The Indian Trust Fund Litigation: An Overview of Cobell v. Salazar
Released: 2012-11-30T00:00:00

Background

First filed in 1996, Cobell v. Salazar involved the Department of the Interior's (DOI's) management of several money accounts. These money accounts, known as IIMs (an abbreviation for Individual Indian Monies) are monies which the federal government holds for the benefit of individual Indians rather than property held for the benefit of an Indian tribe. The conflict in the case emanated from the federal government's trust responsibility with respect to American Indians. One of the earliest formulations of the concept of the federal government as trustee for Indian tribes came from the U.S. Supreme Court in 1831, likening the relationship to that of "a ward to its guardian." In the capacity of trustee, the United States holds title to much of Indian tribal land and land allotted to individual Indians. Receipts from leases, timber sales, or mineral royalties are paid to the federal government for disbursement to the appropriate Indian property owners. The United States has fiduciary responsibilities to manage Indian monies and assets which have been derived from these lands and are held in trust.

The case was premised on statutory duties imposed upon the federal agencies handling Indian monies as well as on the existence of property rights in funds and assets held in trust for Indians. The courts have recognized broad powers of Congress with respect to Indian affairs legislation and Indian property, but have also recognized that Indian property may not be taken for a public purpose without just compensation. This case was not a claim for just compensation; it was a claim for an accounting by the trustee (i.e., the United States) for receipts and disbursements representing the trust corpus held for the benefit of individual Indians.

The Cobell litigation sprang out of the federal government's trust responsibility with respect to three groups of money accounts held in trust for individual Indian beneficiaries. These accounts are commonly referred to as the Individual Indian Money (IIM) accounts. They include (1) Land-based Accounts—established to receive revenues derived from the approximately 11 million acres held in trust by the U.S. for individual Indians; (2) Special Deposit Accounts (SDAs)—intended to be temporary accounts to hold funds that could not be immediately credited to the proper IIM account holder; and (3) Judgment and Per Capita Accounts—established to receive funds from tribal distributions of litigation settlements and tribal revenues. Congress has delegated to the Secretary of the Interior and the Secretary of the Treasury its responsibilities as trustee with regard to the IIM accounts. The Bureau of Indian Affairs (BIA) has general responsibility for trust land management and income collection.

The BIA, Office of Trust Funds Management, and the Office of the Special Trustee all have trust obligations relating to IIM accounts. Most transactions involving IIM accounts require BIA approval. Therefore, one of BIA's most important duties is managing IIM funds derived from income-producing activities on allotment land, including grazing leases, timber leases, timber sales, oil and gas production, mineral production, and rights-of-way. The Office of Trust Fund Management (OTFM) is responsible for BIA's fiduciary duty to keep accurate financial records of these activities. OTFM also shares the banking aspect of DOI's trust responsibility with the Treasury Department. OTFM and BIA officers collect payments and deposit them into local banks where there is a Treasury General Account. The Treasury Department maintains a single "IIM account" for all IIM funds, rather than individual accounts, while OTFM is responsible for maintaining accounting records for the individual funds. Treasury also invests the funds at the direction of DOI. Finally the Office of the Special Trustee for American Indians is responsible for "trust reform efforts" as established under the Trust Fund Management Reform Act.

The federal government—as holder of these accounts in trust for the Indian beneficiaries—has fiduciary obligations to administer the trust lands and funds arising from them for the benefit of the beneficiaries. The federal government has stipulated, however, that it does not know the exact number of IIM trust accounts that it is supposed to administer; nor does DOI know the correct balances for each IIM account. DOI has conceded that it is unable to provide an accurate accounting for a majority of IIM trust beneficiaries. The Treasury Department also has problems with trust fund management procedures. First, the Treasury Department has permitted the destruction of documents over six years and seven months old, and made no effort to ensure that documents related to accounting for IIM accounts are preserved. In addition, there can be a time lapse between the deposit of funds with the Treasury Department and the investment of those funds. There can also be a time lapse between the issuance of a check and when the payee presents the check, resulting in lost interest.

