) whether the clause was

equally bargained for.

Id. at 389–90 (citing Dace Int’l, Inc. v. Apple Computer, Inc., 655

N.E.2d 974, 977 (Ill. App. Ct. 1995)). Even assuming that tribal

law governs the formation and construction of the contract,

another key element weighs against enforcement of the clause,

namely that the clause was not the product of equal bargain-

ing: It imposes on unsophisticated consumers a nonexistent

forum for resolution of disputes in a location that is remote and

inconvenient.

Although helpful in evaluating the mine-run of forum

selection clauses that a court may encounter, these criteria are

ill-suited for evaluating the forum designated in these particu-

lar loan agreements. The factors set forth in IFC Credit Corp.

presuppose that the designated forum exists and is available to

resolve the underlying dispute. Such is not the case here.

We do find helpful, however, the closely allied yet distinct

concept of unconscionability. See Phoenix Ins. Co. v. Rosen, 949

N.E.2d 639, 647 (Ill. 2011). Under Illinois law, a contractual

provision may be unconscionable on either procedural or

substantive grounds. Razor v. Hyundai Motor Am., 854 N.E.2d

607, 622 (Ill. 2006). “Procedural unconscionability refers to a

situation where a term is so difficult to find, read, or under-

stand 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. “Factors to be considered in determin-

ing whether an agreement is procedurally unconscionable

include whether each party had the opportunity to understand

the terms of the contract, whether important terms were

24 No. 12-2617

hidden in a maze of fine print, and all of the circumstances

surrounding the formation of the contract.” Phoenix Ins. Co.,

949 N.E.2d at 647 (internal quotation marks omitted). Substan-

tive unconscionability, by contrast,

concerns the actual terms of the contract and exam-

ines the relative fairness of the obligations assumed.

… Indicative of substantive unconscionability are

contract terms so one-sided as to oppress or unfairly

surprise an innocent party, an overall imbalance in

the obligations and rights imposed by the bargain,

and significant cost-price disparity.

Kinkel v. Cingular Wireless LLC, 857 N.E.2d 250, 267 (Ill. 2006)

(internal quotation marks omitted). Like other contractual

provisions, forum selection clauses—even those designating

arbitral fora—are not immune from the general principle that

unconscionable contractual provisions are invalid.33

33

Potiyevskiy v. TM Transp., Inc., No. 1-13-1864, 2013 WL 6199949, at *7–10

(Ill. App. Ct. Nov. 25, 2013) (holding that arbitration agreement in

employment contract was substantively unconscionable because it required

a plaintiff to challenge individually each biweekly pay period during which

an allegedly improper deduction occurred, it required arbitration of

disputes in Illinois despite an employee’s state of residence, and the

arbitration fees made claims cost-prohibitive); Timmerman v. Grain Exch.,

LLC, 915 N.E.2d 113, 120 (Ill. App. Ct. 2009) (holding that arbitration

provision was procedurally unconscionable where “[t]he contracts

themselves made no direct mention of arbitration,” and the rules that

incorporated the arbitration provision “were not set forth in the contracts,

nor had they been provided to or made available to the plaintiffs prior to

their entering into the contracts”).

No. 12-2617 25

The choice of forum provision at issue here is both proce-

durally and substantively unconscionable. Turning first to

procedural unconscionability, although the district court held

on remand that the substantive commercial law of the Chey-

enne River Sioux Tribe was reasonably ascertainable, it did not

reach this conclusion with respect to tribal rules for conducting

arbitrations. Indeed, the record establishes that such proce-

dures do not exist. The Tribe has neither a set of procedures for

the selection of arbitrators nor one for the conduct of arbitral

proceedings. Consequently, it was not possible for the Plain-

tiffs to ascertain the dispute resolution processes and rules to

which they were agreeing. Moreover, even if the described

arbitral forum were functional and its rules ascertainable, we

agree with the Federal Trade Commission that “[t]he inconsis-

tent language in the loan contracts, specifying both exclusive

Tribal Court jurisdiction and exclusive tribal arbitration

without reconciling those provisions, also ma[de] it difficult for

borrowers to understand exactly what form of dispute resolu-

tion they [we]re agreeing to.”34 Finally, the Loan Entities’

