A super model: New secured transaction code offers legal uniformity, economic promise for Indian Country

The importance of a community's physical infrastructure is plain to see. A half-completed road or unsound bridge can isolate a town, keeping people and goods from moving freely. A community's legal infrastructure is just as essential, though far less visible. Without adequate laws to support its commerce and other affairs, a community cannot inspire confidence in outside parties, and its economy suffers.

A case in point: Access to affordable credit is limited on many American Indian reservations due to the absence or insufficiency of laws protecting creditors' rights. For tribes seeking to address the issue, a solution is now available. A recently completed model law that covers a type of commerce called secured transactions could provide the legal structure and consistency tribes need to facilitate borrowing from off-reservation partners or other tribes.

A matter of risk

The term secured transaction refers to a loan or other extension of credit where a borrower gives a security interest in his or her designated personal property—that is, property other than real estate—as collateral to a creditor. If the borrower fails to repay or otherwise defaults, the creditor is entitled to take possession of the collateral. Most loans for big-ticket purchases like cars and home appliances fall in this category, as do loans to cover equipment and inventory purchases, operating costs and other essentials that keep businesses running.

State laws governing secured transactions are fairly uniformly modeled on Article 9 of the Uniform Commercial Code, or UCC. The UCC creates a consistent legal environment for commercial transactions throughout much of the U.S. The National Conference of Commissioners on Uniform State Laws (NCCUSL) drafted the UCC in the 1940s and the code was later adopted by all 50 states. (For more information on NCCUSL, see the sidebar below.)

Thanks to the UCC, the legal infrastructure for many aspects of commerce is a given in most places. The code provides uniformity among state laws, enabling efficient cross-border business to take place. Because all states have adopted Article 9, lenders and borrowers usually feel confident the law will protect their interests—even if the two parties are located in different states.

On the reservations and other tribal lands collectively known as Indian Country, it's often a different story. As sovereign nations, American Indian tribes are not subject to state law and are free to adopt their own commercial codes. As a result, tribal commercial laws—to the extent they have been adopted at all—vary in depth and breadth. Laws governing secured transactions are absent or weak on many reservations, which can make outside parties reluctant to lend to tribal entities, entrepreneurs and consumers. The uncertain legal environment introduces an element of risk. Many lenders respond to the risk in one of two ways: avoiding it altogether by not offering loans, or offsetting it by shortening loan terms and charging high interest. The situation limits access to affordable credit, which is a fundamental component of any sustainable business venture. That, in turn, hinders economic development in Indian Country.

Heightened awareness prompts a response

An increased emphasis on Indian entrepreneurship and the development of tribally owned businesses in the last decade has brought a heightened awareness of the issue. As more tribes and tribal members launch commercial enterprises and initiate partnerships with off-reservation firms, more of them encounter barriers to credit, and the importance of a sound legal infrastructure becomes more apparent.

Tribes have used a variety of approaches to address the problem. Some adopted Article 9, but did so prior to 2000, when substantial revisions were made to the act. Others have implemented Article 9 as adopted by the state in which their reservation is located. Still others have adopted discrete components of Article 9, such as those governing collection practices. While these last two approaches are better than adopting no law at all, each presents issues. The wholesale adoption of state law can lead to conflicts with tribal customs, traditions, or other tribal laws. The adoption of an isolated Article 9 creates legal gaps, because the article is an integrated part of the whole UCC and incorporates provisions of other UCC articles by reference.

In 2001, in response to the increased awareness of the need for a workable commercial legal infrastructure in Indian Country, and at the request of several tribes, a committee of NCCUSL commissioners launched an effort to draft the Model Tribal Secured Transactions Act, or Model Tribal Act (MTA). The purpose of the MTA is to provide model legislation for tribes to build sound legal infrastructures that will facilitate transactions with outside lenders, businesses and other tribes. A secondary, but no less practical, goal of the effort is to save Indian tribes the enormous legal fees they would incur if they sought to create their own secured transaction codes.

A uniform, yet adaptable, law

As drafting got under way, committee members kept a few key principles in mind. The new code should be shorter and less complex than Article 9, to facilitate the adoption process; it should incorporate provisions from other UCC articles, to make the act a stand-alone law; and, most importantly, it should be consistent with the core principles of the model UCC's Article 9 while allowing tribes the flexibility to make modifications to address specific tribal customs, laws or other needs.

Sue Woodrow, Community Affairs managing project director at the Helena, Mont., branch of the Minneapolis Fed, echoes that point. Woodrow served as an advisor to the MTA drafting committee from the outset.

