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Supreme Court Addresses Interplay of Sovereign Immunity And Insolvency Statutes

In two cases in as many months, the Supreme Court tackled the application of sovereign immunity in two separate insolvency statutes. Two separate government-like entities suffered conflicting fates while the Court (arguably) employed the same analysis. How so?

Clear Statement Rule

When Congress intends to abrogate sovereign immunity of an entity that would be entitled to assert it, the Court requires that Congress’s language be “unmistakably clear.” Congress must “unequivocally declare” the abrogation of sovereign immunity enjoyed by a defendant. This “clear statement rule” requires Congress to unequivocally declare when it seeks to modify sovereign immunity enjoyed by a defendant. When the language is not “plain”, the Court generally holds that sovereign immunity was not intended to be waived.  

Financial Oversight And Management Board For Puerto Rico v. Centro De Periodismo Investigativo, Inc. No. 22–96, 598 U.S. (May 11 2023)

In order to address Puerto Rico’s public debt crisis, Congress enacted the Puerto Rico Oversight Management And Economic Stability Act of 2016 (“PROMESA”). PROMESA authorized Puerto Rico and its governmental units to seek relief similar to which would be available for municipalities under a title 11 of the United States Code. The centerpiece of PROMESA was the creation of a seven member board to oversee the restructuring process. Because the Board was deemed an entity within the territorial government, the Board was treated (for all purposes) as an arm of Puerto Rico.

When an investigative body sought information from the Board (which the Board refused to provide), the Board was sued in federal court. The Board asserted that it was entitled to sovereign immunity. The trial court (and the Court of Appeals) both determined that PROMESA abrogated Puerto Rico (and the Board’s) sovereign immunity.

The Supreme Court did not determine whether Puerto Rico is entitled to sovereign immunity; the Court was only evaluating whether the language of PROMESA categorically abrogated any sovereign immunity which existed (allowing the Board to be sued). While PROMESA adopts § 106 of the Bankruptcy Code, the Court was clear that such abrogation was limited to only certain claims reflected in § 106 of the Bankruptcy Code. It did not extend to “any and all” lawsuits. Because that language was limited, Congress did not intend to wholly abrogate sovereign immunity. Therefore, since PROMESA did not wholly eliminate Puerto Rico’s immunity from suit, the lower courts must actually determine whether the Board is entitled to sovereign immunity on the facts and claims pled in the underlying case.   

Lac du Flambeau Band of Lake Superior Chippewa Indians et al. v. Coughlin, No. 22-227, 598 U.S. (June 15, 2023)

Here, the Court determined whether § 106 of the Bankruptcy Code abrogated tribal sovereign immunity. Prepetition a debtor took out a short-term loan from a business operated through a Tribe. Unable to pay his various debts (including the short-term loan) the debtor filed a chapter 13 case. During the case, the debtor alleged that the Tribe continue to pursue collection activities in violation of § 362 of the Bankruptcy Code. The Tribe responded arguing that it was entitled to sovereign immunity. The Bankruptcy Court held § 106 of the Bankruptcy Code did not clearly abrogate tribal sovereign immunity and the court of appeals reversed. Noting a circuit split of authority, the Court granted certiorari.

Section 106 of the Bankruptcy Code plainly abrogates sovereign immunity as to any “governmental unit.”  Therefore, § 106 of the Bankruptcy Code did manifest a clear intent to waive sovereign immunity; however, that did not end the inquiry. 

In order to determine which “governmental units” fall within the abrogation, the Court reviewed § 101(27) of the Bankruptcy Code’s definition of “governmental unit.” The Court highlighted the recitation of entities included within the definition of “governmental unit” including the United States, States, Commonwealths, Territories, municipalities (and various respective instrumentalities thereof) and “other foreign or domestic governments”.  The definition plainly does not include the term “Tribe” specifically. The Court concluded that the listing of illustrative forms of government – including the “other foreign or domestic government” phrase the end – was Congress’s clear statement to include all governments by whatever location, nature, or type in the definition. Federally recognized tribes qualify as governments because they exercise unique governmental functions. The fact that Congress may have used the word “Tribes” in other circumstances (but not here) is not definitive; the phrase “other domestic or foreign governments” is sufficiently broad to capture Tribes. Because “Tribes” fall within the statutory definition (even if not by specific mention), the clear statement rule applied. Congress clearly intended to abrogate sovereign immunity for Tribes, allowing them to be sued.

Justice Gorsuch filed a dissenting opinion. Interestingly, the Gorsuch dissent goes through the same “clear statement” analysis that the majority does. However, Justice Gorsuch took issue with the lack of inclusion of the word “Tribes” within the definition of “governmental unit”. Justice Gorsuch argued the clear statement rule requires clarity. Since Congress generally uses “Tribe,” “domestic dependent nation,” “Indian,” “Native American,” or “Indigenous People” in statutory provisions intending to affect tribal issues (including on other sovereign immunity grounds), Congress’s lack of inclusion of those specific words in § 101(27) of the Bankruptcy Code means the statute is “not clear”. Justice Gorsuch argued that the catchall phrase relied upon by the majority is susceptible to multiple meanings (which is acknowledged by the majority). Therefore, the “multiple meanings” actually negates a clear statement. Because the statute fails the clear statement rule, Justice Gorsuch would hold that the Tribes were not included among the governmental units whose sovereignty immunity was abrogated in § 106 of the Bankruptcy Code. Interestingly, Justice Gorsuch’s construction would mean be the only “government” that is not subject abrogation is a “Tribe”.

Justice Thomas’s Take 

Interesting, in each case, Justice Thomas issued an “outlier” opinion addressing whether the asserting “government” was truly entitled to immunity in any instance. Under Justice Thomas’s constructs: (i) Puerto Rico was not entitled to immunity from suit in federal court anyway (so the abrogation analysis was not the correct inquiry) and (ii) Tribes should not be entitled to immunity for off-reservation activities. While neither of these positions rise or fall on the language of the insolvency statute at issue, it will be interesting to see whether either of these positions gain support in future decisions. 


restructuring & insolvency, supreme court, insolvency statues, sovereign immunity