CHICAGO — Repayment of $46.6 million of taxable tribal gaming revenue bonds issued for the Lac du Flambeau tribe in Wisconsin is in the hands of a federal appellate panel after lawyers for the tribe and bondholders laid out their arguments in a dispute over whether the trust indenture required federal approval.
The bond trustee, Wells Fargo Bank NA, acting on behalf of the sole bondholder, Saybrook Capital LLC, last December sought to enforce bondholder rights under the trust indenture after declaring an event of default on the bonds and accelerating bond repayment. The trustee sought the appointment of a receiver, arguing that Lake of the Torches Economic Development Corp. — the tribe’s corporate entity, which issued the bonds — had violated terms of the bond indenture.
Lawyers for the tribe argued that appointment of a receiver was not warranted and that the bond documents gave too much managerial power to bondholders in violation of federal rules.
In January, Judge Rudolph Randa of the U.S. District Court for the Western District of Wisconsin agreed and ruled that the tribe was not required to repay the debt because the trust indenture’s structure required federal approval.
Randa ruled that terms of the trust indenture giving bondholders significant control over casino operations in some circumstances effectively made it a management contract, which must have the approval of the National Indian Gaming Commission under the 1988 Indian Gaming Regulatory Act. Randa voided the indenture and related bond documents, invalidating the tribe’s waiver of immunity against legal proceedings as a sovereign nation.
Wells Fargo appealed the ruling and late last month a Seventh Circuit Court of Appeals panel in Chicago heard arguments in the case.
The district court erred in labeling the trust indenture a management contact because it did not give the bond trustee power to manage actual casino operations, Wells Fargo attorney James Klenk of Sonnenschein Nath & Rosenthal LLP told the panel in asking that the district’s court decision be overturned.
“This is a loan,” he said. “All the bondholders care about is they get paid back their principal and interest. … The parties treated this as a loan … and their intent as stipulated was that it be treated as a loan and not a contract.” For those reasons, Klenk said neither side thought to ask the NIGC for approval.
Klenk argued that even if the panel finds some trust provisions appear to give management rights to bondholders, it should sever the bond resolution from the trust indenture and uphold the repayment obligation and immunity waiver.
“The corporation told investors that this was a squeaky-clean legal deal. All legal regulatory hurdles had been cleared,” he said. “It’s undisputed that the intent of the parties was that there not be a management contract.”
Lake of the Torches attorney Monica Riederer, of Michael Best & Friedrich LLP, countered that Randa’s decision was correct because it looked only at the application of federal law to provisions of the trust indenture and not contract law.
“It really is a management contract” based on provisions that give bondholders in some circumstances a say in hiring and firing of key personnel, she said.
Riederer said the various bonds documents, including the immunity waiver, are too closely linked to the trust indenture to be severed, and without the immunity waiver bondholders lack the right to pursue the corporation through the courts.
The panel raised concerns over the potential impact of a favorable ruling to the tribe and whether the government should take a position on its interpretation of the gaming act. One judge told Riederer: “If we were to rule in your favor, we would really be changing the face of the industry.”
The panel’s judges questioned both sides on their positions with respect to the intent of Congress on requiring approval of management contracts.
Klenk took the position that Congress intended to limit only the oversight of casino management.
Riederer countered that she believed Congress wanted to “ensure that Indian tribes were the primary beneficiaries of gaming.”
She argued that parties to future bond transactions simply need to submit their documents to the NIGC for approval to protect bondholder interests.
Municipal bond participants in the tribal sector and broader market are closely following the case for the precedent it would set. Investors have raised concerns that the ruling could sour interest in tribal bonds while some lawyers counter that it provides a roadmap for how to structure future deals.
While the trustee has presented testimony arguing widespread use of similar language in tribal bond contracts, others have said the Lake of the Torches deal was unique. The National Federation of Municipal Analysts — in a rare filing of a friend of the court brief — warned that the Randa decision could harm the municipal market as a whole because it undercuts investor rights in bond indentures and confidence in disclosure.
The taxable bonds were sold through the tribe’s EDC in January 2008 in a private placement with Saybrook at a 12% interest rate. Stifel, Nicolaus & Co. was underwriter and Godfrey & Kahn SC was bond counsel. Proceeds refunded existing obligations, with $16 million going to fund a loan for a failed riverboat project, the Grand Soleil Project, in Natchez, Miss., while $5 million went into a reserve. Profits from the Natchez project were supposed to repay the bonds.
The EDC is a corporate entity chartered by the Lac du Flambeau band of Lake Superior Chippewa Indians, which is based on an 86,000-acre reserve in Vilas County. The band has 3,415 members and is governed by a 12-member council. It operates a casino, hotel, and convention center.