Congressional oversight committees became concerned with IIM mismanagement in the late 1980s and began holding oversight hearings regarding the IIM accounts in 1988. Four years later, the House Committee on Government Operations produced a report highly critical of the Interior Department. In 1994, Congress enacted the Indian Trust Fund Management Reform Act (the Reform Act), recognizing the federal government's pre-existing trust responsibilities and further identifying some of the Interior Secretary's trust fund responsibilities, such as providing adequate accounting for trust fund balances; providing adequate controls over receipts and disbursements; providing accurate and timely reconciliations; preparing and supplying periodic statements of account performance and balances to account holders; and establishing consistent, written policies and procedures for trust fund management. Significantly, the original House bill ( H.R. 1846 ) would have made the accounting duty prospective only. When another similar bill was introduced to replace H.R. 1846 , that provision was left out. This new bill became the Reform Act, and the courts interpreting it in the Cobell litigation have determined that DOI owes a historical accounting duty going back to June 24, 1938. As the U.S. Court of Appeals for the D.C. Circuit (D.C. Circuit) stated, "the 1994 Act identified a portion of the government's specific obligations and created additional means to ensure that the obligations would be carried out."

The Litigation

The Cobell litigation began in 1996, and its docket enumerated over 3,600 documents and over 20 federal district court and court of appeals opinions. The following attempts to distill the history of this litigation so that it focuses on the substantive issues regarding the IIM accounts.

In 1996, a group of IIM account holders filed a class action suit to compel performance of trust obligations, alleging that the Secretaries of the Interior and the Treasury—as delegatees of the federal government's trust responsibilities—had breached the fiduciary duties owed to plaintiffs by mismanaging the IIM accounts. Two years later, the district court judge bifurcated the trial into two phases, with Phase 1 to focus on reforming the management and accounting of the IIM trust funds, and Phase 2 to address the historical accounting of those accounts. In 1999, United States District Judge Royce C. Lamberth issued a ruling as to Phase 1, holding that the Treasury and Interior Secretaries had breached their fiduciary duties to the IIM account holders. The transition to Phase 2 proved difficult because the defendants were unable to submit—in forms acceptable to the court—plans for reforming the account-management system and for providing a historical accounting.

Two specific issues made it particularly difficult for DOI to provide an accounting in the Cobell litigation. The first of these issues was the fractionation of interests in many of the allotment lands. These interests have been fractionated over the years as they have been divided among the heirs of the original allottees, increasing exponentially with each generation and leading to incredibly small interests that are difficult to track. DOI estimates that there are currently over 1.4 million fractional interests subdividing 58,000 tracts of land. While DOI has stated that it can perform a transaction-by-transaction accounting of the judgment and per capita accounts and the SDAs, the problems presented by the land-based accounts have proven very difficult to resolve. DOI has argued that it should be able to use statistical sampling with respect to some of these accounts.

The second difficult question is determining how far into the past a historical accounting should go. At various points in the litigation, the different parties argued for an accounting of transactions as far back as 1887 (date of the Allotment Act), 1938 (creation of the Secretary's authority to deposit tribal trust funds), and 1994 (date of the Reform Act). Resolving this problem would likely encompass a choice between what is fair and what is possible. One could have very different answers to these two questions, mainly because, as the litigation showed, DOI and Treasury records relating to the IIM accounts are at best incomplete.

In January 2003, DOI provided a new historical accounting plan to Judge Lamberth that would cover all accounts open as of October 25, 1994, when the Reform Act was enacted. After reviewing DOI's plan, Judge Lamberth in September 2003 issued a controversial structural injunction giving the court broad oversight authority to ensure that (1) DOI carries out the accounting (the court adopted what is essentially a modified version of DOI's historical accounting plan, but did not allow DOI to use statistical sampling with respect to the land-based accounts); and (2) DOI reforms its system for managing the IIM accounts. Judge Lamberth also appointed a monitor to ensure compliance with the injunction order.

