Although the steep downturn in the U.S. gaming industry that began in 2008 appears to be easing for the time being, many mid-market gaming companies are still encountering difficulties servicing their debt as consumer spending slowly creeps back. In 2009, the Restructuring Review ran a two-part series on the strategies available to gaming companies seeking to restructure their debts, and the challenges facing creditors who must choose between writing down their investments or attempting to foreclose on their collateral. This article examines additional and unique challenges facing creditors attempting to restructure debt issued by tribal gaming entities.
Creditors negotiating with their borrowers often use several leverage points to influence a borrower who is either in, or is facing, a default. Creditors can use the threat of foreclosure to influence negotiations if they are secured by the borrower's collateral. Creditors can also use the threat of an involuntary bankruptcy petition filed against the borrower in order to strengthen their negotiating position.1 These creditor/borrower negotiations typically lead to a "sharing of the pain," whereby creditors often agree to de-lever the company by writing down a piece of their debt and in exchange take equity in the reorganized company with the hope that the borrower will better be able to service its healthy balance sheet.
These creditor leverage points, however, are often not available in the context of tribal-owned gaming entities, limiting the options for borrowers and lenders/creditors. Creditors cannot threaten an involuntary bankruptcy with respect to sovereign tribal entities. The ability of a creditor to take an equity stake in a tribal entity or to foreclose on all or some of a tribal entities' property may be severely constrained by federal law. This article discusses these constraints. Additionally, we examine the regulatory schemes governing tribal entities and the leverage points that remain for lenders to tribal entities, such as the potential for reducing access to credit if the entities do not work closely with lenders to consensually restructure debt.
The Indian Gaming Regulatory Act
Tribal gaming activities are governed by the Indian Gaming Regulatory Act ("IGRA").2 Under IGRA, the National Indian Gaming Commission (the "NIGC") is charged with regulating the tribal gaming industry. Several IGRA provisions directly affect creditors' rights. First, IGRA provides that tribal casinos can only operate on land owned by the tribe.3 Second, the entity responsible for gaming operations must be wholly owned by the tribe and must be approved by the chairman of the NIGC. Finally, no party can enter into a management contract with a tribe to manage its casinos unless the chairman of the NIGC approves the contract.4 When evaluating a contract, the chairman of the NIGC evaluates the proposed counterparty's background, experience in the gaming industry and with other tribes, and financial resources. Any management contract cannot extend for more than seven years and must provide minimum payments to the tribe.
Consequently, creditors attempting to obtain leverage in their negotiations with distressed tribes - by threatening to foreclose on tribal property securing their loans, or offering to take equity in the borrower in exchange for a reduction in the amount of outstanding debt - may be unable to take these actions without violating IGRA. Similarly, creditors wishing to take control of gaming operations to enhance operational efficiency may be required to seek approval from the chairman of the NIGC. In many of these situations, the proverbial stick has been removed from the hand of the creditors before the parties even sit down to negotiate.
Another tool available to creditors when a borrower has defaulted on its debt is the ability to file an involuntary bankruptcy petition against the borrower. Under section 303 of the Bankruptcy Code, an entity that is not paying its debts as they become due can be forced into chapter 11 or chapter 7 by three creditors holding, on an individual basis, unsecured, non-contingent claims of at least $14,425. Although involuntary petitions are much less common than voluntary filings, the threat of such a petition and the associated effect on the borrower's perceived creditworthiness can force a distressed debtor to the negotiating table.
However, the threat of involuntary bankruptcy appears to be unavailable to creditors of tribal gaming entities. Section 109 of the Bankruptcy Code provides that only a "person" or a "municipality" may be a debtor under the Bankruptcy Code.5 Although cases on the issue are in conflict, recent commentary6 on the subject suggests that tribal entities are neither persons nor municipalities for purposes of the Bankruptcy Code and therefore cannot be a voluntary or involuntary debtor.
