First Circuit Holds that Native American Indian Tribe, and its Online “Payday Lender” Arm Cannot Ignore the Automatic Stay of the Federal Bankruptcy Code.

In a matter of first impression, the US Court of Appeals for the First Circuit has held that the provisions of the Bankruptcy Code that abrogate and set aside the doctrine of “sovereign immunity” apply to Native American Tribes and their “payday lender” subsidiaries, so that such creditors can no longer ignore the fact a borrower has filed for federal bankruptcy protection. In the case of In re Coughlin sub nom Coughlin v. Lac Du Flambeau Band of Lake Superior Chippewa Indians, et al., _____ F.4th _____, Case No. 21-1153 (May 6, 2022), in a 2-1 decision, the First Circuit found that the abrogation provisions of Section 106(a) of the Bankruptcy Code, which eliminates the defense of “sovereign immunity” for “governmental units” as defined by Section 101(27) of the Code, encompasses and explicitly applies to Native American Indian Tribes and the “arms of the tribe” that conduct online “payday lending” operations.

In Coughlin, the borrower had taken out and $1,100 “payday loan” from Lendgreen in 2019, a wholly-owned online “payday lending” subsidiary of the Appellee Indian Tribe, charging more than 500% interest per annum on each loan made. Later that year, the debtor filed a Chapter 13 bankruptcy case in Massachusetts. Lendgreen was listed in the debtor’s bankruptcy filing and mailing matrix. By the time of the debtor’s bankruptcy filing his debt to Lendgreen had grown to nearly $1600 with the accrual of interest. Mr. Coughlin submitted a Chapter 13 Plan provided that all creditors would receive a 100% “dividend”, paying all creditors that filed proofs of claim 100% in full. The debtor, by his attorney, Richard N Gottlieb, Esq. of Boston, served a copy of the debtor’s Chapter 13 Plan on Lendgreen. Notwithstanding the fact that the bankruptcy code imposed an “automatic stay” barring all creditors from taking any further debt-collection activity without first obtaining bankruptcy court approval for the same,  Lendgreen nonetheless repeatedly “dunned” Mr. Coughlin seeking repayment of its debt through numerous and repetitive debt collection letters, emails and voicemail messages to the debtor. 2 months after he filed his Chapter 13 bankruptcy case, Coughlin attempted to take his own life, based upon his belief that, notwithstanding his bankruptcy filing, his “mental and financial agony would never end” and blamed such agony on Lendgreen’s “ regular and incessant telephone calls, emails and voicemails.”

When Coughlin moved to enforce the Automatic Stay under 11 U.S.C. § 362(k) against Lendgreen and its corporate parents, the  Native American Indian Tribe, seeking an order both prohibiting further collection efforts as well as damages attorney’s fees and expenses, the tribe and its affiliates asserted that they enjoyed “tribal sovereign immunity” and moved to dismiss the enforcement action. U.S. Bankruptcy Judge Frank J. Bailey agreed with the Indian Tribe’s claim of “tribal sovereign immunity”, held that the abrogation provisions of Section 106(a) did not apply to the Indian Tribe because it was not a “Governmental Unit”  under the Bankruptcy Code’s definition of the same term, and then proceeded to grant the Tribe’s  Motion to Dismiss the debtor’s enforcement action. Debtor’s counsel then took the extraordinary step of seeking direct appellate review by the First Circuit Court of Appeals of the bankruptcy court’s decision, thereby bypassing the intermediate appellate courts, the U.S. District Court for the District of Massachusetts and the Bankruptcy Appellate Panel of the First Circuit, under 28 U.S.C. § 158(d)(2). Both the U.S. Bankruptcy Court for the District of Massachusetts and the US Court of Appeals for the First Circuit granted direct appellate review of the bankruptcy court’s original decision below.

In a 2-1 decision written by Judge Sandra Lynch dated May 6, 2022, the majority of the panel held that the bankruptcy court’s decision below (that that the Bankruptcy Code’s “abrogation” provisions did not apply to the Indian Tribe and it’s payday lending operation) was legally erroneous and reversed the decision of the bankruptcy court below and remanded the matter back for proceedings consistent with the First Circuit’s judgment in the matter. The First Circuit found that the Indian Tribe was, indeed , a “government” because they acted as the governing authority of its membership, and that, as a government, it was “domestic” in nature because it existed within the United States. The First Circuit found that the definition of a “governmental unit” as expressed in section 101(27) of the Bankruptcy Code was defined as broadly as humanly possible, namely:

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 Common-
wealth, a District, a Territory, a municipality, or a foreign state;
or other foreign or domestic government.

