SCOTUS Holds Bankruptcy Code Waives Tribal Sovereign Immunity: Implications for Tribes as Creditors: Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin
The courts have long been split on the question of whether Native American tribes are immune from legal attacks under federal bankruptcy law. Some courts have held that tribes and tribal-owned entities could not be sued for monetary judgments by bankruptcy trustees, and they could act against bankrupt debtors – for example, by terminating leases, foreclosing on collateral, and suing to collect debts – in ways that other creditors are prevented from doing. However, the freedom enjoyed by tribes in bankruptcy cases may have come to an end.
This freedom from the effect of bankruptcy law was the result of a tribe’s sovereign immunity: the rule that a sovereign, independent government may not be sued without its consent.
However, the U.S. Congress can, by express language in a law, waive the protections of sovereign immunity as to federal laws. The federal Bankruptcy Code (“Code”) contains a waiver of immunity, permitting a wide variety of claims in bankruptcy cases to be brought against the United States, the 50 individual states, and “other foreign and domestic governments.”
The question in Lac Du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, 2023 WL 4002952 (June 15, 2023), was whether this language also strips Indian Tribes of their sovereign immunity from claims in bankruptcy cases. The Supreme Court, in an 8-1 decision, resolved a split in the Circuits and held that it does.
What This Means for Tribes and Tribal-Owned Entities
Because the Supreme Court held that Native American tribes are not immune from claims and lawsuits under the Code, the decision in effect treats tribes as ordinary creditors under the Code and exposes tribes and tribal-owned entities to the bankruptcy court’s jurisdiction in connection with protecting claims held by tribes and their enterprises, as well as with enforcement proceedings arising against tribes or their tribal enterprises from debtors’ claims, including claims brought by bankruptcy trustees.
Tribes and Tribal-Owned Entities As Creditors and Landlords
The Coughlin decision will likely have the most legal impact on tribes and tribal business enterprises that are creditors of a debtor in bankruptcy. The Code defines the word “creditor” broadly: the term includes any entity with a right to payment from a debtor, even if the debt is unliquidated, unmatured, or disputed. For example, if a tribe operates tribal small business lending programs, tribal member loan programs, or lends money to tribal members using per capita payments as collateral, the tribe will be a creditor in that borrower’s bankruptcy case. Similarly, if the tribe has a lease or other land agreements, and the lessee files for bankruptcy, the tribe is a creditor of that lessee.
The Automatic Stay
The “automatic stay” is a core protection for debtors in bankruptcy cases. As soon as a debtor commences a bankruptcy case, all of its creditors – including government entities – must stop virtually all collection efforts and/or court proceedings (including foreclosure suits) and may not initiate or resume them without an order of the bankruptcy court. Instead, tribes and tribal entities, as creditors in a bankruptcy case, must assert their claims through the bankruptcy process, which usually requires filing a document called a “proof of claim” in the bankruptcy case.
Tribes and tribal-owned entities should refrain from taking any actions that would result in violation of the automatic stay and exposure to liability and/or damages and sanctions.
Contracts and Leases
The rules regarding the treatment of contracts and leases in bankruptcy cases are complex, but tribes that are parties to contracts, or that are lessors of real or personal property, will now have to navigate the complex treatment of contracts and leases under the Code. Those rules are lengthy and often non-intuitive. With some exceptions, however, the following are key points:
- Generally, the non-debtor party cannot unilaterally terminate a contract or unexpired lease on account of the bankruptcy filing.
- During the bankruptcy case, a debtor may (A) assume (keep for its own use), (B) assume and assign (transfer to a third party), or (C) reject (walk away from) its contracts and leases and is allowed a period of time within which to make those decisions.
- The debtor may assign a contract or lease to a third party, even if the agreement forbids such assignment, so long as the debtor complies with the requirements of the Code, including curing all monetary defaults.
Tribes and Tribal-Owned Entities as Defendants in Bankruptcy Litigation
The Coughlin decision also exposes tribes and tribal-owned entities to lawsuits in the bankruptcy court, including litigation brought by a debtor or bankruptcy trustee to claw back amounts paid to the tribe or tribal-owned entity as a creditor before the bankruptcy case was filed. Again, the rules are complicated, but creditors (including, now, tribal creditors) may be exposed for receipt of “preferential payments” (payments received on existing debts during the 90 days pre-bankruptcy) and “fraudulent transfers” (broadly, payments made by a debtor either (a) with actual intent to harm other creditors or (b) without receiving reasonably equivalent value in return). If the bankruptcy court finds that either a preference or fraudulent transfer occurred, the recipient may have to return the transfer (or its equivalent value) to the debtor.
Moving Forward: Bankruptcy Counsel for Tribes and Tribal-Owned Entities
For many tribes and tribal-owned enterprises, the Coughlin decision will represent a major change in dealing with debtors in bankruptcy. Moving forward, tribes and tribal-owned entities should consult with tribal and bankruptcy counsel to determine how the Supreme Court’s holding in Coughlin will impact the way tribes and tribal businesses conduct creditor rights’ enforcement and remedies.
Tribes should seek to understand and prepare to uphold their responsibilities as creditors under the Code. At minimum, this effort should include a review of the tribe’s contracts, leases, and codes to determine methods that will best protect the tribe’s interests in the event of bankruptcy. Similarly, tribally-owned enterprises that are now subject to the Code should work with tribal governments to develop corporate policies and best practices to safeguard corporate assets and reduce liabilities.
For more information regarding the SCOTUS decision on Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin please contact your Quarles attorney or: