Why Tribes Should Adopt a Secured Transactions Code 4.8.19

Assistant Secretary—Indian Aﬀairs

Oﬃce of Indian Energy and Economic Development 1 Division of Economic Development

Tribal Economic Development Principles at a Glance Series:

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Tribal Economic Development Principles at a Glance Series

Why Tribes Should Adopt a

Secured Transactions Code

U. S. Department of the Interior

Assistant Secretary—Indian Affairs

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Division of Economic Development

Assistant Secretary—Indian Aﬀairs

Oﬃce of Indian Energy and Economic Development 2 Division of Economic Development

Tribal Economic Development Principles at a Glance Series:

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This is the third in a series of economic development primers prepared by the Indian Affairs Office of

Indian Energy and Economic Development (IEED), Division of Economic Development (DED), U.S.

Department of the Interior, to offer answers to fundamental questions about creating jobs and expanding

economies in federally recognized tribal communities.

The information contained in this primer, or in the articles it cites, is not intended to offer legal advice.

IEED does not control or guarantee the accuracy, relevance, timeliness, or completeness of information

contained in the articles it has cited, nor does it authorize the use of copyrighted materials contained in

them. Users must request such authorization from authors of those articles.

If you would like to discuss tribal secured transactions codes in more detail, please contact the Division

of Economic Development at (202) 208-0740.

Assistant Secretary—Indian Aﬀairs

Oﬃce of Indian Energy and Economic Development 3 Division of Economic Development

Tribal Economic Development Principles at a Glance Series:

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What is a secured transaction?

A secured transaction is an agreement between two parties in which one of the parties gives

property (other than real estate) as collateral – or security – for a loan. There are two types: one

that involves a “possessory security interest” (Example A) and another that involves a “non-

possessory security interest” or “lien” (Example B):

Why are non-possessory security interests important?

Liens like the one described in Example B enable businesses to obtain the credit they need

to buy office or farm equipment, machinery, vehicles used for business, and other tangible

personal property used in commerce. Likewise, they enable consumers to buy on credit the

tangible items that businesses produce or sell, including vehicles and appliances.

Why are secured transactions codes needed?

Laws are needed to enforce the liens or security interests of creditors. If such laws did not

exist or were not enforced, sellers of goods would be reluctant to accept anything but cash for the

full sales price of any tangible items they might otherwise sell on a credit basis. Likewise, lenders

would be reluctant to loan unless they knew with certainty that a borrower would repay. This

would prevent businesses from starting up or expanding because they could not obtain key

equipment, machines, or vehicles, or may not have access to operating lines of credit.

These laws are important, too, because they provide a means of reconciling competing

claims in collateral by establishing who has priority when there are several claimants.

Example A:

Tom seeks to borrow $2,000 from Mary. Mary

agrees to loan Tom the money but wishes to have

some means of being paid back should Tom

default. Mary knows that Tom has a hand-crafted

roping saddle worth $2,000 and that this can

become collateral for the loan. So she asks Tom

to give her possession of the saddle until the loan

is repaid. Mary takes possession of the saddle

(still owned by Tom) and thereby obtains a

possessory security interest in it. If Tom pays

back the loan, Mary must return the saddle to

him. But if Tom fails to pay back the loan, Mary

may sell the saddle and retain the portion of the

sale proceeds that she needs to pay off the

balance of the loan.

Example B:

The facts are the same except that Tom and Mary

sign a “security agreement” giving Mary a

non-possessory security interest or “lien” on the

saddle. In this case, Tom retains possession of his

saddle. Should Tom fail to pay off the loan, Mary

will be able to take possession of the saddle, sell

it, and retain the portion of the sale proceeds that

she needs to pay off the balance of the loan.

Assistant Secretary—Indian Aﬀairs

Oﬃce of Indian Energy and Economic Development 4 Division of Economic Development

Tribal Economic Development Principles at a Glance Series:

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Why does Indian Country in particular need secured transactions codes?

Without such codes and an accurate, reliable and publicly accessible system for filing

claims, tribal firms are often unable to finance the purchase of business-related equipment from

sellers located outside tribal jurisdictions because a dealer cannot enforce its lien (or security

interest) in the purchased item once it has been transported to a reservation. Or, if tribal firms are

able to access financing, it may be at higher interest rates and for shorter terms, thereby making

the credit unaffordable. This is because most tribes have not adopted a secured transactions code

together with a reliable and modern lien filing system to specify how security interests may be

created, perfected, and enforced. Absent these rules, creditors may increase borrowing costs to

offset risks or refuse to lend altogether.

Affordable credit is a daunting problem in Indian Country. Eighty-six percent of tribal lands

do not have a bank and 15 percent of American Indian and Alaska Natives live 100 miles or more

from one.

Of financial institutions on or near tribal communities, only 33 percent offer start-up

loans, only 29 percent offer small business loans, and just 26 percent offer micro business loans.

Entrepreneurs and investors depend on a strong legal infrastructure to protect their interests.

Commerce is inhibited when financial transactions lack certainty and protection. Lenders are

willing to lend when they can rely on a secured transactions code to assure that they will be repaid

in the event of a default. Access to affordable credit is a fundamental component of sustainable

economic development in all modern market economies.

Here’s an example of how the lack of a secured transactions code can block economic

development in a tribal community:

Drew Tulchin and Jessica Shortall, “Small Business Incubation and Its Prospects in Indian Country,” Social

Enterprise Associates, December 2008, p. 1

Ibid.

Bob is a young tribal member living on the reservation. He is a capable auto mechanic who wants to

purchase auto repair equipment in a border town so that he can start an auto repair business. Because

there are no auto repair shops on the reservation, tribal members are anxious for Bob to open one.

Since Bob just graduated from high school and is living with his family, he does not have enough

savings to afford the $5,000 price of the equipment he needs. There are no banks on the reservation, and the

bank in the border town will not lend to him because he has no permanent job and has not established a

credit record.

Bob’s only alternative is to buy the equipment on credit from a border town store. The proprietor of

this store is impressed by Bob and is willing to sell him the equipment on credit until he learns that Bob

lives on the reservation.

(continued on the next page)

Assistant Secretary—Indian Aﬀairs

Oﬃce of Indian Energy and Economic Development 5 Division of Economic Development

Tribal Economic Development Principles at a Glance Series:

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Are tribes required to write their own secured transactions codes?

They can. But this is unnecessary because the National Conference of Commissioners on

Uniform State Laws (NCCUSL) and a working group of tribal officials have already drafted the

Model Tribal Secured Transactions Act (MTSTA) as a template for legislation by tribes to facilitate

transactions between lenders and businesses. The model, created in 2004 and revised in 2017, was

drafted with the objective of creating a uniform tribal secured transactions law consistent with

Article 9 of the Uniform Commercial Code (UCC) in tribal business, legal, and cultural

environments. NCCUSL and the American Law Institute drafted the UCC in the 1940s to establish

a consistent legal framework for commercial dealings between parties from different states. Every

state plus the District of Columbia, Puerto Rico, and the U.S. Virgin Islands has adopted the UCC.

Article 9 of the UCC covers secured transactions.

While the MTSTA differs from UCC Article 9 in a number of ways, its major principles,

terminology, and processes are similar enough to the UCC to ensure that tribal and non-tribal

practitioners can work effectively within both tribal and state jurisdictions.

What does the MTSTA do?

The MTSTA provides a set of rules that specify how security interests may be created,

perfected, and enforced, and who has first rights when two or more competing creditors have

legally enforceable interests in the same collateral. Under this system, a creditor files a financing

statement at a public filing office that constitutes notice to other interested parties about security

interests in the personal property of the debtor. This financing statement perfects (or makes good

against third parties) a creditor’s security interest in most kinds of personal property.

(continued from the last page)

“I’m willing to sign a contract to make monthly loan payments with interest, just like most of your

other customers who don’t pay with cash,” Bob protests. “What’s the problem?”

The proprietor shakes his head saying, “The other customers you refer to all live in town. If any of

them stop making their monthly payments, I have a lien on the items they’ve purchased and can repossess

those items. But, I cannot enforce a lien on anything I sell to you because there is no way to protect my

interest under tribal law. If I sell you the equipment on credit and you stop paying me, I have no way to

recover the equipment and I’ll be out $5,000.”

