Wells Fargo Bank, National Association v. Lake of the Torches Economic Development Corporation

Filing 45

DECISION and ORDER OF DISMISSAL. Signed by District Judge Rudolph T. Randa on 1/11/2010. (arw)

UNITED STATES DISTRICT COURT W E S T E R N DISTRICT OF WISCONSIN

W E L L S FARGO BANK, N.A., a s Trustee, P l a in tif f , C a s e No. 09-CV-768 -vsL A K E OF THE TORCHES ECONOMIC D E V E L O P M E N T CORPORATION, Defendant.

D E C IS IO N AND ORDER

T h is matter was filed on December 21, 2009 and assigned to the Honorable Barbara C ra b b , Chief United States District Judge for the Western District of Wisconsin. The p la in tif f , Wells Fargo Bank, N.A. ("Wells Fargo"), alleged that the defendant, Lake of the T o r c h e s Economic Development Corporation ("Lake of the Torches EDC," or the " C o rp o ra tio n " ), breached a Trust Indenture agreement, creating a "very real danger that Lake o f the Torches EDC will refuse to pay interest or principal on the $46,615,000 principal a m o u n t of bonds that it has issued." Wells Fargo also filed an expedited motion for the ap p o intm en t of a receiver. O n January 5, Judge Crabb recused herself, and the case was transferred to the u n d e rs ig n e d for further proceedings. On January 6, the Court issued an order dismissing the c a se . The Court found that the "Trust Indenture is a management contract that was executed w ith o u t prior approval from the National Indian Gaming Commission. Without prior

a p p ro v a l, the entire contract is void ab initio" (internal citations omitted). The Court in d ic a te d that a written opinion would follow, which is issued herein. BACKGROUND W e lls Fargo is a national banking association with trust powers, with its principal p la c e of business in Sioux Falls, South Dakota. Well Fargo's Corporate Trust Division has its principal place of business in Minneapolis, Minnesota. The Lake of the Torches EDC is a corporation chartered by the Lac du Flambeau Band of Lake Superior Chippewa Indians (th e Tribe). L a k e of the Torches EDC is a single purpose, wholly-owned entity of the Tribe, estab lish ed under tribal law in Wisconsin to own and operate the Lake of the Torches Resort C a sin o (the "Casino Facility"). Several years ago, the Tribe sought to expand its revenue b a se by participating in a project to build a riverboat casino, hotel and bed-and-breakfast in N a tch e z , Mississippi called the Grand Soleil Project. In order to refinance and consolidate c e rta in Lake of the Torches EDC debt associated with the operation of the Casino Facility, a n d also to fund participation in the Grand Soleil Project, the Corporation issued bonds and e n te re d into a Trust Indenture with Wells Fargo on January 1, 2008. Saybrook Capital LLC (" S a yb ro o k " ) is the sole holder of Lake of the Torches EDC bonds under the Trust Indenture. U n f o rtu n a te ly, the Grand Soleil Project has been plagued by problems since it began a n d is still not operational. The Tribe struggled to make bond payments and was forced to re d u c e or eliminate many programs that are important to the health and welfare of the Tribal m e m b e rs. The failure of the Grand Soleil Project to materialize exacerbated the economic

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s tre ss caused by the Bonds. The expected revenue from the project was intended to fund re p a ym e n t of the Bonds. Under the Trust Indenture, the Trustee (Wells Fargo) has an obligation in the event o f default or breach to "enforce[] . . . its rights and the rights of the Bondholders as due d ilig e n c e, prudence and care would require and to pursue the same with like diligence, p ru d e n c e and care." The Trust Indenture was intended to give the Trustee oversight of Lake o f the Torches EDC funds relating to its Casino Facility operations. The Trust Indenture requires mandatory daily deposits of Lake of the Torches EDC f u n d s relating to its Casino Facility operations. Section 5.01 of the Trust Indenture requires th a t all gross revenues from the Casino Facility be deposited, on a daily basis, into a d e sig n a ted trust fund: "The Corporation shall make daily deposits of Gross Revenues . . . into th e Revenue Fund or a Deposit Account controlled by the Trustee from which transfers will b e made into the Revenue Fund upon order of the Trustee." Lake of the Torches EDC may o n ly draw funds from the Operating Account to pay for Lake of the Torches EDC operating e x p e n se s: "Funds on deposit in the Operating Reserve Account may be withdrawn by the C o r p o ra tio n upon written certification from the Authorized Representative that the funds b e in g withdrawn are needed and will be used by the Corporation to pay Operating Expenses o f the Corporation." O n November 30, 2009, Tribe Treasurer Barry LeSieur and Tribe Vice President Dee M a yo , acting on behalf of the Lake of the Torches EDC, requested that $4,750,000 be tra n sf e rre d from the Lake of the Torches EDC Operating Reserve Account to the Lake of the

