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Alexander Hogan

excerpted from:  Alexander Hogan, Protecting Native American Communities by Preserving Sovereign Immunity and Determining the Place of Tribal Businesses in the Federal Bankruptcy Code, 43 Columbia Human Rights Law Review 569 (Spring, 2012)(172 footnotes omitted)(Student Note)


In most contexts, bankruptcy provides a level of certainty to both creditors and debtors by establishing recourse for debtor insolvency. Specifically, a debtor may file for bankruptcy or creditors may force a debtor into involuntary bankruptcy. This certainty, however, is not present when dealing with Indian tribes. Because the status in the Federal Bankruptcy Code is unclear, interactions between Indian businesses and creditors are complicated and could be a point of concern if ongoing problems in the financial markets make default by Indian borrowers more likely. Like attacks to the immunity doctrine, the uncertainty surrounding the Bankruptcy Code is a threat to Indian businesses. A solution to both problems must be found in order to remove barriers to Indian businesses.

This Part will first describe the different entities that conduct business on Indian land. The next section will discuss the goals of the bankruptcy system. A brief overview of the Bankruptcy Code will highlight the various chapters under which debtors may file for bankruptcy. Then, the next section will explore the application of these chapters to Indian tribes to determine whether Indian tribes can file for bankruptcy. After concluding that Indian tribes are ineligible to file for bankruptcy under existing bankruptcy statutes and describing the consequences of their inability to file, this Part will discuss equity and policy reasons why Indian tribes should be able to file for bankruptcy.

A. Types of Indian Business Entities

In order to understand the uncertainty and resultant problems created by the Bankruptcy Code, one must first understand that there are three different types of actors in the Indian business community. First, there is the tribe itself. Second, there are tribal businesses. These are corporations created by the tribe both to provide necessary services and to spur economic development. These businesses are subordinate to the tribe, but, unlike most types of government services, can be run for profit. Finally, there are businesses unaffiliated with the tribe that are owned by private, individual tribal members.

No one disputes that individual members of the tribe who own private businesses may file for bankruptcy. Rather, the uncertainty surrounding Indian entities in the Bankruptcy Code pertains to Indian tribes as a whole, as well as to the businesses these tribes charter. Because businesses chartered by tribes are responsible for substantial revenue generated by tribes, the uncertainty can have significant ramifications for Indian businesses.

Under the Indian Reorganization Act of 1934, the Secretary of the Interior can issue a charter of incorporation to a tribe allowing the tribe to form corporate entities and conduct business:

The Secretary of the Interior may, upon petition by any tribe, issue a charter of incorporation to such tribe .... Such charter may convey to the incorporated tribe the power to purchase, take by gift, or bequest, or otherwise, own, hold, manage, operate, and dispose of property of every description, real and personal, including the power to purchase restricted Indian lands and to issue in exchange therefore interests in corporate property, and such further powers as may be incidental to the conduct of business, not inconsistent with law ....

These tribal entities are known as Section 17 corporations. In interpreting the statute, the Sixth Circuit Court of Appeals has held that the language of Section 17 itself--by calling the entity an incorporated tribe'--suggests that the entity is an arm of the tribe. Therefore, if a tribe is unable to file for bankruptcy, it is unclear under what theory a tribally chartered business could file for bankruptcy given that the business is still part of the tribe. It is the general view that if tribes cannot file for bankruptcy, then neither can their businesses.

B. Goals of the Bankruptcy System

The Supreme Court has described the purpose of the bankruptcy system as promoting a fresh start for debtors:

The federal system of bankruptcy is designed not only to distribute the property of the debtor, not by law exempted, fairly and equally among his creditors, but as a main purpose of the act, intends to aid the unfortunate debtor by giving him a fresh start in life, free from debts, except of a certain character, after the property which he owned at the time of bankruptcy has been administered for the benefit of creditors. Our decisions lay great stress upon this feature of the law--as one not only of private but of great public interest in that it secures to the unfortunate debtor, who surrenders his property for distribution, a new opportunity in life.

