Rochelle's Daily Wire

The U.S. Supreme Court decided to hear two more bankruptcy cases this term. To resolve a split of circuits, the Court will rule in Lac du Flambeau whether Section 106 of the Bankruptcy Code abrogates Indian tribes’ sovereign immunity.

The Court’s decision in Tyler will resolve a recently arisen circuit split and determine whether a real estate tax foreclosure can violate the Takings Clause of the Fifth Amendment.

The Court granted both petitions for certiorari on January 13. Oral argument in the cases will likely take place in April, with decisions before the end of the term in late June.

Tyler and the Takings Clause

While the certiorari petition was pending in Tyler v. Hennepin County, 22-166, a circuit split arose. Between the two cases just added to the Supreme Court’s argument calendar, Tyler may have greater practical significance for bankruptcy practice.

By deciding in Tyler whether a real estate tax foreclosure by a governmental unit can violate the Takings Clause, the Supreme Court may put to rest a long-standing circuit split on the question of whether a tax foreclosure can be attacked in bankruptcy as a fraudulent transfer.

In Tyler, the county had foreclosed on a woman’s home to recover $15,000 in real estate taxes. The county sold the home for $40,000 but gave the homeowner none of the $25,000 surplus. Conceding the validity of the foreclosure, the homeowner filed a class action under the Takings Clause challenging the county’s retention of the $25,000 surplus.

The district court dismissed for failure to state a claim and was affirmed last year in the Eighth Circuit. Tyler v. Hennepin County, 26 F.4th 789 (8th Cir. 2022). The homeowner filed a petition for certiorari in May.

The highest courts in six states and five federal district courts found Takings Clause violations when governmental units in tax foreclosures kept more than the homeowner owed. Courts in eight states found no constitutional violation.

The homeowner in Tyler has the Sixth Circuit on her side. In October, the Cincinnati-based appeals court created a circuit split by holding that a real estate tax foreclosure violated the Takings Clause. Hall v. Meisner, 21-1700, 2023 BL 2043 (6th Cir. Oct. 13, 2022). The Sixth Circuit denied a motion for rehearing en banc on January 13. To read ABI’s report on Hall, click here.

If the Supreme Court concludes that a homeowner has a constitutional right to the surplus in a tax foreclosure sale, the decision may put a related issue to rest: Can a tax foreclosure be attacked in bankruptcy as a fraudulent transfer?

In BFP v. Resolution Trust, 511 U.S. 531 (1994), the Supreme Court held that regularly conducted real estate mortgage foreclosures cannot be fraudulent transfers, no matter how much equity the debtor loses above the mortgage debt.

The Fifth, Ninth and Tenth Circuits expanded BFP by holding that real estate tax foreclosures cannot be called fraudulent transfers. The most recent of those decisions came from the Ninth Circuit. See Tracht Gut, LLC v. Los Angeles County Treasurer, 836 F.3d 1146 (9th Cir. 2016). To read ABI’s report on Tracht Gut, click here.

The Second, Third, Sixth and Seventh Circuits have held that real estate tax foreclosures can be attacked as fraudulent transfers. To read ABI’s reports, click here, here, here and here.

Indian Sovereign Immunity and Lac du Flambeau

Over a lengthy dissent, the First Circuit deepened an existing circuit split in May by holding that the Bankruptcy Code waived sovereign immunity as to Native American tribes. Coughlin v. Lac du Flambeau Band of Lake Superior Chippewa Indians (In re Coughlin), 33 F.4th 600 (1st Cir. May 6, 2022). To read ABI’s report, click here.

The First Circuit sided with the Ninth Circuit, which had held in 2004 that Section 106(a) abrogates sovereign immunity for tribes. Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055, 1061 (9th Cir. 2004).

The First Circuit disagreed with the Sixth Circuit, which found no waiver in 2019. In re Greektown Holdings, LLC, 917 F.3d 451, 460- 61 (6th Cir. 2019), cert. dismissed sub nom. Buchwald Cap. Advisors LLC v. Sault Ste. Marie Tribe, 140 S. Ct. 2638 (2020). While the certiorari petition was pending in Greektown, the case settled, and the petition was dismissed. To read ABI’s report on Greektown, click here.

The facts before the Supreme Court in Lac du Flambeau could not be more compelling in favor of the debtor.

Despite bankruptcy, a payday lender owned by a federally recognized tribe continued attempting to collect an unsecured debt. Two months after bankruptcy, the debtor attempted to commit suicide, blaming his action on the incessant calls.

In bankruptcy court, the debtor sought an injunction to halt collections attempts, along with damages and attorneys’ fees. The bankruptcy court granted the tribe’s motion to dismiss, based on sovereign immunity.

The First Circuit accepted a direct appeal and reversed. The tribe filed a petition for certiorari in September. The Court granted the petition on January 13, along with the petition in Tyler.

The cases are Tyler v. Hennepin County, 22-166 (Sup. Ct.); and Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, 22-227 (Sup. Ct.).