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T o rc h e s EDC Master Account at Chippewa Valley Bank. LeSieur and Mayo certified that th e purpose of the transfer was to pay operating expenses of Lake of the Torches EDC. The f u n d s were transferred pursuant to that request on December 1, 2009. O n December 7, 2009, Saybrook sent a letter to the Lake of the Torches EDC and the T rib e questioning the necessity of the transfer of funds for operating expenses and advising o f Saybrook's request to the Trustee to demand documentation and evaluate the legitimacy o f the transfer of funds. On December 8, December 9, and December 11, the Trustee made f u r th e r requests for documentation as required by Sections 6.06 and 6.07 of the Trust In d e n tu re . The Trustee alleges that Lake of the Torches EDC did not provide a substantive re sp o n s e to these demands and did not produce the documents required by these sections of th e contract. S e c tio n 8.01(c) of the Trust Indenture provides that a failure to "observe or perform, in any material respect, any covenant, condition, agreement or provision" of the Indenture A g re e m e n t (including Sections 5.01, 6.06 and 6.07) constitutes an Event of Default. Section 8 .0 2 provides that upon the occurrence of an Event of Default, the Trustee may "by notice in writing delivered to the Corporation declare the principal of all Bonds hereby secured then o u ts ta n ding and the interest accrued thereon immediately due and payable, and such principal a n d interest shall thereupon become and be immediately due and payable . . ." Furthermore, th e Trustee is entitled to the appointment of a receiver pursuant to Section 8.04. O n December 18, 2009, Saybrook requested the Trustee to declare the principal and in ter e st of all bonds due immediately based on multiple Events of Default. The Trustee in

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tu rn notified the Lake of the Torches EDC that the principal and interest of all bonds are due im m e d ia te ly. On December 21, the Trustee brought the instant lawsuit, alleging four claims f o r breach of the Trust Indenture: (1) Failure to Deposit Daily all Gross Revenues; (2) Use o f Funds for Unauthorized Purpose; (3) Failure to Provide Records for Inspection; and (4) F a ilu r e to Provide Financial Statements. A N A L Y SIS In 1988, Congress passed the Indian Gaming Regulation Act ("IGRA"). The IGRA e s t a b lis h e s "a statutory basis for the operation of gaming by Indian tribes as a means of p ro m o tin g tribal economic development, self-sufficiency, and strong tribal governments." 2 5 U.S.C. § 2702(1). The IGRA was also enacted to "shield [Indian tribes] from organized crim e and other corrupting influences, to ensure that the Indian tribe is the primary b e n e fic ia ry of the gaming operation, and to assure that gaming is conducted fairly and h o n estly by both the operator and players." 25 U.S.C. § 2702(2). The IGRA effects these g o a ls in part by providing for federal oversight of contracts between tribes and non-tribal e n titie s for the management of tribal gaming operations. Tribes may enter into contracts for th e management of gaming operations only with the approval of the National Indian Gaming C o m m issio n ("NIGC") Chairman. See 25 U.S.C. § 2711(a)(1); 25 U.S.C. § 2710(d)(9). U n a p p ro v e d management contracts are void. See 25 C.F.R. § 533.7; First Am. Kickapoo O p e ra tio n s , L.L.C. v. Multimedia Games, Inc., 412 F.3d 1166, 1176 (10th Cir. 2005) (" L a c k in g the formality of NIGC approval, an agreement to manage does not become a c o n tra c t: it is void"). It is undisputed that the Trust Indenture was not approved by the