One month later, Congress passed an appropriations rider stating that "nothing in [the Reform Act] or in any other statute, and no principle of common law, shall be construed or applied to require the Department of the Interior to commence or continue historical accounting activities with respect to the [IIM] Trust" until 2005 or when Congress more clearly delineates DOI's accounting obligations under the Reform Act. Congress took this action in direct response to Judge Lamberth's structural injunction order, stating that compliance could cost upwards of $6 billion and that diverting that amount of resources could be "devastating to Indian country." Two subsequent appropriations bills limited the funds available to DOI for the historical accounting to $58 million for FY2005 and FY2006.

On December 10, 2004, the D.C. Circuit issued an opinion striking down almost all of Judge Lamberth's injunction. The court first held that, pursuant to Congress's directive contained in the aforementioned appropriations rider, DOI could not be compelled to perform any historical accounting. The court noted, however, that the directive would sunset on December 31, 2004, and the judges pointed out that they could not "address the issues that would be relevant if the district court [after December 31, 2004] reissued those provisions [compelling a historical accounting]." The court next largely overturned Judge Lamberth's injunction as to DOI's systemic reform. Looking to Supreme Court precedent, the D.C. Circuit held that judicial review under the Administrative Procedure Act (APA) is limited to specific agency actions, and that such review cannot be extended to "claims of broad programmatic failure." The court held that Judge Lamberth, in issuing his injunction, had impermissibly wandered into this latter area, which is more properly reserved for executive or legislative action. While the D.C. Circuit upheld Judge Lamberth's requirement that DOI submit a plan laying out how it will come into compliance with its fiduciary obligations, the court found that the other elements of Lamberth's order (e.g., the appointment of a monitor, the listing of and compliance with tribal laws) were not tied to specific findings of wrongdoing and suggested greater, and inappropriate, judicial intrusion into agency discretion.

On February 23, 2005, Judge Lamberth—noting that the deadline contained in the appropriations rider had passed—issued another structural injunction with respect to the historical accounting. Once again, he adopted a modified version of DOI's historical accounting plan, but prohibited the use of statistical sampling and required an accounting going back to the Allotment Act of 1887. He refused to stay the order pending appeal, citing the plaintiffs' nine-year wait and "a delay directed by Congress in a bizarre and futile attempt at legislating a settlement in this case."

On November 15, 2005, the D.C. Circuit vacated Judge Lamberth's injunction and historical accounting order and directed that, on remand, the district court, in evaluating DOI's plan for a statistical sampling to accomplish the accounting, should not ignore the general language of the Reform Act and subsequent congressional limitations on funding, suggesting that the Reform Act should not be seen as mandating "the best available accounting without regard to cost." The court of appeals would later remove Judge Lamberth from this case for abuse of discretion and bias.

On January 30, 2008, Judge James Robertson, assigned to the case in December 2006, rejected DOI's historical accounting plan not because of its use of statistical sampling methodology, but on the basis of finding its scope legally inadequate in terms of years and accounts or funds to be covered. He then held that DOI's accounting for the funds was impossible "as a conclusion of law" because DOI could not "achieve an accounting that passes muster as a trust accounting" due to the inadequacy of funding provided by Congress. Judge Robertson ordered a hearing to develop a process for determining an appropriate remedy.

On August 7, 2008, Judge Robertson issued a decision on the remedy issue in which he awarded plaintiffs $455.6 million in restitution. The figure represents the amount to be restored to plaintiffs as receipts not credited to their accounts. Claims for damages for funds which never were collected or for mismanagement of assets are not included in the figure and were not before the court in Cobell . To determine the amount of restitution, the court had to examine the models the parties had set forth for determining the difference between what Treasury had posted as receipts to the IIM accounts and what had been disbursed to individual accounts or account holders. Information accumulated from the years of attempts at arriving at a satisfactory and reliable means of reconstructing the records at DOI and Treasury aided the court in evaluating the models offered by the parties.

