In February 2017, an enticing loan pitch showed up in area mailboxes from an unlikely source, a small Native American tribe in Michigan’s Upper Peninsula.
“You are one of 1,442 people in Richmond that BigPictureLoans.com has pre-approved to receive up to $400. Imagine the relief of having $400 deposited into your bank account as early as tomorrow. ... Our quick, secure and private online application process makes borrowing fast and easy,” the solicitation said.
At least five Virginians — there could be thousands more — borrowed from Big Picture, in some cases at annual percentage rates of more than 600 percent. One woman borrowed $800, agreeing to pay $5,400 in interest over 22 months. The five have filed a class action lawsuit alleging the loans violate Virginia’s usury laws.
Were the plaintiffs the victims of a so-called “rent-a-tribe” scheme, an enterprise operated by a predatory, internet lender hiding behind the Lac Vieux Desert Band of Lake Superior Chippewa Indians?
Or is the federally-recognized tribe entitled to engage in lending at otherwise illegal interest rates in an effort to diversify its income and protect its cultural autonomy while being protected from liability by the sovereign immunity it enjoys as a legitimate tribal government?
On Tuesday, the Richmond-based 4th U.S. Circuit Court of Appeals will take up the question of whether the loan operation is an extension of the tribe entitled to “arm-of-the-tribe” immunity, or whether the tribe essentially is a front for outsiders controlling and profiting from the business.
The appeal by Big Picture and other defendants challenges U.S. District Judge Robert E. Payne’s ruling last year that the tribe’s lending business was not protected by sovereign immunity and therefore was not immune from the class action suit.
Payne held that the primary purpose of the tribe’s purchase of Bellicose Capital, which it rebranded as Ascension Technologies LLC, was to shield outsiders from liability.
The stakes, according to both sides, are high.
“This case involves a small tribe of American Indians who sought to better the lives of their people by conducting business with the larger society by means of the internet. ... They have done well, bringing millions of dollars into the tribal treasury, and they saw an even brighter future for the years ahead. That future is now in jeopardy,” wrote the lawyers for one of the defendants.
The defendants maintain that Payne erred by wrongly shifting the burden to the tribal businesses to prove sovereign immunity, instead of requiring the plaintiffs to show that sovereign immunity does not apply.
On the other hand, the attorneys general of 14 states and Washington, D.C., including Virginia’s Mark Herring, want Payne’s decision upheld.
In a brief to the appeals court, they wrote: “Enforcing consumer protection laws has only become more difficult with the advent of tribal payday lending schemes, in which non-tribal lenders affiliate with Indian tribes to attempt to benefit from their tribal immunity.”
“The relationships that Big Picture Loans and Ascension Technologies claim to have with the Lac Vieux Desert Band of the Lake Superior Chippewa Indians are merely the most recent version of decades-old attempts to avoid coverage of District of Columbia and state laws,” the attorneys general argue.
They added, “It is vital that courts recognize arm-of-the-tribe immunity only when it is truly warranted.”
A spokesman for the tribe said in a prepared statement that “the term ‘rent-a-tribe’ is an offensive slur and one of the ugliest assertions about a tribe’s success.”
“This phrase promotes a negative stereotype about Native Americans, which is an implication that they put their sovereignty up for sale and that they aren’t sophisticated enough to run their own businesses,” the spokesman said.
He said Big Picture and Ascension were formed under the tribe’s laws and operated by the tribe, and that income from the business accounts for 40 percent of the tribe’s general fund budget, paying for such government services and benefits as health care and education.
It is not known how many people in the Eastern District of Virginia, which stretches from Northern Virginia through Richmond and east to Hampton Roads, have borrowed money from Big Picture.
A similar suit against Big Picture has since been filed in California, and there may be others pending now in other states.
In a statement last month unrelated to the suit, the Virginia attorney general’s office said that in recent years, its predatory lending unit has focused on online lenders, which have been a growing part of the lending market.
Statewide, the unit has recovered more than $45.9 million in restitution and forgiven debt from online lenders, including $15.3 million from CashCall.
“CashCall broke the law by engaging in a ‘rent-a-tribe; scheme, using a South Dakota company with a purported Native American tribe affiliation called Western Sky Financial LLC as a façade for marketing and issuing its high-cost installment loans,” the attorney general’s office said last year.
The office said online consumer loans generally remain subject to Virginia’s usury statutes and annual interest rate limits of 12 percent, unless the lender qualifies for an exception, such as being an SCC-licensed payday or motor vehicle title lender.
One of the plaintiffs, who spoke on the condition his name not be used, said he knew the interest rate was high, but he needed the money and assumed the rate was legal.
