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The Precarious Immunity of Tribal Corporations

June 04, 2012

The Case
American Property Management Corporation v. Superior Court, by the California Court of Appeals (court) May 24, 2012.

The Context
Tribal sovereign immunity is a well-established doctrine of federal Indian law but it is not popular with courts. Judges dismissing cases brought against tribes or tribal corporations often complain that sovereign immunity is "unfair" because it prevents non-Indian litigants from seeking redress for alleged contract breaches or torts committed by tribes. It is sometimes noted that the federal and state governments provide statutory waivers to permit suits but that tribes normally do not. Courts will, therefore, look for opportunities to limit the scope of sovereign immunity, especially where tribal business corporations are involved. American Property Management Corporation v. Superior Court provides an example.

The Facts
The Sycuan Band of the Kumeyaay Nation (Tribe) charted the Sycuan Tribal Development Corporation (STDC) under Sycuan's tribal laws. STDC formed American Property Investors LLC (API) under California law, as its sole member. API formed Sycuan Investors LLC, under California law, as its sole member. Sycuan Investors LLC formed U.S. Grant Hotel Ventures LLC (USG) under California law as its sole member. USG bought the U.S. Grant hotel in San Diego and entered into an agreement with APMC to manage the hotel.
In 2005, USG sued APMC for $1.35 million. APMC countered claimed for $5 million. USG prevailed at tribal court but the court reversed certain rulings and remanded for further proceedings on the counterclaims, at which point USG moved to dismiss on grounds of sovereign immunity. The motion was granted and APMC filed a petition for writ of mandate in the court, which granted the writ.

What the Court Decided
The court applied a multi-factor test drawn from the Tenth Circuit's decision in Breakthrough Mgmt. Group, Inc. v. Chukchansi Gold Casino & Resort (10th Cir.2010) 629 F.3d 1173, 1185 (10th Cir. 2010), focusing on:

  1. the method of the corporation's creation;
  2. its purpose;
  3. its structure, ownership, and management, including the amount of control the tribe has over the entities;
  4. whether the tribe intended for the entity to have tribal sovereign immunity;
  5. the financial relationship between the tribe and the entity; and
  6. whether the purposes of tribal sovereign immunity are served by granting immunity to the entity.

The court concluded that USG was not an "arm" of the tribe, citing in particular the circumstances that the LLC form insulated the tribal treasury from risk and that the entity was formed as "a profitable enterprise rather than for any specific purpose related to tribal development":

"With respect to "the financial relationship between the tribe and the entities" ... relevant considerations include whether the corporate entity generates its own revenue, whether a suit against the corporation will impact the tribe's fiscal resources, and whether the subentity has the power to bind or obligate the funds of the tribe. The vulnerability of the tribe's coffers in defending a suit against the sub-entity indicates that the real party in interest is the tribe.

... cases which have not extended immunity to tribal enterprises typically have involved enterprises formed solely for business purposes and without any declared objective of promoting the tribe's general tribal or economic development. Here, as we have explained, the declared business purpose for forming U.S. Grant, LLC was to acquire and operate the hotel as a profitable enterprise rather than for any specific purpose related to tribal development. Further, in determining whether the policy behind tribal sovereign immunity is furthered by conferring immunity on an entity related to an Indian tribe, cases look to whether immunity "directly protects the sovereign Tribe's treasury, which is one of the historic purposes of sovereign immunity in general." ...As we have already discussed, sovereign immunity is not necessary to protect the tribe's treasury because of the limited liability created by organizing U.S. Grant, LLC as a California limited liability company."

What it Means
The court's decision reflects a desire by the court to limit the scope of tribal sovereign immunity. Its logic can easily be adapted by other courts to deny other tribal corporations the protection of sovereign immunity. Tribes need to recognize the threat and plan accordingly.

The court's holding is based on two errors in law and logic. First, the notion that a tribal corporation should not share the tribe's immunity if a judgment against it would not impact the tribal treasury makes no sense. In the absence of tribal guarantee, a judgment against a corporation will never impact a tribal treasury. Shielding the owner's assets is the whole point of incorporation.

Second, the court's conclusion that acquiring and operating a hotel is not a purpose "related to tribal development" ignores the Supreme Court's 1998 decision in Kiowa Tribe of Oklahoma v. Manufacturing Technologies, Inc. rejecting any distinction between governmental and commercial activities of a tribe. In that case, the court applied sovereign to prevent the plaintiff from suing the Tribe for breach of a contract to purchase stock in an aviation company.

What Tribes Can Do
Tribes should form corporations and LLCs under federal or tribal law, not state law. Resolutions, articles, operating agreements, bylaws and other organic documents should address tribal economic development goals and identify governmental purposes for the revenue to be generated by the entities formed. Tribal members should predominate in management. Elected officials should have the right to remove board members.

Tribes should be ready to point out the defects in the arguments that the shielding of tribal assets is inconsistent with tribal sovereign immunity and that off-reservation business activity is unrelated to tribal economic development.

The Indian Nations Law Team
The Indian Nations Law team's periodic Alerts supplement our monthly Updates by drawing attention to recent court decisions that we think may reflect, or spark, a trend in Indian law. For more information on Godfrey & Kahn's Indian Nation law services, contact Brian Pierson at 414.287.9456 or bpierson@gklaw.com.

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