CHICAGO — Repayment of about $46 million of taxable tribal gaming revenue bonds from a $50 million issue on behalf of the Lac du Flambeau tribe in Wisconsin remains in question as investors decide their next move, following a federal judge’s dismissal of their case seeking to enforce their bond indenture rights.

Judge Rudolph T. Randa of the U.S. District Court for the Western District of Wisconsin earlier this month dismissed the case  in which the trustee sought the appointment of a receiver.

Randa ruled the trust indenture void, labeling it “a management contract” that should have been approved by the National Indian Gaming Commission. “Without prior approval, the entire contract is void,” he said.

A more detailed written opinion has not yet been issued.

The bond trustee, Wells ­Fargo Bank NA, filed the lawsuit in December against the tribe’s corporate entity, the Lake of the Torches Economic Development Corp., seeking to enforce its rights under the trust indenture after declaring an event of default on the bonds and accelerating bond repayment.

The lawsuit sought a ­temporary restraining order to prevent the tribe from distributing reserve funds and the appointment of a temporary receiver to exercise oversight over revenues, issues, payments, and profits of the tribe’s corporate entity, which operates its casino.

The lawsuit charged that the tribal corporation violated provisions of the trust indenture by failing to provide financial documentation, failing to make daily deposits to a revenue fund from casino revenues that go to repay the bonds, and inappropriately diverting nearly $5 million from the revenue fund to cover operating expenses.

The taxable bonds were sold through the tribe’s EDC in January 2008 with small annual maturities of between $3 million and $4 million between 2009 and 2011 and a $38.5 million maturity due in 2012. Stifel, Nicolaus & Co. was underwriter on the bonds, which were sold in a private placement to Saybrook Capital LLC at a 12% interest rate. Godfrey & Kahn SC was bond counsel.

In the event of a default, the indenture allows bondholders to accelerate payment of the principal and interest on the bonds and to appoint a receiver. The trustee notified the EDC of the default on Dec. 18 and of its intent to declare the principal and interest on all bonds due ­immediately.

“The defendant’s conduct not only threatens the security for these bonds, but also, if left unremedied, will cause lenders — like the bondholders in this case — to stop investing needed resources into other tribal communities,” the lawsuit read.

Attorneys for the EDC argued that the appointment of a receiver was not warranted and that the bond documents gave too much managerial power to bondholders. They said the contracts should be “void and unenforceable as unapproved management contracts.” 

The EDC argued that the National Indian Gaming Commission has long and consistently taken the position that any agreement that provides for “planning, organizing, directing, coordinating, and controlling all or any portion of a tribal gaming operation is a management contract” that must be approved.

The offering statement warned that the tribe is a sovereign nation generally immune from legal proceedings, though the tribe waived that immunity in connection with the bond documents. The judge’s voiding of the contracts also voids the waiver of sovereign immunity.

The bond documents did warn that remedies in the event of a default might be limited and unenforceable and could prove “expensive” and “time-consuming.” The bonds are secured by pledged revenue and collateral.

The financially struggling tribe has not resumed making its daily payments into the fund that goes to repay the debt, according to the trustee, though tribal officials have said in published reports that they don’t intend to skip out on repayment of the bonds. Representatives from Saybrook did not return calls to comment on whether they would appeal.

“We agree with the findings of the court and are committed to fulfilling all legal responsibilities,” tribal administrator ­William Beson said in a statement.

The ruling has raised questions among some tribal sector market participants over its potential impact on repayment of existing bonds and the ability of tribes to lure future investors. Fitch Ratings analyst ­Megan Neuburger, who covers the Indiana gaming sector, said the provisions in question that rendered the documents “management contracts” are not commonly used in transactions she has reviewed.

Another market participant said the ruling would provide guidance on language in future transactions.

Proceeds of the bonds went to refund existing obligations of the corporation, 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 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.

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