Tribal Casino Bankruptcies - The Train Is Leaving The Station

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.

During 2010, the issue was elevated to a new level of urgency when Foxwoods, the mega-casino owned by the Mashantucket Pequot Tribe of Connecticut, was unable to satisfy its debt service and the creditors and investors were unable to quickly agree on a debt restructuring that would avoid a total financial collapse of the tribal gaming/resort enterprises, prompting a national debate as to whether bankruptcy was even an option for Foxwoods. Indeed, Gaming Legal News published a major article in the fall of 2010 that examined the relevant statutory and case law concerning the issue. See "Bankruptcy and Tribal Casinos: 'Conventional Wisdom' Meets Reality" (Vol. 3, No. 28 - Oct. 27, 2010). Foxwoods never went into bankruptcy, nor did other tribal casinos in deep financial distress such as the Inn of the Mountain Gods and Lake of the Torches, but the debate has continued albeit with a lower level of publicity. However, the issue is now front and center 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.

To reiterate points discussed in the article of October 27, 2010, the question directly goes to whether Iipay is eligible to file for bankruptcy, and that takes us to Section 109 of the Bankruptcy Code, which defines those who qualify as "debtors" eligible to obtain relief under the Code. Although Indian tribes are not specifically excluded...