Wells Fargo Loses Again In Lac Du Flambeau Tribal Bond Litigation

In the latest round of litigation in the controversial Lac Du Flambeau bond default case, the US District Court for the Western District of Wisconsin has issued an order denying Wells Fargo's motion to vacate the dismissal of its lawsuit and to amend the complaint to add new claims.  The Court has confirmed the lower court's ruling that the original agreement between Wells Fargo and the Lac Du Flambeau Tribe was actually a "management contract" that required approval from the National Indian Gaming Commission.  Since the NIGC was not consulted and did not approve the agreement in advance, the Trust Indenture between Wells Fargo and the Tribe has been ruled void and unenforceable by the bank.

The Tribe has issued a press release, with Tribal President Jerome "Brooks" Big John stating: "This significant victory confirms the strength of the Tribe's legal position and provides the Lac Du Flambeau Band with further confidence in the Tribe's ability to manage Tribal operations in support of the Tribal membership."

The litigation arose when the Tribe was unable to make scheduled debt service payments on bonds that were issued through Wells Fargo to finance the Tribe's Lake of the Torches casino and resort facility.  The Tribe's press release does not indicate the current status of repayment plans.

Wells Fargo Takes Another Run At Lac Du Flambeau Tribal Bond Lawsuit

When the Lac du Flambeau Tribe fell behind on repaying $50 million in bonds that financed its casino in northern Wisconsin, bond issuer Wells Fargo asked a federal judge to appoint a receiver to run the casino and increase payments on the debt service. After having its lawsuit dismissed in federal court on the basis of the bond agreement being an unauthorized management contract, the bank has made a motion to amend its original Complaint.

Wells Fargo respectively submits that the Court’s dismissal was contrary to Seventh Circuit precedent as well as fundamental fairness and basic due process because: (i) Wells Fargo was not granted leave to amend its Complaint to demonstrate that the defendant had waived sovereign immunity; and (ii) Wells Fargo was not permitted to present evidence and argument regarding whether the Trust Indenture was a “management contract” under the Indian Gaming Regulatory Act (“IGRA”) and its related regulations or to respond to defendant’s evidence.

Wells Fargo’s proposed amended Complaint alleges 14 causes of action against the Tribe, including breach of contract, reformation of the bonds and the indenture, restitution, unjust enrichment, fraud, negligent misrepresentation, and conversion. A copy of the amended Complaint can be accessed HERE.  The amended Complaint asks the court to grant the following relief against the Tribe and in favor of Wells Fargo:

(1) Enter a judgment against the Defendant on each Count of the Complaint and
identified above;
(2) Order Defendant to pay Plaintiff such damages as have been sustained in
consequence of Defendant’s wrongful actions;
(3) Enter a declaratory judgment on the Bonds that Defendant has repudiated and breached the Bonds and is obligated to pay the full amount of principal and
(4) Enter a declaratory judgment that the principal and interest on the Bonds has been accelerated pursuant to the terms of the Trust Indenture;
(5) Order Defendant to pay all costs and expenses, including attorneys’ fees;
(6) Reform the Indenture and the Bonds to the extent necessary to conform with the Parties’ intent; and
(7) Order Defendant to provide restitution to Plaintiff in an amount to be determined by the Court.

NAFOA Conference Call On Tribal Finance - 10 February

Native American Finance Officers Association Conference Call Series
“Indian Country Financing at a Crossroads”
A Primer to NAFOA’s Next Decade Finance Conference
Wednesday, February 10 – 10:00AM Pacific / 1:00PM Eastern
Dial-In Number: (800) 965–6503
Conference ID: 54703566

NAFOA’s experts will weigh in on the recent Lac du Flambeau management decision, and then take a broader look at the potential crisis that may emerge with future tribal defaults. This call will begin to address the situations that will be discussed in greater depth and breadth at NAFOA’s “Next Decade Finance Conference,” March 16-17 in New Orleans.

The call will be moderated by NAFOA President Bill Lomax, who has been actively working with Tribal governments most of his career and has several years experience working on Wall Street helping tribes with financing and investments. An enrolled member of the Gitxsan Nation, Bill teaches in the area of financial literacy and has acted as a trainer in numerous Tribal financial education sessions

NAFOA Issues Statement On Controversial Tribal Bond Repayment Case

Bill Lomax, President of the Native American Finance Officers Association, has issued the following statement regarding the recent federal court decision in the Lac du Flambeau bond repayment case.

Dear Tribal Leaders and Finance Officers,

I am writing to inform you about a case concerning a Tribal bond issuance that has recently been decided and, in theory, has potential implications for any Tribe that currently has financing or may be seeking financing for a Tribal project.

