ABA Section of Business Law

When the location is tribal

A new law affects real estate deals in Indian Country

By MARK D. OHRE

D oing a real estate deal involving Indian lands has always been kind of tricky. But it just got a little easier.

With the recent wave of interest in private investment in Indian Country, the legal battleground over the Bureau of Indian Affair’s (BIA) power to review and approve all tribal land-related transactions has also intensified. In the past, many businesses that were eager to jump into lucrative lease arrangements found the delays and administrative red tape associated with the BIA prohibitive.

To encourage business enterprises to take advantage of new opportunities, Congress has limited the BIA’s approval authority and opened up a new world for tribes, entrepreneurs and lenders. However, statutory ambiguities and general unfamiliarity with Indian law present certain risks to the inexperienced.

Understanding the complexities of real estate transactions in Indian Country begins with a general understanding of the special relationship between the federal government and Indian tribes, as well as the different legal entities that entrepreneurs may encounter. This article provides the general Indian law background, then analyzes specific transactions between Indian tribes and non-Indians within the context of the revised 25 U.S.C. § 81 and the proposed federal regulations for Section 81.

The most important relationship between the federal government and Indian tribes concerns the trustee status of tribal lands. In this relationship, the federal government is titleholder and protector of lands for the Indian tribes, while the tribes operate as beneficiaries enjoying the rights to the lands.

In general, non-Indians are allowed to lease tribal and allotted property for a period ranging between 25 and 99 years. The governing tribal documents and federal and tribal leasing statutes must be consulted to determine the limits on leasing. In addition, while Indian land itself cannot be encumbered, leasehold interests can be encumbered, assigned and used as collateral for financing the transaction. Encumbering the leasehold interests, however, still requires the BIA’s approval and the consent of the tribe.

Besides an Indian tribe, other entities may be involved in a proposed transaction. Generally, these other parties are legal entities that can enter into contracts much like a corporation chartered under state law. Involvement with these other entities has both legal and practical ramifications for the proposed transaction.

Those seeking to engage in transactions in Indian Country must first determine whether they are dealing with an Indian tribe. For a tribe to gain the benefits and privileges conferred by federal law under the trustee relationship, it must either (1) gain de jure or official federal recognition, or (2) gain de facto sovereign status in the eyes of the federal government. Federal recognition may arise from treaties, statutes or executive and administrative orders.

The entrepreneur must next determine whether the tribe is organized under Section 16 of the Indian Reorganization Act of 1934 (IRA), 25 U.S.C. § 461, et seq. If organized under Section 16, was the tribe’s constitution put to a vote, adopted by the tribal members and approved by the secretary of the Interior? The constitution, if adopted, will govern the tribe’s formal structure much like a corporate charter would govern a state corporation.

It is important to become familiar with the tribe’s structure and laws. Generally, most tribes are organized with a president, chairperson, governor, chief or other individual designated as the tribe’s primary leader. This individual is generally elected by the tribal membership and holds office for a set period of time. The tribal leader usually presides over a tribal council or similar group of decision makers who are also elected. Depending on the overall population of the tribe, the tribal council may range from nearly 100 delegates (the Navajo nation) to only three or four members.

To determine the governing structure of the tribe, including its executive, legislative and judiciary branches, copies of the tribe’s constitution, code, ordinances or similar documents should be reviewed. Copies can be obtained by contacting the tribe’s administrative office directly or the local BIA office. In addition to a tribe, the enterprise may encounter a Section 17 corporation, tribal corporation or tribal enterprise.

A Section 17 corporation is a federally chartered corporation, according to the IRA, 25 U.S.C. § 477, which permits the tribe to incorporate and obtain its corporate charter from the secretary of the Interior. Under a Section 17 corporate umbrella, the tribe becomes a separate legal entity from the governmental entity created. The new tribal corporation has the powers to contract, to pledge assets and to be sued.