The result is that Bob is unable to start his business and the tribal community will not have a local

auto repair shop.

Assistant Secretary—Indian Aﬀairs

Oﬃce of Indian Energy and Economic Development 6 Division of Economic Development

Tribal Economic Development Principles at a Glance Series:

t ŚǇdƌŝďĞƐ^ŚŽƵůĚĚŽƉƚĂ^ĞĐƵƌĞĚdƌĂŶƐĂĐƟŽŶƐŽĚĞ

What is the core purpose of the MTSTA?

Its main purpose is “to promote economic development by encouraging and supporting

business dealings between tribal entities, tribal member-owned businesses and tribal consumers,

and financial institutions and other businesses outside of a Tribe’s jurisdiction” (Comment on

MTSTA §9-103).

Is there something more a tribe must do in addition to adopting the MTSTA?

Yes, adopting a secured transactions code is just the first step. The next, indispensable step

is for a tribe to provide a means of recording financing statements. A financing statement notifies

the public that the creditor/secured party may have a lien on the personal property of a particular

debtor. Public filing offices determine when filings will be accepted, how records must be

maintained, what kind of fees will be charged, and how information is made available to the

public. In most states, it is the Secretary of State who administers the UCC filing office. For most

tribes, setting up a reservation-based financing statement filing system would be prohibitively

expensive. Generally, tribes also lack the capacity and training to administer these systems. A more

practical approach for a tribe that has adopted the MTSTA is to enter into a joint powers

agreement, memorandum of understanding, or compact with the state to administer the financing

statements that arise from the tribe’s secured transactions code. Another advantage to state systems

is that they are electronic and accessible online.

IEED has made itself available to help tribes negotiate joint powers agreements, memoranda

of understanding, or compacts with states in order to include in state commercial lien recording

systems financing statements and liens incident to tribal commercial codes. Some tribes have

adopted codes but failed to designate a filing system, while others have adopted codes and

designated a state filing system but neglected to enter into a formal agency arrangement with the

state filing office.

“Implementation Guide and Commentary to the Revised Model Tribal Secured Transactions Act,” National

Conference of Commissioners on Uniform State Laws, 2017, p. 82.

Assistant Secretary—Indian Aﬀairs

Oﬃce of Indian Energy and Economic Development 7 Division of Economic Development

Tribal Economic Development Principles at a Glance Series:

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When a Tribe adopts a secured transactions code, is it waiving sovereign immunity?

No. Adopting a secured transactions code has no effect on sovereign immunity and, in itself,

is an act of self-governance and sovereignty. The MTSTA contains a section not contained in UCC

Article 9 that protects the sovereign immunity of a tribal nation, plus its agencies and

instrumentalities, and any waiver of sovereign immunity “must be approved by an authorized

representative or governing body of the Tribe and appropriately recorded” (Comment on MTSTA

§9-102). The MTSTA also contains a provision on choice of law that preserves tribal sovereignty

even if another state or federal law applies to the transaction or a part of it (MTSTA §9-117).

What if a tribe were to adopt the official text of UCC Article 9 rather than adopting the

MTSTA?

This would be ineffective as this version is just a template and contains many blank spaces.

Nor was it designed, as MTSTA was, specifically for tribal nations.

Why can’t a tribe just adopt Article 9 as it was enacted by the state in which the tribe is

located?

Nothing prevents a tribe from doing so. However, unlike the MTSTA, state codes were not

devised with tribal nations in mind, so state codes may contain provisions that do not comport with

tribal law and custom.

What if a tribe adopts its own unique version of Article 9?

Again, it is within the power of a tribe to do this. But, the danger in doing this is that some

provisions of the tribe’s code may not synchronize with the state’s code. Tribal secured transactions

are supposed to make credit transactions between persons on and off the reservation more seamless

and fluid, less troublesome, less likely to lead to misunderstandings, and more apt to encourage

commerce. Those with provisions that are not materially similar to those of the state code may

have the opposite result.

Assistant Secretary—Indian Aﬀairs

Oﬃce of Indian Energy and Economic Development 8 Division of Economic Development

Tribal Economic Development Principles at a Glance Series:

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But, isn’t adoption of a secured transactions code just an invitation to non-tribal members to

come on the reservation and repossess personal property held by tribal members? Won’t

this lead to trouble?