claims concerning the scope of tribal jurisdiction, as well as

their invocation of an irrelevant constitutional provision, “may

[have] induce[d] [the Plaintiffs] to believe, mistakenly, that

they ha[d] no choice but to accede to resolution of their

disputes on the Reservation.”35

With respect to substantive unconscionability, the dispute-

resolut io n me chanism set forth in the loan

34

FTC Br. 27.

35

Id.

26 No. 12-2617

agreements—“conducted by the Cheyenne River Sioux Tribal

Nation by an authorized representative in accordance with its

consumer dispute rules”36—did not exist. As the district court

“resounding[ly]” concluded, there simply was no prospect “of

a meaningful and fairly conducted arbitration”; instead, this

aspect of the loan agreements “[wa]s a sham and an illusion.”37

36

R.14-1 at 5.

37

R.95 at 6. Our conclusion would not change if we were to apply tribal

law as opposed to Illinois law, as urged by the Defendants. According to the

Defendants, the courts of the Cheyenne River Sioux Tribe would employ

“‘traditional contractual principles,’ including the Restatement,” to

determine if the forum selection provision were unconscionable. Defen-

dants’ Reply Br. 9. They explain that the Restatement, unlike Illinois law,

requires a showing of both procedural and substantive unconscionability.

However, as we already have demonstrated, the forum selection clause here

is both substantively and procedurally unconscionable.

We note that other courts have refused to honor agreements to arbitrate,

where the rules are inherently biased or are not formulated in good faith.

See, e.g., Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 940 (4th Cir. 1999) (“By

creating a sham system unworthy even of the name of arbitration, Hooters

completely failed in performing its contractual duty.”). Indeed, we have

refused to enforce an arbitration agreement where the obligation was so

one-sided as to make any genuine obligation illusory. Cf. Penn v. Ryan’s

Family Steak Houses, Inc., 269 F.3d 753, 756, 758–61 (7th Cir. 2001) (observing

that the agreement to arbitrate is “hopelessly vague and uncertain as to the

obligation EDS has undertaken” and concluding that, “[f]or all practical

purposes, EDS’s promise under this contract makes performance entirely optional

with the promisor” (emphasis added) (internal quotation marks omitted)).

No. 12-2617 27

2.

The Loan Entities nevertheless maintain that these state-

law-based shortcomings are irrelevant because Section 2 of the

Federal Arbitration Act “preempts arbitrator bias defenses

because such defenses are not applicable to all contracts.”38

They point out that section 2 of the FAA provides that arbitra-

tion clauses are “valid, irrevocable, and enforceable, save upon

such grounds as exist at law or in equity for the revocation of

any contract.” 9 U.S.C. § 2 (emphasis added). They then submit

that, because arbitrator bias is a “defense[] that appl[ies] only

to arbitration or that derive[s] [its] meaning from the fact that

an agreement to arbitrate is at issue,” AT&T Mobility LLC v.

Concepcion, 131 S. Ct. 1740, 1746 (2011) (emphasis added), it is

not applicable to “any contract” and is therefore preempted.

We cannot accept this argument. The arbitration clause here

is void not simply because of a strong possibility of arbitrator

bias, but because it provides that a decision is to be made

under a process that is a sham from stem to stern. Although

the contract language contemplates a process conducted under

the watchful eye of a legitimate governing tribal body, a

proceeding subject to such oversight simply is not a possibility.

The arbitrator is chosen in a manner to ensure partiality, but,

beyond this infirmity, the Tribe has no rules for the conduct of

the procedure. It hardly frustrates FAA provisions to void an

arbitration clause on the ground that it contemplates a pro-

ceeding for which the entity responsible for conducting the

proceeding has no rules, guidelines, or guarantees of fairness.

38

Defendants’ Reply Br. 5.

