The Fourth Circuit Court of Appeals has refused to let BMO Harris Bank arbitrate claims that it collected illegal payday loans through a tribal lender, labeling the arbitration agreement as a calculated attempt to skirt federal laws. A three-judge panel upheld a lower court’s finding that an arbitration agreement between Great Plains Lending LLC and a North Carolina man was unenforceable, saying the contract’s terms take the “plainly forbidden step” of requiring tribal law jurisdiction, to the exclusion of federal and state law. The panel wrote:

Great Plains purposefully drafted the choice of law provisions in the arbitration agreement to avoid the application of state and federal consumer protection laws.

North Carolina resident James Dillon took out a payday loan in 2012 from Great Plains, a lender owned by the Otoe-Missouria Tribe of Indians. Although North Carolina law prohibits interest rates over 16 percent, Great Plains charged Dillon an interest rate of 440 percent because it had no physical presence in the state. When applying for the loan, Dillon electronically signed a contract that included an arbitration agreement. The agreement required that Otoe-Missouria tribal law be applied to any claims, while disclaiming the application of state or federal law. Dillon later filed a putative class action alleging the payday lender had issued illegal loans. But he did not sue Great Plains. Instead, Dillan accused financial institutions, including BMO Harris Bank, of facilitating the illegal loans in violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act.

The district court denied BMO’s attempt to arbitrate the allegations against it, using a then-newly issued Fourth Circuit Court of Appeals opinion in Hayes v. Delbert Services Corp. to come to its decision. In the Hayes appeal, the Fourth Circuit ruled an arbitration agreement between a consumer and Western Sky Financial LLC was unenforceable because it renounced the authority of federal law by exclusively requiring tribal law jurisdiction. The agreement was an “integrated scheme to contravene public policy,” the appellate court said in its opinion.

The Fourth Circuit echoed that reasoning in its opinion, saying Great Plains’ agreement contains many of the same provisions deemed unenforceable in the Hayes appeal. Great Plains took a calculated step to avoid federal law with its contract, the panel said. The panel said:

Just as we did in Hayes, we interpret these terms in the arbitration agreement as an unambiguous attempt to apply tribal law to the exclusion of federal and state law.

Dillon is represented in this case by Hassan A. Zavareei of Tycko & Zavareei LLP. The case is James Dillon v. BMO Harris Bank NA (case number 16-1362) in the U.S. Court of Appeals for the Fourth Circuit.


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