Although the tribal corporation is similar to a corporation formed in Delaware, there are significant differences. For example, certain tribal corporate actions, such as waiver of sovereign immunity, may require approval by the tribe. In this regard, a tribal corporation can only be sued if it waives its sovereign immunity.

Tribal enterprises formed under the tribal law can take many different forms, but two are prevalent. The tribe could form a tribal instrumentality much like a local tax commission or housing authority. Or, the tribe could form a tribal- or state-chartered corporation. A tribal-chartered corporation is formed under the tribal law’s corporation code, while a state-chartered corporation is formed under state law.

The purpose of the tribal enterprise and whether it is an "economic arm" of the tribe or a separate and distinct business entity may determine whether the enterprise has sovereign immunity. To understand the purpose and powers of the tribal corporation or a tribal enterprise, all documents governing the entity should be analyzed.

Although individual tribal members may be directly involved in the real estate transaction, most entrepreneurs will spend their time dealing with a legal entity, or the tribe, through individual agents. Prudent entrepreneurs will confirm the authority of all individuals acting on behalf of the legal entity or tribe. Individual tribal members acting on their own behalf do not have sovereign immunity rights.

Notwithstanding that Indian tribes, most Section 17 corporations, tribal corporations and tribal enterprises have sovereign immunity from suit, most recognize that they must agree to at least a limited waiver of their immunity in order to induce businesses to invest on their reservations. To assure that there is a forum to resolve disputes, a complete or partial waiver of sovereign immunity should be obtained from the tribe.

In addition, sovereign immunity waivers, which are usually upheld by the courts, should be obtained, not only from the tribe, but also from a Section 17 corporation, a tribal corporation and a tribal enterprise. While certain arbitration clauses and corporate charters can provide for an implicit or explicit waiver, all waivers should be "unequivocally expressed" in the transactional documents.

Although most business transactions start with the best of intentions by all parties, problems may occur that require resolution through the legal system or some other forum. Disputes arising in Indian Country are not necessarily always resolved in the tribal courts, or according to tribal law, but such may be the outcome unless agreed otherwise. The parties may agree to a particular forum, or according to a particular state’s law.

Frequently, the tribes and their business partners will agree to resolve contractual disputes through binding arbitration so that the court system is foregone wholly except for enforcement of an arbitration award. Choice-of-forum and choice-of-law matters are major concerns that should be agreed on at the onset.

In March 2000, President Clinton signed the Indian Tribal Economic Development and Contract Encouragement Act into law. The statute’s purpose is to encourage outside investment in Indian Country within the confines of the federal government’s trustee relationship on Indian lands. To facilitate this objective, Congress revised Section 81 and amended the long-standing rule that subjected all transactions between non-Indians and Indian tribes (or individuals) relating to Indian lands to the BIA’s approval.

Instead, the revised statute sought to limit approval of transactions related to Indian lands only to those agreements that "encumber Indian lands for a period of seven or more years." Even under the amended Section 81, contracts requiring Section 81 approval are unenforceable until approved by the BIA.

To determine whether a transaction falls outside the scope of Section 81 and the BIA’s bureaucracy, you need to determine whether the contract is exempt and then apply the elements of revised Section 81 to the facts of the transaction.

The revised Section 81 required the secretary to enact regulations establishing which contracts are not covered by Section 81. On July 14, 2000, the BIA compiled a Notice of Proposed Rulemaking regarding the revised section. For purposes of this article, the most important proposed regulations are (e) and (f). Under the proposal, the following contracts do not require BIA approval:

• Contracts that do not convey exclusive or nearly exclusive proprietary control over tribal lands for a period of seven years or more.

• Contracts that are entered into by tribes chartered as corporations under 25 U.S.C. 477 (that is, Section 17 corporations).