28 No. 12-2617

See Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 940 (4th Cir.

1999) (“By creating a sham system unworthy even of the name

of arbitration, Hooters completely failed in performing its

contractual duty.”); cf. Penn v. Ryan’s Family Steak Houses, Inc.,

269 F.3d 753, 756, 758–61 (7th Cir. 2001) (refusing to enforce an

arbitration clause that is “hopelessly vague and uncertain as to

the obligation EDS has undertaken” because it, “[f]or all

practical purposes, … makes performance entirely optional

with the promisor” (internal quotation marks omitted)).39

39

The Loan Entities also make the claim that, “[b]ecause Illinois enforces

adhesion contracts despite unconscionability claims, it may not use [the]

unconscionability doctrine to void arbitration provisions in those con-

tracts.” Defendants Reply Br. 6 (citing Koveleskie v. SBC Capital Mkts., Inc.,

167 F.3d 361, 366–67 (7th Cir. 1999)). Koveleskie does not support such a

sweeping conclusion. In Koveleskie, we commented that Illinois courts do

not consider disparity of bargaining power, standing alone, as a reason to

invalidate contracts. Consequently, “the disparity in the size of the parties

entering into the agreement … without some wrongful use of that power,

is not enough to render an arbitration agreement unenforceable.” 167 F.3d

at 367 (alteration in original) (internal quotation marks omitted). Here, as

we have discussed, the Loan Entities used the disparity in bargaining power

to impose on the Plaintiffs a dispute-resolution mechanism that does not

exist.

We also cannot accept the Loan Entities’ suggestion that the FAA

preempts Illinois’s rules on unconscionability with respect to the forum

selection clause because they have a “‘disproportionate impact on

arbitration agreements.’” Defendants’ Reply Br. 16 (quoting AT&T Mobility

LLC v. Concepcion, 131 S. Ct. 1740, 1747 (2011)). According to the Loan

Entities, subjecting arbitration agreements to unconscionability rules for

forum selection clauses “would give States free rein to gut the FAA by

labeling their policy applicable to ‘forum selection clauses’ rather than

arbitration provisions.” Id. at 17. However, because the Supreme Court has

(continued...)

No. 12-2617 29

The Loan Entities also contend that section 5 of the FAA

prevents our voiding the arbitration clause. That section

provides, in relevant part, that, “if for any other reason there

shall be a lapse in the naming of an arbitrator or arbitrators[,]

… the court shall designate and appoint an arbitrator or

arbitrators … who shall act under the said agreement with the

same force and effect as if he or they had been specifically

named therein.” 9 U.S.C. § 5.

Like the Loan Entities’ earlier argument, this submission

assumes that the arbitration provision’s only infirmity is the

disability of a particular arbitrator or class of arbitrators. Here,

however, the likelihood of a biased arbitrator is but the tip of

the iceberg. Although the arbitration provision contemplates

the involvement and supervision of the Cheyenne River Sioux

Tribe, the record establishes that the Tribe does not undertake

such activity. Furthermore, there are no rules in place for such

an arbitration. Under these circumstances, the court cannot

save the arbitral process simply by substituting an arbitrator.

This case is therefore distinctly different from the situation

that we faced in Green v. U.S. Cash Advance Illinois, LLC, 724

F.3d 787 (7th Cir. 2013). In Green, a lender moved to dismiss a

39

(...continued)

treated arbitration provisions as forum selection provisions, see Mitsubishi

Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 630–31 (1985)

(treating an arbitration clause in an international agreement as it would

other “freely negotiated contractual choice-of-forum provisions”), we

perceive no impediments in allowing states to apply their generally

applicable unconscionability rules to arbitration provisions in the same

manner they would apply those rules to clauses designating non-arbitral

fora.