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N IG C . Therefore, if the Court determines that the contract is a management contract, the c o n tra c t is void. T h e IGRA regulations define "management contract" as "any contract, subcontract, o r collateral agreement between an Indian tribe and a contractor or between a contractor and a subcontractor if such contract or agreement provides for the management of all or part of a gaming operation." 25 C.F.R. § 502.15. The regulations also define "primary

m a n a g em e n t official" as any person who has authority to "set up working policy for the g a m in g operation." 25 C.F.R. § 502.19(b)(2). Accordingly, the regulations demonstrate that a "necessary condition for a management contract is that it grant to a party other than the t ri b e some authority with regard to a gaming operation." Machal, Inc. v. Jena Band of C h o c ta w Indians, 387 F. Supp. 2d 659, 665 (W.D. La. 2005) (citing First Am. Kickapoo). T h e security provided for the Bonds was the existing Casino Facility in Lac du F la m b e a u . The Corporation pledged "[a]ll right, title and interest in and to the Gross R e v e n u es of the Corporation, and investment earnings on the Gross Revenues of the C o r p o r a tio n ." Trust Indenture at 2, Granting Clause I. The Gross Revenues of the

C o rp o ra tio n include all receipts from the operation of the Casino Facility. Id. § 1.01. The C o rp o ra t i o n also pledged the Casino's equipment and "[a]ll right, title, and interest in and to the Corporation's accounts, deposit accounts, general intangibles, chattel paper, in stru m e n ts and investment property and the proceedings of each of the foregoing and all b o o k s , records and files relating to all or any portion of the Pledged Revenues." Id. at 2, G ran tin g Clause II.

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T h e Trust Indenture provides that the Corporation cannot "incur capital expenditures th a t exceed 25% of the prior fiscal year's capital expenditures without receiving the written c o n se n t of [at least 51% of the bondholders], which consent will not be unreasonably w ith h e ld ." Id. at § 6.18. It provides for the appointment of a "Management Consultant" at th e direction of a majority of the bondholders if the "Debt Service Ratio" falls below a c e rta in level. Id. at § 6.19.1 It further provides that the Corporation will not "replace or rem o v e and will not permit the replacement or removal of the [Casino's] General Manager, C o n tro lle r, or Chairman or Executive Director of the Gaming Commission for any reason w ith o u t first obtaining the prior written consent of 51% of the [bondholders]." Trust Ind en ture, § 6.20. All of these provisions give the bondholders the opportunity to exert s ig n if ic a n t control over the management operations of the Casino Facility. See Affidavit of K e v in Washburn,2 ¶ 8; First Am. Kickapoo, 412 F.3d at 1173 (provision to "supervise, train an d instruct" Casino employees allowed contractor to set up working policy for the Casino); 2 5 C.F.R. § 531.1(b)(4) (hiring, firing, training and promoting employees); 25 C.F.R. § 5 3 1 .1 (b)(1 ) (maintenance and improvement of gaming facility). T h e Trust Indenture contains additional terms that give the bondholders management c o n tro l when the Corporation defaults. In the case of a specified "Event of Default," the

