On June 15, 2023, the U.S. Supreme Court ruled that the Bankruptcy Code barred an Indian tribe’s attempts to collect on a defaulted debt from a Chapter 13 debtor.

In Lac du Flambeau Band of Lake Superior Chippewa Indians et al. v. Coughlin, the Supreme Court held that the Bankruptcy Code unambiguously abrogated the sovereign immunity of all governments, including federally recognized Indian tribes. Although the case involved a suit for damages for violating the automatic stay that is triggered when an individual files for Chapter 13 bankruptcy relief, the Court’s decision will deprive tribes of sovereign immunity from suit for violations of other provisions of the Code.

The Underlying Dispute

The Lac du Flambeau Band of Lake Superior Chippewa Indians is a federally recognized tribe that owns several business entities including Lendgreen. Lendgreen specializes in the offering of high-interest, short-term (“payday”) loans. Brian Coughlin took out one of these loans for $1,100 but filed for Chapter 13 bankruptcy relief before he paid off the loan.

Under the Code, Coughlin’s filing triggered an automatic stay that prevents creditors from attempting to collect from the debtor while the debtor’s bankruptcy case remains pending. 11 U.S.C. § 362(a). Relevant to this dispute, the Code also abrogates claims of sovereign immunity “as to a governmental unit” under § 362 and numerous other provisions in the Code. 11 U.S.C. § 106(a). A “governmental unit” “means 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.” 11 U.S.C. § 101(27).

According to Coughlin, the tribe (through Lendgreen) ignored his bankruptcy petition and the automatic stay and aggressively attempted to collect on the debt. He alleged that Lendgreen’s efforts were so aggressive that they caused Coughlin severe emotional distress, so he moved to enforce the automatic stay against Lendgreen, its parent corporations, and the tribe in bankruptcy court and sought damages, costs and attorney’s fees. The tribal parties opposed Coughlin’s motion and invoked sovereign immunity as a defense. The bankruptcy court ultimately agreed that the “governmental unit” definition in the Code did not unambiguously abrogate the tribal parties’ sovereign immunity. The U.S. Court of Appeals for the First Circuit reached the opposite conclusion before the Supreme Court granted certiorari to resolve a split in the circuits on the question.

The Code Unambiguously Abrogates Tribal Sovereign Immunity

In a majority opinion by Justice Jackson, joined by six other Justices, the Supreme Court agreed with the First Circuit that the Code unambiguously abrogates sovereign immunity and affirmed. The Court began by acknowledging that, if Congress wishes to abrogate sovereign immunity, it “must make its intent ... unmistakably clear in the language of the statute.” If there were a plausible reading that a statute preserves sovereign immunity, Congress has not spoken with the requisite clarity. The Court was satisfied that Congress achieved this clear statement threshold for several reasons.

The Supreme Court explained that the “governmental unit” definition “exudes comprehensiveness from beginning to end” because Congress “rattled off a long list of governments that vary in geographic location, size, and nature.” And the definition concludes with a “broad catchall phrase” covering “other foreign or domestic government[s].” The Court compared the catchall phrase to similar phrases that are meant to capture both ends of a spectrum and everything between—e.g., “rain or shine,” “near and far.” The Court concluded that Congress’s definition was plainly intended to apply to all sovereign governments, including tribal governments.

The Supreme Court also found support for its holding in the larger context of the Code. The Code is designed to secure an “orderly and centralized” discharge and debt restructuring process for debtors. In that spirit, many of the Code’s provisions (including the automatic stay provision) sweep broadly on their own terms. For its part, the automatic stay provision halts all attempts at collection until a bankruptcy plan is confirmed and effective, and that plan binds creditors—even if a creditor’s claim is not provided for in the plan. The Court also observed that the Code contains limited exceptions for governmental units that act as creditors. The Court concluded that carving out a subset of governments that would enjoy not just those narrow exceptions, but blanket immunity from enforcement proceedings under the Code would “risk[] upending the policy choices that the Code embodies.”

Justice Thomas concurred in the judgment, reiterating his long-held view that sovereign immunity for Indian tribes (as opposed to state and federal governments) is a judicial invention that finds no support in the Constitution, and, at a minimum, Indian tribes are not entitled to sovereign immunity from suits involving off-reservation commercial conduct. Because the tribal conduct at issue was such conduct, he concluded that the tribal parties lacked sovereign immunity regardless of the abrogation provision.

Justice Gorsuch dissented. In his view, the Code’s “governmental unit” definition could plausibly be read not to abrogate tribal sovereign immunity—and therefore did not abrogate it. In particular, he reasoned that the phrase “other foreign or domestic government” could either encompass, as the Supreme Court concluded, all governments—foreign, domestic, and everything in between—or it could encompass only purely foreign governments and purely domestic governments. Indian tribes, he argued, “occupy a unique status that is neither politically foreign nor domestic.” He would have required Congress to speak more clearly before finding an abrogation of tribal sovereign immunity.

Implications

Congress’s abrogation of sovereign immunity in the Code will have effects well beyond application of the automatic stay provision to Indian tribes at issue in Lac du Flambeau. The Supreme Court’s decision makes it clear that Congress’s abrogation applies to the enforcement of a host of other provisions governing bankruptcy cases. After Lac du Flambeau, Indian tribes may no longer raise an immunity defense to bankruptcy matters involving:

• Involuntary bankruptcy (§ 303)
• A bankruptcy court’s power to “issue any order, process, or judgment that is necessary or appropriate to carry out” the Code’s provisions (§ 105)
• The allowance of claims or interests (§ 502)
• The use, sale or lease of property (§ 363)
• Preferential payments and transfers (§ 547)
• Fraudulent transfers and obligations (§ 548)
• The binding effects of confirmation in Chapter 9 (§ 944)
• Post-petition claims against the debtor in Chapter 13 cases (§ 1305)

The decision’s effects, moreover, also will not be limited to Indian tribes. The Supreme Court expressly rejected the notion that the abrogation of sovereign immunity from suit applied only to governmental entities that could be classified as either purely foreign or purely domestic. Instead, it concluded that the Code abrogated the sovereign immunity of all governmental entities, even if they have quasi-domestic and quasi-sovereign attributes—using as an example the International Monetary Fund.