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Legal Update: U.S. Bankruptcy Court Finds Tribal Gaming Payment Not Part of Debtor’s Bankruptcy Estate

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In the recent decision, In re: Musel, the United States Bankruptcy Court for the District of Minnesota held that tribal payments are not considered a property interest of a bankruptcy estate when federal law governs and the tribe expressly rejects defining the payments as a property interest.

Brenda Jo Musel (hereinafter “Debtor”) was a member of the Pokagon Band of the Potawatomi Indians. As part of her tribal citizenship, Debtor received $750 monthly payments from the tribe’s gaming operations. After filing for Chapter 7 bankruptcy, the bankruptcy trustee argued that Debtor’s future tribal payments were property of the bankruptcy estate. Debtor argued otherwise and the trustee motioned for turnover of the tribal payments.

As a general matter, when a debtor files for bankruptcy, a bankruptcy estate is immediately created and includes all legal or equitable interests of the debtor. Unsatisfied creditors of the debtor are then able to recover losses through the administration of the estate. With regard to tribal payments, the court had not yet decided if tribal payments constitute a property interest when a tribe’s Gaming Revenue Allocation Plan expressly purports to not create any vested property interest, while state law would treat the tribal payments as a property interest.

The creditors in this case presented several compelling rationales for why a tribal payment is a property interest subject to the bankruptcy estate. For one, state law defines property interests and tribal payments are similar to other recognized property interests such as interests in a partnership or limited liability company. Moreover, just like business interests that result in dividends and other reoccurring disbursements, the right to receive tribal payments are similarly guaranteed to tribe members if and when the payments are made. However, the court determined that state law did not control whether tribal payments are property interests and, therefore, any similarity that tribal payments have to other state defined property interests was minimally persuasive.

The federal government recognizes tribal nations as sovereign nations subject only to the authority of the federal government, except if Congress has expressly provided that state law applies. Here, the Federal Indian Gaming Regulatory Act (IGRA) mandates that tribes engaged in gaming adopt an ordinance or resolution outlining how the gaming activities will provide benefit to the general welfare of the tribe. One way tribes can fulfil the IGRA requirement is paying tribal members from the proceeds of the gaming activities. If the ordinance satisfies the requirements of the IGRA, the statute states that the ordinance must be approved by the National Indian Gaming Commission. And because the gaming ordinance must be approved if it satisfies the IGRA, tribal authority, not state law, essentially governs after the ordinance satisfies IGRA requirements.

The Pokagon Tribe’s ordinance providing that gaming profits are to be disbursed to tribe members satisfied the requirements of the IGRA. The ordinance also expressly stated that the tribal payments do not create any vested property interest. Therefore, the court determined that the tribe’s express rejection of the intention to create a property interest governs and Debtor’s future tribal payments were not to be included in her bankruptcy estate. The court also added that because the IGRA requires gaming activities proceeds are to be used for the benefit of tribe members, it would be contrary to the statutes purpose for tribal payments go to a bankruptcy estate, and subsequently to creditors of that estate, rather than the tribe’s citizens that the statute is intended to benefit. Moreover, because tribal payments generally last for the lifetime of each tribe member, the bankruptcy estate would remain open for a potentially indefinite period of time. The court reasoned that not only would estate administration of this sort be impractical, it would be contrary to one of the principal objectives of bankruptcy—to provide debtors with a fresh start.