Federal Appeals Court Rules Tribal Issuer's Trust Indenture is a Void "Management Contract"
By LEN WEISER-VARON
A case of interest to holders of bonds issued by Indian tribes to finance gaming facilities continues to wend its way through the courts. On September 6, 2011, the United States Court of Appeals for the Seventh Circuit issued its opinion in Wells Fargo Bank, National Association v. Lake of the Torches Economic Development Corporation. The case centers on whether a trust indenture for bonds issued by an instrumentality of an Indian tribe to finance a gaming facility is a “management contract” that is void if not approved by the National Indian Gaming Commission (NIGC). The appellate court upheld a federal district court judgment that the indenture had particular provisions that converted it into a “management contract.” Although in connection with the sale of the bonds the tribal issuer and its counsel had represented and opined, respectively, that no such approval was required, the appellate court agreed with the issuer's argument, in a lawsuit by the bond trustee alleging an indenture default, that the indenture was void due to the failure to obtain NIGC approval. The district court had dismissed the litigation, ruling that because the indenture was void, a sovereign immunity waiver by the tribal issuer in the indenture also was void, and that the federal courts therefore lacked jurisdiction to consider any claims brought by the bond trustee against the tribal issuer on behalf of bondholders. The appellate court remanded the case to the lower court with direction that the lower court reconsider whether sovereign immunity waivers in transaction documents other than the void indenture were effective, and if so whether there were claims not based on the indenture that the bond trustee or the bondholders could assert to recover amounts paid for the bonds.
The appellate court ruled that although the federal statute requiring NIGC approval of Indian gaming facility management contracts does not clearly define what constitutes a “management contract”, Congress intended a broad application and that there was no exemption for financing instruments. The court determined that the following provisions, taken as a whole, tipped the indenture into “management contract” status:
- The required deposit of the casino’s gross revenues with the bond trustee and, upon an event of default, the bond trustee’s ability to approve withdrawals of such funds for operating expenses,
- The required retention of a bondholder-approved independent third-party consultant if debt service coverage is below a specified level, and the requirement that the tribal issuer exercise best efforts to implement the consultant’s recommendations as to improving operations and cash flow,
- The required approval by majority bondholders of capital expenditures in excess of a specified percentage of prior year capital expenditures, such approval not to be unreasonably withheld
- A prohibition on the removal or replacement of the casino’s general manager, controller or chairman or executive director of the gaming commission without the majority bondholders’ consent.
- The ability of the bondholders to require the tribal issuer’s selection of new management after an event of default.
In addition, the appellate court agreed with the lower court that the provisions it deemed problematic could not be severed from the indenture under the indenture’s severance clause. Accordingly, the appellate court upheld the lower court’s determination that, because the indenture was void in its entirety, the waiver of the tribal issuer’s sovereign immunity contained in the indenture was void. Without a valid waiver of sovereign immunity, the federal courts have no jurisdiction over any claims against a tribal issuer.
The appellate court partially reversed the lower court and remanded the case for consideration of whether waivers of sovereign immunity in documents other than the indenture (such as the bonds themselves and the issuer’s resolution approving the bonds) were valid. The appellate court held that the fact that such other documents were part of the same transaction and referenced the indenture did not make them “management contracts.” The court also characterized as “premature” the district court’s conclusion that the bonds and other bond-related instruments were “interdependent” with the indenture, and asked the district court to determine whether the tribal issuer intended the sovereign immunity waivers in those documents to be operative irrespective of the status of the indenture. The appellate court indicated that the bond trustee and/or bondholders should be permitted to file amended complaints asserting legal or equitable claims not based on the indenture, and that the district court should consider again whether the tribal issuer has validly waived sovereign immunity as to such non-indenture claims.
The appellate ruling represents the view of one federal circuit on a controversial matter, and leaves this particular case in an unresolved status. The court acknowledged that the tribe and its counsel had taken the position in connection with the bond offering that the indenture was not a management contract and required no NIGC approval, but, without discussion, treated that as inconsequential to the tribal issuer’s ability to argue in court that the indenture was void. While the litigation seems likely to continue, the ruling suggests that purchasers of tribal bonds must proceed with extreme caution in evaluating, and relying upon other parties’ evaluations of, the legality and validity of bond documents with tribal entities.