Bondholders and Trustee Avoid Tribal Court Jurisdiction on Defaulted Bonds

February 5, 2016

On November 24, 2015, the Seventh Circuit Court of Appeals held that bondholders and their counsel were not required to exhaust tribal court remedies in a case involving a bond transaction in which the parties expressly consented in the transaction documents to the jurisdiction of federal or state courts in Wisconsin.1  The Seventh Circuit also held that the tribal entities involved effectively waived their sovereign immunity in the transaction documents. This decision reinforced precedent giving effect to contractual forum selection provisions and underscored the importance of clear contractual waivers of sovereign immunity.

Background:

In January 2008, Lake of the Torches Economic Development Corporation (“Corporation”), wholly-owned by the Lac du Flambeau Band of Lake Superior Chippewa Indians (the “Tribe” and, together with the Corporation, collectively the “Tribal Entities”), issued $50 million in taxable gaming revenue bonds to build a riverboat casino, hotel, and bed and breakfast in Natchez, Mississippi, and to refinance existing debt. The bonds were purchased and resold by financial entities, with Wells Fargo Bank serving as trustee of the bonds (collectively, the “Financial Entities”). The Tribe later met difficulty in meeting its bond obligations and, in October 2009, the Tribe elected a new governing council that had campaigned on a pledge to repudiate the bonds.  The Corporation eventually repudiated its obligations under the bonds and refused to repay the outstanding principal or interest.

The Litigation:

A series of lawsuits arose over the sale of the bonds by the Corporation, including an action brought by Wells Fargo Bank, as trustee, alleging that the Corporation breached the bond indenture. After over three years of litigating in federal and state court, the Tribal Entities brought a tribal court action in April 2013 seeking a declaration that the bonds were invalid under the Indian Gaming Regulatory Act (“IGRA”) and tribal law.

Wells Fargo Bank and the other Financial Entities and Godfrey & Kahn S.C., counsel to the Corporation and bond counsel (“Godfrey”), then instituted an action in the United States District Court for the Western District of Wisconsin seeking a ruling that the tribal court lacked jurisdiction over them and an injunction to prevent the Tribal Entities from pursuing their tribal court action. The district court preliminarily enjoined the Tribal Entities from proceeding against the Financial Entities, but allowed the tribal action to proceed against Godfrey.2 The Tribal Entities appealed the district court’s grant of the injunction and Godfrey cross-appealed the district court’s denial of the same.

Tribal Court Exhaustion Not Required:

The Seventh Circuit agreed with the district court that tribal court exhaustion was not required. Following its reasoning in Altheimer & Gray v. Sioux Manufacturing Corp.,3 the Court of Appeals concluded that the fact that the Tribal Entities expressly consented in the bond documents to the jurisdiction of federal or state courts in Wisconsin, to the exclusion of any tribal court, was dispositive of the exhaustion issue.  Citing Altheimer, the Seventh Circuit noted “[t]o refuse enforcement of this routine contract provision would be to undercut the Tribe’s self-government and self-determination.”

Waiver of Sovereign Immunity Upheld:

The Seventh Circuit rejected a string of the Tribal Entities’ defenses to the waivers of immunity, including that the waivers were unenforceable because the bond transaction was procured by fraud and that the Tribal Resolution and Bond Resolution did not specifically contain waivers of immunity. The Seventh Circuit concluded that, because the Bond Resolution approved all of the legal provisions in other bond documents, including the waivers, the waivers were enforceable by all the Financial Entities.

The Seventh Circuit also rejected the Tribal Entities’ argument that the waivers were unenforceable because they were in collateral, unapproved management contracts, which the Tribe alleged were void under IGRA, concluding that a document that is “collateral” to a management contract only in the sense that it is related does not require approval under IGRA; it is only when a related agreement also provides for management of all or part of a gaming operation that approval under IGRA is required.  Because the bond documents in question did not provide for management of any part of the Corporation’s gaming operation, no approval under IGRA was required.

Enjoining the Tribal Court Action Proper:

After concluding that tribal court exhaustion was not required and that the Tribal Entities waived their sovereign immunity, the Court of Appeals concluded that the district court properly enjoined the tribal court action.

The Court of Appeals concluded that the Financial Entities established a likelihood of success on their claim that the tribal court lacked jurisdiction over them under the exceptions that can support tribal retained or inherent authority over nonmembers in Montana v. United States.4 The court held that the Tribal Entities’ tribal court action did not fall within Montana‘s first exception, which allows tribal regulation of nonmembers through taxation, licensing or other means when nonmembers enter consensual relationships with a tribe or its members via commercial dealings, contracts, leases or other arrangements.

Similarly, the Financial Entities were likely to prevail in showing there was no tribal court jurisdiction under Montana‘s secondexception, i.e., that the nonmember conduct threatens or has some direct effect on the political integrity, the economic security, or the health or welfare of the tribe, the Court of Appeals noted that the Tribal Entities did not point to any actions by the Financial Entities that threatened the Tribal Entities in any such manner.  In the tribal court action, the only question raised by the Tribal Entities was the enforceability of commercial agreements.  The court reasoned that the financial consequences of adhering to freely negotiated commercial transactions did not rise to the level of threat or injury required by the second Montana exception.

The preliminary injunction was proper because the Financial Entities established a likelihood of success on their claim of lack of tribal jurisdiction; the Financial Entities would suffer irreparable harm if forced to litigate in two forums; and the balance of the harms and the public interest weighed in favor of issuing the injunction.

Law Firm’s Reliance on Forum Selection Clauses:

The Seventh Circuit also rejected the Tribal Entities’ assertion that Godfrey could not invoke the forum selection clauses in the bond documents (by which the parties expressly submitted to the jurisdiction of federal and state courts in Wisconsin) because Godfrey was not a party to the bond transaction. The Court of Appeals found that Godfrey’s relationship to the transaction met both the affiliation and mutuality tests for whether a non-party can enforce a forum selection clause enumerated in Adams v. Raintree Vacation Exchange, LLC,5 because Godfrey was intimately involved in the negotiations leading to, and the documents evidencing, the bond transaction. Furthermore, as bond counsel to the transaction, Godfrey’s opinion was essential to facilitating the sale of the bonds. The court noted that the Tribal Entities named Godfrey as a defendant in the tribal court action, requiring Godfrey to defend the bond documents’ validity in tribal court, while the Tribal Entities also maintained the inconsistent position that those documents gave Godfrey no enforceable rights. The Court of Appeals reversed the district court’s judgment denying Godfrey a preliminary injunction and remanded the matter for a determination of whether Godfrey is entitled to a preliminary injunction.

Take-Aways:

Parties seeking to avail themselves of forum selection and governing law clauses and waivers of sovereign immunity should ensure that such clauses and waivers are included in each document comprising a transaction, including resolutions of the governing bodies of the parties involved in the transaction. When entering into a transaction covered by IGRA, isolation in a separate agreement of provisions that could be construed to be gaming management provisions may prevent claims that the other transaction documents are void if approval under IGRA was not obtained for those documents.

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  1. 1. Stifel, Nicholaus & Co., Inc. v. Lac du Flambeau Band of Lake Superior Chippewa Indians, 807 F.3d 184 (7th Cir. 2015).
  2. 2. Stifel, Nicholaus & Co., Inc. v. Lac du Flambeau Band of Lake Superior Chippewa Indians, 2014 U.S. Dist. LEXIS 67474 (W.D. Wisc. 2014).
  3. 3. 983 F.2d 803 (7th Cir. 1993).
  4. 4. 450 U.S. 544 (1981).
  5. 5. 702 F.3d 436 (7th Cir. 2012).

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