The court, in formulating its remedy, decided not to accord plaintiffs the full benefit of evidentiary presumptions in their favor. This led the court to apply a modified burden of proof on the government's statistical model for calculating data that it could not produce. DOI had shown that only 77% of the monies collected for the IIM system had been posted to IIM accounts. Accepting the government's calculation of receipts but using their own formula for calculating a disbursement rate for each year, the plaintiffs claimed a shortfall of $3.6 billion over 122 years. To this they proposed adding approximately $43.4 billion as "benefit to the government" based on a formula they had devised which assumed that whatever was not disbursed to the account holders was available for general governmental expenses, relieving the government of a need to issue and pay interest on Treasury bonds.

The government produced evidence explaining some of the shortfall between receipts and disbursements. A DOI expert testified that the discrepancy reflected the fact that not all the funds received into Treasury's IIM account are intended to be credited to individual Indian trust fund accounts. Some, such as tribal trust fund receipts or bid or lease deposits, are to be funneled on a pass-through basis to other recipients.

Having admitted that 23% of IIM receipts had not been posted to IIM accounts and faced with the plaintiffs' charge that approximately $4 billion had not been disbursed to account holders, the government was required to explain the shortfall and put a figure on it. The explanation was essentially that the individual Indian trust beneficiaries were not entitled to all of the funds that Treasury deposited in the IIM account. The government attempted to demonstrate this point by using a statistical model that employed a "multiple imputation" technique to account for the multiplicity of variables imputed to the large range of missing data with respect to the accounts.

With both the plaintiffs' and defendant's statistical models before him, Judge Robertson not only found the model offered by the plaintiffs to be defective, he also criticized their failure to offer specific evidence to discredit the defendant's model. According to his opinion, the plaintiffs' model could not be considered, among other reasons, because it was inconsistent in accepting the government's estimate of receipts, but not of disbursements, which reflected "a super-strong interpretation of the presumption against the breaching trustee that cannot be equitably applied to the trusts at issue here."

Accordingly, Judge Robertson accepted the government's model, but provided a certain evidentiary advantage to the plaintiffs by selecting the "maximally conservative" estimate. Therefore, using the maximally conservative estimate as established by the government model, the court concluded that $455.6 million was the amount missing in the IIM trust and that only that amount would be awarded in restitution.

District Court Instructed to Enforce the "Best Accounting" DOI Can Provide with "Limited Government Resources"

The July 24, 2009, decision issued by the U.S. Court of Appeals for the District of Columbia vacated the holding in Judge Robertson's January 2008 decision that DOI did not have to conduct an accounting due to impossibility and remanded the case to the district court for further proceedings. The court of appeals concluded that the district court was correct to grant deference to DOI's methodology in conducting the accounting because "it 'a[rose] out of an administrative balancing of cost, time, and accuracy.'" However, the court of appeals also found that the district court's conclusion that "the proper scope of the accounting obligation … is the result … of a legal interpretation of the 1994 Act and other statutes governing the IIM trust" was not completely correct. Although the district court correctly concluded that the extent of the scope of the accounting is derived from statutory law, the court of appeals concluded that "the unique nature of this trust requires the district court to exercise equitable powers in resolving the paradox between classical accounting and limited government resources." Thus, the court of appeals concluded that the district court was incorrect in assuming it could not adjust the scope of the accounting in order to provide the best accounting possible with the limited resources made available by Congress. Rather, "the district court sitting in equity must do everything it can to ensure that Interior provides them an equitable accounting. The district court's holding of impossibility contradicts the requirement of an equitable accounting—one that makes most efficient use of limited government resources."

After holding that DOI must conduct the best accounting possible with the money Congress appropriated for the task, the court of appeals then provided some guidance to the district court in order to help establish the proper scope of the accounting. The court of appeals first noted that "the district court should exercise its equitable power to ensure that Interior allocates its limited resources in rough proportion to the estimated dollar value of payments due to class members." The court of appeals also recommended that the district court "consider low-cost statistical methods of estimating benefits across class sub-groups." Finally, the court of appeals concluded that the district court erred in ordering an accounting for accounts closed before the 1994 Reform Act was passed because the act only contemplated an accounting of funds held in trust by the United States at the time of the act's passage.

