Earlier this week, the United States Court of Appeals for the Seventh Circuit upheld the Lake of Torches decision that invalidated a bond indenture as a "management contract" because it contained provisions that permitted lenders to influence the management of a tribal casino without National Indian Gaming Commission (NIGC) approval of such bond indenture. But the court also reversed the lower court's decision to block the indenture trustee from seeking recovery on legal and equitable claims that may arise under the sovereign immunity waivers in other financing documents related to the indenture. Although the decision provides some important guidance for lending to tribal casinos, it does very little to ameliorate the uncertainty in tribal casino financing affecting the capital markets since the original district court decision in the Lake of Torches case. A copy of the appellate decision can be found here.

Background

The Lac du Flambeau Band of Lake Superior Chippewa Indians (the "Tribe") financed the development of the Lake of Torches Resort Casino and related gaming investments (collectively, the "Casino") by borrowing $50 million from investors represented by Wells Fargo as indenture trustee (the "Trustee"). The financing was memorialized through an indenture (the "Indenture") and additional customary documents including promissory notes, tribal resolutions and collateral documents (the "Additional Documents").

The financing was collateralized by, among other things, a lien on a collection account. The Indenture obligated the Tribe to deposit all gross gaming revenues generated by the Casino into the collection account. Disbursements from the collection account were made to the Tribe to fund casino operating expenses and to pay interest and principal on the bonds.

The Casino did not perform as expected and the Tribe defaulted on its repayment obligations with the $50 million principal balance still outstanding. In addition, the Tribe ceased depositing Casino revenues into the collection account and diverted Casino revenues away from its lenders.