No. The MTSTA allows a creditor/secured party to repossess collateral after the debtor’s

default only by consent of the debtor after the default occurs or through a judicial process, and all

repossessions must be done without “breaching the peace” (MTSTA §9-609).

Repossession occurs as a last resort by a secured party dealing with loan or other credit

agreement payments that are overdue or nonexistent who has obtained from the borrower a

financing statement filed in accordance with the code, thereby perfecting his or her rights in the

property. A security agreement usually defines what constitutes a debtor’s default. Default occurs

when the debtor either fails to make a payment when due or violates his or her security agreement.

After a debtor defaults, the secured party may obtain possession or control of the collateral

by written consent of the debtor or by obtaining an order from the tribal court. The secured party

can then sell the property and pay off the debt (or a portion of it) with the proceeds, or, in some

cases, keep the collateral to satisfy the debt. The debtor can reacquire (redeem) the collateral by

paying off the debt before the collateral is sold.

Wouldn’t it be a better idea then for a tribe to adopt the MTSTA, but delete provisions

authorizing repossession?

No. This would be self-defeating as it would essentially neuter the code. It is unlikely that a

creditor will allow anyone to purchase on credit where the creditor cannot repossess the personal

property that has been financed. Without a provision authorizing repossession, someone buying

personal property on credit could stop their payments and remove it to the tribal community where

it could not be lawfully repossessed.

Are there any kinds of personal property that a tribe should consider removing from the

scope of a secured transactions code?

Yes, a tribe can insert a provision into its code that prohibits, for example, the pledging of

sacred objects as collateral for credit transactions or loans. The MTSTA includes as a "usage of

trade" a local custom or tradition of the tribe. The MTSTA’s implementation guide points out that

if a provision of the MTSTA conflicts with a tribal custom or tradition, the tribe should consider

which should take precedence and specify that result in its enactment of the law. Transfer of

sacred objects out of tribal possession is an example of this kind of conflict (MTSTA §9-114).

Assistant Secretary—Indian Aﬀairs

Oﬃce of Indian Energy and Economic Development 9 Division of Economic Development

Tribal Economic Development Principles at a Glance Series:

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Has IEED had a role in tribes adopting the MTSTA?

Yes. Tribal adoption of the MTSTA has long been a priority for IEED and the Division of

Economic Development has funded several tribes to explore adoption of commercial law codes

modeled on the MTSTA: the Chippewa Cree Indians of the Rocky Boy Reservation (2005); the

Crow Tribe (2005); the Arapaho Tribe of the Wind River Reservation and the Shoshone Tribe of

the Wind River Reservation (2005); the Confederated Tribes of the Warm Springs Reservation

(2006); the Seminole Nation of Oklahoma (2006); the Sac & Fox Nation (2006); the Oglala Sioux

Tribe (2006); the Blackfeet Tribe (2006); the Confederated Tribes of the Umatilla Indian

Reservation (2006); and the Tulalip Tribes (2006). However, this funding is no longer available.

In 2007, DED organized with the National Congress of American Indians the National

Native American Economic Policy Summit in Phoenix, Arizona, which was attended by over 500

tribal and federal representatives. Among the 100 recommendations adopted by tribal leaders at the

Summit was to “Develop commercial codes that can be adopted or customized by each tribe. . .”.

In FY 2012 and FY 2013, DED joined with the U.S. Small Business Administration (SBA)

and the Federal Reserve System to sponsor at six key Indian Country locations training workshops

for tribal government and business representatives on how adoption of the MTSTA can boost

creditor and investor confidence in tribal economies and ensure the steady growth of business and

consumer credit on reservations.

Native American Economic Policy Report, NCAI and IEED, 2007, p. 6.

Assistant Secretary—Indian Aﬀairs

Oﬃce of Indian Energy and Economic Development 10 Division of Economic Develop-

Tribal Economic Development Principles at a Glance Series:

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U. S. Department of Interior

Assistant Secretary—Indian Affairs

ϐ  

Division of Economic Development

1951 Constitution Ave, N.W. MS-20-SIB

Washington, D.C. 20245

Phone: (202) 208-0740