"Our chief goal and challenge was to allow for customization while maintaining uniformity in the key transactional pieces of the law," she says. "The code had to be harmonized enough with UCC Article 9 to facilitate secured transactions across reservation and state boundaries, but flexible enough for tribes to make it their own."

The drafting committee comprised more than a dozen NCCUSL commissioners, all experts on aspects of commercial law. In addition to Woodrow, advisors included legal counsel for several California rancherias and representatives from 10 Indian tribes. Participating tribes included the Crow Nation, Sac and Fox Nation, Navajo Nation, Chitimacha Tribe of Louisiana, Oneida Indian Nation of New York, Cherokee Nation, Confederated Tribes of the Warm Springs Reservation, Chickasaw Nation, and Little Traverse Bay Bands of Odawa Indians.

During semiannual meetings, frequent conference calls and countless e-mail exchanges, MTA committee members and advisors examined every line of the UCC's Article 9, plus several interrelated UCC articles, and gradually pieced together the new code. As they worked through each section, committee members created case studies to test what they had drafted, then presented the scenarios to the whole group for debate. In Woodrow's view, the approach was invaluable.

"The process produced sound results and demonstrated the benefit of doing this with a large group," she recalls. "A number of our debates raised scenarios and issues that no single person could have thought of."

Inconsistencies and adaptations

The greatest amount of debate centered on issues where tribal policies, traditions or other laws were inconsistent with the UCC. One example is self-help repossession. As adopted by the states, the UCC provides that if a borrower fails to make loan payments—on an auto loan, for example—the financing company can repossess the car on its own, without working through the court system, so long as it does not breach the peace. The practice is controversial in Indian Country, where repossession practices by outside companies on some reservations have been deemed unreasonable or even abusive. In acknowledgement of the issue, the MTA does not provide for self-help repossessions and instead requires creditors to work through tribal courts. However, for tribes that do want to allow self-help repossessions, alternative language is available.

Fixtures are another example. Fixtures include things like furnaces or kitchen sinks that start out as freestanding items and are later attached to real property such as homes or land. Upon their attachment, they become hybrid items—part personal property, part real property. In most places, land is simply bought and sold, and the fixtures go with it. Not always so in Indian Country, where much of the land is held in trust by the federal government and cannot be sold or otherwise encumbered, such as with a security interest, without special permissions. To avoid issues related to trust land, the MTA excludes property that is not freely transferable, or alienable, from its scope.

As they incorporated adaptable language into the MTA, NCCUSL committee members exercised some adaptability of their own. During the drafting process, they took the unusual step of creating a practical guide to ease comprehension and adoption of the code.

"Commercial law is so complex," explains Woodrow, who chaired the task force that drafted the guide. "Some of the issues are extremely difficult for lawyers who've specialized in this field for years to sort out. As we drafted the code, the need for an accessible guide to the law became apparent."

The resulting Implementation Guide features plain-language commentary on each provision of the code. It also discusses UCC filing system options for tribes, incorporates a model filing system regulation and raises important policy issues for tribal legislatures to consider. The guide's drafters hope it will serve as a resource for tribes and an educational tool for the legal community.

Spreading the word

The committee finalized the MTA in August of 2005, after four years of drafting. Currently, committee members and advisors are promoting the code at every opportunity. Woodrow alone has given more than 20 presentations on the MTA at various community development and Indian economic development conferences and workshops, and at educational sessions for state agencies and the legal community. The Minneapolis Fed is partnering with NCCUSL and regional tribal organizations to develop a legal curriculum for training tribal judges and attorneys who will be working with and adjudicating issues under the MTA. The curriculum's drafters hope to roll it out at regional training events in the first half of 2006.

Promotional efforts by organizations outside of NCCUSL and the Federal Reserve are at an early stage. The U.S. Department of the Interior's Bureau of Indian Affairs recently began providing MTA implementation funding to tribes, to help them cover the costs of legal counsel or other needed assistance. Financial institutions, which have a potentially huge stake in the expansion of lending to Indian Country, have expressed some interest in promoting widespread adoption of the code.

Initial tribal responses to the MTA are positive. A number of tribes have expressed strong interest in the act or are already taking steps toward implementing it. Processes and time frames for adopting new laws vary from tribe to tribe; in many cases, a tribe's governing body must first carefully review and discuss the code in order to resolve any policy issues, and then pass a resolution of adoption. Depending on their bylaws or constitutions, tribes will then be ready to either adopt the code or put the question up for vote in a public referendum. For a given tribe, the whole process could take months from start to finish.

