CHICAGO — The trustee who represents owners of $46.6 million of taxable tribal gaming revenue bonds issued for the Lac du Flambeau tribe in Wisconsin is appealing a federal judge’s ruling that the tribe is not responsible for repaying the debt because the trust indenture’s structure required federal approval.

Both sides are bolstering their legal and consulting teams and the first legal briefs in the case  of Wells Fargo Bank NA against Lake of the Torches Economic Development Corp. are due next month to the Seventh Circuit Court of Appeals in Chicago. Lake of the Torches is the tribe’s corporate entity.

The bond trustee is challenging the January decision by Judge Rudolph T. Randa of the U.S. District Court for the Western District of Wisconsin dismissing the case originally filed last December by Wells Fargo on behalf of the sole bondholder, California-based Saybrook Capital LLC. The trustee sought the appointment of a receiver because Lake of the Torches had violated terms of the bond indenture.

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 before its execution under the 1988 Indian Gaming Regulatory Act.

“Without prior approval, the entire contract is void,” the opinion read.

As news of the ruling has circulated over the last four months, it has sparked much debate among tribal finance leaders, bankers, lawyers, and investors over its potential near-term and long-term impact. In the near term, the ruling has prompted those participants to existing agreements to scour the documents for similar terms that could be challenged.

Some market participants have raised concerns that the ruling in the longer term will sour investor interest. In legal documents filed by Wells Fargo, ­William Newby, head of gaming and leisure coverage in the firm’s real estate investment banking group, warned the ruling could put future financings in peril. Some say past transactions incorporated similar ­provisions.

Fitch Ratings analyst Megan Neuburger, who covers the Indian gaming sector, said the provisions in question that rendered the documents management contracts and invalid are not commonly used in transactions she has reviewed.

Some market participants believe that when looking for the more far-reaching impact of the judge’s decision, they see a clear road map for what terms and conditions can be used to provide repayment guarantees in bond indentures and what should be avoided to prevent future challenges.

“There is money out there to invest, but I think the investment community is going to take a much harder look at all aspects of a project and the financing,” said Dennis Whittlesey, an attorney in the District of Columbia office of Dickinson Wright PLLC. Whittlesey is not involved in the Lac du Flambeau case but is an adviser to local governments, tribes, and developers on Indian gaming projects.

“The lesson of the Lac du Flambeau case is you have to better assess the long-term integrity of the project with greater scrutiny and scrub the financial documents,” Whittlesey said. He added that in lieu of certain terms that favor bondholders, investors will likely demand a little extra yield and may tighten bond payout provisions, such as shortening maturities.

While some struggling tribes may be looking for an out, Whittlesey said the impact could be limited as Indian gaming is generally weathering the recession — with some exceptions — and tribes with future expansion plans may not want to damage their relationship with the investment community.

The tribe has said in statements and reported at a meeting in March of the Native American Finance Officers Association in New Orleans that it intends to honor the financial obligation and is in negotiations to restructure the deal, according to attendees, Whittlesey said.

To help avoid similar challenges, participants in a financing can also seek a review of their documents for management contract provisions by the NIGC, which will issue a “declination letter” if none are found. Such letters are not foolproof in a legal challenge, but could hold weight in a court’s review.

The litigation began in December when Wells Fargo sought to enforce bondholder rights under the trust indenture after declaring an event of default on the bonds and accelerating bond repayment.

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

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 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.

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.

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.”

Randa agreed, writing that the trust indenture included limits on capital expenditures without bondholder approval, allowed bondholders to hire a management consultant if debt-service coverage fell below a certain threshold, and gave bondholders the ability to replace key casino leaders.

“All of these provisions give the bondholders the opportunity to exert significant control over the management operations of the casino facility,” Randa wrote. The indenture gave bondholders further rights over casino operations in the event of a default.

Well Fargo argued in its motion to vacate the decision and to amend its complaint that the primary purpose of the indenture was to secure repayment of the bonds, not to impose management terms, and that the bond issue terms should be considered separate from the trust indenture as a collateral contract. The court rejected that position, countering that the documents still are part of the overall indenture.

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

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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