Lender Beware: Court Voids Trust Indenture with Tribal Corp.

While the economy was humming in January 2008, the economic development agency of the Lac du Flambeau Band of Lake Superior Chippewa Indians sought to build a river boat hotel and casino.  To fund the project, a Tribal corporation issued bonds and entered into a Trust Indenture with Wells Fargo.  Unfortunately, the project has never gotten off the ground and the Tribal corporation now owes principal and interest on the $46,615,000 bond amount.  With the Tribal corporation unable to pay any additional principal and interest, Wells Fargo sued to enforce the Trust Indenture to allow the Court to appoint a receiver upon default.

Yesterday, the U.S. District Court in Wisconsin issued a decision and order in Wells Fargo Bank v. Lake of the Torches Economic Development Corporation, dismissing Wells Fargo's claims and stating the Trust Indenture is void ab initio (from the beginning) because the receivership amounts to a management contract under the Federal Indian Gaming Regulatory Act that should have been, but was not, approved by the National Indian Gaming Commission.  Because the Trust Indenture is void, the waiver of the Tribal corporation's immunity from suit contained within the agreement was also void.

This case could have a chilling effect on financing practices within Indian Country, despite the Tribe's stated intention to negotiate a solution.  At first blush, the Court's decision leaves banks and bondholders at the mercy of tribal businesses when projects fail to thrive economically.  But, upon closer inspection, the error here occurred in 2008 when Wells Fargo entered into the Trust Indenture for the Casino project without considering its implications under Federal Indian gaming laws.  Tribes and lenders must take care when structuring business arrangements to ensure that the agreed remedy upon default will not violate some other applicable Federal law.