Santa Ysabel Resort and Casino

Tribe v. Tribe Test For Bankruptcy Code

The oft-debated question whether Tribal casinos are eligible for bankruptcy protection may be a little clearer next month, thanks to a recent case in the U.S. Bankruptcy Court for the Southern District of California. But what makes the case intriguing is the creditor challenging tribal entity eligibility for bankruptcy is another tribe. Bankruptcy watchers were sure there would be a challenge to Santa Ysabel Resort and Casino’s bankruptcy petition. But in a strange turn, the biggest creditor of the Casino’s owner – Iipay Nation of Santa Ysabel – is the Yavapai-Apache Nation. The papers and petition are available via Turtle Talk.

Note to future tribal casino bankruptcy petitioners: be prepared to defend your eligibility under the Code, especially if your largest creditor is an Indian Tribe. Lawyers for the Yavapai-Apache Nation tuned in quickly to the problems with Santa Ysabel’s petition:

Sections 109 and 101 of the Bankruptcy Code govern who may be a bankruptcy debtor. Specifically, § 109(d) limits eligibility for chapter 11 to “a person that may be a debtor under chapter 7 of this title” and a number of other entities not relevant here.

A necessary requirement for chapter 7 eligibility is that an entity fall within the definition of “a person.” 11 U.S.C. § 109(b). Section 101(41) provides that “[t]he term ‘person’ includes individual, partnership, and corporation, but does not include governmental unit.”

Because the Iipay Nation is a “governmental unit,” it cannot be a bankruptcy debtor.

On its voluntary petition the Debtor is listed as "Santa Ysabel Resort and Casino" and for type "Corporation (includes LLC and LLP )" is checked. This is odd since in the Omnibus Declaration the Casino’s GM states "The Debtor is an unincorporated company.” This might be important since, conceivably, although Chapter 11 won't apply to governmental units, including tribes, it could apply to a formally incorporated tribal business.

Many forecasted that tribal entity bankruptcy eligibility would be tested at the bottom of the downturn. But as tribal bankruptcy petitions continue to be filed – the Southeast Alaska Native village corporation Klukwan Inc. filed for bankruptcy this week – perhaps we are seeing tribal debtors testing the waters now, as they realize there is no relief on the horizon and no hope for workouts.

Anthony Broadman is a partner with Galanda Broadman in Seattle. His practice focuses on matters critical to Indian Country. He can be reached at anthony@galandabroadman.com.