Tuesday, August 28, 2012

Tribal Casino Bankruptcies – The Train is Leaving the Station

By Dennis J. Whittlesey

There long has been a legal debate as to whether businesses owned and operated by Indian tribes could either file for protection under the federal Bankruptcy Code or, correspondingly, be involuntarily taken into bankruptcy by creditors.

The issue is now front and center again with the recent bankruptcy filing in Southern California by the Santa Ysabel Resort and Casino, a wholly owned property of the Iipay Nation of Santa Ysabel located in San Diego County. The Iipay Nation – formerly known as the Santa Ysabel Band of Mission Indians – filed for protection under the Bankruptcy Code a month ago, and that filing has now been opposed by both the County and the casino’s largest creditor, the Yavapai-Apache Nation of Arizona. Yavapai holds approximately $33 million of the project’s $40 million indebtedness, and the County has been awarded some $3 million in payments owed by the Tribe, an award determined through mediation and confirmed by court judgment. The Yavapai sued the Iipay for its default in making loan payments and won a $9 million judgment earlier this year. Both opponents contend that the Iipay Nation cannot file for bankruptcy due to the lack of eligibility and authority for tribal filings.

Although Indian tribes are not specifically excluded from bankruptcy protection under the Code, they are not expressly included either. Thus, in order for federally recognized Indian tribes (or Indian casinos) to be eligible for relief, they must fall under one of Section 109’s prescribed categories of “debtors” – a “municipality” or a “person.” A tribe does not meet the definition of “municipality” under 11 U.S.C. § 101(40) because it is not a “political subdivision or public agency or instrumentality of a State.” It similarly is unlikely that a tribe constitutes a “person” as defined in 11 U.S.C. § 101(41).

This gets us to Section 101(27), which defines “governmental unit” broadly to include domestic and foreign governments at all levels, as well as their constituent units. Courts have held that Congress intended to define governmental units in the broadest possible sense. See TI Fed. Credit Union v. DelBonis, 72 F.3d 921, 930 (1st Cir. 1995); H.R. Rep. No. 95-595, 95th Cong., 1st Ses. 311 (1977). The fact that the definition “adds a catch-all phrase, ‘or other foreign or domestic governments’” means that “all foreign and domestic governments, including but not limited to those particularly enumerated in the first part of the definition, are considered ‘governmental units’ for the purpose of the Bankruptcy Code.” Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055, 1057 (9th Cir. 2004), cert. den. 543 U.S. 871 (2004).

It must be emphasized that the reported decisions have examined whether an Indian tribe constitutes a “governmental unit” for purposes of applying the sovereign immunity provisions of 11 U.S.C. § 106 (discussed infra). But they have not examined specifically whether a tribe is a “governmental unit” or “domestic sovereign” for purposes of eligibility for bankruptcy relief. Thus, based on existing statutory and case law, it appears that tribes, as domestic sovereigns, arguably fall under Section 101(27)’s definition of “governmental unit” and, thus, are excluded from eligibility as bankruptcy debtors.

A number of courts have ruled that Indian tribes are not eligible to file under the Bankruptcy Code because they are not specifically identified therein. However, the contrary conclusion has been reached by three courts. In ruling that Indian tribes are “governmental units” within the meaning of Section 101(27), those courts focused on statements of former Supreme Court Chief Justice John Marshall in the second of his three-decision “Marshall Trilogy” describing tribes as “domestic dependent nations.”

The bottom line here is that both sides of the Santa Ysabel bankruptcy have strong arguments and outstanding law firms to present them. To read more about this case and the arguments involved, check out the latest edition of Gaming Legal News.