Beyond the Bankruptcy Code: a New Statutory Bankruptcy Regime for Tribal Debtors

• Publication year: 2019

Beyond the Bankruptcy Code: A New Statutory Bankruptcy Regime for Tribal Debtors

Laura N. Coordes

BEYOND THE BANKRUPTCY CODE: A NEW STATUTORY BANKRUPTCY REGIME FOR TRIBAL DEBTORS

Laura N. Coordes^*

ABSTRACT

Native American tribes and tribal businesses play an important role in U.S. commerce, but many of these entities are effectively prohibited from filing for bankruptcy relief when financial distress occurs. This Article demonstrates how and why the Bankruptcy Code is a poor fit for these "tribal debtors" and suggests that Congress enact a new statutory regime to provide structured debt relief for these entities rather than modify the Bankruptcy Code.

Although this proposal is novel with respect to tribal debtors, Congress has looked beyond the Bankruptcy Code to provide debt relief when use of the Code would be inapt on two other recent occasions: the passage of the Dodd-Frank Act andPROMESA. Using tribal debtors as an example, this Article investigates whether and how this practice might continue and what it might mean for the bankruptcy system writ large.

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Introduction.............................................................................................365

I. Eligibility for Structured Debt Relief....................................368

A. The Status Quo: Confusion and Uncertainty............................ 368

1. Tribal Entities in Commerce .............................................. 369
2. Tribes' Uncertain Status..................................................... 373
3. Eligibility for Bankruptcy................................................... 375

B. Obstacles to Tribal Bankruptcy................................................ 380
C. Incompatibility Illustrated: Alaska Native Corporations ......... 385
D. The Case for Tribal Debt Relief............................................... 387

II. Searching for Relief: The Bankruptcy Code and Beyond .... 391

A. Existing Proposals.................................................................... 391

1. Proposals for Determining Eligibility................................ 391
2. Alternative Mechanisms ..................................................... 393
3. Clarification ....................................................................... 394

B. Specialized Laws for Otherwise Ineligible Entities .................. 395

1. PROMESA .......................................................................... 396
2. Dodd-Frank........................................................................ 400

III. Designing Tribal Debt Relief......................................................402

A. Key Features and Benefits........................................................ 402

1. Substance............................................................................ 402
2. Process and Benefits .......................................................... 407

B. Concerns ................................................................................... 410

Conclusion: A Broader Perspective.....................................................415

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INTRODUCTION

In a crisis, uncertainty is dangerous and terrifying. Financial crises are no different. The events leading to the 2008 recession caused banks—and regulators—to panic,¹ and U.S. economic policy became unsteady as the Federal Reserve and lawmakers struggled to respond.² In particular, the "shocking" collapse of Lehman Brothers set off a "financial tsunami," which in turn nearly "triggered a global financial meltdown."³

Similarly, after the Supreme Court in 2016 rejected Puerto Rico's attempt to enact its own form of bankruptcy legislation,⁴ Puerto Rico teetered on the brink of financial collapse. Congress rushed to devise a solution⁵ in the face of the commonwealth's declaration that it intended to default on significant payment obligations, which threatened to trigger "a cycle of hospital closures, electric-grid instability, infrastructural collapse, and emergency-service breakdowns."⁶ When the next crisis strikes, which entities will be left to face the devastating consequences of uncertainty?

Native American tribes and tribal-affiliated businesses⁷ (collectively referred to as "tribal entities" or "tribal debtors")⁸ are playing an increasingly

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significant role in U.S. commerce,⁹ yet the U.S Bankruptcy Code makes it difficult, if not outright impossible, for these entities to use the bankruptcy system as debtors. Lack of guidance from the Bankruptcy Code in this area creates uncertainty for tribal entities and those that engage in business with them. Because tribal entities are increasingly important players in U.S. commerce and business, uncertainty as to these entities' treatment in bankruptcy may make them the next victims of an unexpected financial crisis, with consequences that could destabilize a significant portion of the American economy.