In addition to the benefit the debtor receives from the opportunity to begin anew, there are also broader benefits to society. The current bankruptcy system can be viewed as a direct outgrowth of the United States' capitalist system, which seeks to encourage entrepreneurial activity. The system is also to the benefit of creditors, as it aims to establish an orderly distribution of the debtor's assets, thereby promoting equality among creditors.

C. Overview of the Bankruptcy Code

The chapter under which an entity files for bankruptcy depends on the nature of the entity and the results that the entity hopes to achieve through bankruptcy. Chapters 7, 9, 11, and 13 provide different options for bankruptcy under the Code.

Both individuals and businesses may use Chapter 7. Under this Chapter, a complete liquidation occurs. For individuals, this means they must liquidate their assets, distribute the value to creditors, and then start over free of debts after the liquidation. For businesses, this means they must liquidate their assets, and, instead of reorganizing and continuing operations, must cease doing business going forward. Debtors can either voluntarily file for a Chapter 7 bankruptcy or creditors can force them into an involuntary Chapter 7 proceeding.

Chapter 9 is designed for insolvent municipalities. Only voluntary filings are permitted under this Chapter, and in order to qualify as an eligible municipality, several conditions must be met. The following section will describe these conditions in greater detail when analyzing whether Indian tribes can utilize Chapter 9.

Chapter 11 allows businesses and individual consumer debtors to reorganize their financial affairs. Upon filing under Chapter 11, the Code gives debtors a period of time to reorganize their assets and liabilities in a formal reorganization plan. This option provides the possibility that the business will succeed in the future, allowing creditors to receive greater value than they would in a liquidation, preserving the jobs of those working in the business, and keeping a productive agent in the economy.

Chapter 13 gives relief to individuals with regular income who want to restructure their finances under a repayment plan that spans no more than five years. Although individuals may file under Chapter 11, as stated above, most individuals file under Chapter 13 if they want to restructure, as opposed to liquidating. However, individuals may have to revert to Chapter 11 because there is a limit on the amount of debt one can restructure under Chapter 13.

D. Eligibility of Indian Entities to File for Bankruptcy

The Bankruptcy Code does not explicitly refer to Indian tribes. Therefore, in order to determine whether tribes can file for bankruptcy, one must analyze tribal eligibility under each Chapter.

1. Chapter 13

Bankruptcy under Chapter 13 is reserved for filings by individuals with regular income and is unavailable to corporations or partnerships. Although all individuals are persons under the Code, not all persons are individuals. Even though corporations and partnerships are persons under 101(41), they are not individuals and cannot file under Chapter 13. Similarly, an Indian tribe is not an individual person, so, like corporations or partnerships, it cannot file. Although an individual member of a tribe would qualify as an individual under this definition, the tribe itself does not qualify.

2. Chapter 9

Chapter 9 bankruptcies are for municipalities. To be eligible under this provision, an entity must meet all the requirements of 109(c), which provides that an entity may only be a debtor under this chapter if it (1) is a municipality; (2) is specifically authorized in its capacity as a municipality to be a debtor under State law or a governmental officer empowered by State law authorizes the entity to be a debtor under Chapter 9; (3) is insolvent; and (4) desires to effect a plan to adjust such debts.

Section 101(40) of the Code defines the term municipality as a political subdivision or public agency or instrumentality of a State. This definition seemingly precludes Indian tribes from being considered a municipality. To maintain that an Indian tribe is a subdivision or instrumentality of a state would contradict the principles of sovereignty and self-governance that underlie the political structure of Indian tribes. In addition, the requirement that the State authorize municipalities to file would also undermine sovereignty and self-governance. Requiring one sovereign, the State, to authorize the actions of another sovereign, the tribe, does not comport with traditional notions of sovereignty.

3. Chapter 11

Chapter 11 bankruptcies are designed for individuals and businesses that wish to reorganize their assets and liabilities. The eligibility criteria for filing under Chapter 11 are very similar to criteria under Chapter 7, where persons are eligible to file. The statutory definition of persons in 101(41) includes an individual, a partnership, and a corporation.

