While operating a business on tribal lands may protect you from certain federal laws, an online payday lender can’t just prop up a storefront on tribal lands in order to offer high-interest loans that are illegal in many states.

Back in 2009, the operators of California-based payday lender CashCall met with Martin Webb, a businessman and member of the Cheyenne River Sioux Tribe to cook up a scheme to sell payday loans all around the country without having to worry about each state’s licensing requirements or restrictions on interest rates.

The idea was that Webb would operate Western Sky Financial, which in a series of memorable TV commercials pushed the high-interest loans and the company’s purported connection to the tribal community, referring to it as a “100% Native American-owned business”:

In truth, every loan that Western Sky made was almost immediately resold to CashCall, which also reimbursed Western Sky for the costs of its web servers and maintenance, marketing expenses and bank fees, and some office and personnel costs. The deal also indemnified Western Sky from the costs associated with any and all “civil, criminal or administrative claims or actions… [and] all reasonable attorneys fees and legal costs associated with a defense of such claim or action.”

CashCall also agreed to provide Western Sky with customer support, marketing, website hosting and support, a toll-free phone number, and to handle electronic communications with customers.

With so much of Western Sky’s costs and business being handled by CashCall, it became clear to regulators that this was not a purely tribal operation. Even if it were, the government contends that tribal affiliation doesn’t protect an online lender from having to follow the laws of the states in which it lends money.

In Dec. 2013, the Consumer Financial Protection Bureau sued CashCall, accusing the company of collecting on loans in states where payday loans are either barred outright or effectively outlawed by restrictions on interest rates.

Both CashCall and the CFPB recently asked the court to grant summary judgment for their respective sides, with the CFPB seeking to have CashCall — and not Western Sky — deemed the “true lender” of the loans in question. The government also wanted the court to confirm that the laws of a borrower’s home state — as opposed to tribal law — applies to CashCall/Western Sky loan agreement. Thus, contended the Bureau, these loan agreements should be considered void or uncollectible under the laws of 16 states. Finally, the CFPB sought a summary judgment that CashCall had violated the Consumer Financial Protection Act by servicing and collecting on loans that it had no legal right to offer.

CashCall countered that the CFPB has exceeded the authority and was trying, in alleged violation of the law, to establish a usury limit. The company also asked the court to rule that the loans are not void and that the relevant tribal law does apply. It accused the CFPB of violating CashCall’s due process rights by seeking to penalize them for allegedly unfair practices without providing CashCall with fair notice that this particular behavior was prohibited. Finally, the lender sought to have the court rule that the CFPB’s very structure is unconstitutional.

This week, District Court judge John Walter ruled [PDF] in favor of the CFPB, noting that CashCall was indeed the true lender of these loans.

“CashCall, and not Western Sky, placed its money at risk,” writes Walter, noting that CashCall funded the actual loans by depositing money in Western Sky’s account, and that Western Sky faced no risk as CashCall not only purchased every loan made by Western Sky, but paid a premium on top of the loan value. “CashCall assumed all economic risks and benefits of the loans immediately upon assignment. CashCall bore the risk of default as well as the regulatory risk.”

Since Western Sky was not the true lender of these payday loans, and neither CashCall nor its borrowers had any substantial relationship with the tribe, then state lending laws apply.

Even if CashCall were more substantially connected to the tribe, the court says the lender would still not be able to enforce the tribal choice-of-law provision in its loan contracts. That’s because the 16 states where CashCall made loans in violation of local usury laws would have a materially greater interest.

Because CashCall was making loans in states where it either had no license to lend money or where those loans exceeded state usury limits, the court agreed that the company can not collect loans in most of the 16 states listed in the CFPB’s lawsuit.

Judge Walter also concluded that CashCall deceived consumers by leading them to believe that these loans were enforceable and that tribal law applied.

“Indeed, the intentionally complicated and sham structure of the Western Sky loan program would have made it impossible for reasonable consumers to know that [tribal] law did not govern the loan agreements, and thus that their loans were void and/or not payable under the laws of their home states,” writes the judge.

Regarding CashCall’s counter claims, Judge Walter denied all of them, explaining that the CFPB was not trying to set usury limits, but merely enforce a prohibition against collecting on loans that are not owed.

Western Sky stopped funding new loans in 2013.

Just a few weeks ago, CashCall made a deal with the Minnesota attorney general to refund around $4 million to customers and forgive more than $5 million in loans.

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