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June 26, 2015

Despite Changing Economic Reality, Federal Court Holds Indian Tribes Have Sovereign Immunity in Bankruptcy, Absent Waiver

As the Indian gaming industry continues to thrive, Indian tribes are increasingly engaging in other commercial endeavors including banking, construction, energy, telecommunications, manufacturing, retail and more. Based on a long line of Supreme Court precedent, Indian tribes are generally immune from the federal and state laws that regulate and give rise to liability in these industries, absent an express waiver of this immunity. But in recent years, the propriety of tribal sovereign immunity in this changing economic reality has come into question. In particular, federal courts are in disagreement over whether tribal sovereign immunity extends to the bankruptcy context, as highlighted by a recent decision from the United States District Court for Eastern Michigan (District Court).[1]

On June 9, 2015, the District Court held that Congress did not clearly, unequivocally and unmistakably express an intent to abrogate the sovereign immunity of Indian tribes in sections 106(a) and 101(27) of the Bankruptcy Code, reversing the decision of the United States Bankruptcy Court for Eastern Michigan (Bankruptcy Court) below. The District Court then remanded the matter to the Bankruptcy Court on the issue of whether the appellants nevertheless waived their sovereign immunity by participating in the bankruptcy proceeding.

The case began in the bankruptcy proceeding of a Detroit hotel and casino. The creditors’ committee (which was later substituted by the litigation trustee) brought an adversary proceeding against the Sault Ste. Marie Tribe of Chippewa Indians and Kewadin Casinos Gaming Authority (Tribe), among other defendants, alleging $177 million in fraudulent transfers under sections 544 and 550 of the Bankruptcy Code and Michigan state law.

The Tribe moved to dismiss the fraud claims based on sovereign immunity. The litigation trustee opposed dismissal, arguing that tribal sovereign immunity is expressly abrogated under the Bankruptcy Code. Specifically, section 106(a) of the Bankruptcy Code provides that “[n]otwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in” sections 544 and 550, among other sections, of the Bankruptcy Code. “Government unit” is in turn defined under section 101(27) of the Bankruptcy Code 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) . . . or other foreign state or domestic government.”

The Bankruptcy Court agreed with the litigation trustee, holding Congress intended to remove the cloak of tribal sovereign immunity in section 106(a) of the Bankruptcy Code when it abrogated the sovereign immunity of “government unit[s],” and further defined a “government unit” in section 101(27) of the Bankruptcy Code to include the catchall phrase “other . . . domestic government[s].” Although the phrase “Indian tribes” is not explicitly contained in either these sections or the Bankruptcy Code in general, the Bankruptcy Court concluded that Congress’s clear intent could be deduced by reading these sections together, and that no “magic words” are required to accomplish abrogation.

In reversing the Bankruptcy Court’s decision, the District Court went into a lengthy analysis of the history behind tribal sovereign immunity. Pursuant to Supreme Court precedent, “[a]s a matter of federal law, an Indian tribe is subject to suit only where Congress has authorized the suit or the tribe has waived its immunity.”[2] “To abrogate tribal immunity, Congress must ‘unequivocally’ express that purpose.”[3]

Yet despite this undisputed Supreme Court precedent, whether Congress unequivocally expressed the intent, in sections 106(a) and 101(27) of the Bankruptcy Code, to abrogate tribal sovereign immunity, has been analyzed by a handful of federal courts, leading to two irreconcilable conclusions.

For example, the Ninth Circuit and Arizona federal courts have held that sections 106(a) and 101(27) of the Bankruptcy Code clearly and unequivocally waive the sovereign immunity of Indian tribes.[4] Applying “syllogistic reasoning” the Ninth Circuit explained that “Indian tribes are certainly governments,” and “[t]he Supreme Court has recognized that Indian tribes are ‘domestic dependent nations,’” therefore, the “category ‘Indian tribe’ is simply a specific member of the group of the domestic governments, the immunity of which Congress intended to abrogate” in section 106(a) of the Bankruptcy Code.[5] The Ninth Circuit further explained that “the Supreme Court’s decisions do not require Congress to utter the magic words ‘Indian tribes’ when abrogating tribal sovereign immunity.”[6]

By contrast, the Eighth Circuit Bankruptcy Appellate Panel (BAP) has held exactly the opposite — that Congress did not unequivocally express its intent to abrogate tribal immunity in actions under the Bankruptcy Code.[7] Disagreeing with the Ninth Circuit, the Eighth Circuit BAP held that absent a specific mention of the phrase “Indian tribes” in the Bankruptcy Code, any finding of abrogation under sections 106(a) and 101(27) of the Bankruptcy Code would be based on nothing more than inference or implication, which are prohibited by Supreme Court precedent.

The District Court adopted the Eighth Circuit BAP’s reasoning, rejecting that abrogation of tribal immunity may be accomplished by deductive reasoning or in the absence of specific reference to “Indian tribes:”

“While this Court accepts the conclusions that Indian tribes are both ‘domestic’ and bear the hallmarks of ‘governments,’ it does not necessarily follow that combining these admitted attributes together in a single generic phrase in [section] 101(27) ‘unequivocally and unmistakably,’ and ‘without ambiguity’ leads one to conclude with ‘perfect confidence’ that Congress intended thereby to include Indian tribes and to abrogate the ‘special brand’ of sovereign immunity enjoyed by Indian tribes without so much as a reference to Indian tribes in the Bankruptcy Code.”[8]

It remains to be seen how the Bankruptcy Court will address the issue of waiver of sovereign immunity upon remand, which the District Court did not provide any guidance on in its opinion. It also remains to be seen whether the litigation trustee will appeal the District Court’s decision to the Sixth Circuit. In the meantime, the federal courts are divided over the question of whether sections 106(a) and 101(27) of the Bankruptcy Code abrogate the sovereign immunity of Indian tribes, which division will likely eventually makes its way to the Supreme Court, particularly in light of the ever increasing commercial activities of Indian tribes in this changing economic reality.

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Notes:

[1] In re Greektown Holdings, LLC, No. 2:14-cv-14103-PDB-RSW (E.D. Mich. June 9, 2015), D.E. No. 15. [back]

[2] Kiowa Tribe of Oklahoma v. Manufacturing Technologies, Inc., 523 U.S. 751, 754 (1998); see also Michigan v. Bay Mills Indian Community, 134 S. Ct. 2024 (2014). [back]

[3] C&L Enterprises, Inc. v. Citizen Band Potawatomi Tribe of Oklahoma, 532 U.S. 411, 418 (2001). [back]

[4] Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055 (9th Cir. 2004), cert. denied, Navajo Nation v. Krystal Energy Co., Inc., 543 U.S. 871 (2004); In re Russell, 293 B.R. 34, 44 (D. Ariz. 2003) (concluding that section 106(a) abrogates tribal sovereign immunity “unequivocally[] and without implication”); In re Davis Chevrolet, Inc., 282 B.R. 674, 683 n.5 (Bankr. D. Ariz. 2002) (“It seems to this court that ‘other domestic goverment’ is broad enough to encompass Indian tribes.”) [back]

[5] Krystal Energy Co., 357 F.3d at 1057-58. [back]

[6] Krystal Energy Co., 357 F.3d at 1061. [back]

[7] In re Whittaker, 474 B.R. 687 (B.A.P. 8th Cir. 2003). [back]

[8] In re Greektown Holdings, LLC, No. 2:14-cv-14103-PDB-RSW, D.E. No. 15, pp. 25-26. [back]

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