The Seventh Circuit in Wells Fargo Bank, NA v. Lake of the Torches Economic Development Corp. affirmed in part and reversed in part the U.S. District Court for the Eastern District of Wisconsin’s decision dismissing an action to collect and appoint a receiver over a gaming operation in default on a $50 million dollar bond indenture. (Incidentally, Wells Fargo Bank, NA, the largest gaming lender in Indian Country is the plaintiff but is only the trustee for the bondholders, its own assets are not at risk). The District Court held that the bond indenture was an unapproved management contract and hence completely void as a matter of law.
And there is the rub. A court struck down a loan of $50 million because it provided control of the casino to the lender in the event that the lender was not being repaid. As any banker can tell, syndicated commercial loans as a matter of course contain strong protections to support re-payment. Otherwise no one would ever lend money. And certainly not $50 million.
However, in Indian Country the Congress provided that in order for an indvidiual or company, other than the Tribe on whose land gaming is conducted, to control a casino that it must have a management contract approved by the National Indian Gaming Commission. The NIGC is the expert agency which provides guidance through its regulations and bulletins as to what does and does not constitute a management contract. The NIGC views its duty to protect Indian gaming for the Tribes and to prevent bad actors from conducting business. The only problem from a lender’s point of view is that NIGC approval can be slow, and the banks typically do not want to manage a casino in any event. As a result, loan agreements include creative methods of to ensure re-payment – which supposedly stop short of management. Bad actors, unfortunately, have similar incentive to avoid NIGC scrutiny – and seek to put creative methods of control into loans, leases, or consulting agreements, because they too want to be paid from the Indian casino. In response, the NIGC maintains a broad view of management and informs whoever will listen that the potential for management equals management.
The lesson from Lake of the Torches is that a void contract is a void contract. No provision of an unapproved management contract may be severed or enforced. This rule ensures that lenders do not profit from placing control provisions into a document which are only intended primarily to intimidate pre-litigation or arbitration.
The Seventh Circuit’s holding:
We conclude that the Indenture constitutes a management contract under IGRA and that, as a condition of its validity, it should have been submitted to the Chairman of the NIGC for approval prior to its implementation. The parties’ failure to secure such approval renders the Indenture void in its entirety and thus invalidate s the Corporation’s waiver of sovereign immunity. The district court therefore correctly determined that it was without jurisdiction with respect to Wells Fargo’s motion for the appointment of a receiver.
The full opinion is available at: http://caselaw.findlaw.com/us-7th-circuit/1579278.html
The other lesson from Lake of the Torches is that the Seventh Circuit expressed substantial deference to the NIGC’s opinion and that of its former general counsel Kevin Washburn the Dean of the University of New Mexico School of Law. The Seventh Circuit listened to the expert agency’s bulletins and guidance, and those positions are designed to promote the goals of IGRA and protect Indian tribes. This should be a sign that Courts can be educated that a seemingly punitive holding (invalidating a $50 million dollar loan) actually supports Congressional policy and the public interest in protecting Indian gaming.
