California: Tribal Sovereignty: The Appeals Board Revisits the Five Factor Analysis Set Forth in Miami

By Hon. Susan V. Hamilton, Former Assistant Secretary and Deputy Commissioner, California Workers’ Compensation Appeals Board

It is well-settled law that federally recognized Indian Tribes have sovereign immunity from state workers’ compensation liability. Any notion to the contrary was dispelled by the Court of Appeal’s decision in Middletown Rancheria v. Workers’ Comp. Appeals Bd. (1998) 60 Cal. App. 4th 1340, 66 Cal. Comp. Cases 15. That immunity is understood to apply broadly and deeply and extends to legal actions arising from a tribe’s commercial activities even when those activities do not take place on tribal land (Michigan v. Bay Mills Indian Community (2014) 572 U.S. 782, 134 S. Ct. 2024). What is less clear, however, is whether tribally affiliated entities share in a tribe’s sovereign immunity. Our Supreme Court addressed that issue in People v. Miami Nation Enterprises (Miami) (2016) 2 Cal. 5th 222, 211 Cal. Rptr. 3d 837, 2016 Cal. LEXIS 9626.

Briefly, in that case, two federally recognized Indian Tribes created two affiliated business entities that provided short-term deferred deposit (aka “payday”) loans over the internet. These types of loans often have high fees that, coupled with the short-term nature of the loan, make the annual interest rate charged unusually high. In 2003, the California legislature enacted the Deferred Deposit Transaction Law (see Fin. Code, § 23000, et seq.) to limit the size of loans and the fees that can be charged. In response to the law, some deferred deposit lenders sought to become affiliated with federally recognized Indian Tribes, hoping to be covered by the tribes’ sovereign immunity. In Miami, supra, the two tribally affiliated entities provided deferred deposit loans over the internet to California borrowers under terms that allegedly violated the act. In their defense to an injunctive relief action brought by California’s Commissioner of Corporations, the affiliated entities argued that they were entitled to sovereign immunity from enforcement under the act because they were “arms of the tribe” and the appellate court agreed.

On review, our Supreme Court saw the principal question before it as the method that should be used to determine whether a tribally affiliated entity shares in a tribe’s immunity from suit. It answered that question by holding that an entity asserting sovereign immunity has the burden of showing by a preponderance of evidence that it is an arm of the tribe entitled to tribal immunity under a five-factor analysis:

• First, the entity’s method of creation.
• Second, whether the tribe intended the entity to share in its sovereign immunity.
• Third, the entity’s purpose.
• Fourth, the tribe’s control over the entity.
• Fifth, the financial relationship between the tribe and the entity. The court then remanded the case to the trial court to further examine the matter.

A recent panel decision revisits Miami’s five-factor test and in a thoughtful and compelling opinion explains how, in re-weighing the five-factors, it reached the conclusion that the preponderance of evidence establishes petitioner affiliate’s sovereign immunity. The case is Luiz v. Masonite, Northern Circle Indian Housing Authority; United Native Housing Authority Development Corp. (Luiz) (August 4, 2023, ADJ11269850) 2023 Cal. Wrk. Comp. P.D. LEXIS 209 (Appeals Board noteworthy panel decision).

The Facts

Christian Luiz (applicant) filed a cumulative trauma injury claim alleging injury to his neck and upper extremity against Northern Circle Indian Housing Authority (Northern Circle) and United Native Housing Authority Development Corp. (Affiliate). A trial was held and the WCJ issued a decision finding that the Appeals Board lacked jurisdiction over Northern Circle based on the tribe’s sovereign immunity from state workers’ compensation proceedings. The decision also found that Affiliate was not entitled to sovereign immunity and is subject to the jurisdiction of the Appeals Board. Affiliate filed a timely petition for reconsideration. An Appeals Board panel granted Affiliate’s petition to further study the facts and law. On August 4, 2023, the panel issued its decision after reconsideration, reversing the WCJ and finding that Affiliate is entitled to sovereign immunity and, therefore, the Appeals Board lacks jurisdiction over applicant’s cumulative trauma claim.

The Panel’s Analysis

At the outset, the panel explains that where an applicant pursues a state workers’ compensation claim against a federally recognized Indian Tribe, the applicant has the burden of demonstrating that the Appeals Board has jurisdiction over the claim, citing Middletown Rancheria, supra. However, where the applicant is pursuing a compensation claim against a tribally affiliated entity, as in this case, the burden is on the affiliated entity to establish its entitlement to the same sovereign immunity as the Indian Tribe itself under the five-factor test articulated by the Supreme Court in Miami, supra. The affiliated entity has the burden to show by a preponderance of the evidence that it is an arm of the tribe and thus entitled to share in its sovereign immunity. That burden is met through the five-factor analysis that considers the legal or organizational relationship between the Indian Tribe and the entity, as well as the practical operation of the entity in relation to the Indian Tribe. Of significance, the panel acknowledges the Supreme Court’s declaration that no single factor in the five-part analysis is dispositive; rather, in each case, the specific facts must be considered, followed by an overall assessment of whether the entity has successfully carried its burden of proof.