30 No. 12-2617

plaintiff’s claims under the Truth in Lending Act on the

ground that the lending contract required submission of

disputes to “arbitration by one arbitrator by and under the

Code of Procedure of the National Arbitration Forum.” Id. at

788 (internal quotation marks omitted). The National Arbitra-

tion Forum, however, had stopped taking consumer cases for

arbitrations. The district court, therefore, denied the motion to

dismiss on the ground that “the identity of the Forum as the

arbitrator [wa]s ‘an integral part of the agreement’” and that

the arbitration provision was therefore void. Id. at 789. We

reversed. We noted that the language of the agreement called

for the arbitration to be conducted in accordance with the

National Arbitration Forum’s procedures, not necessarily

under its direct auspices. The district court, therefore, could

invoke section 5 of the FAA to appoint an arbitrator, who then

could “resolve this dispute using the procedures in the

National Arbitration Forum’s Code of Procedure.” Id. at 793.

In Green, we noted that, if the particular arbitration clause

before us had been shorn of all detail as to the number of

arbitrators, the identity of the arbitrators or the rules that the

arbitrators were to employ, the mere existence of the arbitra-

tion clause would have made it clear that the parties still

would have preferred to submit their dispute to arbitration. Id.

at 792–93.

Although such mutuality of intent might have been

apparent in the contractual relationship in Green, it is not at all

apparent in the situation before us today. The contract at issue

here contains a very atypical and carefully crafted arbitration

clause designed to lull the loan consumer into believing that,

although any dispute would be subject to an arbitration

No. 12-2617 31

proceeding in a distant forum, that proceeding nevertheless

would be under the aegis of a public body and conducted

under procedural rules approved by that body. The parties

might have chosen arbitration even if they could not have had

the arbitrator whom they had specified or even if the rules to

which they had stipulated were not available. But even if these

circumstances had been tolerable, a far more basic infirmity

would have remained: One party, namely the loan consumer,

would have been left without a basic protection and essential

part of his bargain—the auspices of a public entity of tribal

governance. The loan consumers did not agree to arbitration

under any and all circumstances, but only to arbitration under

carefully controlled circumstances—circumstances that never

existed and for which a substitute cannot be constructed.

In sum, the arbitration clause is both procedurally and

substantively unconscionable under Illinois law. It is procedur-

ally unconscionable because the Plaintiffs could not have

ascertained or understood the arbitration procedure to which

they were agreeing because it did not exist. It is substantively

unconscionable because it allowed the Loan Entities to manip-

ulate what purported to be a fair arbitration process by

selecting an arbitrator and proceeding according to nonexistent

rules. It is clearly “unreasonable” under the standard articu-

lated in M/S Bremen. Under such circumstances, the FAA does

not preempt state law, nor does it operate to permit the

creation, from scratch, of an alternate arbitral mechanism.

32 No. 12-2617

C.

Having concluded that the arbitration clause contained in

the loan agreements is unenforceable, we now turn to the

Loan Entities’ alternative argument for affirmance—that the

agreements’ forum selection clause requires any litigation to be

conducted in the courts of the Cheyenne River Sioux Tribe.

1.

“[T]he inherent sovereign powers of an Indian[40] tribe do

not extend to the activities of nonmembers of the tribe.”

Montana v. United States, 450 U.S. 544, 565 (1981). Nevertheless,

“Indian tribes retain inherent sovereign power to exercise some

forms of civil jurisdiction over non-Indians on their reserva-

tions, even on non-Indian fee lands.” Id. Recognizing this

limited right, the Court in Montana articulated two narrow

situations in which a tribe may exercise jurisdiction over

nonmembers: (1) “[a] tribe may regulate, through taxation,

licensing, or other means, the activities of nonmembers who

enter consensual relationships with the tribe or its members,

through commercial dealing, contracts, leases, or other

arrangements”; and (2) “[a] tribe may also retain inherent

power to exercise civil authority over the conduct of non-

Indians on fee lands within its reservation when that conduct

threatens or has some direct effect on the political integrity, the

economic security, or the health or welfare of the tribe.” Id. at

40

Throughout this opinion, we use the term “Indian” rather than “Native

American,” reflecting the fact that both tradition, governing statutes, and

cases follow that practice.

