Northwest Business Litigation

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. 

First tribally-owned Wall St. investment firm

After years of economic development focused on resource extraction and gaming, the Lower Brule Sioux Tribe, a federally-recognized tribe located in South Dakota, recently purchased the Westrock Group, making the company the first fully Tribally-owned investment firm.

This purchase signals not only a major shift in Tribal economic development focus, it also provides the Westrock Group with a huge advantage over other investment firms.  Because it is a Tribally-owned business, the firm will not be liable for Federal income tax.  Tribal ownership will also give Westrock access to funds that were previously off-limits because Westrock was not a minority-owned business.  Now the company may reach out to state pension funds, college endowments, and other government contractors that require a part of their money to be invested through minority-owned firms.

Without question, the growth potential for Westrock and the returns realized by the Tribe may herald a new era of Tribal economic development. 

Non-Indian subject to tribal jurisdiction, says Ninth Circuit

On May 14, 2009, a Ninth Circuit Court of Appeals panel in Elliott v. White Mountain Apache Tribe reaffirmed that non-Indian litigants must exhaust available Indian tribal court remedies before pursuing an action in Federal court to challenge the Tribe's jurisdiction.  

In so holding, the Ninth Circuit concluded that the Tribe had "plausible" jurisdiction to enforce against a non-Indian tribal regulations that prohibit, among other things, trespassing onto tribal lands, setting a fire without a permit on tribal lands, and destroying natural resources on tribal lands.  The Court placed particular importance on the fact that the Tribe was the landowner and suggested that the Tribe had jurisdiction because the non-Indian's actions (setting a fire that destroyed millions of dollars' worth of natural resources) affected the Tribe's political and economic well-being. 

The decison is an important reminder that Indian tribes retain jurisdiction to enforce Tribal laws on Tribal lands, and that non-Indians must defend actions brought against them in Tribal Court. 

Snoqualmie Tribe members win banishment case in federal court

In a legal first, tribal members have been victorious in Federal court challenging a tribal banishment action.  Rob Roy Smith and Steven Kennedy of Ater Wynne represented the tribal members, all of whom were one-time elected members of the Snoqualmie Tribe's government.

On April 30, 2009, the U.S. District Court for the Western District of Washington granted the Petition for a Writ of Habeas Corpus filed by nine Snoqualmie Tribal members challenging a banishment imposed by the government of the Snoqualmie Tribe last year.  The Court held that the Tribe's government violated the Petitioners' due process rights under the Indian Civil Rights Act and vacated the banishment.  As a result, the Petitioners' membership in the Tribe, as well as their benefits, are restored.  The Court also imposed a time restriction on a pre-existing social banishment that prevented the Petitioners from coming onto tribal land and attending tribal events.  The Court reduced the open-ended social banishment to 90 days, further vindicating and protecting the tribal members' Indian civil rights. 

The decision comes after the first trial held in federal court under the 1968 Indian Civil Rights Act seeking relief from a tribal banishment action.  This is the first federal court decision to overturn a banishment after trial upon a finding of a denial of due process.  Tribal banishments and disenrollments have been increasing in frequency in recent years.  The decision could have profound effects on the way tribal governments treat their tribal members, pointing the way to greater respect for Indian Civil Rights.

21st Annual Indian Law CLE in Seattle: May 8, 2009

The Washington Bar Association's Indian Law Section will host the 21st Annual Indian Law Section CLE on May 8, 2009 at 1111 Third Avenue, 30th Floor Conference Center, Seattle, Washington. Topics include:  An update on recent cases, Indian tribal trust funds management, Indian civil rights and tribal sovereignty (featuring Rob Roy Smith of Ater Wynne), an examination of Federal recognition cases, a discussion of the Indian Country under the Obama administration, juvenile justice in Indian country, tax planning for tribal construction, and the ethics of litigation in tribal court.  Approved for 6.0 CLE Credits for Washington Attorneys: 5.25 General Credits and .75 Ethics Credit.  Please go to the website below for more information or to register:  https://www.wsbacle.org/seminar_files/09844SEA.pdf.

