A federal appellate court has affirmed a district court’s decision invalidating a $50,000,000 tribal bond indenture on grounds that the indenture was an unapproved management contract and void under the federal Indian Gaming Regulatory Act, 25 U.S.C. § 2701 et seq. The decision by the United States Court of Appeals for the Seventh Circuit in Wells Fargo Bank, National Association as Trustee v. Lake of the Torches Economic Development Corporation2 also found that the waiver of sovereign immunity in the bond indenture could not be severed from the invalid agreement to provide the necessary predicate for suit against the tribal development corporation. The appellate court, however, remanded the case to the federal district court to permit the Trustee for Saybrook Capital LLC, the Bondholders, to amend the complaint and assert different legal theories based on documents other than the indenture. The appellate court also directed the district court to consider whether, now that the bond indenture is void, the trustee has legal standing to litigate claims on behalf of the bondholders.

Discussion

  1. The District Court’s Decision

The U.S. District Court for the Western District of Wisconsin issued a decision on January 11, 2010, in which it found five provisions of the Lake of the Torches Economic Development Corporation (the “EDC”) bond indenture (the “Indenture”) constituted indicia of a management contract.3 The disputed provisions of the Indenture analyzed by the district court were:

  • Capital Expenditures: limiting capital expenditures to 25% of the prior year’s capital expenditures unless written consent of the majority Bondholders is obtained;
  • Independent Consultant: if the EDC’s debt service coverage ratio falls below 2.00 to 1.00, requiring the EDC to engage an independent management consultant and use its best efforts to implement the consultant’s recommendations;
  • Consent to Remove Key Managers: prohibiting the EDC from replacing or removing key management personnel for any reason without first obtaining the prior written consent of the majority Bondholders;
  • Consent to Hire Managers: upon an Event of Default, providing the majority Bondholders with the right to require the hiring of new management and the right to consent to replacement management; and
  • Right to a Receiver: upon an Event of Default, and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Trustee and the Bondholders, providing the Trustee with “as a matter of right” the appointment of a receiver or receivers of the Trust Estate with such powers as the court making such appointment shall confer.

Under IGRA, management contracts must be approved by the Chairman of the NIGC or they are void ab initio. The district court held that, in the context of the EDC Trust Indenture, which also included a pledge of gross gaming revenues and casino equipment, the five provisions “[t]aken collectively and individually” constitute a management contract. The court further held that: (1) the Trustee lacked a waiver of sovereign immunity to sue the EDC since it could not rely upon the waiver contained in the void Indenture; (2) the waiver of immunity in the Indenture could not be severed from the offending provisions of the Indenture; and (3) the offending provisions of the Indenture could not be severed or separated from the contract. The court denied the Trustee’s motion to appoint a receiver and dismissed the case. In a decision on April 23, 2010, the district court refused to vacate its January decision and permit the Trustee to assert new legal theories for relief based upon the bond instruments themselves, which included a waiver of sovereign immunity, and EDC Board’s resolutions approving the transaction. The district court found that these documents were collateral to the Indenture and as such were also unapproved, void agreements. The case then went to appeal before the United States Court of Appeals for the Seventh Circuit (the “Seventh Circuit”).

  1. The Seventh Circuit Order
  1. The District Court Has Diversity Jurisdiction Over A Suit Involving A Tribal Corporation.

As an initial matter, the Court considered whether the district court properly exercised federal court jurisdiction over the Trustee’s suit for breach of the Indenture. The Trustee had asserted federal court jurisdiction based on the diversity statute, the statute providing federal courts with jurisdiction over disputes in which the amount in controversy exceeds $75,000 and in which the parties are of diverse citizenship.4 The Court considered whether the EDC, a tribal corporation, could be considered a citizen of a state for purposes of diversity jurisdiction given that a majority of federal courts have held that an Indian tribe itself cannot be onsidered a “citizen of any state” for purposes of diversity jurisdiction.5 The Court concluded that a “corporation chartered under Native American tribal law should be treated as a citizen of a state” under the diversity statute and therefore, concluded that diversity jurisdiction existed because the EDC was considered a citizen of the State of Wisconsin and the Trustee was a citizen of South Dakota.6

  1. The Court Takes A Broad View Of What Constitutes A Management Contract Because IGRA And Its Regulations Define Such Terms Broadly.

In its analysis, the Seventh Circuit focused first on the language of IGRA and Congress’ statements of its purpose in enacting the regulatory regime.7 The Court concluded that the statutory provisions were broadly drafted and “do not offer a precise answer to the question” presented by the case, nor has the National Indian Gaming Commission (“NIGC”) provided any specific guidance on implementing IGRA’s requirement that such contracts be approved by the Chairman of the NIGC.8 The Court noted that the NIGC general counsel’s informal “declination” letters opining on whether specific documents were management contracts “speak more directly to the precise problem” but are of limited weight because they are neither contemplated by IGRA nor authorized by IGRA’s regulations nor apparently scrutinized formally by the Chairman or by the Commission itself.9 Nonetheless, the Court said, the declination letters demonstrate a concern that any party’s participation in the actual management of a gaming facility – whether through a traditional contract to oversee casino operations or through a financing agreement “that permits the provider of funding intermittently to interject itself in the management decisions of the facility to ensure the security of its investment – should be subject to the Chairman’s scrutiny and approval as a management contract.”10

  1. The Indenture’s “Problematic” Provisions, Taken Together, Transfer Management Control To The Trustee And Bondholders

While noting the lack of definitive guidance or careful and comprehensive regulations from the NIGC and suggesting in a footnote that the agency provide such guidance as to the permissible scope of financing agreements,11 the Court went on to find that certain provisions in the Indenture were “problematic.”12 The “problematic” provisions identified by the Court include:

  • Control over Revenues: the Indenture required the EDC to deposit all casino gross revenues daily into an account controlled by the Trustee from which transfers would be made upon order of the Trustee and from which the EDC could withdraw funds only upon written certification that funds are needed and will be used to pay operating expenses. The Court stated that the gross revenue provisions set conditions on the allocation and disposition of the revenues and “gives [the Trustee] ultimate control over withdrawals” and “without some limitation” on the Trustee’s discretion “to allocate or condition the release of the Casino’s gross revenues even to pay operating expenses . . . bestows a great deal of authority in an entity other than the Tribe to control the Casino’s operations.”13
  • Capital Expenditures: the limitation on the EDC from expending greater than 25% of the previous year’s capital expenditures without bondholder consent. The Court noted that this provision controlled the amount that the EDC could spend on capital expenditures, “a major prerogative in determining the present and future direction of any corporate entity.”
  • Independent Consultant: the Indenture’s provision requiring the EDC to retain an independent management consultant if debt-service-coverage ratio falls below 2.00 to 1.00 and use it best efforts to implement the recommendations.
  • Consent to Removal of Key Managers: the Indenture’s prohibition on limitation or removal of key casino managers without bondholder consent. The Court stated that such provision “gives the bondholders truly powerful authority over the management” of the EDC.
  • Post-Default Hiring Provisions: the Indenture’s provision that in an event of default, the bondholders can require the EDC to hire new management of the bondholders’ choosing.

The Court noted that the revenue control, capital expenditure, independent consultant and key manager provisions each affect the “day-to-day management” of the EDC and expressed serious concerns over the “even greater” control the bondholders could exert over hiring decisions after a default. The Court concluded:

We reiterate that we do not attempt here to delineate precise guidelines for parties to loan agreements involving an Indian gaming operation, a task better left to the Commission. Nevertheless, we are firmly convinced that, taken together, the provisions discussed above transfer significant management responsibility to [the Trustee] and the bondholder and therefore render the Indenture a management agreement subject to the approval of the Chairman.14

The Court noted that because the five provisions it discussed were sufficient to render the Indenture a management contract, “we need not determine whether the provision relating to the appointment of a receiver is similarly problematic.”15 The Court also refused to reform, or rewrite, the Indenture or sever the problematic provisions from the document, stating that IGRA’s regulations explicitly provide that management contracts that have not been approved by the Chairman are void.16

D. The Trustee May Amend Its Complaint To Rely On Collateral Documents That May Include Waivers of EDC’s Sovereign Immunity.

The Court agreed with the Trustee that it should have been permitted to file an amended complaint raising legal claims based upon documents other than the Indenture – specifically, the Bond instruments themselves and the EDC Board’s resolution approving the transaction. The district court had denied this request, finding it futile because it considered these ancillary documents to be collateral to the Indenture and the bonds incorporated the flawed Indenture by reference.17 As such, the district court ruled, the entire transaction and all collateral agreements required the Chairman’s approval and without such approval would be void.18 The appellate court, however, agreed with prior court decisions that found a document collateral to a management contract is subject to agency approval only if the document provides for the management of all or part of a gaming operation. It also disagreed with the district court’s view that the waivers of sovereign immunity in the collateral documents were interdependent upon the Indenture.

It is not immediately apparent that the waivers contained in the documents attached to the proffered amended complaint, when read separately or together, ought to be construed as dependent on the validity of the waiver in the Indenture and that they do not make clear the Corporation’s intent to render itself amenable to suit for legal and equitable claims in connection with the bond transaction.19

The Court directed the district court on remand of the case to permit the Trustee to file an amended complaint raising claims for legal and equitable relief in connection with the bond transaction and address whether the Trustee’s standing to seek such relief survives the voiding of the Indenture, then address whether the transactional documents, taken alone or together, evince an intent on the part of the EDC to waive its immunity to claims by the Trustee on its own behalf as Trustee, and, if it has standing to do so, on behalf of the bondholders. Under federal appellate rules, the Trustee may file a motion for rehearing of the threejudge panel that issued the decision (here, however, a member of the panel, Judge Evans, is now deceased) and/or rehearing by the full panel of active Seventh Circuit judges. If no such petition is filed, then the Court Clerk will complete papers to send the case back to the district court (the “mandate”). The issuance of this mandate is stayed upon the filing of a petition for panel rehearing or rehearing en banc. The Trustee also has the option of petitioning the United States Supreme Court for a writ of certiorari. This is generally done after the petition for panel rehearing or rehearing en banc has been denied, although a party may proceed to directly petition the Supreme Court rather than petition for rehearing in the circuit court.20

  1. Guidance For Contracting Parties

Following the District Court’s decision, the NIGC staff has issued a series of declination letters opining on such provisions as capital expenditure minimums and maximums, receiver remedies, the establishment of operating accounts, and the pledge of gross gaming revenues. The agency has informally developed and relied upon certain “IGRA Enforcement Limitation” language in which lenders agree that they will not exercise management controls over the casino operations. We expect most lenders will continue to follow these practices:

  • Ensure that a full waiver of the tribal party’s sovereign immunity to suit is provided independently in an authorizing tribal resolution;
  • Seek and obtain declination letters from NIGC counsel;21
  • Scrutinize capital expenditure provisions to ensure they lack any discretionary component evidencing lender approval or control;
  • Scrutinize operating expense provisions to ensure they lack any discretionary component evidencing lender approval or control; and
  • In financings secured by a pledge of gross gaming revenue, include the IGRA Enforcement Limitation language.