Platinum Oil Properties Bankruptcy Decision

A recent decision by the Federal Bankruptcy Court for the District of New Mexico – In re Platinum Oil Properties, LLC, No. 11-09-10832 (Bankr. NM, Aug. 12, 2011) (Memorandum Opinion) – reached legal conclusions with significant repercussions for tribes dealing with debtors who go into bankruptcy. The court held, among other things, that a confirmed Chapter 11 bankruptcy plan is binding on tribes, even if they did not participate in the bankruptcy proceeding and even if the plan conflicts with other federal law, and that the Bankruptcy Code is a waiver of tribal sovereign immunity. Although this decision is subject to appeal, Indian tribes may wish to consider it when deciding whether to participate in a bankruptcy proceeding.

Bankruptcy actions may have a significant effect on the rights and interests of an Indian tribe if the person or corporation filing for bankruptcy is indebted to the tribe or tribal entity, or may claim to own tribal property or a leasehold interest in tribal property. A debtor filing for bankruptcy under Chapter 11 of the Bankruptcy Code must disclose the assets of the debtor’s estate and usually proposes a business reorganization plan to avoid liquidation and to repay creditors. If an Indian tribe receives notice of such an action, the tribe has to determine whether to participate in the bankruptcy court’s proceedings to confirm a bankruptcy plan, object to a proposed bankruptcy plan, or ultimately appeal a confirmed bankruptcy plan.

In Platinum Oil, the court considered an adversary proceeding filed by the Jicarilla Apache Nation (Nation) against a Chapter 11 bankruptcy petitioner challenging the petitioner’s description of the debtor’s estate. In particular, the Nation challenged the inclusion of the operating rights and working interests in and under two oil and gas leases of land held in trust for the benefit of the Nation as part of the debtor’s estate. The debtor (Platinum Oil) claimed that the lease rights and interests at issue had been assigned, via a confirmed bankruptcy plan in a prior bankruptcy proceeding, to a group that later formed Platinum Oil. The Nation challenged the assignment of these lease rights and interests on the grounds that the transfer conflicted with the Indian Mineral Leasing Act (IMLA) and the applicable sections of the Nation’s Code. The Nation also argued that its sovereign immunity was a bar to the operation of the prior bankruptcy plan against the interests of the Nation. The bankruptcy court rejected both of the Nation’s arguments.

The IMLA regulations provide that approved leases may be assigned or transferred only with the approval of the Secretary of the Department of the Interior (DOI). The Nation’s Code similarly provides that a lease assignment is not effective unless it is approved by the Nation’s Legislative Council and the parties execute certain forms required under the Nation’s law. The lease assignment at issue in the bankruptcy was not approved by either the Secretary or the Nation, and thus the Nation argued the purported lease assignment conflicts with both federal and tribal law and cannot be effective. The court observed that a confirmed Chapter 11 plan is binding on creditors who received proper notice and that such a creditor is bound by the terms of the confirmed plan “even if it had a different understanding of their meaning or did not realize their effect.” (In re Platinum Oil at p. 16) The court further noted that a confirmation order is treated as a final order and has res judicata effect, meaning that the order is essentially binding upon the parties in any subsequent litigation. Thus, the court concluded that the Golden Oil Plan provided that the operating rights and working interests of the subject leases could be transferred without further approval by the DOI or the Nation, except as required under the terms of the plan. Moreover, the court found that both DOI and the Nation are bound by the plan’s terms – even if the Golden Oil Plan contains terms that are contrary to the IMLA or the Nation’s Code. The court advised that questions regarding the propriety or legality of a bankruptcy court confirmation order must be addressed on direct appeal or by objection to the plan. The court noted that the Nation did not object to the plan or appeal the confirmation order, and ruled that the Nation is now barred from asserting that the plan is contrary to applicable law.

The bankruptcy court also ruled that the Nation does not enjoy sovereign immunity from the operation of the prior bankruptcy plan, because the court found that the Bankruptcy Code (11 U.S.C. § 106), which abrogates the sovereign immunity of “governmental units,” abrogates the sovereign immunity of Indian tribes. The Bankruptcy Code’s definition of the term “governmental unit” includes the phrase “or other foreign or domestic government.” Although there is split authority on the question, the court found that phrase includes Indian tribes and constitutes Congress’s clear and unequivocal abrogation of tribal sovereign immunity.

In sum, the court found the following: (i) that creditors are bound by a confirmed bankruptcy plan if the party has received proper notice of the bankruptcy plan, even if the creditor did not participate in the bankruptcy court’s confirmation proceedings; (ii) a plan can supersede conflicting law, such as federal law or tribal law; (iii) a confirmed plan will have a res judicata effect against a creditor and cannot be challenged except by objection or direct appeal of the order; and (iv) the sovereign immunity of Indian tribes is abrogated by the Bankruptcy Code and is not a bar to the operation of a bankruptcy plan. Thus, under this decision, if an Indian tribe is noticed of a bankruptcy proceeding in which the tribe has an interest and the tribe does not object to a proposed plan or appeal a plan confirmation order, the tribe may be barred from challenging the operation of the order even if it violates tribal or federal law.

Please let us know if we may provide further information or assistance regarding the Platinum Oil Properties bankruptcy decision.