One could argue that a tribe qualifies as a corporation. Black's Law Dictionary defines a corporation as a group or succession of persons established in accordance with legal rules into a legal or juristic person that has legal personality distinct from the natural persons who make it up ... [possessing] the legal powers that its constitution gives it. Tribes are groups of individuals organized under tribal constitutions in accordance with federal law. Similar to the way corporations are governed by boards of directors, a governing body manages tribes. Like corporations, tribes take part in commercial ventures for profit and either disburse these profits to tribal members or use them to provide services to tribal members, similar to the use of corporate profits for the benefit of constituent shareholders. Nevertheless, despite these strong analogies, there is no precedent that has defined a tribe as a corporation under the Code in order to allow it to file for bankruptcy.

Although one could make the argument that tribes are corporations based on the above analogies, it is clear that tribes are more than a simple aggregation of individuals. Tribes are also sovereigns afforded special rights and protections by law. A tribe's additional rights and protections do not negate the parallels to a corporation that exist and may even add to the legal personality distinct from the natural persons who make [the corporation] up. The critical question is whether the features that distinguish a tribe from a corporation outweigh the parallels such that tribes would not be eligible to file for bankruptcy as corporations under Chapter 11.

4. Chapter 7

Chapter 7 is reserved for debtors who want to liquidate as opposed to restructuring. Section 109(b) of the Bankruptcy Code sets forth the eligibility requirements for filing for relief under Chapter 7. A person, as defined in 101(41), is eligible for relief under this chapter. Because most debtors that qualify for Chapter 11 also qualify for Chapter 7, determining tribal eligibility under Chapter 7 involves an analysis similar to the one above for Chapter 11, with a similarly uncertain outcome.

E. Determination as to Whether Indian Tribes Can File

The above analysis shows that there is no clear place where Indian tribes fit into the Bankruptcy Code. Absent technical statutory definitions, one might see a tribe as most similar to a municipality--an entity that both governs and provides for a particular group of people within a given area. However, sovereignty prevents tribes from meeting the necessary requirements to be a Chapter 9 debtor. The most likely recourse for tribes is to argue they are sufficiently similar to corporations, thus allowing them to file under Chapters 7 or 11. However, numerous distinguishing factors and a lack of precedent would force a tribe hoping to file for bankruptcy as a corporation to make a novel, tenuously supported argument, unlikely to impress a court absent indication from Congress that it meant to include Indian tribes within the Bankruptcy Code.

The strongest factor weighing against a tribe's ability to file is the Code's more expansive definition of a governmental unit. As stated above, the strongest argument a tribe can make in favor of filing is to analogize itself to a corporation. A corporation has the power to file because it falls within the Code's definition of a person, who may file under Chapter 7 or Chapter 11. However, 101(41) of the Code explicitly states that a person cannot be a governmental unit. Therefore, if the Code deems the tribe a governmental unit, the tribe cannot be a person, and the analogy to a corporation fails.

Section 101(27) of the Code broadly defines a governmental unit as including the following: United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States ..., a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government. Courts have addressed the issue of whether, under the Code, Indian tribes are considered governmental units with regard to the sovereign immunity provision in 106, which states, Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section ...,

The most significant opinion on the issue is the Ninth Circuit Court of Appeals' holding in Krystal Energy Co. v. Navajo Nation. In Krystal, the Navajo Nation had issued tax assessments to a debtor, who appealed the assessments and filed an adversary proceeding against the Navajo Nation in bankruptcy court. The court had to determine whether the Navajo Nation was immune from suit. The bankruptcy court granted the Navajo Nation's motion to dismiss, and the federal district court affirmed. However, the court of appeals held that 106 abrogated tribal sovereign immunity and found that the phrase other foreign or domestic governments encompassed Indian tribes, citing Chief Justice Marshall's characterization in Cherokee Nation. Therefore, the debtor could bring the Navajo Nation into court. If this characterization of an Indian tribe as a governmental unit is indeed the majority standard adopted by the courts going forward, then, as stated above, a tribe cannot be both a person and a governmental unit under the Code.

