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Bankruptcy Filing by Tribal Member Does Not Abrogate Tribal Sovereign Immunity; Arm or Agency of Tribe Also Retains Sovereign Immunity

July 30, 2012 | Posted by Groshong, Geoff | Print this page
Four members of a recognized tribe, The Lower Sioux Community, in the State of Minnesota (the "Tribe"), filed individual bankruptcy petitions (these individuals are referred to as "debtors" below). The bankruptcy trustees in those four cases (the "Trustees") commenced adversary proceedings. In three of the adversary proceedings, the trustees pursued the Tribe and the debtors for turnover of ongoing tribal revenue payments owed to the debtors under the Tribe's ordinances and the Indian Gaming and Regulatory Act ("IGRA"). In the fourth adversary proceeding, the trustee sought to avoid a lien asserted by a Tribe-related entity, Dakota Finance Corporation ("DFC"), on ongoing revenue payments by the Tribe to the debtor. The Tribe and DFC asserted sovereign immunity. The Bankruptcy Court held that the Tribe and a related entity, DFC, were protected by sovereign immunity from actions to obtain the revenues or to avoid DFC's lien against Tribe revenue payments.

The Trustees appealed to the Bankruptcy Appellate Panel for the Seventh Circuit (the "BAP"), asserting that the Tribe's sovereign immunity was abrogated by Congress in enacting the present form of 11 U.S.C. Section 106(a), which abrogates sovereign immunity for certain sections of the Bankruptcy Code "as to a governmental unit." "Governmental unit" includes, among other things, "other foreign or domestic government" under 11 U.S.C. Section 101(27).

The BAP affirmed. The Tribe is a federally recognized Indian tribe organized according to Section 16 of the Indian Reorganization Act, and as such it enjoys sovereign immunity as a matter of common law from suits on contracts. Tribal sovereignty is subject to the control of Congress, but without congressional authorization, the Indian Nations are exempt from suit. Under established United States Supreme Court precedent, abrogation of sovereign immunity cannot be implied but must be unequivocally expressed in explicit legislation. The BAP held that Congress did not, by enacting Section 106(a) of the Bankruptcy Code, unequivocally express its intent to abrogate the sovereign immunity of Indian tribes, in explicit legislation, by providing for such abrogation as to "other foreign or domestic governments." In affirming the Bankruptcy Court, the BAP noted that a leading case, Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055 (9th Cir. 2004), had held that Section 106(a) of the Bankruptcy Code did abrogate tribal sovereign immunity on the basis that Indian tribes are in fact a member of a group of domestic governments whose immunity Congress intended to abrogate.

The BAP distinguished Krystal. Indian tribes are not mentioned at all in the statute. In fact, Indian tribes are "domestic dependent nations" and are neither foreign nor domestic governments within the meaning of the Bankruptcy Code definition of "governmental unit." Courts have been directed to adhere to the general principle that statutes are to be interpreted to the benefit of Indian tribes. In enacting Section 106 of the Bankruptcy Code, Congress did not unequivocally express its intent to abrogate the sovereign immunity of tribes. Sovereign immunity also protected DFC. "Absent waiver, the Supreme Court has made clear that immunity does apply to commercial activities of the tribe" and to subdivisions of a tribe, including those engaged in economic activities, provided that the relationship between the entity and the tribe is sufficiently close to permit the entity to share in the tribe's immunity. The BAP could not say that the Bankruptcy Court clearly erred in concluding that DFC was an arm or agency of the Tribe entitled to the same immunity as the Tribe. The court's factual analysis may provide guidance for tribes in retaining sovereign immunity for related commercial entities, including those operating under IGRA.

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