On June 15, 2023, the Supreme Court held that the Bankruptcy Code unambiguously abrogates the sovereign immunity of federally recognized Indian tribes. Therefore, tribes may not raise sovereign immunity as a defense to multiple portions of the Bankruptcy Code. Many tribal enterprises and their business partners, for the first time, will need to consider the legal implications of bankruptcy on their business arrangements. The immediate significance of this case is that tribes may be subject to damage claims for violating the automatic stay. However, there may be broader implications for tribal business dealings from this case.
The Lac du Flambeau Band of Lake Superior Chippewa Indians (hereafter “Band”) is a federally recognized Indian tribe located on the Lac Du Flambeau Reservation in northern Wisconsin. One of the Band’s enterprises, called Lendgreen, is a payday lending business. In July of 2019, Brian Coughlin (hereafter “Coughlin”) took out a $1,100 payday loan from Lendgreen, but later filed for bankruptcy. Coughlin’s filing of a bankruptcy petition triggered the automatic stay against further collection efforts by creditors. Coughlin alleges that Lendgreen repeatedly attempted to collect on Coughlin’s debt after the automatic stay was in force. Two months after he filed for bankruptcy, Mr. Coughlin attempted suicide, claiming Lendgreen’s debt-collection efforts were to blame for his agony. Coughlin later filed a motion in Bankruptcy Court, attempting to have the stay enforced against Lendgreen and the Band. Coughlin also sought damages for emotional distress and attorney’s fees.
The Band and Lendgreen moved to dismiss, arguing that the Band and Lendgreen were immune from suit. The Bankruptcy Court agreed; it held that it had to dismiss the suit because the Bankruptcy Code did not clearly express Congress’s intent to waive tribal sovereign immunity. Coughlin appealed to the Court of Appeals for the First Circuit. The First Circuit reversed the Bankruptcy Court’s opinion, holding that the Bankruptcy Code abrogates tribal sovereign immunity. The Supreme Court granted certiorari to address whether the Bankruptcy Code abrogates tribal sovereign immunity.
The Bankruptcy Code abrogates sovereign immunity of “governmental unit[s].” 11 U.S.C. 106(a). “Governmental units” is defined as follows:
United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of [any of the foregoing]; or otherforeign or domestic government.
11 U.S.C. § 101(27) (italicized for emphasis). The central question of the case is whether “other foreign or domestic government” unambiguously included federally recognized Indian tribes. The Supreme Court concluded as follows:
[T]he Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possesses the power to assert such immunity. Federally recognized tribes undeniably fit that description; therefore, the Code’s abrogation provision applies to them as well.
Justice Gorsuch alone dissented. Since there were multiple potential interpretations of “other foreign or domestic government,” he would have concluded Congress did not unequivocally express its intent to waive the sovereign immunity of federally recognized Indian tribes.
The Supreme Court’s decision could have far-reaching implications for tribes and those that do business with tribes. First, tribes must monitor whether any of their business partners have filed for bankruptcy before attempting to collect any accounts receivable, as failing to do so may violate the automatic stay. Second, bankruptcy courts, rather than tribal courts, may decide the amount or legality of tribal taxes under Section 505(a)(1) of the bankruptcy code. In addition, bankruptcy trustees may attempt to claw back assets that debtors have paid to tribes. See 11 U.S.C. §§ 544, 547, 548, 550. All of these potential consequences create new challenges for tribal enterprises, as many tribal enterprises draft contracts assuming that tribal law applies and any dispute will be handled in tribal court. It is important, however, to note that a court may not award punitive damages against a tribe, just like other governmental units.
The Supreme Court’s decision does not provide Indian tribes any arguments that they may file for bankruptcy or otherwise be forced into bankruptcy. Section 109 of the Bankruptcy Code provides that only a person or a municipality may be a bankruptcy debtor. A “municipality” means a political subdivision, public agency, or instrumentality of a State. So, a municipality does not include a tribe as they are not an instrumentality of a state, and the Supreme Court’s decision does not impact this conclusion. In addition, a “person” includes an individual, partnership, and corporation, but does not include a governmental unit. Since “governmental units” are excluded from the definition of “person” and tribes are governmental units, tribes are generally precluded from filing for bankruptcy or being forced into bankruptcy.
In summary, tribal businesses and their partners must consider the bankruptcy code when entering into new business arrangements.