The Lac du Flambeau Band of Lake Superior Chippewa Indians (Lac du Flambeau Band) found support from law professors specializing in federal Indian law as well as an assemblage of tribes and Native American groups in its bid before the U.S. Supreme Court to assert sovereign immunity from suit regarding alleged violations of the automatic stay. While they acknowledge that tribal immunity may be abrogated, they insist Congress must do so expressly and unequivocally.

In January, the Supreme Court agreed to hear Lac du Flambeau Band v. Brian W. Coughlin, case number 22-227, after the First Circuit last year barred the Lac du Flambeau Band from seeking to collect on a $1,600 debt obligation to the tribe’s lending arm, Lendgreen, after the debtor filed for Chapter 13 bankruptcy. The Bankruptcy Code abrogates the sovereign immunity of “governmental units” for numerous provisions, including the automatic stay.

Section 101(27) of the Code defines a “governmental unit” as the:

United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.

The First Circuit determined that the Code “unequivocally strips tribes of their immunity” by identifying them as “domestic governments.” On this basis, the debtor proceeded to file a $173,000 lawsuit against the Lac du Flambeau Band for violating the automatic stay by attempting to collect on the $1,600 debt.

The Ninth, Second, and Tenth Circuits are in alignment with the First Circuit, finding that tribes fall within the definition of a governmental unit as an “other…domestic government.”

Conversely, bankruptcy and other courts in the Third, Sixth and Eighth Circuits have found that tribes are not governmental units within the meaning of the Bankruptcy Code and that the Code thus does not waive tribal sovereign immunity.

Opposing the petition for certiorari, the debtor argued that the First Circuit was correct to include tribes as a “governmental unit.” Law professors in their amici curiae brief argued that the First Circuit erred in construing Congress’ meaning because nothing in the Bankruptcy Code explicitly abrogates tribal sovereign immunity. A collection of tribes and Native America groups supported the professors’ position and requested the Supreme Court refuse to “weaken the unequivocal-expression standard” for abrogating tribal immunity.

The amici brief argues that — due to a tribe’s limited ability to generate tax revenue and a “historic lack of investment in tribal infrastructure and economies” — many tribes have created their own businesses to support tribal members, and those businesses often involve or interact with people who could subsequently file bankruptcy. Absent immunity, a tribe could be involuntarily subjected to bankruptcy proceedings as a third party; forced by a bankruptcy trustee to surrender funds paid to the tribe by a debtor; prohibited from evicting a lessee of tribal lands under an automatic stay; or be subject to a debtor’s confirmed bankruptcy plan that may include terms which would negatively affect a tribe’s rights.

Further, if tribes are determined to be governmental entities, the question of whether a tribe can be a debtor under § 109 of the Bankruptcy Code comes to the fore. If tribes cannot be debtors, they are limited in their ability to reorganize their commercial operations through an established path that is available to nontribal commercial entities. The tribal restructurings would have to be done without the protections afforded to debtors under Chapter 11, resulting in restructurings that are often more complicated, time-consuming, and costly.

The tribes point to the Ninth Circuit’s ruling in Krystal Energy Co. v. Navajo Nation, holding that the Bankruptcy Code’s reference to “other … domestic government” includes tribes, as proof that the cited concerns are not merely theoretical. Since that decision, the Navajo Nation and other tribes in the Ninth Circuit have faced numerous suits and have been forced to defend themselves “in costly litigation and in distant courthouses without the ability to assert immunity.” Such suits have a deleterious effect, even if the tribes are ultimately successful.

If the Supreme Court affirms the First Circuit’s ruling, the tribal groups state that the impact could extend beyond bankruptcy proceedings and be applied in commercial disputes involving tribal waivers of sovereign immunity or to the interpretation of, for example, federal laws underlying disputes between states and tribes.

Troutman Pepper will continue to monitor this litigation and provide updates.