December 7, 2009, Settlement

On December 7, 2009, the Secretaries of the Interior and Treasury reached a settlement agreement with the plaintiffs' class. However, under its own terms, the settlement would not be effective until authorized by Congress. The settlement agreement originally called for Congress to authorize it legislatively by December 31, 2009. The deadline, however, was extended eight times to February 28, 2010, April 16, May 25, June 15, July 9, August 6, October 15, and finally to January 7, 2011. After a number of failed attempts to approve the settlement, Congress finally authorized the settlement through the Claims Resolution Act of 2010 (CRA), which was signed by President Obama on December 8, 2010.

The settlement agreement addressed the claims of two separate classes. One class, the "Historical Accounting Class," is defined as those Indian beneficiaries who had an open IIM account between October 25, 1994, and September 30, 2009, in which there was at least one cash transaction credited to it. The "Trust Administration Class" is defined as those individual Indian beneficiaries alive as of September 30, 2009, who have or had IIM accounts between roughly 1985 to the present (the time period when IIM accounts were kept in electronic databases) and individual Indians who, as of September 30, 2009, had recorded or other demonstrable ownership interest in land held in trust or restricted status, regardless of the existence of an IIM account or proceeds generated from the land.

The settlement agreement released the federal government from claims related to the mismanagement of the IIM accounts of both the Historical Accounting Class and the Trust Administration Class. However, the settlement also specifically excluded from the release (1) claims related to the payment of the account balances of existing IIM accounts; (2) claims related to the payment of existing amounts in special deposits accounts, tribal accounts, or judgment fund accounts; (3) claims related to the breaching of trust or alleged wrongs after September 30, 2009; (4) claims for damages to the environment other than those claims expressly identified as Land Administration Claims; (5) claims for trespass; (6) claims against tribes, contractors, and other third parties; (7) equitable, injunctive, or non-monetary claims for boundary correction and appraisal errors; (8) money damages arising from boundary or appraisal errors that occur after September 30, 2009; (9) claims arising out of leases, easements, rights-of-way, and similar encumbrances existing as of September 30, 2009; (10) claims related to failure to assert water rights and quantification; and (11) health and mortality claims. The settlement also stated that no further monetary obligations shall attach to the federal government after the funds agreed upon in the settlement are dispensed.

In return for this release of liability, the settlement established two funds. The first fund would receive $1.412 billion from the Judgment Fund and will be called the "Accounting/Trust Administration Fund." From this fund, each member of the Historical Accounting Class shall receive $1,000. After this payment is made, the next stage involves establishing the identities of the members of the Trust Administration Class and paying each member a pro rata amount. This amount involves a $500 base payment. In addition, each member of the class will receive a pro rata amount of the remaining monies in the Accounting/Trust Administration Fund. Any money remaining in this fund will be used to finance a program called "Funds for Indian Education Scholarships," which provides for the cost of post-secondary education for Indian students.

The second fund, called the "Trust Land Consolidation Fund," would receive $2 billion. This fund, which will terminate in 10 years, will be used to acquire fractional interests in trust or restricted land pursuant to 25 U.S.C. §2201 et seq., which authorizes the Land Consolidation program. This program is the principal vehicle by which the federal government consolidates fractionated trust and restricted lands. Monies from this account will also be made available for the "Funds for Indian Education Scholarships."

The CRA excludes amounts received by individual Indians pursuant to the settlement from inclusion as gross income for federal tax purposes. The settlement and CRA also left for the district court's consideration the amount of attorneys' fees and the amount of the incentive award for the named plaintiffs of the class.

The district court approved the settlement on July 27, 2012. A few members of the class appealed the settlement to the U.S. Court of Appeals for the D.C. Circuit, which upheld the fairness of the settlement. After the Supreme Court denied a petition for certiorari and the appeal period expired, the settlement became final on November 24, 2012.