No. 12-2617 33

565, 566. The Loan Entities maintain that the tribal courts have

jurisdiction over the present dispute under the first exception.

The Loan Entities have not met their burden of establishing

tribal court jurisdiction over the Plaintiffs’ claims.41 We begin

with the Supreme Court’s initial observation in Montana that

tribal court jurisdiction over non-Indians is limited: “Indian

tribes retain inherent sovereign power to exercise some forms

of civil jurisdiction over non-Indians on their reservations, even on

non-Indian fee lands.” Id. at 565 (emphasis added). “[A] tribe’s

adjudicative jurisdiction does not exceed its legislative jurisdic-

tion”; therefore, if a tribe does not have the authority to

regulate an activity, the tribal court similarly lacks jurisdiction

to hear a claim based on that activity. Plains Commerce Bank v.

Long Family Land & Cattle Co., 554 U.S. 316, 330 (2008) (internal

quotation marks omitted).

In Plains Commerce Bank, the Court explicitly noted that the

nature of tribal court authority over non-Indians is circum-

scribed: “We have frequently noted, however, that the sover-

eignty that the Indian tribes retain is of a unique and limited

character. It centers on the land held by the tribe and on the tribal

members within the reservation.” Id. at 327 (emphasis added)

(citation omitted) (internal quotation marks omitted). In short,

“Montana and its progeny permit tribal regulation of nonmem-

41

Cf. Attorney’s Process & Investigation Servs., Inc. v. Sac & Fox Tribe of the

Miss. in Iowa, 609 F.3d 927, 936 (8th Cir. 2010) (“Because ‘efforts by a tribe

to regulate nonmembers … are presumptively invalid,’ the Tribe bears the

burden of showing that its assertion of jurisdiction falls within one of the

Montana exceptions.” (alteration in original) (quoting Plains Commerce Bank

v. Long Family Land & Cattle Co., 554 U.S. 316, 330 (2008))).

34 No. 12-2617

ber conduct inside the reservation that implicates the tribe’s

sovereign interests.” Id. at 332 (additional emphasis added).

Here, the Plaintiffs have not engaged in any activities inside

the reservation. They did not enter the reservation to apply for

the loans, negotiate the loans, or execute loan documents. They

applied for loans in Illinois by accessing a website. They made

payments on the loans and paid the financing charges from

Illinois. Because the Plaintiffs’ activities do not implicate the

sovereignty of the tribe over its land and its concomitant

authority to regulate the activity of nonmembers on that land,

the tribal courts do not have jurisdiction over the Plaintiffs’

claims.42

2.

We also are unpersuaded by the Defendants’ argument that

the Plaintiffs “consented to tribal jurisdiction.” Appellees’ Br.

37. As the Court has noted on more than one occasion, tribal

42

Because we rest our determination of tribal court jurisdiction on this

basis, we need not consider whether any of the Loan Entities would be

considered a member of the tribe for purposes of the first Montana

exception. See Appellees’ Br. 31.

We also note that, at several places in their submissions, the Loan Entities

suggest that the dispute concerns “on reservation” activities because that

is where Western Sky executed the contracts. See, e.g., Appellees’ Br. 36;

Defendants’ Reply Br. 24. The question of a tribal court’s subject matter

jurisdiction over a nonmember, however, is tethered to the nonmember’s

actions, specifically the nonmember’s actions on the tribal land. There simply

is no allegation here that the dispute involves activities of the Plaintiffs on

the reservation.

No. 12-2617 35

courts are not courts of general jurisdiction. See Nevada v. Hicks,

533 U.S. 353, 367 (2001). Moreover, a tribal court’s authority to

adjudicate claims involving nonmembers concerns its subject

matter jurisdiction, not personal jurisdiction. See id. n.8.

