Lac Intolerant: Supreme Court Rejects Tribal Sovereign Immunity Claims

The Supreme Court recently handed down its third decision interpreting the Bankruptcy Code this term. The decision, Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, is a victory for debtors and a loss for Native American tribes, and also provides insight into how the Court is approaching bankruptcy law issues.

Lac du Flambeau Band Decision

The litigation arose from an individual chapter 13 bankruptcy case. The debtor, Brian Coughlin, had borrowed $1100 from Lendgreen, a payday lender owned by the Lac du Flambeau Band, a federally recognized Native American tribe. Lendgreen continued efforts to collect on its claim even after the petition had been filed. When Coughlin sought to enforce the automatic stay and collect damages, Lendgreen asserted that it was protected by tribal sovereign immunity. Coughlin argued that sovereign immunity was inapplicable because section 106 of the Bankruptcy Code expressly provides a waiver of sovereign immunity if asserted by a “governmental unit.” Lendgreen responded that the section 106 waiver should not apply to a Native American tribe because Native American tribes fall outside of the Code’s definition of “governmental unit.”

Section 101(27) defines “governmental unit” to mean “United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States … a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.” None of the specified examples of a governmental unit fit a Native American tribe, so the dispute centered on the catchall language at the end of the definition.

The opinion reasoned that a waiver of sovereign immunity requires statutory language that is “unmistakably clear.” It noted that this is not a “magic-words requirement” so much as a requirement that Congressional intent be “clearly discernable” from the statute. The Court determined that Congressional intent could be ascertained from the breadth of the definitional language as well as the way that governmental units are treated throughout the Code, and concluded that Native American tribes are included within the scope of “or other foreign or domestic government.” Accordingly, there was a waiver of sovereign immunity that applied to Lendgreen, and the automatic stay could be enforced against Lendgreen.

Analysis

Lac du Flambeau is a win for debtors, as it clarifies that the automatic stay applies to creditors that are tribes or affiliated with tribes. The decision emphasizes that creditors that are tribes or affiliated with tribes should be treated the same as other governmental creditors. Conversely, it is a loss for tribal lenders and tribal-affiliated lenders, who now are clearly subject to the automatic stay and other Bankruptcy Code provisions.

By contrast, the Court’s first bankruptcy decision of the term, Bartenwerfer v. Buckley, was a loss for debtors. Bartenwerfer involved the scope of the individual discharge in a bankruptcy case. The case concerned Kate and David Bartenwerfer, a married couple that filed a joint petition. They had been sued by the buyer of a house owned by a partnership they had formed; while both Bartenwerfers were held liable only David was found to have committed fraud. The question was whether Kate (who was, on the record, not herself a fraudster but still liable as a general partner) could discharge the debt under Code section 523(a)(2)(A), which renders non-dischargeable a debt for property obtained by false pretenses, a false representation, or actual fraud. The Court ruled that the debt was non-dischargeable.

Justice Jackson’s Lac du Flambeau opinion does not refer to her opinion in MOAC Mall Holdings LLC v. Transform Holdco LLC, discussed here, another decision interpreting the Code that was handed down earlier this term and that has striking similarities to Lac du Flambeau. Both opinions deal with issues of statutory interpretation in the absence of clear express language. Both involved considerations on one side of the argument (federal court jurisdiction in MOAC, and tribal sovereignty in Lac du Flambeau) that the Court deemed so important that it requires a “clear statement” of Congressional intent should they be infringed. Both opinions noted that the clear statement of Congressional intent need not contain “magic words,” although different precedents are cited in each case.

When viewed through this lens the two cases went in different directions. In MOAC the Court held that the Code did not contain a clear indication that the provision in question (section 363(m)) should be considered a jurisdictional limitation. In Lac du Flambeau, on the other hand, the Court held that Code contained a sufficiently clear indication to conclude that Native American tribes were included in the definition of “governmental unit.”

What MOAC and Lac du Flambeau have in common is that their reasoning includes both a close reading of the statutory language and a broader analysis of how the disputed provisions can be read in the broader context of the Bankruptcy Code. And Bartenwerfer, which was primarily decided on “plain language” grounds, still supported its decision with an analysis of other related provisions in the Code and a historical analysis of the scope of the bankruptcy discharge in various bankruptcy laws over the years.

Paradoxically, the one case of the three that did not raise a statutory interpretation issue requiring a showing of “clear intent” on the part of Congress (Bartenwerfer) was the one where the decision most relied on a “plain language” analysis. Since the decisions do not discuss each other, it is not clear whether this is a significant distinction or simply a reflection of the extent to which the Court considered the plain language to be dispositive in each case.

The 6-3 partisan split that has been seen in many of the most controversial Supreme Court cases in the last two terms does not seem to carry over to all other cases. Indeed, MOAC and Bartenwerfer were decided by a unanimous Court, and Lac du Flambeau had only one dissent.