There are, however, strong arguments that the Ninth Circuit was wrong. Traditionally, courts have required an explicit reference to Indian tribes as evidence of Congress' intent to abrogate tribal sovereign immunity. The federal district court in Krystal held that the Bankruptcy Code did not abrogate the tribe's sovereign immunity because such an abrogation cannot be implied but must be unequivocally expressed by Congress. Courts may not find an unequivocal expression of abrogation where the language of a federal statute does not include Indian tribes in definitions of parties subject to suit or does not specifically assert jurisdiction over Indian tribes. Because the Bankruptcy Code makes no explicit reference to Indian tribes, under canons of construction of Indian law, the courts should not find an equivocal expression sufficient to have abrogated the tribe's immunity. Although the phrase other foreign or domestic governments could logically include Indian tribes, a court could not say with perfect confidence that this was Congress' intent, as required by the Supreme Court when determining whether state sovereign immunity has been abrogated.

Even if the Ninth Circuit's decision in Krystal was wrong, the question whether Indian tribes are governmental units under the Bankruptcy Code remains. Though it is possible that the Code has not abrogated immunity because 106 lacks an explicit reference to Indian tribes, the heightened standard requiring explicit reference to tribes only applies when determining whether Congress has abrogated tribal immunity. It is possible that even though tribes may not be governmental units for the purposes of 106, they could be considered governmental units under other parts of the Code not dealing with immunity where the heightened standard does not apply. For example, 101(41) of the Code explicitly states that a person is not a governmental unit. Because immunity is not involved in 101(41), there is no requirement that there be an explicit reference to Indian tribes for tribes to fall within the definition of a governmental unit. Thus, the definition of governmental unit would appear to encompass Indian tribes, which would prevent tribes from claiming they are persons under the Code, because a governmental unit cannot be a person. Tribes, therefore, could not file for bankruptcy as corporations.

It is unlikely that Indian tribes can file for bankruptcy under the Code. A tribe's most likely avenue is to rely on the similarities between a tribe and a corporation and file as a corporation. This option, however, is foreclosed if courts deem a tribe to be a governmental unit, as the Ninth Circuit did in Krystal. Although commentators have criticized this holding, their criticisms specifically address whether a tribe constitutes a governmental unit for purposes of abrogating tribal sovereign immunity. Therefore, even if Krystalis eventually overturned, it is still possible that an Indian tribe could fall within the Code's definition of governmental unit for purposes other than abrogation of sovereign immunity. All of these obstacles, taken together, make it unlikely that tribes can file under the Bankruptcy Code.

F. Effect of Inability to File for Bankruptcy

The inability to file for bankruptcy negatively affects Indian tribes in two ways. First, it is more difficult for a struggling business to survive. Second, it is more difficult to obtain initial financing to start a business.

One of the purposes of the bankruptcy system is to restructure a business's finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders. If reorganization is impossible, it is more likely that a struggling business will go under, harming not only the business owner, but also the community that relies on the business. The community effect is amplified in Indian communities because of tribes' reliance on Indian enterprises for economic development. Exclusion from the bankruptcy system deprives Indian tribes of a benefit that they particularly need.

When creditors and insurers are uncertain of their protections under the Bankruptcy Code, they are reluctant to provide financing. Unsurprisingly, then, because the bankruptcy system is not available to Indian tribes, initial financing is difficult to obtain because of the perceived instability of dealing with Indian tribes and the lack of an institutional environment where investors feel secure. In other lending contexts, creditors can rely on an established institutional environment if a borrower becomes insolvent, but in the context of tribal dealings, creditors have no recourse to the bankruptcy system.

Furthermore, receipt of initial financing and the ability to restructure a failing business are closely linked. When a business is struggling, it will either fail or restructure. If the former occurs, then the business will default on its loans and creditors will only receive assets currently on hand through liquidation. Restructuring, however, provides the creditor with the opportunity to recoup a greater portion of its investment. In fact, one requirement of Chapter 11 is that creditors cannot receive less than they would in a liquidation. The ability to restructure can only improve, not harm, the position of creditors.