Subsection (e) of the proposed regulations confirms legislative history as it places agreements that do not convey exclusive or nearly exclusive proprietary control outside the reach of BIA review and approval. In addition, the proposed regulations seek to clarify the language of Section 81 and Subsection (e) by stating that exempt contracts "may include contracts for personal services; construction contracts; contracts for services performed for tribes on tribal lands; and bonds, loans, security interests in personal property, or other financial arrangements that do not and could not involve interests in land."

Although exclusive or nearly exclusive proprietary control may or may not include the above contracts, if the contracts are entered into by a Section 17 corporation, then the contracts are definitely exempt under Subsection (f). Unfortunately, the proposed regulations do not clarify the interpretation of "exclusive or nearly exclusive proprietary control" by suggesting that some contracts may be exempt.

If the transaction is not specifically exempt in the regulations, then the entrepreneur must next review the elements of revised Section 81 to see if the transaction requires BIA approval. Section 81’s "seven years or more" limitation is relatively straightforward from a statutory construction perspective and reiterated in Subsection (e) of the proposed regulations. Any contract that encumbers land for seven years or more falls under Section 81. Put another way, a contract that encumbers land for a period up to seven years does not fall within the scope of the statute.

The Committee on Resources Report states that the seven-year limitation is provided to ensure that parties have an objective measure by which to determine whether their contract falls within the scope of Section 81(b). The committee also suggests that the test will be whether the parties reasonably expected that the agreement would encumber the tribal land for less than seven years when they entered into the agreement. With the committee’s test in mind, it is recommended that the contracting parties include explicit language addressing the anticipated time frame of their contracts.

Unfortunately, ambiguity still remains regarding the seven-year period. For instance, a leasehold mortgage securing a six-year loan could be considered an encumbrance for a period of less than seven years, even though foreclosure will provide the lender with exclusive control under the lease for more than seven years. Although not recommended, a lender could take the risky position that the remedy under the leasehold mortgage should not be a factor since the leasehold mortgage is intended to be released within the seven-year period.

If the contract is not specifically exempt and is for a period greater than seven years, does it "encumber" tribal land? The revised Section 81 replaced the terms "relative to Indian lands," with the term "encumber," thus imposing a higher burden on the BIA and the tribal entity before it could prove that Section 81(b) is triggered. However, the statute provides no further guidance or definition as to which contracts qualify as encumbrances.

According to the committee and Subsection (e) of the proposed regulations, an agreement that allows a non-Indian party to "exercise exclusive or nearly exclusive proprietary control" over Indian lands places an encumbrance over the lands. In contrast to the previous provision requiring BIA approval of any contracts "relative to Indian lands," this definition is relaxed because it creates a more direct relationship between the contract and the real property involved by attaching a legally enforceable interest in the land itself.

The proposed regulations state that a purchase agreement between a non-Indian and a tribe for raw materials manufactured on a reservation would not qualify as an encumbrance, but an easement that allows a non-Indian rights-of-way on tribal lands would qualify as an encumbrance. In addition, if a lender finances a transaction on Indian land and requires, as a remedy of default, authority to operate a store, the remedial interest would encumber the land and require Section 81 approval. However, if a lender only acquired a collateral interest to all revenues derived from the Indian lands over a 10-year period, then the default mechanism would not constitute an encumbrance.

The proposed regulations define the term "encumber" to mean "to attach a claim, lien, charge, right of entry or liability to real property (referred to generally as encumbrances)." The proposed regulations go on to state that "encumbrances may include leasehold mortgages, easements, and other contracts or agreements that could give a third party exclusive or nearly exclusive proprietary control over tribal land." Unfortunately, the more detailed definition of the term "encumber" and the examples provided only create more uncertainty.

For example, it is still unclear whether a lender’s right to access and repossession of personal property located on Indian lands would be considered either a "right of entry" and an encumbrance under the proposed definition or just an extension of the "security interests in personal property" that may be exempt under the examples given in the proposed regulations. Given the complex array of commercial transactions and relationships available to the tribes and their contracting parties, a more detailed definition of encumbrance is required in order to create a stable and reliable contractual atmosphere.