The WCJ’s Application of the Five-Factor Test

Next, the panel reviews the WCJ’s findings relative to each of the factors. As regards Factor One, the method of the affiliate’s creation, the WCJ found that Affiliate is a California Corporation and was formed by Northern Circle. None of the documents associated with the formation of Affiliate reference an intent to grant it sovereign immunity. According to witness testimony, the issue of whether Affiliate should have sovereign immunity was never addressed at the time of its creation. The same witness explained that Affiliate was formed so that it could access housing development funds from the State of California that were not accessible to Northern Circle because it is an Indian Tribe. Based on the documents and testimony, the WCJ concluded that in forming Affiliate, Northern Circle intentionally did not extend tribal status to it because that would have prevented Affiliate from accessing the very housing funds that it was formed to be able to access.

The WCJ then looked to Affiliate’s articles of incorporation to determine Factor Two, whether Northern Circle intended to share tribal immunity with Affiliate. Finding the articles of incorporation silent on that issue, the WCJ concluded that there was no intention on the part of Northern Circle to grant such immunity to Affiliate.

As to Factor Three, Affiliate’s intended purpose, the WCJ acknowledged that it is like, but not identical to, the purpose of Northern Circle. That is, Northern Circle’s mission is to provide housing for tribal members, whereas Affiliate’s purpose is to develop and provide housing assistance to low-income families in need of housing, and others, including “Native American families.” The WCJ concluded that this distinction in purpose between Northern Circle and Affiliate weighs against a finding that Affiliate is entitled to sovereign immunity.

In his examination of Factor Four, tribal control over the entity, the WCJ found that Northern Circle exercised control over Affiliate, but that Affiliate’s Board of Directors included a non-tribal member.

As to the Fifth Factor, the financial relationship between the tribe and the affiliate, the WCJ found this factor to weigh heavily against the extension of tribal immunity, reasoning that Northern Circle intentionally omitted granting tribal status to Affiliate so that Affiliate could access housing funds that were not available to Indian Tribes.

Panel Reweighs the Five Factors

The panel begins its own consideration of the Five-Factors by acknowledging its agreement with the WCJ’s conclusions as to Factor Two (no showing of intent by Northern Circle to share its tribal sovereignty with Affiliate) and Factor Four (that Northern Circle exercised control over Affiliate.). The panel then expresses its conclusions as scores, with Factor Two being one point against Affiliate’s tribal sovereignty and Factor Four being one point in favor of tribal sovereignty.

With the score literally tied, the panel examines the evidentiary bases for the WCJ’s findings on Factors One, Three and Five. As to Factor One, method of creation, the panel rejects the WCJ’s conclusion by pointing out that the WCJ premises his finding on “intent,” which is more relevant to Factor Two rather than the method of creation. It goes on to explain that when analyzing the method of creation in Miami, supra, the Supreme Court found it relevant that the affiliate pay-day lending entities were founded on capital and intellectual property that came from a non-tribal source. In contrast, here, Northern Circle created Affiliate, organized it, partially funded it, and intended that Affiliate serve as a regional affordable housing provider when Northern Circle did not have land or could not provide housing to tribal members. While Affiliate was created to access housing funds that were not available to Northern Circle, another reason for its creation was to take advantage of Northern Circle’s capacity and experience to achieve affordable housing goals. The panel concludes that Factor One is a point in favor of Affiliate’s sovereign status as an arm of Northern Circle.

As to Factor Three, Affiliate’s purpose, the panel similarly rejects the WCJ’s conclusion that Affiliate’s sole purpose was to access certain state funds that were not available to Indian Tribes. While that was one of its purposes, the panel finds several other purposes. The testimony established that Affiliate had several purposes, such as serving as a regional housing provider when the tribe does not have land or cannot provide affordable housing to tribal members; to provide housing assistance to all income-eligible individuals, but with a focus on providing housing assistance to Native Americans; and to take advantage of Northern Circle’s capacity and experience to achieve housing goals. In tallying each of these components of the analysis, the panel concludes that Factor Three is another point in favor of Affiliate’s sovereignty.

In its examination of Factor Five, the financial relationship between Northern Circle and Affiliate, the panel notably takes a broader view than the WCJ, who characterized that relationship as one in which Affiliate was intentionally formed as a non-tribal entity so that it could access housing funds that a tribal entity could not. Instead, the panel identifies several additional components of the financial relationship between Northern Circle and Affiliate. For one, Affiliate was partially funded by Northern Circle. Second, Affiliate received “material in kind” support from Northern Circle in the form of meeting rooms. And third, Affiliate received certain accounting and other financial services from Northern Circle for a small annual fee. The panel then concludes that, taken together, each of these components of the financial relationship between Northern Circle and Affiliate are a point in favor of Affiliate’s sovereign immunity as an arm of Northern Circle.

Finally, the panel tallies the score derived from its own re-weighing of the Five Factors and concludes that Affiliate is entitled to sovereign immunity as an arm of Northern Circle, and the Appeals Board lacks jurisdiction over applicant’s workers’ compensation claim.

What Lessons Should We Take Away from Luiz?

First, the panel’s decision in this case makes clear that the Five Factor Test established in Miami, supra, remains the gold standard to be applied to determine whether a tribally affiliated entity is entitled to sovereignty as an arm of a federally recognized Indian Tribe. Second, and the most important aspect of the decision, is the panel’s emphasis on two key points relevant to application of the factors: no single factor in the analysis is dispositive of whether the entity has carried its burden of proof; rather, each case must turn on application of the factors to its specific facts. Finally, a panel reviewing a WCJ’s decision on reconsideration will apply the factors to the specific facts and, in doing so, may attach a different weight to each, with the end result being a decision that is opposite to the one issued by the WCJ.

Reminder: Board panel decisions are not binding precedent.

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