Therefore, a nonmember’s consent to tribal authority is not

sufficient to establish the jurisdiction of a tribal court. As the

Court explained in Plains Commerce Bank:

Tribal sovereignty, it should be remembered, is a

sovereignty outside the basic structure of the Consti-

tution. The Bill of Rights does not apply to Indian

tribes. Indian courts differ from traditional Ameri-

can courts in a number of significant respects. And

n o nmembe r s ha ve n o p a r t in t r ib a l

government—they have no say in the laws and

regulations that govern tribal territory. Conse-

quently, those laws and regulations may be fairly

imposed on nonmembers only if the nonmember

has consented, either expressly or by his actions.

Even then, the regulation must stem from the tribe’s

inherent sovereign authority to set conditions on entry,

preserve tribal self-government, or control internal

relations.

554 U.S. at 337 (emphasis added) (citations omitted) (internal

quotation marks omitted). The Loan Entities, however, have

made no showing that the present dispute implicates any

aspect of “the tribe’s inherent sovereign authority.”43

43

Dolgencorp, Inc. v. Mississippi Band of Choctaw Indians, 746 F.3d 167 (5th

Cir. 2014), is not to the contrary. Dolgencorp concerned the tribal court’s

(continued...)

36 No. 12-2617

3.

The Loan Entities maintain, however, that the doctrine of

tribal exhaustion requires that the issue of jurisdiction be

decided, in the first instance, by a tribal court. The concept of

43

(...continued)

authority over tort claims brought by a thirteen-year-old tribal member

against the corporate owner of a Dollar General store located on reservation

land. The tribal member was participating in a tribe-operated job training

program at the store when he was sexually molested by the store manager.

The tribal member sued Dolgencorp in tribal court and alleged that the

corporation was vicariously liable for the manager’s actions and that it

negligently had hired, trained, or supervised the manager. Dolgencorp

unsuccessfully sought an injunction against the tribal action in federal

district court. In holding that the tribal court had jurisdiction over these

claims, the Fifth Circuit rejected Dolgencorp’s argument “that Plains

Commerce narrowed the Montana consensual relationship exception,

allowing tribes to regulate consensual relationships with nonmembers only

upon a showing that the specific relationships ‘implicate tribal governance

and internal relations.’” Id. at 174 (emphasis added) (quoting Plains

Commerce Bank, 554 U.S. at 334–35). It stated:

It is hard to imagine how a single employment relationship

between a tribe member and a business could ever have

such an impact. On the other hand, at a higher level of

generality, the ability to regulate the working conditions

(particularly as pertains to health and safety) of tribe

members employed on reservation land is plainly central

to the tribe’s power of self-government. Nothing in Plains

Commerce requires a focus on the highly specific rather

than the general.

Id. at 175. In the present situation, there is no equivalent tribal concern that

satisfied the requirement of Plains Commerce Bank.

No. 12-2617 37

federal court abstention in cases involving Indian tribes known

as the “tribal exhaustion rule” generally “requires that federal

courts abstain from hearing certain claims relating to Indian

tribes until the plaintiff has first exhausted those claims in a

tribal court.” Garcia v. Akwesasne Hous. Auth., 268 F.3d 76, 79

(2d Cir. 2001). It is not at all clear, however, that the doctrine of

tribal exhaustion requires a federal court to abstain from

exercising jurisdiction when that exercise will not interfere

with a pending tribal court action. See Altheimer & Gray v. Sioux

Mfg. Corp., 983 F.2d 803, 814 (7th Cir. 1993) (“It is unclear as to

how broadly Iowa Mutual [Insurance Co. v. LaPlante, 480 U.S. 9

(1987),] and National Farmers [Union Insurance Cos. v. Crow Tribe

of Indians, 471 U.S. 845 (1985),] should be read. … [T]he two

Supreme Court cases dealt only with the situation where a

tribal court’s jurisdiction over a dispute has been challenged by

a later-filed action in federal court.”).44 Even assuming that the

44

The courts of appeals that have addressed the issue have reached

opposite conclusions. In Garcia v. Akwesasne Housing Authority, 268 F.3d 76,

80 (2d Cir. 2001), the Court of Appeals for the Second Circuit held that tribal

exhaustion was not required absent an ongoing tribal proceeding. It

explained its rationale accordingly:

This Court and the Supreme Court have required

abstention under the tribal exhaustion rule on just three

occasions: [Iowa Mutual Insurance Co. v.] LaPlante, 480 U.S.

