U.S. Supreme Court Bankruptcy Roundup

• Published date: 27 July 2023
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Sovereign Immunity: Public Sector Government
• Law Firm: Jones Day
• Author: Mr Christopher DiPompeo and Mark Douglas

Since May 2023, the U.S. Supreme Court has issued three decisions addressing or potentially impacting issues of bankruptcy law. These included rulings concerning the abrogation of sovereign immunity for Native American tribes under the Bankruptcy Code, and for instrumentalities of Puerto Rico under a similar statute enacted in 2016 allowing the Commonwealth to restructure its debts. The Court also handed down an opinion concerning a homeowner's entitlement to the surplus proceeds of a real estate tax foreclosure sale. That ruling could conceivably impact fraudulent transfer litigation in bankruptcy cases arising from real property foreclosures. Finally, the Court denied petitions to review three decisions concerning the "solvent-debtor exception," which has been applied by some courts to require the payment of postpetition interest to unsecured creditors under a cram-down chapter 11 plan.

Tribal Sovereign Immunity

On June 15, 2023, the Court ruled in Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, No. 22-227, 599 U.S. ___ (U.S. June 15, 2023), that section 106(a) of the Bankruptcy Code abrogates Native American tribal sovereign immunity because a Native American tribe satisfies the definition of a "governmental unit" in section 101(27).

Recognized Native American tribes generally have inherent authority to govern themselves without interference by federal or state governments. An important element of this "tribal sovereignty" is immunity from lawsuits in federal, state, and tribal courts, or "tribal sovereign immunity." Under this principle, a tribe may be sued only if the tribe consents to being sued or if Congress has clearly authorized such a suit.

Lac du Flambeau addresses the issue of whether the Bankruptcy Code provides such a clear congressional authorization. Bankruptcy Code Section 106(a) of the Bankruptcy Code abrogates the sovereign immunity of a "governmental unit" in connection with disputes relating to many provisions of the Bankruptcy Code, including actions to enforce the automatic stay, preference and fraudulent transfer avoidance actions, and proceedings seeking to establish the dischargeability of a debt.

Furthermore, pursuant to section 106(b) of the Bankruptcy Code, a governmental unit that files a proof of claim in a bankruptcy case "is deemed to have waived sovereign immunity with respect to a claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which the claim of such governmental unit arose."

Section 101(27) of the Bankruptcy Code defines the term "governmental unit" as:

United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.

11 U.S.C. ' 101(27) (emphasis added).

In July 2019, the debtor took out a payday loan from an indirect subsidiary of the Lac du Flambeau Band of Lake Superior Chippewa Indians (the "Band"). Later that year, the debtor filed a chapter 13 petition in the District of Massachusetts.

After the lender repeatedly...