Additional features of the bankruptcy system that offer protections in the case of a default may increase a lender's willingness to make loans. For example, in a bankruptcy restructuring, a business may, with certain exceptions, assume or reject executory contracts that it entered prior to bankruptcy. Where the ability to retain valuable executory contracts in a reorganization is uncertain, lenders are less likely to provide funds to businesses for startup or expansion. With Indian entities, however, there is no uncertainty; they cannot use this feature of the bankruptcy system because they cannot enter the system at all. Clearly, if lenders are reluctant to lend when there is still a possibility, however uncertain, that the debtor can retain the contracts in bankruptcy, they will be even less willing to lend when their Indian counterparties' exclusion from the bankruptcy system renders this option impossible.

G. Equitable Reasons to Allow Indian Tribes to Utilize the Bankruptcy System

There are two primary reasons that equity requires that Indian tribes be able to avail themselves of the benefits of the bankruptcy system. First, the Ninth Circuit Court of Appeals held in Krystal that the Bankruptcy Code waived the tribe's immunity such that adverse parties can bring the tribe into bankruptcy proceedings. Under Krystal, courts can force tribes to participate in a system from which they cannot simultaneously derive a benefit. Second, other laws treat tribal enterprises like private employers and subject them to burdens as such. However, because the Code does not treat tribes like private employers, tribes cannot file for bankruptcy, creating an asymmetry that likens tribal enterprises to private employers when it is to the tribe's detriment, but distinguishes tribal enterprises from private employers when being treated like a private employer would be to the tribe's benefit.

1. Jurisdiction over Indian Tribes via Krystal

The Ninth Circuit Court of Appeals in Krystal found that Congress intended to abrogate tribal sovereign immunity in the Bankruptcy Code. Therefore, adverse parties can bring suit against tribes in bankruptcy court, effectively creating a system where parties can sue tribes in the bankruptcy system, but tribes cannot avail themselves of that system. The law denies tribes the protections of the system but subjects them to its burdens.

There are few other examples of such asymmetry in the court system, and it is highly unusual that an entity can be sued in a court despite being unable to bring its own lawsuit in that court. Although the asymmetry is not inherently unjust--provided, for example, that the excluded party could bring claims in other courts--it is unjust in the context of bankruptcy because of forum shopping.

The phenomenon of forum shopping in bankruptcy courts is illustrated by Marshall v. Marshall, which became famous because of the celebrity litigants involved. The case concerned the disposition of the estate of J. Howard Marshall II, the late husband of actress and model Anna Nicole Smith. While the Texas probate case was pending, Smith filed for bankruptcy in California after a former nanny sued her. As part of this bankruptcy proceeding, Smith filed suit against Marshall's son, who was also Smith's adversary in the Texas probate case. The bankruptcy court ultimately found in favor of Smith concerning the disposition of Marshall's estate and awarded her over $85 million in compensatory and punitive damages for tortious interference by Marshall's son in the disposition of his father's estate. The California bankruptcy court reached this conclusion under its interpretation of Texas law. At the same time, the Texas probate case continued, and, after five months of testimony from over forty witnesses, the Texas probate court found for Marshall's son on the same issue.

The Supreme Court ultimately ruled that the Texas state court did not have the right to grant itself exclusive jurisdiction over the state law claim. In other words, this decision permits a bankruptcy court finding to be diametrically opposed to a state court finding on the same issue, though both courts purport to apply the same law to the facts.

If bankruptcy courts are able to issue final orders on state law claims that are only tangentially related to a bankruptcy proceeding, forum shopping between state and bankruptcy courts may become more popular. Bankruptcy courts would effectively be acting as a parallel universe to state legal systems, thus putting the two court systems in competition with each other. The litigant would then, of course, choose the forum most amenable to its claim. Still, whether the justice system should tolerate forum shopping between bankruptcy courts and state courts is not the concern of this Note, which instead addresses the way that the opportunity for forum shopping affects Native American businesses.