Defendants named in the plaintiff’s 32-page class action complaint filed in 2017 include Matt Martorello of Dallas and Ascension Technologies LLC, formerly Bellicose Capital LLC — a company formed by Martorello in 2011.
“Matt Martorello recognized the exorbitant profits he could achieve by not complying with Virginia’s usury laws and lending out high interest loans to some of Virginia’s most vulnerable consumers. Recognizing this, Martorello established a rent-a-tribe business model for his company, Bellicose Capital, associating themselves with the Lac Vieux Desert Band of Lake Superior Chippewa Indians,” the plaintiffs allege.
The tribe had a loan operation known as Red Rock Tribal Lending LLC. While said to be a managing consulting company for Red Rock, Bellicose Capital actually procured the investment capital, serviced the loans and received the vast majority of the revenue from the loans, which was then funneled to Martorello, the plaintiffs argue.
In 2016, due to anticipated regulation from the U.S. Consumer Financial Protection Bureau and a cease-and-desist order issued by the New York Department of Financial Services, the plaintiffs allege that Martorello transferred ownership of Bellicose to the tribe.
The transfer, they allege, was “an attempt to shield Bellicose Capital’s illegal business practices. The tribe rebranded Bellicose as Ascension Technologies, which continues to operate with minimal tribal involvement or benefit to the tribe.”
And Red Rock became Big Picture Loans.
Martorello did not respond to a request for comment. His website, www.mattmartorello.com, says he is originally from Illinois.
“Inspired by his own family’s lower-income economic status growing up, and now as the father of two young children, ages one and three — Matt is committed to uplifting his community and helping those who are less fortunate,” his website says.
In court filings, Martorello’s lawyers denied any wrongdoing and said Bellicose Capital LLC was not created to make or collect any loans.
“It is specifically denied that Martorello had direct personal involvement in the creation and day-to-day operations of any illegal enterprise,” Martorello’s lawyers wrote in their brief to the appeals court.
Martorello also denies engaging in any illegal lending activity, that he established a “rent-a-tribe” business model for Bellicose Capital, or that his business relationship with the tribe was an attempt to mislead customers and regulators.
“The tribe approached Martorello in 2011 after independently deciding to explore tribal lending, not the other way around,” Martorello’s lawyers wrote.
Martorello conceded that he does not have a Virginia consumer finance license, but denied that he ever made loans to Virginia consumers or was required to have a Virginia consumer finance license.
In an 81-page opinion last year addressing the key sovereign immunity question, Payne concluded that “the record shows that the formation of Big Picture and Ascension, and indeed, much of the tribal restructuring, was for the real purpose of helping Martorello and Bellicose to avoid liability, rather than help the tribe start a business.”
“The tribe’s intent no doubt was, in part, to help the tribe, but to do so by providing its immunity to shelter outsiders from the consequences of their otherwise illegal actions,” the judge added.
Payne said the tribe plays a substantial role in Big Picture Loans — which employs some tribal members and conducts operations on the reservation — but not in Ascension, which conducts most activities outside the reservation and only employs non-tribal members.
The judge noted that, under the Big Picture and Ascension operating agreements, the tribe would not be liable for any judgment against the business and that the tribe’s monthly gains will only consist, at most, of 5 percent of Big Picture’s revenue.
“Even assuming that Big Picture’s lending operation and Ascension’s support have contributed to the tribe’s economic self-development to some extent, those entities’ actions have primarily enriched non-tribal entities ... and possibly, individuals like Martorello,” Payne added.
The plaintiffs want the appeals court to uphold Payne, warning that “extending tribal immunity on this record would offer a roadmap for payday lenders and others looking for ways to disregard federal and state laws: find a tribe, offer a sliver of revenue, and move the operations over on paper.”
The defendants contend that income from the lending operation will soon account for 60 percent of the tribe’s income and that the only Martorello-related entity receiving payments from the tribe is only for the purchase of assets at fair prices.
They want Payne’s ruling on sovereignty reversed, arguing the following: “This appeal is not a policy debate about consumer finance, or whether state or tribal law governs plaintiffs’ consumer loan agreements.”
“It is a case about tribal sovereign immunity and two specific tribal entities: Big Picture and Ascension. As arms of the Tribe, they are immune from suit. The District Court erred holding otherwise. This case must be dismissed,” they contend.
“Sovereign immunity is intended to promote economic self-sufficiency. Plaintiffs would undercut that goal by limiting tribes to their own ‘start-up’ operations, rather than allowing them to acquire and profit from already-established businesses,” argue Big Picture and the other defendants.
The arguments, open to the public, will be heard by a three-judge panel of the appeals court on Tuesday.