GM 12-101

Tenth Circuit States that Tribal Business Incorporated under State Law May Not Be Entitled to Tribal Sovereign Immunity

On Friday, July 27, 2012, a three-judge panel of the Tenth U.S. Circuit Court of Appeals affirmed the dismissal of an action brought against CND, LLC (CND), a limited liability company licensed under the state laws of Oklahoma, on the grounds of the sovereign immunity of its owner, Cherokee Nation Businesses, Inc. However, the opinion also stated that CND is not entitled to sovereign immunity because it was organized under state law (rather than tribal law), noting that the applicable statute provides that “[e]ach limited liability company may . . . [s]ue, be sued, complain and defend in all courts . . . .” The Court nonetheless upheld the dismissal on sovereign immunity grounds because the plaintiff had not preserved this argument for appeal. The case is Somerlott v. Cherokee Nation Distributors, Inc., No. 10-6157 (10th Cir. July 27, 2012).

The Cherokee Nation (Nation) created Cherokee Nation Distributors, Inc. (CDNI) as an Oklahoma-licensed corporation, and in 2004 converted CNDI from a corporation to an LLC, renaming it CND. In 2008, CND became a wholly-owned subsidiary of Cherokee Nation Businesses, Inc., a tribally-chartered corporation wholly-owned and regulated by the Nation; however, CND remained organized under state law.

The suit arose from the termination of a CND employee, Tina Marie Somerlott, who sued CND in 2008, alleging violations of Title VII of the Civil Rights Act (Title VII) and the Age Discrimination in Employment Act (ADEA). CND moved to dismiss, arguing both that it was exempt from Title VII and the ADEA, and that it was shielded by the Nation’s sovereign immunity. The trial court concluded that CND was a “subordinate economic entity” of the Nation and, applying the six factor test for such entities set out in a prior Tenth Circuit opinion, determined that CND was entitled to sovereign immunity and dismissed the suit.

The Tenth Circuit, however, wrote that the trial court erred―that the subordinate economic entity test does not apply when a tribally-owned entity is organized under state law which allows the entity to be sued, noting that the statute under which CND was organized specifically states that “[e]ach limited liability company may . . . [s]ue, be sued, complain and defend in all courts . . . .” The appellate court went on to state that “CND, a separate legal entity organized under the laws of another sovereign, Oklahoma, cannot share in the Nation’s immunity from suit . . . .”

Judge Neil Gorsuch wrote separately to elaborate on his view that sovereign immunity never encompasses a business owned by one sovereign―whether foreign, federal, state, or tribal―but incorporated under the laws of a second sovereign if that second sovereign’s laws “expressly allow the business to be sued.” “A corporation,” Gorsuch wrote, “isn’t a natural person endowed with inalienable rights, but an ‘artificial being’ that may exercise only those privileges the law ‘confers upon it, either expressly, or as incidental to its very existence.'”

However, all three judges ultimately agreed to uphold dismissal on the grounds that Somerlott had failed to properly raise the issue in the trial court and, therefore, was not entitled to a ruling on that issue. Thus, the Court’s language on sovereign immunity of state-chartered tribal business entities does not have the force of law or precedent, but it provides a strong indication of how the Tenth Circuit would rule if faced with such a case.

Two state high courts have split on this question, with the New York Court of Appeals holding that a tribe’s sovereign immunity extended to its state-chartered entity, and the Arizona Supreme Court holding that a tribal entity chartered under state law fell outside the tribe’s sovereign immunity. The Tenth Circuit is the highest federal court to address this question.

We will continue to monitor developments in this field. Please let us know if we may provide additional information regarding this case.