For businesses unable to pay creditors, bankruptcy can offer rebirth or an orderly demise. In either case, the federal bankruptcy process can protect debtors from their creditors, giving “to the honest but unfortunate debtor … a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.” (Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).) In other words, filing bankruptcy can be a valuable tool in the life of a business concern. But it is one tool that has not been used widely by tribal enterprises, let alone tribal governmental gaming operations.
The federal bankruptcy code dictates how businesses die and how their creditors divide what is left. Its use, like the use of corporate codes at the inception of a business, goes to the heart of what it means to be a firm in a particular jurisdiction. So it is somewhat curious that tribal businesses are prevented, either practically or legally, from using tribal law to order their affairs in bankruptcy. At the very least, it runs counter to the right of tribes “to make their own laws and be ruled by them.” (Williams v. Lee, 358 U.S. 217, 220 (1959).)
The current economic climate has triggered speculation regarding how tribal gaming operations would navigate the bankruptcy process. Fanned by the bankruptcy of Greektown Casino Hotel (once partially owned by a tribe) and the Wells Fargo/Lac du Flambeau debacle, that speculation, coupled with cases abrogating tribal sovereign immunity in the bankruptcy context, suggests that tribes should at least attempt to control their exposure to insolvency by (1) legislating tribal approaches to bankruptcy and (2) contracting with potential future creditors and potentially tribal debtors regarding a common treatment for bankruptcy in Indian country. If federal bankruptcy laws do not work for tribe-owned businesses, tribal bankruptcy laws should.
It is likely that, if implemented, both approaches would be challenged. A tribal bankruptcy code would be attacked as infringing on the exclusive jurisdiction of the federal bankruptcy courts. Agreements with potential future debtors and creditors would be attacked based on tribal court jurisdiction over such entities. Both challenges may be surmountable—and worth the trouble. Non-Indian creditors might even eventually find tribal bankruptcy to be quicker, more efficient and more predictable than attempts to fit tribal businesses into the typical bankruptcy process.
Courts see federal bankruptcy law as so pervasive that it “preclude[s] enforcement of state laws on the same subject much like many other areas of congressional power listed in Article I, Section 8, of the Constitution, such as patents, copyrights, currency, national defense and immigration.” (Sherwood Partners Inc. v. Lycos Inc., 394 F.3d 1198, 1201 (9th Cir. 2005).) Indeed, one court went so far as to opine that “Indian tribal courts have neither exclusive nor concurrent jurisdiction to hear bankruptcy proceedings” as a result of the federal government’s role. (Lower Brule Const. Co. v. Sheesley’s Plumbing & Heating Co. Inc., 84 B.R. 638, 641 (D.S.D. 1988).) Nevertheless, federal bankruptcy law co-exists with, and often actually incorporates, state laws like personal exemptions and voidable transfers. The question in the state context has become whether state law is a “creditor rights provision of the kind that is tolerated by the Bankruptcy Code, or [bestows power] within the heartland of bankruptcy administration.” (Sherwood, 394 F.3d at 1201.) In other words, any attempt by a tribe to regulate the entire field of bankruptcy would need to weather a challenge that, because the federal system has exclusive jurisdiction, the tribe lacks it.
The federal preemption inquiry is different depending on whether the targeted law is tribal or state. (Reich v. Mashantucket Sand & Gravel, 95 F.3d 174, 181 (2d Cir. 1996).) In order to find federal preemption of tribal laws, courts ask whether Congress intended to divest a tribe of its power to legislate in a particular area. (N.L.R.B. v. Pueblo of San Juan, 276 F.3d 1186, 1192 (10th Cir. 2002).) The burden to show congressional intent to divest a tribe of its power to legislate rests with the party arguing preemption. (See EEOC v. Cherokee Nation, 871 F.2d 937, 939 (10th Cir. 1989).)
Federal preemption of state law comes in three kinds: express, implied field pre-emption, or implied conflict pre-emption. (Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 541 (2001).) But courts have held that only express preemption is valid in the tribal context—implied preemption will not do. (San Juan, 276 F.3d at 1192.) For instance, in holding that the Hazardous Materials Transportation Act preempted a tribal radioactive waste ordinance, the Eighth Circuit Court of Appeals relied on a provision of the act that read: “any requirement of … an Indian tribe is preempted if compliance with both the … Indian tribe requirement and any requirement of this chapter … is not possible.” (Northern States Power Co. v. Prairie Island Mdewakanton Sioux Indian Community, 991 F.2d 458 (8th Cir. 1993).) Not surprisingly, the core preemptive clause of the bankruptcy code makes no mention of tribes or their laws. (28 U.S.C. § 1334.)
Not only is the code silent regarding tribes, but the code itself may not allow tribes to take advantage of it. Although there is at least one bankruptcy case involving a tribal debtor (Matter of Cabazon Indian Casino, 57 B.R. 398 (9th Cir. BAP 1986)), bankruptcy practitioners postulate that tribes are not eligible for bankruptcy relief under the code itself. (See Steven T. Waterman, “Tribal Troubles – Without Bankruptcy Relief,” XXVIII ABI Journal 10, 44-45, 87 (2010).) Federal law can hardly be preemptive if the law itself internally excludes tribes. To the extent the Bankruptcy Code offers no or incomplete protections to a tribal debtor, tribes should be permitted to fill the vacuum.
