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.

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.”