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Tribal Sovereign Immunity Bars Preference Claims Against Casinos Subject to Recoupment Rights

Casino Caribbean, LLC v. Money Ctrs. of Am., Inc. (In re Money Ctrs. of Am., Inc.), Adv. Nos. 14-50437 (CSS), 16-50410 (CSS), 2017 WL 775780 (Bankr. D. Del. Feb. 28, 2017)

In this Opinion, the Delaware Bankruptcy Court addressed for the first time whether tribal sovereign immunity bars preference actions against casinos operated by (or on behalf of) Indian tribes.  After considering split authority from other jurisdictions, the Court ruled that it does, although the right to use preference liability defensively in support of a recoupment claim may still be preserved.

The facts underlying the Opinion concern preference claims brought by Michael St. Patrick Baxter, as Chapter 11 Trustee (the “Trustee”) of Money Centers, Inc., et al. (the “Debtors”), against casinos (the “Casinos”) operated by the Quapaw Casino Authority (“QCA”) and Thunderbird Entertainment Center, Inc. (“Thunderbird”).  The Casinos are each associated with federally recognized Indian tribes—QCA with the Quapaw Tribe of Oklahoma and Thunderbird with the Absentee Shawnee Tribe of Oklahoma.  The Trustee’s preference claims are for $220,633.80 against Thunderbird and $1,114,020.76 against QCA.  Significantly, the Trustee’s claim against QCA was brought as a counterclaim in an adversary proceeding in which QCA is an intervening plaintiff.  In that proceeding, QCA seeks, inter alia, a declaration that $502,018 the Debtors allegedly failed to reimburse to QCA is not property of the Debtors’ estates.  QCA also filed proofs of claim in the Debtors’ cases with respect to its claims.

QCA and Thunderbird moved to dismiss the Trustee’s preference claims based on tribal sovereign immunity.  In opposition, the Trustee argued, among other things, that his preference claims are viable because tribal sovereign immunity was abrogated by Congress pursuant to section 106(a) of the Bankruptcy Code.

In its analysis of this issue of first impression for Delaware, the Court noted that Indian tribes have long been recognized as having common law immunity from suit.  However, that immunity can be abrogated by Congress if the intent to do so is “unequivocally expressed” in “explicit legislation.”  Op. at 23 (citation omitted).  Section 106(a) of the Bankruptcy Code is legislation that provides for abrogation of sovereign immunity for purposes of section 547 and other sections of the Bankruptcy Code.  However, the statute is limited in its application to “governmental unit[s].”  11 U.S.C. §106(a).  The question thus presented was whether Indian tribes such as the Quapaw Tribe of Oklahoma and the Absentee Shawnee Tribe of Oklahoma are qualifying “governmental units.”

Authority in other jurisdictions is split on this issue.  Governmental units are defined in section 101(27) of the Bankruptcy Code to include “other foreign or domestic governments.”  The 9th Circuit held in Krystal Energy Co. v. Navajo Nation that tribes are domestic governments within the scope of the statutory language, and, accordingly, that section 106(a) of the Bankruptcy Code abrogates tribal sovereign immunity.  Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055 (9th Cir. 2004).  However, courts in other jurisdictions have subsequently disagreed.  See, e.g.In re Whitaker, 474 B.R. 687 (8th Cir. B.A.P. 2012) (concluding section 106(a) lacks expression of unequivocal intent to abrogate sovereign immunity of Indian tribes); In re Greektown Holdings, LLC, 532 B.R. 680 (E.D. Mich. 2015) (same).

After considering the split authorities, Judge Sontchi agreed with the persuasive reasoning of Whitaker and Greektown.  His Honor noted that section 101(27) of the Bankruptcy Code does not include “Indians” or “Indian tribes” in its definition of government units, and found that section 106(a) does not unequivocally express an intent to abrogate tribal sovereign immunity. Accordingly, His Honor concluded that the Trustee’s preference claims against QCA and Thunderbird are barred absent a waiver of sovereign immunity.  Op. at 27.

The Trustee did not raise issues of waiver with respect to Thunderbird.  Accordingly, Thunderbird’s motion to dismiss was granted.  However, with respect to QCA, the Trustee argued that it waived tribal sovereign immunity by filing proofs of claim.  The Trustee further argued that QCA’s claims are subject to disallowance under section 502(d) of the Bankruptcy Code.  Op. at 28-38.  The Court rejected these arguments, but found that, notwithstanding tribal sovereign immunity, the Trustee’s rights of recoupment are preserved up to the extent of QCA’s $502,018 claim against the Debtors.  As courts have held, when a tribe files suit, it waives immunity as to defendant counterclaims that sound in recoupment.  His Honor made no ruling on the validity or amount of the Trustee’s potential claims in recoupment, but denied QCA’s motion to dismiss pending further determination of the issue.  Op. at 28-38.

[Update – On March 29, 2018, the Delaware District Court affirmed the “well-reasoned decisions” of the Bankruptcy Court and found no error on the Bankruptcy Court’s part in concluding that Congress did not unequivocally express an intent to abrogate sovereign immunity of Indian tribes in sections 106(a) and 101(27).]