Even if a tribal gaming entity were eligible to be a debtor under the Bankruptcy Code, it is unclear how much leverage this would provide to creditors. Many of the remedies and sources of leverage available to creditors under the Bankruptcy Code, such as moving to appoint a trustee, or threatening to object to a plan on the basis that it violates the absolute priority rule, are in apparent conflict with provisions in IGRA requiring the management of tribal gaming entities to be approved by NIGC, and ownership to be held by the tribe. Furthermore, it is unclear whether any of the proceeds of gaming assets can be distributed to creditors under a plan, because IGRA only allows proceeds from gaming interests to be distributed for tribal initiatives or other charitable causes.7
Another significant obstacle facing creditors seeking to enforce their rights against tribal entities is sovereign immunity. Under the "Marshall Trilogy,"8 Indian tribes are recognized as sovereign entities and can therefore invoke the doctrine of sovereign immunity to counter legal actions brought against the tribe. In recognition of this status, many lenders will negotiate language in the applicable credit documents requiring the tribal entity to waive its sovereign immunity. However, the recent case of Wells Fargo Bank N.A. v. Lake of the Torches Economic Development Corporation,9 raises doubts regarding the efficacy of these waivers.
In Wells Fargo, the Lake of the Torches Economic Development Corporation, a chartered corporation of the Lac du Flambeau Band of Lake Superior Chippewa Indians, issued $50 million of bonds in 2008 to finance a new riverboat casino operation. In conjunction with the bond issuance, the Corporation executed a Trust Indenture with Wells Fargo Bank N.A. as the Indenture Trustee. The bonds were secured by substantially all of the Corporation's revenues, accounts, deposits and casino equipment. Additionally, under the language of the Trust Indenture, the Corporation waived its sovereign immunity. In 2009, the Corporation, in violation of the indenture, transferred $4.75 million to the Tribe. Pursuant to its rights under the indenture, Wells Fargo accelerated the loan and initiated a lawsuit against the Corporation seeking the appointment of a receiver.
The district court dismissed the lawsuit, holding that the indenture was a management contract under IGRA, and was therefore void ab initio because it was not approved by the chairman of the NIGC.10 The court pointed to several provisions in the indenture to support its finding that the indenture was a management contract. First, the indenture required approval of 51% of bondholders for the Corporation to replace key executives or to incur certain capital expenditures. Second, bondholders could appoint a management consultant if the Corporation failed to meet certain debt service ratios. Finally, in an event of default, the bondholders could force the Corporation to hire new management and Wells Fargo could appoint a receiver for all the assets that were pledged as collateral.
The court further held that because the indenture was void under IGRA, the court lacked jurisdiction over the dispute due to the Corporation's sovereign immunity. The court reasoned that even though the Corporation had purported to waive its sovereign immunity in the indenture, because the indenture was void ab initio, the indenture never came into effect and the waiver included in the indenture was therefore void as well. Furthermore, even if the waiver provision was severable, such that it could be given effect separate and apart from the rest of the indenture, the court held that there would be no remaining obligations to enforce under the contract.
In addition to the apparent conflict with IGRA created by foreclosure proceedings, even collateral that is not subject to NIGC approval may be out of the reach of creditors attempting to foreclose. A recent decision in the Second Circuit Court of Appeals creates uncertainty with respect to creditors' rights to foreclose on tribal property, even if the borrower cannot claim sovereign immunity with respect to the underlying debt.
In Oneida Indian Nation of N.Y. v. Madison County & Oneida County N.Y.,11 Madison and Oneida Counties (the "Counties") appealed a district court decision prohibiting the Counties from foreclosing on tribal property in order to satisfy a tax lien issued by the counties due to the non-payment of county taxes by the Oneida tribe. The Counties' authority to levy the property tax in question was decided in City of Sherrill v. Oneida Indian Nation.12 In Sherrill, the United States Supreme Court held that the Oneida Indian Nation could not regain sovereignty over its ancient lands by repurchasing them on the open market. Therefore, even after the Oneidas regained title to the land, the local government remained responsible for regulating the land. Accordingly, the local government could levy and collect taxes on the property.
