In a ruling that could have a far-reaching impact in Indian country, a federal judge has refused to appoint a receiver for the Lac du Flambeau’s northern Wisconsin casino even though the tribe defaulted on a $50 million bond.
The action last week by U.S. District Court Judge Rudolph T. Randa throws into question whether the financially struggling tribe, which has lost millions on out-of-state casino projects, will pay the $46.6 million it still owes on bonds that were sold in 2008.
“The entire agreement is a void issue,” said tribal administrator William Beson of the 2008 bond offering, which included giving Saybrook Capital – the California company that bought the bonds – the ability to force the tribe’s casino into receivership if the tribe defaulted on the bonds.
Randa’s decision means the tribe is not on the hook for the money, said Monica Riederer, the tribe’s attorney. Riederer, however, said that does not mean the tribe will walk away from the debt.
“They will do whatever they’re legally required to do,” Riederer said. “They do feel a sense of financial responsibility.”
The tribe argued that the bond agreement was improper because it allowed for the appointment of a receiver to oversee its casino – which the tribe contended was akin to having an outside manager without required federal approval.
A spokeswoman for Wells Fargo, which filed the lawsuit last month, declined to discuss details Friday, saying in a statement that “the bondholder is still considering its options.” Wells Fargo is the trustee for Saybrook Capital.
Meanwhile, nervous investors and tribes will keep a close watch because of the chilling impact the case could have on attempts by other tribes to tap the bond market. Having no ability to enforce collection of a bond debt is “a nightmare for investors,” said Megan Neuburger, an analyst who follows the Indian gaming industry for Fitch Ratings. “It’s sort of an investor’s worst-case fear.”
Mark Jarboe, a Minneapolis attorney who has practiced Indian law for 25 years, agreed.
“People could start getting real cautious out there,” Jarboe said. “It could give people heartburn.”
Jarboe and Neuburger, however, said the impact could be lessened since it is very unusual to include a receivership clause in a bond issue involving an Indian casino.
The Lac du Flambeau case revolves around a controversial $50 million bond offering that carried a 12% interest rate and required a monthly payment of nearly $800,000.
When the tribe stopped setting aside money for the payment, Wells Fargo sued and sought a receiver to oversee the casino.
The tribe countered that the bond agreement gave the bondholders so much authority that it, in effect, made the document a management agreement that would require approval by the National Indian Gaming Commission.
The tribe’s position was supported in an affidavit from Kevin Washburn, former general counsel for the commission.
At the time of the bond offering, the tribe was represented by attorney Brian Pierson, of Godfrey & Kahn. Pierson said Friday that the firm, which reviewed the bond deal, had no comment on the case.
The tribe’s Vilas County casino and related enterprises had a profit of nearly $11.9 million on revenue of $53.4 million for the 12 months ended Oct. 31, Wells Fargo said in court filings.
Despite that profit, the tribe said it could not afford the bond payments.
Historically, the casino operations provided $17 million to $18 million annually to the tribe’s general fund, a payment that was cut to $4 million during the last fiscal year, Janice Philemon, the tribe’s accounting supervisor, wrote in a court filing.
“The tribe has been forced to sustain highly distressing cuts in governmental and social programs of the tribe,” she wrote, noting that the bulk of the general fund came from the casino operations.
Wages to tribal employees were cut 15% in 2008 and another 19.5% last year, among other cuts, she said.