Ninth Circuit rules Fair Labor Standards Act applies to Indian business

The Ninth Circuit today concluded that the Fair Labor Standards Act (FLSA) applies to an Indian-owned smoke shop on trust land on the Puyallup Reservation, and that the Secretary of Labor has authority to enter the business to audit its records as the Secretary can do with any private business.  The case is Solis v. Matheson.

This is the first Ninth Circuit decision to find that the FLSA applies to an Indian business located on Indian trust land.  The court rejected the argument that the operation of the smoke shop was an intramural self-government issue.  In part, this finding was based on the fact that the Puyallup Tribe did not "act[ ] on its right of self governance in the field of wage and hour laws and specifically with respect to overtime," suggesting that if the Tribe did have its own version of the FLSA, that law might have operated to preempt the application of the federal statute.  The court relied on the fact that the smoke shop was a "purely commercial enterprise engaged in interstate commerce selling out-of-state goods to non-Indians and employing non-Indians."  The fact that the smoke shop is owned by individual Indians and not the Tribe seemed to play a minor role in the court's analysis. 

This opinion serves as a reminder that many federal employment laws of "general applicability" govern the operation of tribes and Indian businesses, and that the FLSA mandates, among other things, payment of proper overtime wages to employees.  The case also highlights that Indian and tribal businesses must retain a distinctly tribal government character if they are to avoid unwarranted federal and/or state regulation. 

U.S. Supreme Court throws future tribal land acquisitions into doubt

Today, the U.S. Supreme Court issued a decision in Carcieri v. Salazar that might dramatically limit the ability of the United States to take land into trust for certain Indian tribes.  Trust status is important as it allows tax and other regulatory benefits to flow to tribes and their business partners.  Further, Indian gaming facilities must be located on trust land. 

 

The 6-3 decision narrowly interprets the phrase "now under Federal jurisdiction" in the Indian Reorganization Act, 25 USC 479, to mean that the Secretary of the Interior has authority to take land into trust for tribes that were "under Federal jurisdiction" as of 1934.  Only 258 Indian tribes were recognized by the United States in 1934, and approximately 300 tribes have been federally recognized since then.  The decision affects all post-1934 recognized tribes.  It is now unclear whether the United States can acquire new land for these tribes in trust and whether prior trust acquisitions were valid in the first place.     

 

The majority decision does not define "under Federal jurisdiction."  What does "under federal jurisdiction mean"?  Narrowly construed, "under Federal jusisdicition" might mean formal federal recognition, thereby eliminating the ability of many tribes to acquire new trust land.  Alternatively, it might mean something less formal, such as proof of some existing relationship or oversight by the federal government in 1934.  Supporting this alternative position, Justice Breyer's concurrence expressly references the Stillaguamish Tribe in Washington, and indicates that even though the Tribe was not recognized until 1976 "its reasons for recognition in 1976 included the fact that the Tribe had maintained treaty rights against the United States since 1855." 

 

Based on today's opinion, it would seem that for all future (or pending) trust acquisitions, it will be important for newly recognized tribes to prove up the indicia of "under Federal jurisdiction" in 1934.  This might be demonstrated through a recognized treaty right, as in the case of Stillaguamish. Otherwise, tribes and their business partners looking to acquire land in trust status must carefully review the tribe's federal recognition documents to see what is said about federal superintendence in 1934.  More recently recognized tribes might need to hire anthropologists to do additional research into how the tribe was viewed in 1934. 

 

More litigation is likely to follow.  A congressional "fix" might also be in the works.  Stay tuned. 

Stimulus Bill provides opportunities in Indian Country

The American Recovery and Reinvestment Act of 2009, otherwise known as the the Stimulus Bill, provides tribal governments and Indian-owned businesses access to more than just the $2.5 billion in tribal-specific appropriations. Tribes and their business partners can take advantage of numerous grant and bond programs as well.

Tribes have been made eligible for a number of interesting grant programs, including Tribal Clean Water Grants and grant opportunities to extend broadband service through a program operated by the Department of Commerce. 