It was this last “catch-all” definition that the First Circuit held explicitly covered Indian Tribes, finding that not only did the text of the definition clearly encompass Indian Tribes, but the conclusion was also supported by the historical context so that when Congress abrogated sovereign immunity in 1994, it did so “against the pre-existing backdrop of § 101(27).”  The court adopted the debtor’s reasoning, stating “[a]s Coughlin argues, Congress was aware of the existing definition of “governmental unit“ when it incorporated it into § 106.” The majority of the panel rejected the Indian tribes attempt to argue that, notwithstanding both the broad original definition of “governmental unit” and the historical context underlying the enactment of that definition and the later-enacted § 106, that Congress did not “unequivocally express” its intent to abrogate “tribal sovereign immunity”. The tribe contended that, because neither the bankruptcy code nor the legislative history of the same used the phrase “Indian Tribe“, Congress did not mean to abrogate the tribe’s rights of sovereign immunity unequivocally and expressly. The First Circuit rejected this approach as a requirement to use of “magic words” in order to expressed congressional intent. The court had no difficulty in finding recent Supreme Court precedent that explicitly rejected such an approach in the case of Cooper v. FAA, 566 U.S. 291 (2012) when Congress seeks to affect an abrogation of sovereign immunity in a federal statute. The Tribe was similarly unsuccessful in persuading the First Circuit that they were entitled to “special” treatment because of the fact that they were an Indian tribe.

It is not clear, at this point in time, whether or not the Tribe will be seeking further appellate review from the First Circuit or seek a further appeal to the United States Supreme Court. However, the First Circuit’s decision makes it absolutely clear that no entity, even an Indian Tribe asserting its “tribal sovereign immunity” from suit, should treat the Bankruptcy Code lightly. The holding of the First Circuit also makes it clear that no one, not even a “governmental unit” with pretensions of somehow being special, entitled or otherwise unconstrained by the same rules that all others must follow, are, in point of fact, not above the rule of law that governs the United States of America, particularly in the area of consumer protections such as those provided under the federal Bankruptcy Code.


In a recent decision by Bankruptcy Judge William C. Hillman in the case of In re Kappeler, the Bankruptcy Court in Boston was presented with a Motion to Dismiss an adversary proceeding seeking to declare a debt that the Debtor thought was a dischargeable breach of contract one for a non-dischargeable fraud. The Debtor, an electrician, had been hired to do some electrical work for the plaintiff, an assisted-living facility in Blackstone, Massachusetts.


The plaintiff claimed that the Debtor had represented that he would perform the electrical work and install a fire alarm system in a competent fashion, that he would complete all work to code standards and that all work had passed inspection. The plaintiff went on to allege that the electrical work was not code compliant and did not meet the requirements for a commercial assisted-living facility, necessitating  the plaintiff to pay substantial sums for correction of the work performed by the Debtor. When the Debtor filed a petition for bankruptcy protection under Chapter 7 of the Bankruptcy Code, the plaintiff brought an adversary proceeding to declare the debt owed to it to be non-dischargeable for fraud.


The Debtor responded with a Motion to Dismiss the case based upon the assertion that, among other things, the Plaintiff’s damages were caused from substandard work (i.e. a breach of contract) and not from any misrepresentation as to whether the work was “up to code” or had not been inspected (i.e. positive fraud). The court denied the Motion to Dismiss pointing out that the Debtor had been paid some $35,000 for the electrical work that he did do and therefore the claim for fraud, although needed to still be proven with evidence, the adversary proceeding’s Complaint, in fact, was “plausible” and therefore not subject to being dismissed by the court at that point in the adversary proceeding.


What does this really mean for debtors and creditors? Generally, a simple breach of a contract, by itself, does not give rise to a debt that is non-dischargeable for fraud. However, where specific representations are made about the quality of the work or whether work will be performed in a particular way, such representations may give rise to a potential adversary proceeding for non-dischargeability. By comparison, in the case of Bellas Pavers v. Stewart, the very same Judge granted a directed verdict in favor of the Debtor after the close of a plaintiff creditor’s case where the creditor (a sub-contractor) could not prove that the Debtor (the general contractor) intended not to pay the contractor at the time that the contractor was retained. Judge Hillman was affirmed by the Bankruptcy Appellate Panel for the First Circuit on an appeal defended by my firm. Which only goes to show that when differentiating between a contract claim and fraud claim, the “devil is in the details”.


In Re: Kappeler, Daniel W. (Lawyers Weekly No. 04-012-14) (16 pages) (Hillman, J.) (USBC) Jonathan Horne, of Jager Smith, for the debtor; Patrick O. Flaherty for plaintiff Ducharme Estates, Ltd. (Chapter 7 Case No. 11-18166-WCH; Adversary Proceeding No. 13-1166) (Jan. 30, 2014).