GM 11-107

Appeals Court Upholds Decision Invalidating Bond Security Agreement for Lack of NIGC Approval

On September 6, 2011, the United States Court of Appeals for the Seventh Circuit affirmed the District Court for the Western District of Wisconsin’s decision in Wells Fargo Bank v. Lake of the Torches Economic Development Corporation. The Seventh Circuit agreed with the District Court that the bond indenture issued by Wells Fargo Bank to Lake of the Torches Economic Development Corporation was a management contract that was void for lack of approval by the National Indian Gaming Commission (NIGC). Because the indenture was void, the waiver of sovereign immunity contained in it was also void, and Wells Fargo could not sue the Development Corporation, an arm of the Lac du Flambeau Band of Lake Superior Chippewa Indians.

The Seventh Circuit began by observing that the Indian Gaming Regulatory Act (IGRA) imposes a broad requirement that contracts with non-tribal parties be reviewed by the NIGC for management functions. NIGC must scrutinize non-tribal participation in the actual management of a tribal gaming facility – whether through traditional contracts to oversee daily operations or through financing schemes that permit, or could permit, the provider of funding “to interject itself in the management decisions of the facility to ensure the security of its investment.” Because the indenture was not approved by the NIGC, the Seventh Circuit ruled that it was void. The court noted, however, that not all collateral agreements have to be submitted to the Chairman for approval, only those that contain management functions.

The Seventh Circuit’s ruling that the bond indenture was a management contract went further than the District Court decision. The District Court held that a number of factors, including default remedies found in the indenture such as the right to appoint a receiver in the event of a default, constituted a management contract. The Seventh Circuit agreed that the factors discussed by the District Court constituted a management contract even without the presence of the right of receivership. As a result, the Seventh Circuit ruled that the indenture was a management contract based on fewer factors than the District Court.

The Seventh Circuit reversed the District Court in one regard. It ruled that the District Court should have permitted Wells Fargo to amend its complaint to assert claims for legal and equitable relief based on other documents involved in the transaction other than the bond indenture. The court sent the case back to the District Court, where Wells Fargo may have a chance to argue that the Corporation waived its immunity in one or more of these documents, and that the District Court should hold the Corporation liable for the debt.

This is a significant case which will inform the extent to which financing documents must be reviewed and approved by the NIGC before they may be deemed valid. Please let us know if you would like additional information about any aspect of the decision.