[9,] 14–20[ (1987)]; National Farmers [Union Insurance

Companies v. Crow Tribe of Indians], 471 U.S. [845, ]853–56

[(1985)]; and Basil Cook Enters. v. St. Regis Mohawk Tribe, 117

F.3d 61 (2d Cir. 1997). In each instance, the plaintiff was

litigating a previously-filed, ongoing tribal court action,

and was asking the federal court to interfere with those

(continued...)

38 No. 12-2617

tribal exhaustion doctrine applies where there are no pending

tribal court proceedings,45 we do not believe that exhaustion is

required in this case.

The Loan Entities argue that, “[t]o trigger the tribal exhaus-

tion rule, only a ‘colorable’ claim of tribal subject matter

jurisdiction need be asserted.”46 Even a cursory look at the

cases on which the Loan Entities rely, however, reveals that the

assertion of tribal jurisdiction here is not “colorable.”

44

(...continued)

tribal proceedings. These cases are procedurally distin-

guishable from Garcia’s case because Garcia’s claims have

not been in tribal court. We conclude that the reasoning of

these cases and the policy considerations that underlie

them militate in favor of the opposite result in this case: the

comity and deference owed to a tribal court that is adjudi-

cating an intra-tribal dispute under tribal law does not

compel abstention by a federal court where a non-member

asserts state and federal claims and nothing is pending in

the tribal court.

Id. (parallel citations omitted). But see, e.g., United States v. Plainbull, 957 F.2d

724, 728 (9th Cir. 1992) (rejecting the Government’s argument that “the

district court abused its discretion by abstaining from the merits of this case

because there was no concurrent action pending in the tribal courts”

because “[w]hether a tribal action is pending, however, does not determine

whether abstention is appropriate”).

45

Neither party addressed the issue whether the tribal exhaustion doctrine

applies in the absence of a pending tribal proceeding.

46

Appellees’ Br. 28 (citing Ninigret Dev. Corp. v. Narragansett Indian

Wetuomuck Hous. Auth., 207 F.3d 21, 33 (1st Cir. 2000), and Elliott v. White

Mountain Apache Tribal Court, 566 F.3d 842 (9th Cir. 2009)).

No. 12-2617 39

In Ninigret Development Corp. v. Narragansett Indian

Wetuomuck Housing Authority, 207 F.3d 21, 33 (1st Cir. 2000), a

case decided before Plains Commerce Bank, a dispute had arisen

between a tribal entity, the Narragansett Indian Wetuomuck

Housing Authority, and the Ninigret Development Corpora-

tion (a Rhode Island corporation in which a member of the

Tribe was a principal) concerning the construction of a

low-income, off-reservation housing development for tribal

members. On appeal from the district court’s dismissal of the

development company’s action, the court addressed whether

the doctrine of tribal exhaustion applied. After reviewing the

policy considerations underlying this “prudential doctrine,”

the court observed that “the tribal exhaustion doctrine d[id]

not apply mechanistically to every claim brought by or against

an Indian tribe” and that “scope-related” objections to exhaus-

tion could be raised. Id. at 31–32. The court explained that,

although “activities of non-Indians on reservation lands almost

always require exhaustion if they involve the tribe,” where the

“dispute arises out of activities conducted elsewhere[,] … an

inquiring court must make a particularized examination of the

facts and circumstances attendant to the dispute in order to

determine whether comity suggests a need for exhaustion of

tribal remedies as a precursor to federal court adjudication.” Id.

at 32 (emphasis added). “‘[O]ff-the-reservation’” conduct, the

court observed, “must at a bare minimum impact directly upon

tribal affairs” in order to trigger the exhaustion requirement. Id.

