The interaction between Native American tribes and the U.S. bankruptcy code has been a complex and evolving legal issue. Tribal sovereignty, which grants tribes a degree of self-governance, can affect how bankruptcy laws apply to them, according to the indian tribes. However, bankruptcy laws are federal, and they do apply to tribes and individual tribal members in certain situations.
The issue of predatory lending affecting Native American tribes has been a concern, particularly in the context of online lending and payday loans. Some predatory lenders have sought to exploit the sovereign status of tribes, which could potentially shield them from certain state laws and regulations.
- Sovereign Immunity: Native American tribes have sovereign immunity, which means they are generally immune from lawsuits and other legal actions unless they explicitly waive that immunity or Congress abrogates it. Some predatory lenders have attempted to enter into partnerships with tribes to benefit from this immunity.
- Online Lending: Some lenders have established online lending operations in collaboration with tribes, claiming that the sovereign status of tribes exempts them from state usury laws and other regulations governing lending practices.
- Concerns and Criticisms: This practice has faced criticism and legal challenges. Critics argue that such partnerships may lead to exploitative lending practices, trapping borrowers in cycles of debt with exorbitant interest rates and fees.
- Regulatory Response: Both state and federal authorities have taken steps to address these concerns. States have sought to enforce their lending laws, and federal agencies like the Consumer Financial Protection Bureau (CFPB) have investigated and taken action against certain lenders engaged in unfair and deceptive practices.
- Legal Battles: There have been legal battles surrounding the question of whether tribal sovereign immunity shields these lending operations from regulatory scrutiny. Courts have issued varying decisions on this matter, with some cases affirming the authority of states to regulate lending activities even when conducted in partnership with tribes.
On June 15, 2023, the U.S. Supreme Court decided Lac du Flambeau Band of Lake Superior Chippewa Indians, et al. v. Coughlin. This 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. Lendgreen decided that 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.
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.
Moving forward, tribes need to consider the following:
- 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 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.
- 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.
In the past, debtors have been left in a nasty limbo when dealing with these tribal debts. Now, with this ruling, debtors can assert the same defenses against tribal creditors as they can non-tribal ones.
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