Notwithstanding the holding in Sherrill, the Second Circuit held that the Counties could not foreclose on the tribe's property for failing to pay property taxes. In reaching this conclusion, the court distinguished between jurisdiction over the land and jurisdiction to enforce the lien. The Second Circuit held that although under Sherrill a tribe could not recover its sovereignty over the land and was therefore required to pay property taxes, the tribe did not waive its sovereignty with respect to immunity against a foreclosure action. The court held that although the Counties had the right to assess taxes, "the remedy of foreclosure is not available to the Counties unless and until Congress authorizes such suits or [the Oneidas] consent to such suits."13
Accordingly, even if a tribe waives its sovereign immunity with respect to actions related to the interpretation of its rights and obligations under credit agreements, the tribe may still argue that it maintained its sovereign immunity with respect to the enforcement of the same agreements. Tribes have embraced this ruling. In a recent Form 10-K filing,14 the Mohegan Tribal Gaming Authority, operator of the Mohegan Sun casinos, stated that even though it has waived sovereign immunity with respect to its credit agreements, "[i]f an event of default occurs in connection with our indebtedness, no assurance can be given that a forum will be available to creditors other than [the tribal court]." Additionally, Mohegan noted that, as a practical matter, a creditor's ability to foreclose successfully will depend on the willingness and ability of tribal officials to carry out the tribal court's orders.
Negotiations with Tribes
In summary, when a lender is faced with a defaulting or nearly defaulting borrower and that borrower is a tribal entity, the traditional tools in a creditor's toolkit are extremely limited. Nevertheless, lenders retain some leverage. If a tribal entity were to default on its obligations and refuse to negotiate with lenders on the grounds that sovereign immunity protects the tribal entity from the lenders' exercise of the typical rights and remedies, the entity could potentially freeze the credit markets for all tribal gaming entities on a go-forward basis. In an industry as reliant on credit as the gaming industry (whether it be for capital expenditures, to deal with market dips like those recently experienced, or simply to build a new facility), it is an exceedingly risky strategy for any tribal entity to walk away from its existing debt obligations by declaring sovereign immunity or claiming a violation of IGRA.
This may shed light on the protracted negotiations between the Mashantucket (Western) Pequot Tribal Nation, operator of the Foxwoods Resort and Casino, and its bank lenders. In February 2011, lenders of a $700 million revolving loan originally due in July, 2010, further extended a forbearance agreement with the Pequot until April 7, 2011. In addition to the revolving loan, the Pequot also have $1.43 billion of outstanding bonds. Although it is clear that the Pequot's cash generated from gaming operations cannot service this debt, bondholders and the Pequot have not come to a global consensual resolution to date - although this does not mean that they will be unable to do so eventually.
Similarly, several news outlets reported recently that Mohegan Sun has hired restructuring professionals to engage its lenders in what will likely be similar protracted discussions. Mohegan has $925 million in revolving loans and senior subordinated bonds due in the first half of 2012. Additionally, Mohegan's maximum leverage ratios are set to step-down on March 31, 2011 and analysts believe that Mohegan may be in violation of these financial covenants.15 Although Mohegan's actions indicate that it intends to negotiate in good faith with its creditors, creditors may find themselves in protracted negotiations lacking their usual leverage at the negotiating table.
Restructuring tribal gaming debt presents creditors with unique challenges. However, some of the larger tribal gaming borrowers have thus far shown that they intend to negotiate in good faith with their creditors. Lenders seeking to extend credit to tribal gaming entities should consider protecting themselves by submitting their credit agreements to the NIGC before closing on the loan. They should request a determination that the agreement is not deemed a management agreement under IGRA. This will help ensure that sovereign immunity waivers included in the agreements are enforceable. However, to achieve this determination, creditors may not be able to include provisions granting them control over management in an event of default setting.
Additionally, lenders should insist on a comprehensive waiver of sovereign immunity that specifically waives immunity with respect to foreclosure as well as any other dispute that arises under the credit agreement.