The unenforceability of the project financing documents became public on January 6 of this year, when a federal judge refused to put the Lac du Flambeau tribal casino into receivership after the tribe defaulted on a $50 million bond indenture sold in 2008, ruling that the indenture instrument providing for the receivership actually gave the trustee illegal management control over the gaming operations in violation of IGRA.  In a one-paragraph Order, the court ruled that the agreement was effectively a management contract which was not approved by the National Indian Gaming Commission as required by IGRA’s Section 12, 25 U.S.C. § 2711, and – accordingly – all of the transactional documents are null and void as a matter of federal law.  Five days later, the judge followed up with a 12-page Decision and Order explaining his decision in detail.

The judgment came in litigation filed by Wells Fargo Bank, acting as Trustee for the bondholder, and seeking to invoke provisions of the bond agreement which provided for a receivership proceeding in the event of default.  See Wells Fargo Bank, N.A. v. Lake of the Torches Economic Development Corporation (W.D. Wisc.).  Instead of securing a receivership, the bondholder now finds itself on the wrong side of a decision that it has no rights and no enforceability.

While Wells Fargo is only acting as Trustee.  It neither originated the transaction nor invested in the bonds.  The sole bondholder is Saybrook Capital LLC of Santa Monica, California, a private firm which reportedly directs some $1 billion in private equity and fixed income investments for a cadre of domestic and offshore investors.  The Wells Fargo involvement was limited to its role as Trustee under the bond indenture, and it was acting at the direction of the bondholder. The Indenture was entered into by Wells Fargo in its capacity as Trustee and the Lake of the Torches Economic Development Corporation (“EDC”), a tribal corporation wholly owned by the Lac du Flambeau Band of Lake Superior Chippewa Indians.  The EDC was established specifically to own and operate the tribal casino and was federally chartered under Section 16 of the Indian Reorganization Act of 1934, 25 U.S.C. § 461, et seq.

Following default by the EDC, the litigation was filed by the Trustee seeking the immediate appointment of a temporary receiver to exercise oversight over the revenues, issues, payments, and profits of the casino.  Among the allegations was that the EDC diverted some $5 million from the Indenture’s trust for an impermissible purpose.  At the time of the default, the outstanding debt was $46.6 million.

The EDC responded to the suit by asserting that the Indenture was a management contract never approved by the NIGC, an argument buttressed by two briefs filed only a few days apart and an Affidavit by the dean of the University of New Mexico School of Law (and former NIGC General Counsel), Kevin Washburn, opining that the Indenture likely would be deemed a management contract under NIGC review.  While not required by law, NIGC review is often requested in Indian casino projects when documents contain provisions which might infringe on tribal control of casino management decisions.  However, it is not required for commercial casino transactions, for which the documents frequently give the investors great control over operations in the event of default.  

The commercial lenders involved apparently were unaware of the legal restrictions applicable to some of the very provisions upon which they routinely rely in casino transactions, and accordingly did not seek NIGC review.  Again, it is emphasized such reviews are routine through a well-established process usually leading to issuance of a letter reporting that transaction documents do not constitute management contracts and, thus, do not require NIGC approval.  Known as “declination letters,” they have become an integral part of many Indian casino projects when the developers and investors propose any degree of control over the gaming operations.  The financial law experts apparently missed the point altogether, and responded to the "Management Contract Defense" on December 29 with an eight-page brief stating that it was “disingenuous” for the EDC to raise the management contract issue so late in the game and deeming the claim as nothing more than “a transparent attempt to repudiate a valid, duly authorized contract that merely secures the $50 million in bonds issued by the EDC.”  The crushing blow came in the EDC's 37-page Supplemental Response of January 5, which was a virtual treatise on management contracts under IGRA.

The Order of dismissal was rendered only 24 hours after the Supplemental Response was filed, and the judge discussed various provisions of the Indenture and explained why he concluded it was a management contract and, thus, null and void.  Moreover – and this is critical for any company proposing to do business with a tribal casino – he further declared that there was no waiver of tribal sovereign immunity since the waiver was part of a contract which was no longer lawful.  And he foreclosed any notion of salvation for the bondholder when he ruled that the illegal portions of the Indenture could not be severed from other provisions, meaning that the entire transaction was void and leaving the Trustee and the bondholder without any recourse.  

In short, he found that the EDC had borrowed $46.6 million which it has no legal obligation to repay and for which the bondholder has no legal recourse.

On February 8, the Wells Fargo lawyers filed Motions to (1) Vacate the Judgment and (2) Amend the Complaint.  These pleadings were somewhat expected and the specific arguments easily predicted ("everything was done right and the document is not a management contract").  Those motions were still pending at the time this article was written.

This case – including the reconsideration motions were the subject of extensive discussion in mid-February at the Annual Gaming Law Minefield sponsored by the American Bar Association.  Attendees and panel members included attorneys and corporate executives working in gaming law, including Indian gaming law and the financing of tribal casino projects.  While two prominent Indian Gaming attorneys expressed the belief that the Lac du Flambeau decision may not have much impact on other tribal financings, the prevailing sentiment was to the contrary.  Indeed, a number of professionals asserted that the financial community and its attorneys almost certainly are already reviewing existing transaction documents, the litigation pleadings and the Decision and Order to determine the extent to which they may need to revise their Indian casino financing agreements.  

This matter continues to dominate debate at Indian gaming convocations, including the Spring conference in March of the Native American Finance Officers Association (NAFOA).  That debate sharpened divisions between the tribal parties and financial community.  Indeed, it now is clear that tribal representatives are working to eliminate from all documents anything even remotely approaching management control, while the financial professionals are pressing for new forms of securitization to avoid another devastating judicial decree invalidating the transactional documents.  

The Lac du Flambeau tribal officials repeatedly have said they “feel a sense of financial responsibility” for the outstanding debt of $46.6 million, but that likely will be nothing more than an invitation to renegotiate terms of the financing.  The first casualties very likely will be the 12 percent interest rate and payment schedule.

As noted above, business entities doing business with American Indian tribes have to recognize that there are various legal requirements for NIGC review of elements of any gaming transaction, and the failure to do so can become a major problem as it was in this case.  The Wells Fargo decision is a reminder that advance consulting with lawyers who are experienced and knowledgeable in the applicable Indian gaming laws and regulations can be efficient in terms of money and time.  This is doubly true since NIGC General Counsel's office is now processing many requests for review within six to eight weeks.  Most important is that there is virtually no backlog so the files are promptly reviewed.

The Lac du Flambeau case is still being assessed in both the tribal and financial communities, and many questions remain for further consideration in large part because the NIGC declination letters are not final decisions of the Commission and not binding on the courts.  This means that a judge could determine management contract status for documents which the NIGC previously issued declination letters.  As noted above, the end result is that tribal representatives are trying to edit all vestiges of management from documents, while the business representatives are scrambling to insure that their investments are secured to the fullest extent possible.  

All of this requires careful development of transaction documents.  Deals are being done and will continue to be done.  The degree of care also has increased and will continue to increase.  The potential rewards are significant and the prize is worth the effort.  Getting there may take more time and incur some additional expense in light of Lac du Flambeau, but the game will go on.

By Dennis J. Whittlesey, Dickinson Wright PLLC