A financial services company associated with the Lower Brule Indian tribe is not protected by sovereign immunity, a Manhattan state judge has ruled, allowing a lawsuit against the company over a failed loan purchase deal to go forward.
Supreme Court Justice Eileen Bransten (See Profile) ruled on Oct. 22 in Seaport Loan Products v. LBCDE, 651492/12, that the company, Lower Brule Community Development Enterprise, or LBCDE, is effectively a private, for-profit entity despite its association with the tribe.
LBCDE is being sued by Seaport Loan Products, which claims that LBCDE failed to close on a loan purchase deal arranged by Seaport.
LBCDE is a subsidiary of Lower Brule Corporation, which was incorporated by the Lower Brule Sioux tribe of South Dakota pursuant to Section 17 of the Indian Reorganization Act. Section 17 allows tribes to create corporate entities that are, like the tribes themselves, protected by sovereign immunity.
Lower Brule Corporation’s corporate charter states that all of its subsidiaries also have sovereign immunity. However, LBCDE is incorporated in Delaware, and not under Section 17.
In 2010, LBCDE loaned $22.5 million to one of its own affiliates, LBC Western Holdings. LBC Western Holdings acted as a holding company for financial services firm Westrock Group Inc., which it bought in 2009.
At the time, Westrock was “struggling,” according to Bransten’s decision, and the loan was an effort to save it. The U.S. Department of the Interior guaranteed 90 percent of the loan and interest.
In 2011, LBCDE sought to sell the loan. It entered into an agreement with Seaport to help find a buyer. In January 2012, according to Seaport’s lawsuit, Seaport had found a buyer for the secured portion of the loan, Farm Credit Services of America, and LBCDE agreed to close on the deal.
However, according to the suit, LBCDE did not close, and announced in March 2012 that it was selling the loan to Great American Insurance Group at a higher price instead. The lawsuit includes claims for breach of contract and unjust enrichment.
LBCDE moved to dismiss the suit on the grounds that it is shielded by sovereign immunity. Seaport countered that it needed discovery on that issue; LBCDE argued that sovereign immunity shielded it even from discovery.
Bransten ruled in favor of Seaport in January, allowing discovery to go forward on the issue of LBCDE’s sovereign immunity (NYLJ, Jan. 17).
Following discovery, LBCDE filed a new motion to dismiss, again arguing for sovereign immunity.
Bransten, however, rejected its argument, citing the Court of Appeals’ 1995 decision in Ransom v. St. Regis Mohawk Educ. and Cmty. Fund, 86 N.Y.2d 553, 558, which laid out a series of factors for determining whether a company has sovereign immunity.
Bransten conceded that LBCDE did meet several of the Ransom factors: its board of directors consists mostly of tribal officials; the tribal council has authority to dismiss board members; and the company’s bank accounts are controlled by the tribal council.
However, she said, it fell short on other factors. LBCDE is a federally chartered company, and was not created under tribal law, Bransten said. Furthermore, she said, its purpose is not similar to that of the tribal government. Bransten said that LBCDE’s purpose was “murky,” but that it appeared to have been created in 2009 largely to make the loan to LBC Western Holdings. Although LBCDE offered testimony that it planned to offer micro-credit to members of the Lakota tribe, she said, as of February it had not actually done so.
“Indeed, LBCDE’s contact with the Tribe seems rather limited, since it has no dedicated office space on the Tribe’s reservation, no full-time employees and no website,” Bransten said.
“The foregoing analysis of the Ransom factors points to one conclusion—that LBCDE is an independent, state-incorporated, for-profit enterprise that has been operating principally in New York’s financial services markets, with separate assets, liabilities, purposes and goals, and thus cannot be considered an arm of the Tribe entitled to share in the Tribe’s immunity from suit.”
Bransten therefore allowed Seaport’s breach of contract claim to go forward.
She did, however, dismiss its unjust enrichment claim as duplicative of the breach of contract claim.
Ronald Blum, a partner at Manatt Phelps & Phillips, and Nirav Shah, an associate at that firm, represent Seaport. They declined to comment.
“We are disappointed that the Court adhered to its preliminary ruling on sovereign immunity,” said Robert Giacovas, a partner at Lazare Potter & Giacovas, who represents LBCDE, in an emailed statement. “As this is an important issue for the Lower Brule and indeed for all Native American tribes, we will be pursuing an appeal.”
@|Brendan Pierson can be reached at email@example.com.