By Michelle Tirado

A CALIFORNIA TRIBE WAIVED its sovereign immunity by filing a proof of claim in a bankruptcy proceeding, according to a sate appellate court. In Santa Ynez Band of Mission Indians v. Torres, the Court of Appeals of California upheld the trial court ruling that the Santa Ynez Band opened itself up to suit from a contractor when it filed a proof of claim in the contractor’s Chapter 11 bankruptcy proceedings.

The tribe was suing Torres Construction for allegedly substandard work at its casino. Torres answered the complaint and filed a cross-complaint to recoup money for services provided to the tribe. The state court determined that sovereign immunity did not bar the cross-complaint if it was treated as an action for setoff or equitable recoupment.

After the tribe answered the cross-complaint, Torres filed for bankruptcy, which stayed the state court’s actions. The tribe filed a $3 million proof of claim in the bankruptcy proceeding. Later, the bankruptcy court lifted the stay and ordered the tribe and Torres to prosecute their claims in state court.

Relying on 11 United States Code Section 106 and the bankruptcy court order, the trial court found that the tribe waived its sovereign immunity “and abrogated all matters arising out of its Proof of Claim in said bankruptcy case,” and, as a result, Torres was not limited to the relief of setoff or recoupment on the cross-complaint.

Section 106 of the Bankruptcy Code abrogates the sovereign immunity of “governmental units,” including domestic or foreign governments. It specifically states: “A governmental unit that has filed a proof of claim in the case is deemed to have waived sovereign immunity with respect to the 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.” (Emphasis added.)

The tribe returned to bankruptcy court for a clarification. The bankruptcy court said that its interpretation of the law was not “a matter of exclusive Bankruptcy Court jurisdiction and may be determined by the state court …”

The trial court found against the tribe and awarded Torres damages on the cross-complaint. The tribe objected because the state court did not address the “legal authority” for abrogating the tribe’s sovereign immunity. The trial court overruled the tribe’s objection.

In affirming the trial court’s ruling, the appellate court said that, although the term “Indian Tribe” does not appear in the Bankruptcy Code, the Ninth Circuit Court of Appeals in Krystal Energy Co. v. Navajo Nation concluded that in the Bankruptcy Code, Congress did intend to abrogate the sovereign immunity of foreign and domestic governments, including Indian tribes. The tribe argued that Krystal Energy was wrongly decided and cited opinions from other federal courts that the Bankruptcy Code does not abrogate a tribe’s sovereign immunity.

The court declined to follow those cases and concluded that Krystal Energy controls.

“We hold that where, as here, an Indian tribe files a proof of claim in an adversarial bankruptcy proceeding, the tribe waives its sovereign immunity as to counter claims or cross-complaints that are transactionally related to the proof of claim,” the court said.

“We are well aware of the Supreme Court’s admonition to ‘tread lightly’ in the area of abrogation of tribal sovereign immunity. But the Supreme Court’s decisions do not require Congress to utter the magic words ‘Indian tribes’ when abrogating tribal sovereign immunity.”