"Such independent management consultant shall conduct a review and provide a report . . . which make r e c o m m e n d a t i o n s as to improving the operations and cash flow of the Casino Facility. The Corporation agrees to use its b e s t efforts to implement the recommendations of the management consultant within ninety (90) days . . ." Kevin Washburn is a former General Counsel for the NIGC and is currently the Dean of the University of New M e x ic o School of Law. Dean W a s h b u r n reviewed the Trust Indenture and opined that "if the NIGC had been given an o p p o r t u n i ty to review the Trust Indenture, it would very likely have found that the indenture as written constitutes a m a n a g e m e n t contract, and it would have asserted jurisdiction over the agreement." Affidavit, ¶ 7.
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m a jo rity of the bondholders "shall have the right to require, in writing, the Corporation to h ire new management and shall have the right to consent, in writing, to the management p e rs o n n e l and/or company that the Corporation recommends as replacement management." T ru s t Indenture, § 8.02. An Event of Default also triggers the Trustee's right to the a p p o in tm e n t of a receiver "of the Trust Estate and of the revenues, issues, payments and p ro f its thereof . . . with such powers as the court making such appointment shall confer." Id., § 8.04. The "Trust Estate" includes the assets pledged by the Corporation to secure the b o n d s ­ all revenues, equipment, and accounts of the Casino Facility. Wells Fargo argues th a t a receiver would not exercise oversight over the management of the Casino Facility, but w o u ld only ensure that the Corporation deposited its revenues and paid its liabilities. By f o rc in g the Corporation to deposit its revenues and pay its liabilities, the receiver would in f a ct be exerting a form of managerial control since those monies could not be used for other p u rp o s e s related to the operation of the Casino Facility. "The terms of the indenture seem to presuppose substantial control by a receiver over key financial decisions. These are a m o n g the most important decisions in managing a gaming operation and, because they in v o lv e large sums of money, are among the management decisions of greatest interest to N IG C regulators." Washburn Aff., ¶ 9. Taken collectively and individually, these terms in the Trust Indenture give u n ap p ro v ed third parties the authority to set up working policy for the Casino Facility's g a m in g operation. Even though many of the provisions are contingent, "the regulations' d e f in itio n of a management contract as an agreement that provides for the management of

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`a ll or part' of a gaming operation suggests a definition of management that is partial rather th a n absolute, contingent rather than comprehensive." First Am. Kickapoo at 1175. The C o u rt has no choice but to conclude that the Trust Indenture is a "management contract." S e e , e.g., United States ex. rel. Bernard v. Casino Magic Corp., 293 F.3d 419, 424-25 (8th C ir. 2002) (series of agreements that gave the contractor "a percentage ownership interest in the Tribe's indebtedness" and "mandated the Tribe's compliance" with the contractor's re c o m m e n d a tio n s was a management contract); Machal, 387 F. Supp. 2d at 667-70 (finding a series of agreements to be management contracts). T h e Court's finding that the Trust Indenture is an unapproved management contract d e stro ys the Court's jurisdiction over the defendant. In the absence of a clear waiver, suits a g a in s t tribes (and tribal corporations) are barred by sovereign immunity. See Altheimer & G r a y v. Sioux Mfg. Corp., 983 F.2d 803, 812 (7th Cir. 1993) (citing Oklahoma Tax Comm'n v . Citizen Band Potawatomi Indian Tribe, 498 U.S. 505 (1991)); Kiowa Tribe of Oklahoma v . Mfg. Tech., Inc., 523 U.S. 751, 753 (1998). The Trust Indenture contains a waiver p ro v is io n , whereby the Corporation "expressly waives its sovereign immunity" in relation to "a suit to enforce the obligations of the Corporation under the Indenture, the Bond R e s o lu tio n , the Security Agreement, or Bond Purchase Agreement." Trust Indenture, § 1 3 .0 2 . However, the entire contract is void ab initio, so the waiver in the Trust Indenture is a ls o invalid. See A.K. Mgt. Co. v. San Manuel Band of Mission Indians, 789 F.2d 785, 789 (9 th Cir. 1986) ("the waiver of sovereign immunity is clearly made part of the Agreement, a n d is not operable except as part of that Agreement. Since the entire contract is inoperable

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w ith o u t BIA approval, the waiver is inoperable and, therefore, the tribe remains immune fro m suit") (emphasis added). W e lls Fargo argues that the waiver provision is separable from the unenforceable p ro v is io n s of the Trust Indenture. See Trust Indenture, § 14.04 (Separability of Indenture P r o v is io n s ). As an initial matter, the Court agrees with the Tenth Circuit's observation that it "may be questioned whether any part of a contract determined to be void ab initio, in c lu d in g the severability provisions, may be enforced." First Am. Kickapoo, 412 F.3d at 1 1 7 8 n.5. In any event, the argument is a non-starter. Even if the waiver provision could be s a v e d , the remainder of the Trust Indenture is void, so there would be no remaining o b lig a tio n s to enforce under the contract.3 W e lls Fargo argues that only the NIGC Chairman may determine whether a contract is void under the IGRA. This argument misapprehends the nature of the administrative s c h e m e and the consequences which flow from the failure to gain approval of a purported m a n a g em e n t contract. Wells Fargo brought this action to enforce the Trust Indenture and s o u g h t immediate appointment of a receiver, thus bringing the issue of the validity of the c o n tra c t squarely before the Court. If a contract with an Indian tribe is a management c o n tra c t, then the Court has no choice but to find such a contract void if it was not approved b y the Chairman. See 25 C.F.R. § 533.7. "The regulations' requirement that management

