Gibbs v. Haynes Invs., LLC

• Decision Date: 22 March 2019
• Docket Number: Civil Action No. 3:18cv48
• Court: U.S. District Court — Eastern District of Virginia
• Parties: Darlene GIBBS, et al., on behalf of themselves and all individuals similarly situated, Plaintiffs, v. HAYNES INVESTMENTS, LLC, et al., Defendants.

368 F.Supp.3d 901

Darlene GIBBS, et al., on behalf of themselves and all individuals similarly situated, Plaintiffs,

v.HAYNES INVESTMENTS, LLC, et al., Defendants.

Civil Action No. 3:18cv48

United States District Court, E.D. Virginia, Richmond Division.

Signed March 22, 2019

Kristi Cahoon Kelly, Andrew Joseph Guzzo, Casey Shannon Nash, Kelly Guzzo PLC, Fairfax, VA, Craig Carley Marchiando, Elizabeth W. Hanes, Leonard Anthony Bennett, Consumer Litigation Associates, Newport News, VA, James Wilson Speer, Virginia Proverty Law Center, Richmond, VA, for Plaintiffs.

David Neal Anthony, Timothy James St. George, Troutman Sanders LLP, Richmond, VA, David Foster Herman, Pro Hac Vice, Jonathan Peter Boughrum, Pro Hac Vice, Richard Lawrence Scheff, Pro Hac Vice, Armstrong Teasdale LLP, Philadelphia, PA, Robert Field Moorman, KaneJeffries LLP, Henrico, VA, for Defendants.

MEMORANDUM OPINION

M. Hannah Lauck, United States District JudgeThis matter comes before the Court on Defendants' Haynes Investments, LLC ("Haynes Investments"), Sovereign Business Solutions, LLC ("SBS" or "Sovereign Business Solutions"), and L. Stephen Haynes's (collectively with Haynes Investments and SBS, the "Haynes Defendants") three motions: the Motion to Transfer or, in the Alternative, to Stay Proceedings (the "Motion to Transfer"), (ECF No. 36), the Motion to Compel Arbitration, (ECF No. 34), and the Motion to Dismiss, (ECF No. 32).¹ Plaintiffs Darlene Gibbs, Stephanie Edwards, Lula Williams, Patrick Inscho, and Lawrence Mwethuku's ("Plaintiffs") responded to the Motions, (ECF Nos. 41, 42, 43), and the Haynes Defendants replied, (ECF Nos. 44, 45, 46).²

Accordingly, the matters are ripe for disposition. The Court dispenses with oral argument because the materials before it adequately present the facts and legal contentions, and argument would not aid the decisional process. The Court exercises jurisdiction pursuant to 28 U.S.C. §§ 1331³ and 1367.⁴ For the reasons that follow, the Court will deny the Motions.

I. Procedural and Factual Background

A. Summary of Allegations in the Complaint ⁵

This controversy arises out of the Haynes Defendants' involvement in an allegedly unlawful lending operation involving two Native American-owned lending companies⁶ and multiple alleged co-conspirators. The lending operation allegedly offered loans to Plaintiffs in amounts ranging from $ 300 to $ 3,000, charging interest rates ranging from 227.92% to 448%. (Compl. ¶¶ 120–21, ECF No. 1.) Plaintiffs bring this suit on behalf of themselves and all individuals similarly situated, alleging that this lending operation violates state and federal lending laws.

Plaintiffs allege that the lending operation constitutes what they refer to as a "rent-a-tribe." Under this improper business model, actors establish entities to originate internet-based high interest loans so as to evade state and federal usury and lending laws. A non-tribal entity and a Tribe agree to establish a lending company in the Tribe's name. According to Plaintiffs, the Native American Tribe nominally establishes the lending company in order to extend its tribal sovereign immunity to the newly-formed business entity. The tribal company, however, receives capital from a different, non-tribal person or company who seeks to use the tribal lending companies in order to cloak the unlawfully high-interest internet loans with sovereign immunity. The non-tribal entity retains the vast majority of the profits and controls the lending tribal entity, from major business decisions to day-to-day operations. In exchange, the Tribe receives only a small percentage of the revenue.

Here Plaintiffs challenge the formation and operation of two lending entities: Plain Green⁷ and Great Plains.⁸ Plain Green seeks immunity as part of the Chippewa Cree Tribe. Great Plains would claim immunity as part of the Otoe-Missouria Tribe. Because only the Haynes Defendants—who principally ran the Plain Green lending operation—remain in this action, the Court, for clarity, focuses on the factual allegations as to them. Plaintiffs also allege, however, that Haynes played a critical role in finding a new bank to partner with both Plain Green and Great Plains after they had been targeted by state and federal regulators (and the Department of Justice), resulting in some banks ceasing the processing of their loans. As such, some claims regarding Great Plains are interspersed and all five Plaintiffs bring their claims against the Haynes Defendants.

