On June 15, 2023, Justice Jackson led the majority in an 8-1 decision holding that the Bankruptcy Code abrogates federally recognized tribes’ sovereign immunity. The decision has significant implications for tribal creditors in bankruptcy proceedings. Tribal creditors, especially in those jurisdictions where tribal sovereign immunity was previously allowed, may now be compelled to appear as a third party, targeted by a trustee to recover money paid to the tribe by the debtor, subject to the debtor's confirmed plan, or prohibited from evicting a lessee on tribal lands due to the automatic stay. As a result of the ruling, federally recognized tribes and their enterprises will be treated like other government creditors in bankruptcy and will need to adhere to the laws and procedures established by the Bankruptcy Code.
Lendgreen, a business owned by The Lac Du Flambeau Band of Lake Superior Chippewa Indians, extended a high interest payday loan in the amount of $1,100 to Brian Coughlin. Mr. Coughlin filed a petition for Chapter 13 bankruptcy before he could repay the loan in full. Lendgreen continued to pursue collection efforts despite the placement of the bankruptcy automatic stay against creditors.
Mr. Coughlin filed a motion in the bankruptcy court to enforce the automatic stay against Lendgreen, its parent corporations, and the Tribe. The Tribe moved to dismiss on the basis that the bankruptcy court lacked jurisdiction because tribes enjoy sovereign immunity from suit.
Justice Jackson, with Chief Justice Roberts and Justices Alito, Sotomayor, Kagan, Kavanaugh, and Barrett joining, delivered the 16-page opinion of the Court declaring that “the Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possesses the power to assert such immunity,” including federally recognized tribes. The crux of the decision came down to Section 106(a) of the Bankruptcy Code, which states that “sovereign immunity is abrogated as to a government unit” and Section 101(27), which defines “governmental unit” to include all foreign and domestic governments.
The Tribe tried to argue that Congress did not intend to include tribes in Section 106(a) and Section 101(27) because neither statute mentions Indian tribes by name. The Tribe argued that it is historical practice for Congress to specifically mention Indian tribes in statutes when abrogating their sovereign immunity. Further, the Tribe made the argument that the catchall phrase “other foreign or domestic government” excludes governmental entities that are not purely foreign or purely domestic, like the tribes. Lastly, the Tribe noted that Congress has historically treated various types of governments differently for the purposes of bankruptcy law.
Justice Jackson rejected all the Tribe’s arguments in turn, finding that the clear statement of rule of congressional intent is not a “magic-words” requirement. Engaging in a detailed analysis of the Bankruptcy Code, Justice Jackson explained that although the Code did not mention federally recognized tribes by name, Congress clearly intended them to be covered by the broad definition of a governmental unit. Justice Jackson further explained that this holding is consistent with the rest of the Bankruptcy Code, which broadly applies to all government creditors.
For tribes located in the Ninth Circuit, the Coughlin decision will not significantly change the landscape for bankruptcy cases, as the Ninth Circuit previously settled the abrogation issue in 2004, holding that the Bankruptcy Code abrogates tribal immunity because the definition of “governmental unit” includes Indian tribes. Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055, 1061 (9th Cir. 2004).
But for those tribes operating in other jurisdictions, the ruling is consequential and will require a major shift in how bankruptcy proceedings are approached. For example, federally recognized tribes may now be sued in bankruptcy court by debtors and trustees looking to avoid liens, enforce the automatic stay, and recover preferences and fraudulent transfers. This will undoubtedly increase bankruptcy related litigation costs, as tribes may need to include additional funding in their budgets to engage counsel to help navigate the often-complex issues arising in bankruptcy court. It is worth noting, however, that governmental creditors still enjoy protections under the Bankruptcy Code, such as the ability to enforce police powers despite the automatic stay. But for most routine collection actions, Indian tribes will need to adhere to the same rules and processes that apply to all creditors.
In the wake of the majority’s opinion, there is a concern among tribal nations that the decision may have unintended consequences. As noted by The Navajo Nation in its amici brief, by lowering the standard for abrogating tribal immunity, the Supreme Court may open the door for litigants to argue that other statutes also waive tribal immunity, such as the Clean Water Act or the Fair Credit Reporting Act. Whether this fear will materialize is unknown and will likely be the subject of litigation in coming years.