W e l ls Fargo did not argue that the illegal management provisions could be severed from the remainder of the T r u s t Indenture. The "rule of severability" provides that a contract may survive if an illegal clause can be severed from t h e remainder of the contract without defeating the primary purpose of the bargain. See Dawson v. Goldammer, 722 N .W .2 d 106, 110 (Ct. App. 2006). Because many of the "Event of Default" provisions are illegal, the contract cannot be s e v e r e d . See First Am. Kickapoo at 1178 (declining to sever provisions when the entire contract is meant to be a "package d e a l" ) .

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c o n tra c ts be approved to be valid creates no ontological mystery whereby a contracts springs f u lly-f a sh io n e d from nothingness, but rather identifies a formality necessary before an a g re e m e n t to manage a tribal gaming operation can become a contract to so manage." First A m . Kickapoo at 1176. In United States ex rel. St. Regis Mohawk Tribe v. President R.C. - St. Regis Mgt. Co., 4 5 1 F.3d 44 (2d Cir. 2006), the Second Circuit dismissed a Tribe's request for a declaratory ju d g m e n t that an unapproved management contract was void. The court dismissed because th e Tribe failed to exhaust their administrative remedies. "By proceeding directly to the d is tric t court in an action nowhere authorized under IGRA, the Tribe impermissibly sought a determination outside the administrative review scheme drafted by Congress." Id. at 51. S t. Regis is inapposite because it arose in a completely different procedural posture. In the in s ta n t case, Wells Fargo seeks to enforce a management contract, but the Court cannot give e f f e c t to such a contract in the absence of prior approval from the NIGC Chairman. In other w o rd s , the Court may determine whether a contract is a management contract when the issue b e c o m e s ripe for adjudication. See Casino Magic Corp., 293 F.3d at 424-26; First Am. K ic k a p o o at 1172-75. S im ila rly, Wells Fargo argues that the Corporation should be estopped from arguing th e invalidity of the Trust Indenture because the Corporation failed to exhaust its a d m in is tra tiv e remedies. This argument ignores the Tribe's pursuit of an NIGC opinion as p a rt of an ongoing effort to renegotiate the Bond payments with the Trustee, an effort that p r e d a te s this litigation. See Declaration of William Beson, ¶¶ 12-14. Moreover, Wells

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F a rg o 's purported reliance upon the Tribe's initial failure to pursue an NIGC opinion was c o m p le te ly unreasonable. See Lewis v. Washington, 300 F.3d 829, 834 (7th Cir. 2002) (e q u ita b le estoppel requires reasonable reliance). Given the size of the transaction and the c o m p lic a te d nature of the regulatory scheme, it is a bit surprising that Wells Fargo did not in sis t upon NIGC review and approval. "Because the regulatory landscape appears uncertain t o the untrained observer and because transactional attorneys seek to minimize risk and u n c e rta in ty, it is common for parties to obtain NIGC review of transactional documents for th e finance of Indian gaming operations, even when the parties assert that the financing a rra n g e m e n t does not constitute a management contract." Washburn Aff., ¶ 6; see also In r e SRC Holding Corp., 352 B.R. 103, 176 (Bkrtcy. D. Minn. 2006). N O W , THEREFORE, BASED ON THE FOREGOING, IT IS HEREBY O R D E R E D THAT this case is DISMISSED. The Clerk of Court is directed to enter ju d g m e n t accordingly. D a te d at Milwaukee, Wisconsin, this 11th day of January, 2010. S O ORDERED,

s / Rudolph T. Randa HON. RUDOLPH T. RANDA U.S. District Judge

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