- High court rules tribe-owned lenders are subject to bankruptcy laws
- Ruling could spur more creditor planning, attorneys say
A Supreme Court ruling that Native American tribe-owned lenders must comply with US bankruptcy laws resolves a circuit split and heightens the financing subsector’s risks in debt collection.
In the 8-1 opinion, the Supreme Court said Thursday that the US Bankruptcy Code doesn’t specifically mention tribes, but that the court doesn’t have “a magic-words requirement” in trying to determine whether Congress, in writing the law, meant to waive tribal sovereign immunity.
The ruling means tribe-owned businesses must generally comply with US bankruptcy law’s automatic stay that protects debtors from creditors’ collection and lawsuits. They could jockey to be secured creditors—as government entities often do—in bankruptcy cases. But they are nonetheless creditors who are bound by US laws, the high court said in the opinion.
“The tribe will be treated the same as other ‘government units,’” said Wilda Wahpepah, special counsel in Sheppard Mullin Richter & Hampton LLP’s finance and bankruptcy practice.
The battle stems from payday lender Niiwan LLC, owned by the Lac du Flambeau Band of Lake Superior Chippewa Indians, trying to repeatedly collect on a $2,600 loan issued to borrower Brian Coughlin, who had filed for Chapter 13.
The band petitioned the justices after the US Court of Appeals for the First Circuit ruled that Niiwan was bound to the bankruptcy code’s automatic stay.
The First Circuit’s ruling was in line with a Ninth Circuit holding but reached the opposite conclusion of the Sixth Circuit.
Creditor Planning
“Native American Indian Tribes have been using their sovereign immunity in the many ‘rent -a-tribe’ lending cases to avoid claims and legal process arising from debts in bankrupt fintech companies,” Gary H Leibowitz, attorney with Cole Schotz P.C.'s restructuring practice, said.
But the Supreme Court is now demonstrating that tribal sovereignty is no longer absolute and can be waived by judicial action, said Mike Andrews, head of the Native American Policy group at McGuireWoods Consulting and former chief counsel to the US Senate Committee on Indian Affairs.
“The impact on other tribal economic development opportunities could be troubling,” he said.
Now subject to US bankruptcy law’s intricacies, tribes could conduct more creditor planning and may have more incentive to obtain secured property interests from debtors, said J. Kirk McGill, special counsel at Hall Estill.
“If I’m getting thrown in with all the other unsecured creditors and I’m going to get 5 cents on the dollar five years from now, that’s a good reason for me to want to be a secured creditor,” McGill said.
‘Slippery Slope’
The ruling could have an effect on tribal sovereign immunity outside of bankruptcy. Concern over the broader impact of the majority opinion seemed at least in part to inform Justice Neil Gorsuch’s dissent.
Gorsuch noted that it was the first time the Supreme Court found that Congress “intended to abrogate tribal sovereign immunity without expressly mentioning Indian tribes somewhere in the statute.”
“Certainly this case is a slippery slope for other similar type cases,” Andrews said.
Lawyers will likely look to find out how many other federal statutes may apply similar language to the one the justices interpreted Thursday, McGill said.
“I would be worried about things like gambling statutes, tax statutes, criminal statutes—there’s all kinds of statutes that talk about governmental entities,” McGill said.
Courts could find that tribal sovereign immunity is waived in other federal statutes where Congress has waived governmental immunity, Wahpepah said.
In 2016, the US Court of Appeals for the Seventh Circuit upheld a Wisconsin tribe’s sovereign immunity defense related to a Fair and Accurate Credit Transaction Act, or FACTA, class suit, Wahpepah noted.
FACTA doesn’t explicitly mention Indian tribes, but the Seventh Circuit held there that Congress didn’t unequivocally abrogate the sovereign immunity of tribes in FACTA, Wahpepah said.
“If a similar case were brought against a tribe, a court might reach a different conclusion based on today’s decision, exposing tribal governments and their wholly owned tribal businesses,” Wahpepah said.
To contact the reporters on this story:
To contact the editors responsible for this story:
Learn more about Bloomberg Law or Log In to keep reading:
Learn About Bloomberg Law
AI-powered legal analytics, workflow tools and premium legal & business news.
Already a subscriber?
Log in to keep reading or access research tools.