The Decision:
On January 6, 2010, the United States District Court for the Western District of Wisconsin (the “Court”) issued an order in the case of Wells Fargo Bank, National Association, as Trustee v. Lake of the Torches Economic Development Corporation. This order invalidates the trust indenture for $46,615,000 of bonds issued by a tribal corporation of the Lac du Flambeau Band of Lake Superior Chippewa Indians (“LDF”) for the refinancing of the Lake of Torches Casino and other LDF debt. In this order, the Court ruled that the indenture amounted to a management contract and is void due to failure to seek the required National Indian Gaming Commission approval.

Some have suggested that this case may have dire consequences for all Tribes seeking financing. We have consulted with some of the top attorneys in Indian country and believe that this case is “sui generis” or unique in its facts and are hopeful that it will not have widespread application to the Native American community.

The Risk of Existing Tribal Trust Indentures or Financing Agreements Being Invalidated as Management Contracts:

The Indian Gaming Regulatory Act prohibits Tribes from entering into management agreements for casinos without review and prior approval by the Chairman of the NIGC. A financing arrangement risks being invalidated in its entirety if it includes provisions that could be construed as providing the lender with rights of management. The Court concluded that the bond indenture in the LDF financing does not comply with NIGC guidelines related to impermissible elements of management control.

Some have suggested that this case could lead to other Tribal trust indentures and financing agreements being invalidated as management contracts. We at NAFOA do not think this is the case. The trust indenture in the LDF case includes several critical provisions not commonly found in Tribal gaming financings.

One highly experienced Indian country attorney we consulted has suggested that “the trust indenture is like none [he has] ever seen and clearly does not conform with the standards set by the NIGC.” For example, according to the pleadings in this case, the indenture included provisions: 1) requiring bondholder approval of changes to specified senior management of LDF’s casino operation; 2) permitting bondholders to direct LDF to hire new management in the event of default by LDF; 3) upon certain financial covenant violations, requiring LDF to retain an independent gaming management consultant and thereafter use “best efforts” to implement the recommendations of such consultant; and 4) permitting the appointment of a receiver over casino revenues and casino equipment in the event of a default by LDF. The Court concluded that these provisions, among others, overstep NIGC rules concerning a lender’s ability to assert management powers within a financing agreement.

We believe that few trust indentures or other financing agreements in Indian country are likely to have provisions similar to the ones mentioned above and we think this will limit the applicability of this case to other Tribes. Thus, it is our hope that Tribes and their lenders need not be concerned about the validity of their financing agreements.

We do however have some concerns about the broad language used by the Court in this case. In addition to the provisions noted above, the Court included references to some commonly used provisions often found in trust indentures and loan agreements. We are hopeful that the National Indian Gaming Commission will provide some guidance so as to avoid confusion about which of the provisions, taken together or separately, would constitute a management contract if included in a trust indenture or loan agreement.

For detailed information on Tribal bond issues and the impact of current legal decisions, contact Jeff Nave, Marc Greenough, or Bill Tonkin.

Ruling In Lac du Flambeau Casino Bond Case Highlights Tribal Sovereignty Power Against Creditors

When the Lac du Flambeau Tribe fell behind on repaying $50 million in bonds that financed its casino in northern Wisconsin, bond issuer Wells Fargo asked a federal judge to appoint a receiver to run the casino and increase payments on the debt service. As reported on Turtletalk, the judge refused based on principles of Tribal sovereignty, leaving the bank and bondholders with few legal options other than negotiating with the Tribe.

In 2008, the Lac du Flambeau issued bonds to provide capital for the construction and operation of its casino. The bonds carried interest at 12% and required a monthly payment from the Tribe of approximately $800,000. With the economy plunging and over $46 million still to be repaid on the bonds, the Tribe stopped setting aside money to service the debt. Wells Fargo then filed suit in federal court to appoint a receiver to run the casino, in accordance with the terms of the bond agreement the Tribe executed with the bank.

The Tribe argued that the receivership clause in the bond agreement was so broad that it was actually a management agreement that would require approval by the National Indian Gaming Commission. The Commission had not been involved in negotiating the deal and did not provide any approval, therefore the Tribe argued that the agreement was void. The judge’s refusal to appoint a receiver essentially validated that position, leaving Wells Fargo with no direct ability to take control over the casino’s operations. “The entire agreement is a void issue,” said Tribal administrator William Beson.

The judge’s decision means the Tribe is not legally responsible to pay back the money, said Monica Riederer, the Tribe’s attorney. However, she said that does not mean the Tribe will completely renege on the debt. “They will do whatever they’re legally required to do,” Riederer said. Meanwhile, investors and Tribes across the country will no doubt closely monitor the impact this situation has on the ability of Tribal entities to obtain future bond financing. Having no ability to enforce collection of a bond debt is “a nightmare for investors,” said Megan Neuburger, an analyst who follows the Indian gaming industry for Fitch Ratings. “It’s sort of an investor’s worst-case fear.”