Many American Indian tribes earn significant income from gambling enterprises and other such businesses. The tribes frequently allocate the tribal income and distribute it to members of the tribe. The resulting income stream to the member of the tribe may be quite significant. It is not unusual for such allocations to exceed $20,000 per month.
If a tribe member who receives such distributions files Chapter 7 bankruptcy, does the member-debtor retain the right to receive postpetition distributions from the tribe? Or, are such distributions property of the bankruptcy estate under Bankruptcy Code ยง 541? If they are property of the estate, may the Chapter 7 trustee sell the rights to the income stream and use the proceeds of sale to pay creditors in the bankruptcy?
Various courts have answered these questions in different ways. In doing so, the courts look to federal law concerning bankruptcy and federal law concerning Indian treaties. The courts also must look to state law because in bankruptcy a debtor’s property rights are generally determined under state law. In addition, the courts look to tribal ordinances, which establish the members' rights in the allocation. Of particular interest regarding the ordinances is whether they allow the recipient to assign the income stream, or instead prohibit such assignment, or are silent on the subject.
In 2006, the Bankruptcy Appellate Panel (“BAP”) for the Ninth Circuit considered these questions in connection with the Chapter 7 bankruptcy filing of an Indian tribe member in California. In that case, entitled In re Brown, the BAP concluded that the future payments were part of the bankruptcy estate. However, the court concluded that the income stream was no value to the estate because it was not assignable under a mixture of federal law, state law and certain tribal ordinances. It therefore denied a turnover motion brought by the Chapter 7 trustee, and remanded the case to the bankruptcy court with instructions for the lower court to take evidence to determine the nature of the payments. In 2013, a bankruptcy court in North Carolina relied on Brown to reach the same result on similar facts.
In certain cases of this type, the predominant creditor in the case, or perhaps only creditor in the case, is the I.R.S. If the debtor owes income taxes which are more than three years old, and if the debtor has properly filed a tax return with respect to such taxes at a time sufficiently in the past, the income taxes may be dischargeable in bankruptcy. Because income taxes are not considered consumer debt under the Bankruptcy Code, if the amount of income taxes the debtor owes constitutes more than half of his debt, the bankruptcy “means test” doesn’t apply. This means that under certain circumstances the debtor is able to discharge the taxes no matter what level of income he is receiving postpetition.
The bankruptcy cases are sometimes considered by the courts in the posture of a “turnover” motion brought by the trustee. On the other hand, they are sometimes considered in the posture of a motion brought by the debtor to compel the trustee to abandon the property. The burden of proof can be different in these types of motions, meaning that under some circumstances it may be more advantageous for the debtor to wait for the trustee to bring a motion for a turnover order, rather than for the debtor to bring his own motion to compel abandonment.
Not all courts reach the same results in these types of cases. For example, in In Re Barth (Bkrtcy. D. Minn. 2013), the court decided that the distributions were not part of estate because the tribal ordinances did not create a property right in the distributee. On the other hand, in In Re Howley (Bkrtcy. D. Kan. 2011) the court held that the property was part of the estate, and that the trustee could take control of the income stream because the tribal ordinance in that case did not have any language establishing that the distributions were not assignable. The Howley court surveyed several other cases in which the courts have reached differing results sometimes based on very different rationales.
The court in Howley instructed the lower court to conduct a hearing on valuation of the income stream, noting that it was subject to several contingencies. This is yet another issue which comes up in these sorts of cases. That is, even if the Chapter 7 trustee obtains an order authorizing the sale of the income stream, how much is it worth? Would a buyer pay anything near the net present value of the income stream? One would expect that such a buyer would not do so, because of the vagaries of the amounts of the distributions, and the many factors which might result in the income stream drying up. So the trustee may wind up unable to sell the asset for anything approaching its theoretical value, because in many cases the income stream will be of value only to the original distributee, the debtor.
Yet another hurdle which the I.R.S. can face when seeking to levy on tribal distributions. In In re Puyallup (D.Wash. 2014) the court held that the I.R.S. couldn’t levy on postpetition tribal distributions because the amounts of such payments were not “fixed and determinable,” as is required in the Code of Federal Regulations. This reasoning provides another rationale supporting the result that postpetition distributions are not available to pay prepetition debt, at least if the debt was income taxes. Note that this issue obtains regardless of whether the taxpayer is in bankruptcy or not.
This post is intended to point out the myriad issues which arise at the intersection of tax law, tribal law, federal bankruptcy law, state law with respect to assignments and the like, and even the Code of Federal Regulations. The results are much less predictable than a prospective bankruptcy debtor would like. Deciding whether to expose one’s future income distributions to such uncertainty is something which can be done only after careful consideration by a lawyer. As can be seen, in many cases the lawyer will only be able to provide the client with a suggestion as to what the odds are of his prevailing in the bankruptcy court. The debtor will have to decide whether to gamble his future on an uncertain result. This might be seen as ironic because gambling by other persons is frequently the source of the income in the first place.