The Crow experience

The very first tribe to pursue MTA implementation happens to be located in the Ninth District. Leaders of the Crow Nation of Montana, who served on the NCCUSL committee's advisory group, first became aware of the MTA three years ago when the tribe's economic development director, Shawn Realbird, attended a conference featuring a presentation by Woodrow on NCCUSL's MTA drafting effort. The act's promise of uniformity struck Realbird, who was searching for a commercial code to fit the Crow Nation.

"Uniformity is one of the primary objectives of economic development," he asserts. "For an Indian tribe, uniformity will eliminate insecurity on the part of investors, lending institutions, financial people, attorneys and anyone else who's involved. It ensures that contracts, documents and agreements are consistent. It's the focal point."

Realbird expressed his interest in the MTA to Woodrow, who later invited him to join the NCCUSL effort as an advisor. He provided feedback and cultural insights for the remainder of the drafting process.

The Crow Nation's executive branch submitted the MTA to the tribal legislature for approval on July 18, 2005—"before the ink on the act was dry," recalls Realbird. The full, 18-member legislature then sent the act to its judicial committee for discussion. During regular meetings over several months, the committee has been examining the act bit by bit, talking through issues related to self-help and court-ordered repossessions, investors' rights and other matters.

According to Realbird, legislators have been receptive to the MTA—after they got over the initial shock of paging through the document.

"The act is over a hundred pages long, and there's a lot of complex information to comprehend. It must have seemed overwhelming to them at first. Once we started going over it paragraph by paragraph, they became more comfortable with it."

The Crow Nation's discussions of the MTA feature an extra layer of complexity. All of the tribe's official business is conducted in the Crow language, and Realbird has to translate the act's legal terminology from English to Crow, using culturally relevant phrases to convey terms like interest rate and collateral, which have no counterpart in the Crow tongue.

"It's extremely hard to translate these terms into something that's meaningful in our language," he says. "Many times, I have to explain something three or four ways before the concept is clear."

Realbird anticipates the legislature will vote on the MTA soon, which could enable him to meet a March 15, 2006, implementation deadline set by Crow Nation Tribal Chairman Carl Venne.

Passage of the act would mark the end of a "big, long process" and, Realbird predicts, the beginning of a new era of prosperity for the Crow Nation. The basis of his prediction? Location, location, location. The Crow Reservation covers a vast chunk of southeastern Montana, close to Yellowstone National Park, the City of Billings, the Black Hills and the junction of Interstate 90 and State Highway 212—two corridors that carry heavy tourist traffic for much of the year.

"With commercial laws in place, the Crow people will be able to provide services and businesses to capture that traffic," says Realbird. "We'll have hotels, restaurants, art shops, catering companies, horse rentals and culture-based businesses like Indian dance groups. The Crow Reservation will turn into another Jackson Hole."

Realbird's vision includes opportunities to tap some of the reservation's natural resources.

"We're one of the last markets in the U.S. that's never been explored for its energy reserves. We have 2.5 million acres of property, and it contains oil and gas deposits, 17 billion tons of recoverable coal and trillions of cubic feet of coal bed methane. When we have a commercial code, energy companies will be able to invest here. It'll enable us to assist the U.S. by developing and selling energy, to help bring down prices for consumers."

Next steps for the Crow Nation include working to adopt additional commercial laws, to create a more comprehensive legal framework for the reservation. As Realbird observes, "One law needs another in order for economic development to happen."

Putting the wheels in motion

Tribes with their own visions of economic development are starting down the same path the Crow Nation is following. Other tribes moving to consider or implement the MTA include the Chippewa-Cree Tribe of Rocky Boy's Reservation, Eastern Shoshone and Northern Arapaho Tribes of the Wind River Reservation, Sac and Fox Nation, Confederated Tribes of the Warm Springs Reservation and Oglala Sioux Tribe.

As tribal legislatures begin the painstaking process of reviewing and discussing the MTA's provisions line by line, they are helping strengthen the commercial legal infrastructure of Indian Country, tribe by tribe. And once a strong infrastructure is in place, tribal communities may finally be able to realize their full economic potential.

In Realbird's words, "Economic development in Indian Country is like a Ferrari. When we get commercial codes in place, we can turn the key in the ignition, and the wheels of commerce can start moving forward. More people will become involved in the economy by selling or purchasing goods. Once those wheels are moving, there's no way the car can stop and stall. It's just a matter of starting it."

For more information on the MTA drafting effort, contact Sue Woodrow at (406) 447-3806 or susan.woodrow@mpls.frb.org. To access the MTA and accompanying Implementation Guide, visit www.nccusl.org/Update/ and click on "Final Acts & Legislation."

As it becomes available, information on MTA implementation training sessions will be posted on the Community Affairs calendar.