Although various observers have expressed concern over a tribal debtor's lack of eligibility for bankruptcy,¹⁰ eligibility is only the first hurdle a tribal debtor will encounter if it seeks to restructure its debts using the U.S. Bankruptcy Code. Even if a tribal entity were deemed eligible to file for bankruptcy, the Bankruptcy Code conflicts with other federal statutes and policies governing Indian nations and their businesses, such as the Indian Gaming Regulatory Act ("IGRA"). The federal government's trust relationship with tribes, tribal sovereignty, the federal regulatory environment, and other tribal laws and customs pose further challenges for prospective tribal debtors.

These under-explored challenges raise the question of whether tribal entities should be eligible for bankruptcy or some sort of structured debt relief in the first place. While acknowledging that exclusion of tribal entities from the Bankruptcy Code may have been intentional, this Article nevertheless illustrates that tribal entities can experience debt overhang and holdout creditors in the

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same way other bankruptcy-eligible entities can. When tribal entities have a need for bankruptcy's unique debt restructuring tools,¹¹ this Article advocates for those entities to be deemed eligible to restructure their debt.

If getting into bankruptcy is the first step, the next step involves determining how bankruptcy relief can be fashioned for tribal debtors. Rather than use the Code's ill-fitting law and procedures, this Article proposes an alternative: Congress should enact a new statutory regime for tribal debt relief.

Although special debt relief legislation is a novel proposal with respect to tribal entities, it is not unprecedented. In 2010, Congress passed the Dodd-Frank Act, which provides for an orderly liquidation process for distressed financial firms.¹² These firms were ineligible to file for relief under the Bankruptcy Code.¹³ And in 2016, Congress enacted special debt restructuring legislation for Puerto Rico, another entity that was deemed ineligible for traditional, Code-based bankruptcy relief.¹⁴

With respect to both banks and Puerto Rico, Congress looked beyond the Bankruptcy Code to create laws specifically tailored to these entities and their unique attributes.¹⁵ Indeed, as this Article will discuss, specialized legislation may become a new norm in bankruptcy law, as entities previously not contemplated by the Bankruptcy Code pursue options for debt restructuring. This Article contends that, like financial firms and U.S. territories, tribal entities are differently situated from other debtors covered by the U.S. Bankruptcy Code. Therefore, if Congress were to consider structured debt relief for tribal entities, these entities deserve a distinct form of relief, one that allows these entities to concretely address the threat that creditors may destroy ongoing operations.

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The Article proceeds as follows. Part I examines the question of whether tribal entities should be eligible for structured debt relief. After probing the nature of the problem of excluding tribal debtors from Code-based bankruptcy relief, Part I discusses the merits and drawbacks of granting tribal entities access to relief before concluding that access to structured debt relief is warranted in distinct cases. Part II then explores possible avenues of relief for tribal debtors. After surveying existing proposals for granting tribal debtors eligibility for bankruptcy under the Bankruptcy Code, Part II introduces on an alternative path: the creation of specialized bankruptcy legislation.

Part III then explains the process for developing specialized legislation for tribes and provides guidance on key features of this proposed bankruptcy relief. Significant features include an automatic stay; a voluntary, orderly process for debt adjustment and liquidation; exclusivity for tribal debtors to propose a plan; use of collective action clauses and other sovereign debt restructuring tools, when appropriate; a property distribution scheme that allows for some equity retention; strict scrutiny of debtor-in-possession ("DIP") lending; limited interference into the debtor's internal affairs; and an adjudicator to run the process and settle disputes. This Part also analyzes some of the benefits and drawbacks of the proposed legislation. Part IV concludes by briefly explaining how specialized law may represent a broader shift for the bankruptcy system as a whole.

I. ELIGIBILITY FOR STRUCTURED DEBT RELIEF

Tribal entities are playing an increasingly significant role in U.S. commerce, yet these entities face uncertainty when it comes to addressing financial difficulties. It is at best unclear, and at worst outright prohibited, for tribal entities to use the U.S. Bankruptcy Code as debtors. This Part describes the current treatment of tribal entities under relevant U.S. laws and highlights some of the arguments for and against their eligibility for bankruptcy relief. Ultimately, this Part concludes that tribal entities should be eligible for structured...