(emphasis added). In Ninigret, the court determined that this

requirement had been met because “Ninigret’s dealings with

the Authority bore directly on the use and disposition of tribal

resources (land and money).” Id. Here, the Loan Entities do not

40 No. 12-2617

posit any way in which the present dispute “impact[s] directly

upon tribal affairs.” Id.47 There has been no showing that the

present dispute involves questions of tribal self-governance or

use of tribal resources in the manner present in Ninigret.

Elliott v. White Mountain Apache Tribal Court, 566 F.3d 842

(9th Cir. 2009), is equally unhelpful to the Loan Entities in

establishing a “colorable” claim of tribal court authority. Elliott

concerned an action brought by the White Mountain

Apache Tribe against a non-Indian, who had gotten lost on

reservation lands. In an effort to attract attention, Elliott had set

a signal fire, which grew into a substantial forest fire, burned

over 400,000 acres, and caused millions of dollars in damage.

The tribe brought suit in tribal court for damages, “alleging

violations of tribal executive orders, the tribal game and fish

code, the tribal natural resource code, and common law

negligence and trespass.” Id. at 845. The Ninth Circuit agreed

with the tribe that this scenario raised a colorable claim of

tribal jurisdiction:

The tribe seeks to enforce its regulations that

prohibit, among other things, trespassing onto tribal

lands, setting a fire without a permit on tribal lands,

and destroying natural resources on tribal lands.

The Supreme Court has strongly suggested that a

tribe may regulate nonmembers’ conduct on tribal

47

The Loan Entities do argue that “the Tribe has an interest in claims

against a local, member-owned business for its on-Reservation conduct.”

Appellees’ Br. 30. It goes without saying that a dispute in which the tribe

takes an “interest,” id., is markedly different from a dispute which

“impact[s] directly upon tribal affairs,” Ninigret, 207 F.3d at 32.

No. 12-2617 41

lands to the extent that the tribe can “‘assert a land-

owner’s right to occupy and exclude.’” The tribal

regulations at issue stem from the tribe’s “land-

owner’s right to occupy and exclude.”

Id. at 849–50 (emphasis added) (citations omitted) (quoting

Hicks, 533 U.S. at 359). Again, the Loan Entities have asserted

nothing akin to the Tribe’s right, as a landowner, “to occupy

and exclude.”48

The present dispute does not arise from the actions of

nonmembers on reservation land and does not otherwise raise

issues of tribal integrity, sovereignty, self-government, or

allocation of resources. There simply is no colorable claim that

the courts of the Cheyenne River Sioux Tribe can exercise

jurisdiction over the Plaintiffs. Tribal exhaustion, therefore, is

not required.

Conclusion

The arbitration provision contained in the loan agreements

is unreasonable and substantively and procedurally unconscio-

nable under federal, state, and tribal law. The district court,

48

Indeed, the other cases relied upon by the Loan Entities for the proposi-

tion that tribal exhaustion is required concern regulation of, or actions on,

tribal land. See, e.g., Iowa Mut. Ins. Co., 480 U.S. at 11 (concerning insurance

company’s liability to a tribe-owned business and its tribe-member

employee for injuries sustained on the reservation); Duncan Energy Co. v.

Three Affiliated Tribes of Ft. Berthold, 27 F.3d 1294, 1295 (8th Cir. 1994)

(concerning tribal court’s authority over a dispute involving tribal taxation

of commercial property on reservation land and tribal regulation of

employment on reservation land).

42 No. 12-2617

therefore, erred in granting the Defendants’ motion to dismiss

for improper venue based on that provision. Additionally, the

courts of the Cheyenne River Sioux Tribe do not have subject

matter jurisdiction over the Plaintiffs’ claims. Nor have the

Defendants raised a colorable claim of tribal jurisdiction

necessary to invoke the rule of tribal exhaustion. The district

court’s dismissal, therefore, cannot be upheld on the alterna-

tive basis that this dispute belongs in tribal court. We therefore

reverse the judgment of the district court granting the Defen-

dants’ motion to dismiss and remand for further proceedings

consistent with this opinion. The Plaintiffs may recover their

costs in this court.

REVERSED and REMANDED