A separate but intrinsic inquiry is the twisted calculus that courts apply when examining whether federal “laws of general applicability” apply to tribes. The Bankruptcy Code, as a federal law of general applicability, should apply to tribes absent a narrow exception. Unless the Bankruptcy Code (1) touches exclusive rights of self-governance in purely intramural matters; (2) would abrogate rights guaranteed by Indian treaties; or (3) was not intended by Congress to apply tribes, then it would apply to tribes. (Donovan v. Coeur d’Alene Tribal Farm, 751 F.2d 1113, 1115-16 (9th Cir. 1985).)
In Solis v. Matheson, 563 F.3d 425, 433-434 (9th Cir. 2009), however, the court examined a law of general applicability (the Fair Labor Standards Act) under the intramural exception, applying a pseudo-preemption analysis. There, the court held that because the tribe had not exercised its sovereign authority in enacting regulations that would conflict with FLSA, FLSA did not touch exclusive rights of self-governance in purely intramural matters. (Id. at 433.) The court noted, in particular, that the tribal parties “did not assert that the FLSA does not preempt any such laws.” (Id.) It is extremely unlikely that, absent the quasi-arbitration regime contemplated below, any court would refuse to apply the Bankruptcy Code under this intramural exception alone. Bankruptcy is inherently extramural.
But there is a potential window—albeit narrow—for the exercise of tribal self-government in the bankruptcy context, despite what appears to be a complete federal regulatory regime. At the core, a tribe has “a strong interest as a sovereign in regulating economic activity involving its own members within its own territory and … may enact laws governing such activity … .” (Pueblo of San Juan, 276 F.3d at 1200.) There is no more important economic regulation than that applied in bankruptcy.
Creating Tribal Jurisdiction
Even if a tribe were able to successfully navigate challenges to the actual legislation of a tribal bankruptcy code, any tribal process would be challenged eventually if jurisdiction was asserted over non-member creditors and debtors. Under Montana v. United States and its increasingly restrictive progeny, tribal courts have jurisdiction over only those non-members “who enter consensual relationships with the tribe or its members, through commercial dealing, contracts, leases or other arrangements [or whose] conduct threatens or has some direct effect on the political integrity, the economic security, or the health or welfare of the tribe.” (450 U.S. 544 565-66 (1981).) Jurisdiction of tribal bankruptcy courts over non-Indians would be most common, and strongest, under the first “consensual relationships” prong. Although, the now-narrow “direct effects” prong could conceivably provide tribal courts with bankruptcy jurisdiction based on “economic security.”
Montana consensual relationships jurisdiction has been repeatedly limited by the U.S. Supreme Court. The assertion of jurisdiction, regulatory or adjudicatory, must have a nexus to the consensual relationship itself. (See Atkinson Trading Co. v. Shirley, 532 U.S. 645 (2001).) Therefore, at its strongest, an assertion of jurisdiction over an involuntary litigant in tribal court will look like an arbitration clause, replete with forum selection and a clear waiver of non-tribal bankruptcy venue and remedies. Of course, this is not required for an assertion of tribal court jurisdiction, but it certainly would help.
Tribes with adequate buying power may be able to negotiate bankruptcy-remedy-selection clauses into key contracts, such as gaming project financings, construction contracts and joint venture agreements. Today’s contracting party may be tomorrow’s debtor, creditor or adversary-proceedings opponent. But in all likelihood, tribal bankruptcy administration is only possible for tribal debtors. Non-member debtors will almost certainly proceed through the federal system, unless, conceivably, all of their creditors were tribal and the non-tribal debtor had agreed to the tribal process. The more likely course, again, if the tribal law withstood scrutiny, would be for tribal entities only to enter into tribal bankruptcy. In this case, a tribal bankruptcy could succeed if all creditors were subject to tribal bankruptcy court jurisdiction, through Montana consensual relationship jurisdiction buttressed by a forum selection clause and waiver of non-tribal remedies.
Why would tribes want to go to so much trouble? Most tribes probably don’t. But the costs and challenges of self-governance in one of the most crucial areas of tribal commercial law may prove desirable for those tribes wishing to ensure that, if disaster strikes, they have some access to insolvency protection. As a matter of self-governance, tribal law on bankruptcy would offer tribes the opportunity to decide whether, as federal courts have, sovereign immunity should be waived in the adversary proceeding context. (Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055, 1056 (9th Cir. 2004).) In addition, tribal preferences and administrative procedure could be expressed in such a law. Non-doctrinally, the effort and burden of negotiating bankruptcy-forum clauses and legislating tribal bankruptcy codes themselves could be invaluable when weighed against the alternative costs to tribal sovereignty and self-governance.