As to Plain Green, Plaintiffs allege that the Haynes Defendants, in conjunction with other actors and through a web of entities, actually "funded and partially operated" the so-called "rent-a-tribe" scheme at the heart of this case. (Compl. ¶ 2.) Specifically, the Haynes Defendants and several non-tribal actors entered into a term sheet in support of the unlawful tribal lending operation.⁹ (See Compl. Ex. 1 "March 2011 Term Sheet" 1, ECF No. 1-1.) Per the March 2011 Term Sheet, a designated non-tribal entity¹⁰ provided "the infrastructure to run the lending operations." (Compl. ¶ 34 (citing March 2011 Term Sheet 1).) Haynes Investments "provide[d] funding to the Tribe to enable it to make each of the [l]oans." (Id. ¶ 35 (quoting March 2011 Term Sheet 1–2).) In accordance with the provisions in the 2011 Term Sheet, Haynes Investments provided a principal amount of up to $ 2,000,000 through "a revolving line of credit" to fund the loans. (Compl. ¶ 36 (quoting Compl. Ex. 2 "Credit Agreement" 1, ECF No. 1-2).)

Once Plain Green originated the loans in its name, another designated third-party entity "purchased" the loans from Plain Green. (Compl. ¶ 37.) As part of this "purchase," the third party entity "refunded [back to Haynes Investments] 99% of the funds provided by Haynes Investments, wh[ich] also received: (1) 5% interest on the money loaned to the Tribe, and (2) 1% of the revenue collected on the loans as a ‘referral’ fee." (Id. ¶ 38.) Plaintiffs allege that Great Plains has a comparable structure, albeit with different entities.

In this way, although Plain Green¹¹ and Great Plains¹² executed the loan agreements, the Haynes Defendants¹³ and other non-tribal entities actually funded and controlled the lending operation. The lending operation issued loans to Virginia residents with interest rates far in excess of Virginia's usury law, which caps interest rates at 12%, with some exceptions not applicable here. See Va. Code. Ann. § 6.2-303. The Haynes Defendants, together with other non-parties, "marketed, initiated, and collected usurious loans in Virginia." (Compl. ¶ 118, ECF No. 1.)

On several occasions, Haynes Investments increased its investment in the Tribal lending operation. Between December 2011 and June 2012, "Haynes Investments received a monthly profit between $ 131,555 and $ 166,714" from its participation in the Tribal lending venture. (Id. ¶ 53 (citing Compl. Ex. 7 "ILP Profit Share Breakout Trend" TF-VA0602566).) As of July 12, 2012, Haynes Investments had increased the line of credit it extended to the lending operation to $ 20,000,000, ten times the amount originally agreed upon in March 2011.

In August 2012, Haynes proposed an additional arrangement "to continue to grow" the improper lending operation. (Id. ¶ 55.) As part of this new financing arrangement, Haynes created Sovereign Business Solutions,¹⁴ which provided Plain Green a principal amount of up to $ 15,000,000 through a revolving line of credit to fund additional loans. In exchange, "SBS received 15% interest on the outstanding advances on the line of credit, as well as a security interest in the loans in the event of default." (Id. ¶ 61 (citing Compl. Ex. 9 "February 2013 Credit and Security Agreement" §§ 3.3, 3.7).) Haynes signed the February 2013 Credit and Security Agreement on behalf of SBS.

Plaintiffs allege that Haynes "did not merely invest" in this unlawful Tribal lending scheme, (Compl. ¶ 64,) but rather, "played an integral role in helping ... [to] obtain a bank willing to process payments through the Automated Clearing House Network (the ‘ACH Network’)," (id. ¶ 65.) The ACH Network "allows financial institutions to send or take money directly out of a bank account without the requirement of a direct relationship between the financial institution and the borrower." (Compl. ¶ 66.) Plaintiffs quote reports stating that the ACH plays a "vital role" in online lenders' ability to conduct business.¹⁵ (Id. ¶ 68 (citation omitted).) These same financial reports indicate that due to the ACH's vital role, "state and federal regulators, as well as the Department of Justice have, seized on the ACH Network as a means to stop online lending by out-of-state lenders." (Id. (citation omitted).

When regulators targeted Plain Green and Great Plains, and banks consequently "ceased processing the debits and credits on their loans,"¹⁶ (Compl. ¶ 72), Haynes "played a critical role in finding a new bank to partner with Plain Green and Great Plains," (id. ¶ 73). To this end, Haynes met with several banks beginning in 2013 and identified several possible partners over the course of a year.

Plaintiffs in this case all entered into loan agreements (the "Contracts" or the "Loan Contracts") with either Plain Green or Great Plains. (See Gibbs Agr., ECF No. 35-1; Williams Agr., ECF No. 35-1; Edwards Agr., ECF No. 35-1; Inscho Agr., ECF No. 35-1; Mwethuku Agr., ECF No. 35-1.) Although some variation in wording exists among the Contracts, they essentially include the same terms and the minor differences do not alter the outcome on the Motions. Because the legal analysis requires a detailed evaluation of specific provisions within each Contract, an introductory summary follows.

Each Contract purports to constitute a loan agreement between the named plaintiff and either Plain Green (two contracts) or Great Plains (three contracts), including the underlying loan terms, choice of law provisions, and arbitration agreements. The principal amounts varied, from as low...