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).

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