Tribal Immunity: When a Bond Indenture Becomes a Management Contract

Some pitfalls of doing business under IGRA emerged in a September ruling of the U.S. Court of Appeals for the Seventh Circuit involving the casino subsidiary of the Lac du Flambeau Band of Lake Superior Chippewa Indians of Wisconsin.  In January 2008, that tribe sold $50 million of bonds to support a non-IGRA casino project in Natchez, Miss.  Under a trust indenture agreement, Wells Fargo Bank was appointed trustee for the bonds; as trustee, the bank could seek appointment of a receiver if the Tribe defaulted and also had the power to approve some capital expenditures.  When the project performed poorly and the Tribe repudiated $46 million of the bond issue, the bank moved for a receiver under the indenture.

The court of appeals concluded, however, that the indenture was really a management contract under IGRA that had to be approved by the National Indian Gaming Commission (NIGC).  Because the NIGC never approved the indenture, the court held, it was void and unenforceable, as was the waiver of the tribe’s sovereign immunity contained in it.  Accordingly, the bank could assert no rights against the tribe under the indenture.  Wells Fargo Bank v. Lake of the Torches Economic Development Corporation, No. 10-2069.

The appellate court offered the bank a slender basis for hope by approving an amendment to its complaint that seeks recovery of the $46 million under the bond agreement itself.  The Seventh Circuit ruled that because the bond agreement granted the bank no powers over the borrower’s business operations, that agreement (unlike the indenture) was not a management contract requiring NIGC approval.  The court of appeals did direct, however, the trial court to consider first whether the bank has standing to sue under that agreement as a constructive trustee even after the indenture is voided.