In addition, the proposed regulations define "Indian lands" more narrowly by excluding all allotted lands not held by the tribe, but more broadly by including ". . . lands the title to which is held by an Indian tribe subject to a restriction by the United States against alienation." The new definition raises the question as to whether fee property acquired by a tribe and not within Indian Country is now subject to Section 81 approval. 25 U.S.C. § 177 restricts transfers in fee property owned by tribes, except for certain fee property in the Ninth Circuit.

Some title companies have already taken the conservative position that Section 177’s restrictions on fee property renders transfers or encumbrances on fee property owned by the tribe subject to Section 81 approval. Because of lenders’ and title companies’ conservative interpretation of Section 177 and the revised Section 81, it is likely that more tribes will follow the Salt River Pima-Maricopa Indian Community’s example and request that Congress give them an exemption from Section 177.

Even if the contract is not exempt, for a period greater than seven years and an encumbrance on Indian land, the entrepreneur may still be able to avoid Section 81 approval. The proposed regulations state that the term "Indian tribe" means "any tribe, nation, band, pueblo, rancheria, colony, or community which is federally recognized by the United States government for special programs and services provided by the Secretary to Indians because of their status as Indians." Although the term Indian tribe has been interpreted broadly to include tribal enterprises and corporations, the proposed regulations do not specifically include such entities.

When contracting with a tribal enterprise or corporation, an entrepreneur may take the risky position of not seeking BIA approval based on the fact that the tribe is not a party to the transaction. However, the entrepreneur must be aware that statutory interpretations of federal statutes in the area of federal Indian law usually favor Indian parties.

If doubt still exists as to whether Section 81 approval is required, which is likely because of the current ambiguities in the proposed regulations, entrepreneurs can now rely on the BIA’s written determination that a contract does not require Section 81 approval. In the past, the BIA’s formal determination that Section 81 approval was not required was insufficient, because it was up to the courts to interpret the statute and decide if Section 81 was required.

To make sure that their contracts were enforceable, the parties were required to obtain an "accommodation approval" from the BIA. Under Section 81(c), a BIA determination that a contract does not require Section 81 approval is now a valid exception. Therefore, the BIA will no longer issue accommodation approvals. Instead, the agency will provide a written statement that the contract submitted does not require Section 81 approval.

The amended Section 81 opens a new world to entrepreneurs by encouraging economic independence and outside investment in tribal lands. However, in the absence of specific regulations regarding interpretation and applicability of the statute to various transactions between non-Indians and Indians, uncertainty exists as to which transactions require BIA approval and which ones lie outside the purview of the statute. Regardless of the type of Indian land-related transaction, entrepreneurs should always remember to:

• review the tribe’s constitution and the tribal corporation’s or tribal enterprise’s documents;

• obtain a limited waiver of sovereign immunity from all Indian entities;

• review the revised Section 81 and all regulations to determine if approval is required (if not sure, always request the BIA’s approval);

• review the tribe’s constitution, the tribal corporation’s or tribal enterprise’s organizational documents, and the lease to see if these documents require separate BIA approval; and

• review any additional federal Indian law and the tribe’s own statutes and regulations that may be applicable to the transaction.

Although a few generalizations exist for conducting business in Indian Country, each tribe and its legal, economic and business environment is different. It is important that entrepreneurs do their homework before approaching a tribe, tribal corporation or tribal enterprise about a potential real estate transaction. The better prepared and informed the entrepreneurs are, the better chance there is for developing a longstanding, beneficial business relationship that effectively deals with the challenges.

 Ohre is a senior associate with Snell & Wilmer in Phoenix. His e-mail is mohre@swlaw.com.

"Indian Country," by the way, is the governing legal term. In layman’s terms, it means the territory where Indians are governed primarily by tribal and federal rather than state law.

Want to know about it in legalese? See 18 U.S.C. Section 1151.

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