Bankruptcy courts have authority to interpret state law--such as contract, property, or tort law--and thus parties that have claims against Indian entities that have waived immunity have their choice as to where to bring the claims: state court or bankruptcy court. Any strategic litigant will bring suit in the court most likely to find in its favor. Indian enterprises, however, cannot forum shop and file suit in the bankruptcy system, which gives non-Indian entities a distinct advantage in litigation. By allowing parties to sue Indian entities in bankruptcy court, but not allowing Indian entities to bring suit in bankruptcy, the law permits inequitable, one-sided forum shopping.

2. Lack of Consistency in the Likening of Tribes to Private Employers

A privately held corporation, as long as it meets the necessary requirements of the Bankruptcy Code, can file for bankruptcy and enjoy the benefits and protections the system affords. A tribal enterprise, however, even if it is similar to the private entity in all ways except its status as a tribe, cannot avail itself of the bankruptcy system. This disparity creates an advantage for the private enterprise but a detriment to the tribal enterprise.

Failing to provide tribal enterprises access to the bankruptcy system might be justified if tribal enterprises were uniformly distinguished from private enterprises in other business contexts. Tribes, unlike private corporations or municipalities, are independent sovereigns, and the law could achieve symmetry in the business context by uniformly recognizing tribes as sovereign entities that are different from other private business entities. However, an analysis of employment law--an integral aspect of doing business--reveals no such symmetry.

The federal government regulates many aspects of the employment relationship, including hours worked, wages, safety and health, collective bargaining, and prohibition of discrimination. Tribal employers are subject to lawsuits claiming they have violated these statutes. Employment lawsuits against tribal employers require that the courts determine whether Congress intended the statutes to include Indian tribes within the definition of employers. Only Title VII of the Civil Rights Act and the Americans with Disabilities Act expressly exclude Indian tribes from coverage. The rationale for excluding Indian tribes from these two statutes is respect for tribal sovereignty and self-government. Other federal employment statutes are silent as to whether they apply to Indian tribes and thus require judicial interpretation.

Courts have found that Indian tribes are subject to the requirements of the Occupational Safety and Health Act (OSHA). The Employee Retirement Income and Security Act (ERISA) has also been found to apply to tribes. In Smart v. State Farm Insurance Co., an employee of the Chippewa Health Center, which the tribe owned and operated, contested the denial of a claim under a health plan offered by the tribe. The Seventh Circuit Court of Appeals reasoned that applying ERISA to tribes would not affect tribal sovereignty and the right to self-government. The Ninth Circuit Court of Appeals reached the same result when adjudicating a dispute concerning a pension fund, finding that the application of ERISA to tribes would not interfere with sovereignty or self-government.

The application of these statutes to Indian enterprises likens them to private employers rather than the sovereign entities that they are. There may be policy arguments that justify treating an Indian enterprise like a private employer in the employment law context, such as affording the Native American workforce with protections in the event that no tribal remedies are available. However, if the law treats tribes like private employers and, as such, subjects them to suit under employment law, then the law should also treat tribes like private employers in the context of the bankruptcy system. There are equally meritorious policy arguments for allowing tribes to use the bankruptcy system. Tribes are disadvantaged by their inability to utilize the bankruptcy system, so if the law forces Indian businesses to bear the burdens and responsibilities of a private employer, then the law should also grant them the benefits and privileges of a private employer, particularly given the reciprocal nature of the employer-employee relationship.

Federal labor statutes impose duties upon employers in relation to their employees. Through the bankruptcy system, federal law also grants private employers privileges in the employer-employee relationship--namely, the right to avoid paying back wages in bankruptcy. For example, in a Chapter 7 liquidation, creditors, including employees, share in the distribution of the liquidating entity's assets, but they cannot collect beyond the amount available for liquidation, even if the employer does not pay all owed wages. Those privileges are unavailable to Indian entities, another example of the law subjecting Indian entities to the burdens but not the privileges of the legal system.



. 2012 J.D. Candidate, Columbia Law School.