Courts Continue Trend of Recognizing Tribal Immunity in Bankruptcy Proceedings

HIGHLIGHTS:

• Section 106(a) of the U.S. Bankruptcy Code provides for abrogation of the sovereign immunity of "governmental units" for purposes of certain bankruptcy-related litigation.
• Trial and appellate courts are not in accord regarding whether Native American tribes are included in the definition of "governmental unit."
• The U.S. Bankruptcy Court for the District of Delaware recently rejected a leading case supporting abrogation of tribal sovereign immunity, holding instead that Section 106(a) does not contain unequivocal waiver of those rights.
• This decision, and the interpretation of the "governmental unit" definition therein, has implications beyond Section 106, warranting careful consideration of current bankruptcy practice by all Native American tribes and their business ventures.

Judge Christopher S. Sontchi of the U.S. Bankruptcy Court for the District of Delaware (Court) issued a decision on Feb. 28, 2017, that has important – and positive – significance for Native American tribal governments, their commerce centers and attorneys that represent them. The decision was issued in connection with two suits brought by the Chapter 11 trustee (Trustee) of Money Centers of America Inc. (MCA) and Check Holdings Inc. (CHI), as well as Chapter 11 debtors (Debtors), to recover preferential transfers¹ paid by the Debtors to two casinos operated by separate and unrelated tribes prior to the Debtors' bankruptcy filings (the Litigation). See Casino Caribbean, LLC, et al. v. Money Centers of Am., Inc., et al. (In re Money Centers of Am., Inc., et al.), Adv. Pro. Nos. 15-50437 (CSS) and 16-50410 (CSS) (Bankr. D.Del. Feb. 28, 2017).

The casinos filed motions to dismiss the claims pending against them, arguing that: 1) the suit against Native American tribes is barred by the doctrine of tribal immunity; 2) Congress has not abrogated that immunity through the Bankruptcy Code; and 3) tribal sovereign immunity is extended to the casinos as subdivisions of federally recognized Native American tribes. The Trustee urged that Indian tribes are among the "governmental units" whose sovereign immunity has been abrogated by Congress through Section 106 of the Bankruptcy Code.

As support for his position, the Trustee cited to the "leading case" on this issue, Krystal Energy Company v. Navajo Nation, 357 F.3d 1055 (9th Cir. 2004)², in which the U.S. Court of Appeals for the Ninth Circuit concluded that Native American tribes are included within the definition of "governmental units" for purposes of Section 106³, on account of having been referred by the U.S. Supreme Court as "domestic dependent nations that exercise inherent sovereign authority." See Michigan v. Bay Mills Indian Cmty., 134 S.Ct. 2034, 2030 (2014).

U.S. Bankruptcy Court Decision

After consideration of the parties' arguments and precedent, the Court agreed with the casinos that the Litigation was indeed barred by tribal sovereign immunity. Declining to follow Krystal, Judge Sontchi instead agreed with the courts In re Whitaker, 474 B.R. 687 (B.A.P. 8th Cir. 2012), and In re Greektown Holdings, LLC, 532 B.R. 680 (E.D. Mich. 2015), that the language of Section 106 does not evidence Congress' intent to abrogate tribal immunity in the express manner that the Supreme Court has cautioned is mandated. Importantly, Judge Sontchi noted that:

Although the Supreme Court has noted that Congress need not state its intent in a particular way (i.e. use "magic words") the abrogation of immunity needs to be clearly discernible from the statutory text; however, the Greektown court noted that there is not a single example in which the Supreme Court has found that Congress intended to abrogate a tribe's sovereign immunity without specifically using the words "Indians" or "Indian tribes."

Decision at p. 27, citing Greektown Holdings, 532 B.R. at 699 (emphasis added)

In its holding, the Court joined a growing majority in concluding that Congress did not unequivocally abrogate Native American tribal sovereign immunity when it enacted 11 U.S.C. §106 despite inclusion of the catch-all term "other domestic government" within the definition of "governmental unit" in the Bankruptcy Code.

As a crucial corollary, the Court also held that the Tribes' sovereign immunity extended to the casinos it operated based on the Ninth Circuit's holding in Allen v. Gold Country Casino, 464 F.3d 1044, 1046-47 (9th Cir. 2006) and the stated goal of the Indian Gaming Regulatory Act to "promote tribal economic development, self-sufficiency, and strong tribal governments."⁴ Like in Allen, Judge Sontchi concluded that each casino functioned as an "arm of a Tribe" whose sovereignty would protect the Tribe's treasury. The Trustee has since appealed Judge Sontchi's decision, and his Motion for Leave to Appeal the Decision with regard to defendant Quapaw Casino Authority of the Quapaw Tribe of Oklahoma⁵, docketed on March 13, 2017, is pending.

Considerations for Tribes

It is worth noting that aside from protecting Tribes and casinos from suit in bankruptcy "avoidance action" litigation, Judge Sontchi's decision and the cases he relied on also make clear that many bankruptcy courts do not consider Native American tribes to be "governmental units" – a definition with applicability beyond Section 106 of the Bankruptcy Code. Tribes and their business units are cautioned to carefully consider whether their present bankruptcy practice – particularly with regard to reliance on the "governmental unit" deadline to file proofs of claim and the impact of filing a claim – is appropriately implemented. Particular care must also be taken to ensure that the process for establishing each new gaming or other tribal business venture preserves tribal immunity under the parameters of Allen v. Gold Country and Supreme Court precedent.

In any event, this will not be the last time that issues involving the extent of tribal sovereign immunity make their way through the judiciary and into practice this year. The issuance of Judge Sontchi's decision follows closely on the heels of oral argument before the Supreme Court in Lewis v. Clarke⁶, a case involving consideration of whether a tribe's sovereign immunity protects a casino employee from suit in state court involving tort claims arising from an automobile accident that occurred on non-tribal land. To date, the Supreme Court precedent has not limited immunity from suit to transactions on reservations and to governmental activities, and it would be surprising for the Court to depart from these holdings and their analyses. Distinguishing Lewis v. Clarke, though, is the fact that the plaintiffs sued the casino employee in his "individual" capacity and seek a recovery of damages from the employee's own personal assets, not those of his employer.

Holland & Knight's Native American Law Group will issue further updates on this, and any other cases of import, as they unfold. 
   

Notes

¹ Section 547 of the U.S. Bankruptcy Code, 11 U.S.C. §101 et seq. permits a trustee to sue to recover transfers of a debtor's property made to a creditor on account of antecedent debt during the 90-day period preceding a petition date.

² Cert. denied, Navajo Nation v. Krystal Energy Co., Inc., 543 U.S. 871 (2004).

³ The definition of "governmental unit" is contained within Bankruptcy Code, Section 101(27) as follows: "United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, 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).

⁴ 25 U.S.C. §2701, et seq.

⁵ The only issue the Court did not decide is whether the filing of a proof of claim by defendant Quapaw Casino Authority of the Quapaw Tribe of Oklahoma against the CHI bankruptcy estate served to waive that casino's immunity on a limited basis, with regard to the Trustee's own affirmative defense of recoupment. Further litigation on that issue will likely ensue.

⁶ Supreme Court Case No. 15-500.

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