Bankruptcy Implications of Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin

At a Glance

• Supreme Court rules that tribes are subject to certain requirements of the Bankruptcy Code applicable to creditors (listed below).
• Tribes and tribal entities remain ineligible under the Bankruptcy Code for bankruptcy relief as a debtor.

On June 15, 2023, the U.S. Supreme Court decided Lac du Flambeau Band of Lake Superior Chippewa Indians, et al. v. Coughlin. The case involved a tribal entity, “Lendgreen,” that lent an individual, Brian Coughlin, “$1,100 in the form of a high-interest, short-term loan.” Coughlin filed for bankruptcy under Chapter 13. Believing it was not subject to certain Bankruptcy Code provisions that generally applied to creditors, including the automatic-stay provisions, Lendgreen continued its debt collection efforts despite the bankruptcy proceeding. Coughlin filed a motion to enforce the automatic stay against Lendgreen, its parent corporations and the tribe. The bankruptcy court denied the motion, but the First Circuit reversed. The Supreme Court granted certiorari thereafter.

The Supreme Court held that 11 U.S.C. § 106(a) abrogates tribal sovereign immunity for the enumerated list of Bankruptcy Code provisions in Section 106(a). Specifically, the Court was convinced that the definition of “governmental unit,” incorporated into Section 106(a), swept in tribal governments by including the broad phrase “other foreign or domestic governments” in its definition. The decision resolved a circuit court split that has existed since 2019. Compare In re Coughlin, 333 F.4th 600, 603-04 (1st Cir. 2022) (holding that the Bankruptcy Code abrogates tribal sovereignty); Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055, 1061 (9th Cir. 2004) (same); with In re Greektown Holdings, LLC, 917 F.3d 451, 460-61 (6th Cir. 2019) (concluding the reverse).

Although tribes and tribal entities are now subject to 11 U.S.C. § 106(a), they remain ineligible for bankruptcy relief as debtors since 11 U.S.C. § 109 only provides eligibility to a “person” or “municipality” and a “governmental unit” is not incorporated into either definition.

Tribes should, however, consult with counsel to determine how Lac du Flambeau will impact the way tribal businesses conduct their operations off-property going forward. For reference, we include below a list of some of the most important provisions implicated by the holding, along with a brief explanation of those provisions.

• Tribes may be held liable for violations of the automatic stay as well as the discharge and plan injunctions.
  • Sections 362, 524 and 1141 — The commencement of a bankruptcy case is intended to provide a “breathing spell” for a debtor, imposing an automatic stay that prohibits commencement or continuance of any action to collect or recover a prepetition debt (i.e., a debt arising prior to commencement of the case). The successful completion of a bankruptcy case is then intended to provide a debtor with a “fresh start” through issuance of a discharge and/or confirmation of a plan. Any attempts to enforce a prepetition debt against a debtor are sanctionable under the Bankruptcy Code, whether prior to or after issuance of the discharge and/or plan confirmation, and parties found in violation may be subject to punitive damages. Tribes should consult with counsel before seeking to recover monies owed by a debtor in bankruptcy; a motion for relief from the automatic stay or from the discharge or plan injunction may be appropriate.
• Tribes may be subject to actions for turnover and clawback by the estate or estate representative.
  • Sections 542 and 543 — The turnover provisions of the Bankruptcy Code provide that an entity in possession, custody or control of property of the debtor must return that property to the debtor or trustee upon request after the commencement of a bankruptcy case. In some appellate circuits, for example, a creditor must promptly deliver to the bankruptcy estate property that was validly repossessed from the debtor prior to the petition date. Certain circuits impose sanctions upon creditors for failure or refusal to do so. These claims may be litigated through motion practice; commencement of an adversary proceeding is not required. However, given the prevailing circuit split on the issue of sanctions, tribes should contact counsel before responding to a motion seeking turnover.
  • Sections 546, 547, 548, 549, 550, 551 and 749 — The clawback provisions of the Bankruptcy Code authorize a debtor or trustee to commence avoidance actions to invalidate certain pre-bankruptcy transactions and “claw back” or recover their value for the benefit of the debtor’s bankruptcy estate. In some cases, the inquiry is related to the timing of the transfer; for example, under Section 547 of the Bankruptcy Code, payments from a debtor to a third-party creditor within the 90 days prior to the filing of the bankruptcy case may be recovered as “preferential” transfers. In other cases, the inquiry is related to whether a debtor made a “fraudulent” transfer with the intent to hide assets, or the debtor received from the transfer less than fair market value while the debtor was insolvent. There are statutory defenses to preference and fraudulent transfer actions, both of which must be litigated through an adversary proceeding. Specific deadlines govern adversary proceedings, so a tribe served or threatened to be served with an adversary complaint should contact counsel immediately.
• A tribe’s claims against or liens on property of a debtor may be eliminated in a “free and clear” sale.
  • Section 363 — Often, in the context of a Chapter 11 case, a debtor in possession will auction its assets for sale. When purchasing assets from a bankruptcy estate, purchasers often rely on Section 363(f) of the Bankruptcy Code, which allows property of the debtor to be sold “free and clear” of any interest in property, including liens, claims and other encumbrances (such as leasehold interests), but excluding rights of setoff, recoupment and other defenses — if preserved. Because this broad protection strictly precludes claimants or creditors — now including tribes — from recovering damages through claims against the purchaser of the assets after the sale has closed, and can otherwise potentially eliminate critical litigation rights, tribes with any interest in property of a debtor should promptly contact counsel upon service of any bidding procedures.
• A tribe may give nonconsensual third-party releases in connection with a Chapter 11 plan.
  • Sections 105 and 524 — In some jurisdictions, under certain circumstances, Chapter 11 plans may include significant provisions that release nondebtor parties from liability to other nondebtor parties without the consent of all potential claimholders. A nonconsensual third-party release essentially releases third parties that did not file for bankruptcy from claims that could otherwise be brought against them, in exchange for the released parties’ payment into a pool of funds. Tribes should consult with counsel to preserve any claims against a party subject to a third-party release prior to confirmation of any plan that is served on the tribe.
• Statutes of limitations on potential claims against tribes may be subject to tolling.

Section 108 — To help provide a “breathing spell” for a debtor, the Bankruptcy Code provides that statutes of limitations on nonbankruptcy claims that have not expired prior to the commencement of a bankruptcy case may be tolled for two years after the filing of the bankruptcy petition. This means that statutes of limitations do not continue to run during that period of the bankruptcy case and deadlines for bringing an action on such claims are held in abeyance. Tribes involved in nonbankruptcy litigation should consider whether the plaintiff commenced a bankruptcy proceeding in assessing whether the plaintiff’s claims are time-barred.