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Tribal Sovereign Immunity Defeats Bankruptcy Jurisdiction

Authors: Francis J. Lawall and Veronica A. Torrejón

3/22/2017
Tribal Sovereign Immunity Defeats Bankruptcy Jurisdiction

Reprinted with permission from the March 16, 2017 issue of The Legal Intelligencer. © 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Jurisdictional issues under the Bankruptcy Code can often ­create a procedural morass for even the most seasoned practitioner. When tribal ­sovereign immunity is thrown into the mix, the analysis gets even harder. Recognizing the unique nature of tribal immunity, a federal bankruptcy court recently blessed its use by two Native American tribes as a jurisdictional shield against claims and counterclaims even though it was one of the tribes that initiated suit in In re Money Center of America, Docket No. 14-10603 (Bankr. D. Del. Feb. 28) (CSS).

The decision, by Judge Christopher S. Sontchi, lies at the intersection of ­bankruptcy law, tribal sovereign ­immunity and subject matter jurisdiction. Native American tribes, of which there are more than 400 within the United States, have long been recognized as possessing common-law immunity from suit traditionally enjoyed by sovereign powers. This immunity, may only be abrogated by "unequivocal" and "explicit" Congressional action.

In the Money Center case, in addition to questions of whether and when tribes can assert sovereign immunity protection, the court also considered whether Congress specifically limited or wholly eliminated sovereign immunity protections in the Bankruptcy Code. Courts have split on this issue.

Handing down its decision in late February, the court ultimately granted a motion to dismiss by one of the two movants, both of which were casinos run by Native American tribes. Significantly, the court held that: both tribes and, therefore, the casinos they operate, enjoyed sovereign immunity; the Bankruptcy Code does not abrogate sovereign immunity; and except for when waived, sovereign immunity divests the court of subject matter jurisdiction.

The Two Cases

The casinos' motions were filed in two separate actions—both involving Money Centers of America, Inc. and its subsidiary Check Holdings (the debtors). The first case, commenced by the debtors' Chapter 11 trustee, sought avoidance of certain "preferential transfers" to Thunderbird Entertainment Center, Inc. In the second case, Quapaw Casino Authority (QCA) had intervened in an action, alleging that Check Holdings had failed to reimburse it for cash advanced to customers using the ATM provided by Check Holdings. The trustee counterclaimed seeking to recover alleged transfers made to QCA.

As an initial matter, the court held that the casinos could assert sovereign immunity to challenge subject matter jurisdiction, under Rule 12(b)(1) of the Federal Rules of Civil Procedure. The court rejected the trustee's argument that sovereign immunity could only be used as an affirmative defense, examining different Third Circuit holdings and concluding that the casinos were only making facial attacks on subject matter ­jurisdiction based on the ­allegations as pled rather than challenging any factual basis asserted by the trustee.

The court granted the motion by Thunderbird—a casino wholly-owned by the Absentee Shawnee Tribe of Oklahoma, thus dismissing the preference action against the tribe. The motion filed by QCA—a subdivision of the Quapaw Tribe of Oklahoma—was granted only in part, since the court held that it lacked sufficient information regarding a counterclaim filed in that action to determine whether the QCA had waived sovereign immunity.

Did Congress Abrogate Sovereign Immunity in the Bankruptcy Code?

After determining that the casinos were both entitled to the protections of sovereign immunity—since they had sufficient ­relationships with their tribes—the court held that Congress had not abrogated the tribes' sovereign immunity in Section 106 of the Bankruptcy Code. Section 106 states, in relevant part: "sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section." Section 101 of the Bankruptcy Code defines "governmental unit" as including "other foreign or domestic governments."

The court acknowledged a split in the courts on this issue. Specifically, the U.S. Court of Appeals for the Ninth Circuit, in Krystal Energy v. Navajo Nation, held that since the U.S. Supreme Court has recognized that tribes are "domestic dependent nations," it follows that tribes are "domestic governments" under the Bankruptcy Code. 357 F.3d 1055, 1057-58 (9th Cir. 2004). However, the Eighth Circuit bankruptcy appellate panel in Whitaker v. Dakota Finance (In re Whitaker) disagreed with the Ninth Circuit and held that such a finding is inconsistent with the required "explicit" Congressional abrogation of immunity, 474 B.R. 687, 693-95 (B.A.P. 8th Cir. 2012). The Whitaker court held that Congress did not unequivocally abrogate sovereign immunity under the Bankruptcy Code. The Whitaker holding is echoed by the U.S. District Court for the Eastern District of Michigan in Buchwald Capital Advisors v. Papas (In re Greektown Holdings), where the court explained that it could not say with "perfect confidence" that the term "other domestic government" refers to tribes. The Money Center court found the reasoning of Whitaker and Greektown persuasive.

Waiver of Sovereign Immunity

After holding that the casinos were ­protected by sovereign immunity, which was not abrogated by the Bankruptcy Code, the court next looked at whether the QCA had, nonetheless, waived sovereign immunity by filing a proof of claim against Check Holdings. The court, however, held that when a tribe files suit it does not waive immunity, it only does so with respect to counterclaims that sound in recoupment. Moreover, recoupment must be narrowly construed, meaning that "both debts must arise out of a single integrated transaction." Also, under no circumstances can the counterclaimed amount exceed the amount sought in the suit. Thus, while filing a proof of claim will subject the tribe to Bankruptcy Court jurisdiction, such jurisdiction ­remains very much limited to the claims asserted within the proof of claim itself.

At that point, the QCA seemed well on its way to winning its motion. However, the court held that it did not yet have sufficient information to evaluate the different claims. The court, thus, denied the QCA's motion to dismiss the counterclaims until it could determine whether the trustee's counterclaims and the QCA's claims were subject to or exceeded the bounds of recoupment.

The Money Center decision is interesting at several levels. First, at least in Delaware, it would appear that Section 106 will not serve as a general bar to tribal sovereign immunity. Second, even if a proof of claim is filed by a tribe, that filing does not constitute a general waiver of sovereign immunity and submission to bankruptcy court jurisdiction, but rather is limited only to recoupment rights which might exist in connection with the claims covered by the proof of claim.  

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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