Sovereign Immunity In Bankruptcy: Contrasting Opinions From U.S. Supreme Court (Puerto Rico & Lac Du Flabeau Tribe)

By: Donald L Swanson

Contrasting opinions from any court, issued a month apart, are always instructive. 

And we have a new such thing—from the U.S. Supreme Court, no less, and from May and June of this year. The contrast is on this subject: whether sovereign immunities of Puerto Rico and of a federally recognized tribe are abrogated in bankruptcy.  

On May 11, 2023, the U.S. Supreme Court issues its opinion in Financial Oversight and Management Board for Puerto Rico v. Centro De Periodismo Investigativeo, Inc., Case No. 22-96, like this:

• the Question Presented is whether the bankruptcy-type statute enacted for Puerto Rico “categorically abrogates any sovereign immunity the board enjoys from legal claims”; and
• the Supreme Court says, “We hold it does not.”

By contrast, a month later (on June 15, 2023), the U.S. Supreme Court issues its opinion in Lac Du Flambeau Band of Lake Superior Chippewa Indians v Coughlin, Case No. 22-227, like this:

• the Question Presented is whether the Bankruptcy Code “expresses unequivocally Congress’s intent to abrogate the sovereign immunity of Indian tribes”; and
• the Supreme Court says, “That is a high bar. But . . . we find it has been satisfied here.”

What follows is a summary of each contrasting opinion.

Puerto Rico Opinion

–Facts

Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act of 2016 (PROMESA) to deal with a fiscal emergency:

• Puerto Rico’s public debt soars to a level that it cannot service, and Puerto Rico is not eligible for relief under the Bankruptcy Code—so, Congress adopts PROMESA as a bankruptcy-type relief for Puerto Rico;
• PROMESA creates a Financial Oversight and Management Board for Puerto Rico (the “Board”) as an entity within the territorial government of Puerto Rico that:
  • approves and enforces its fiscal plans and budgets;
  • supervises its borrowing; and
  • represents Puerto Rico in the PROMESA proceedings; and
• Respondent sues the Board to get access to access to public records, and the Board moves to dismiss the suit on sovereign immunity grounds.

–Legal Standards Applied

The abrogation standard for sovereign immunity “is stringent”: Congress must make its intent to abrogate “unmistakably clear in the language of the statute.”

Such “unmistakably clear” language exists in only two situations:

1. when a statute explicitly says it is stripping immunity from a sovereign entity; and
2. when a statute creates a cause of action and authorizes suit against a government on that claim.

PROMESA fits neither.  It does not even mention (let alone explicitly abrogate) sovereign immunity, and it does not create any cause of action or claim against the Board or Puerto Rico.

The upshot is evident: Congress does not make an intention to abrogate sovereign immunity for the Board or Puerto Rico “unmistakably clear.”

Lac Du Flambeau Tribe Opinion

–Facts

Lac du Flambeau Band of Lake Superior Chippewa Indians is a federally recognized Tribe that owns several business entities.

In 2019, one of those entities (the “Band Lender”) loans $1,100 to Coughlin at high-interest and over a short-term.  Later, Coughlin files Chapter 13 bankruptcy with the loan unpaid.

Then Band Lender, with knowledge of the bankruptcy and the automatic stay, continues collection efforts.  This causes Coughlin emotional distress, and he attempts suicide.

Coughlin asks the Bankruptcy Court to enforced the automatic stay against Band Lender, who invokes a sovereign immunity defense. 

–Bankruptcy Code Provisions

Two Bankruptcy Code provisions lie at the crux of the abrogation question:

1. §106(a) provides, “sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section,” including the automatic stay (emphasis added); and
2. §101(27) says “governmental unit” within the Bankruptcy Code “means United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States . . . , a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government” (emphasis added).

–Central Question & Legal Standard

So, the “central question” is “whether the abrogation provision in §106(a) and the definition of ‘governmental unit’ in §101(27), taken together, unambiguously abrogate the sovereign immunity of federally recognized tribes.”

The Supreme Court applies the same legal standard it applied a month earlier: i.e., to “abrogate sovereign immunity, Congress must make its intent unmistakably clear in the language of the statute.”

–Ruling and Rationale

The Supreme Court rules:

• “the Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possesses the power to assert such immunity”; and
• “Federally recognized tribes undeniably fit that description; therefore, the Code’s abrogation provision plainly applies to them as well.”

Here is a summary of its rationale:

• the §101(27) definition of “governmental unit” exudes comprehensiveness from beginning to end;
• other bankruptcy provisions support the plain meaning of the Bankruptcy Code’s abrogation language, including the fresh start policy that:
  • protects debtor’s assets from dismemberment and discharges and restructures debtor’s debts—such protections sweep broadly, by their own terms; and
  • applies to all creditors, including governmental units; and
• a federally recognized tribe qualifies as a “governmental unit” under §106(a) because:
  • it exercise uniquely governmental functions—makes its own substantive laws, enforces those laws in its own forums, and taxes activities on the reservation; and
  • both Congress and the Supreme Court have repeatedly characterized tribes as governments.

–Concurring and Dissenting Opinions

Justice Thomas concurs in the result but adds his view that:

• tribal immunity does not extend to a tribe’s activities conducted off the reservation; and
• since the stay violations arise from off-reservation conduct, Band Lender lacks sovereign immunity.

Justice Gorsuch dissents like this:

• Until today, there was not one example in all of history where this Court had found that Congress intended to abrogate tribal sovereign immunity without expressly mentioning Indian tribes somewhere in the statute.
• No longer. The Court reads the phrase “other foreign or domestic government” as synonymous with “any and every government” . . . —all for the purpose of holding that §106(a) of the Bankruptcy Code abrogates tribal sovereign immunity. It is a plausible interpretation. But plausible is not the standard our tribal immunity jurisprudence demands.
• Before holding that Congress has vitiated tribal immunity, the Legislature must “unequivocally express” its intent to achieve that result. Respectfully, I do not think the language here does the trick. The phrase “other foreign or domestic government” could mean what the Court suggests: every government, everywhere. But it could also mean what it says: every “other foreign . . . government”; every “other . . . domestic government.”
• And properly understood, Tribes are neither of those things. Instead, the Constitution’s text—and two centuries of history and precedent—establish that Tribes enjoy a unique status in our law. Because this reading of the statute is itself (at worst) a plausible one,
• I would hold that the Bankruptcy Code flunks this Court’s clear statement rule and reverse.

Conclusion

The Supreme Court’s new and contrasting opinions on sovereign immunity abrogation, issued a month apart, provide great help on understanding the abrogation standard and how it is applied.

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