In addition, the Act provides an important expansion of tax-exempt bond authority for tribes.  Generally, tribes are limited to tax exempt financing for “essential government functions,” which has been narrowly interpreted by the IRS as a function that is customarily performed by a state or local unit of government with general taxing powers. The Act amends the Internal Revenue Code to allow tribes to issue “Tribal Economic Development Bonds", defined as a bond issued by a tribe whose interest would be exempt from taxation if issued by a state or local government.  The bonds cannot be used to finance any portion of a building in which Class II and Class III gaming is conducted, or any property used in the conduct of gaming; proceeds must be used to finance facilities located on the reservation; and must not exceed in the aggregate for all tribes $2 billion, which must be allocated among tribal governments in the manner deemed appropriate by the Secretaries of Treasury and Interior.  Despite these limitations, tribes should be able to take advantage of increased tax exempt financing for a wide variety of on-reservation economic development projects.  This will increase opportunities for businesses engaged in Indian Country.

Ninth Circuit limits tribal court commercial jurisdiction

In its first tribal civil jurisdiction case since last year's U.S. Supreme Court ruling in Plains Commerce Bank (see our blog entry about the case), a panel of the Ninth Circuit Court of Appeals in Philip Morris v. King Mountain Tobacco rejected tribal court jurisdiction over a lawsuit brought by a Yakama tribal member business against tobacco giant Philip Morris seeking declaratory relief in a trademark infringement dispute. 

The panel concluded, for the first time in the Ninth Circuit, that "a tribal court has jurisdiction over a nonmember only where the claim has a nexus to the consensual relationship between the nonmember and the disputed commercial contacts with the tribe."  Applying this rule, the panel majority found that even though Philip Morris had marketing contracts with various stores on the reservation, the suit was about trademark infringement on nationwide sales which had nothing to do with the contracts.  The Court narrowly construed the other two grounds by which a tribal court may acquire jurisdiction over a nonmember, by limiting such cases to those that "pose a direct threat to tribal sovereignty" and rejecting the argument that the Lanham Trademark Act granted tribal court jurisdiction to cancel federally-granted trademarks.  Judge Fletcher, writing separately, concurred in the judgment but issued a separate opinion to chastise the majority for "engag[ing] in extended dicta in an attempt to undermine" certain long-standing tribal jurisdiction cases.

This opinion, issued earlier this week, marks a further limitation on the reach of tribal court jurisdiction over commercial cases brought against nonmember defendants.  If a tribe seeks to secure tribal court jurisdiction over a nonmember as part of a contractual relationship, it is critical both to establish clear contractual obligations that bind the nonmember to tribal court jurisdiction, and to limit any litigation to the scope of the contract.  Otherwise, state or federal forums will decide the dispute.

Ninth Circuit extends tribal sovereign immunity to casino employees

The Ninth Circuit issued a fascinating Indian law ruling on Friday, November 15, in  a case named Cook v. AVI Casino Enterprises.  In Cook, plaintiff sued a Tribal casino enterprise organized as a Tribal corporation under Tribal law, and two casino employees in their official capacities, for personal injuries from a drunk driving incident involving another casino employee.  The Ninth Circuit panel held 2-1 that the court could exercise jurisdiction over the case under principles of Federal diversity jurisdiction, but held 3-0 that the court lacked subject matter jurisdiction because of Tribal sovereign immunity.

The case is interesting for three reasons.  First, this appears to be the first court of appeals decision to squarely hold that a Tribal corporation, incorporated under Tribal law, can be considered a citizen of the state where its principal place of business is located -- even though all business is conducted within Tribal lands in that state.  Second, the case is the first to hold that Tribal sovereign immunity extends to Tribal employees sued in their official capacity.  Previously, the rule of Tribal sovereign immunity extended only to Tribal officials acting in their official capacities.  Third, Judge Ronald M. Gould, who authored the panel opinion, filed a concurrence requesting that either the U.S. Supreme Court take the case or that Congress take some action to limit Tribal sovereign immunity in the "wholly commercial" Indian gaming context to avoid what Judge Gould saw as the unjust result in this case.

This decision is one of many recent opinions to express frustration with the use of tribal sovereign immunity to bar certain claims.  This might be the type of case that gets the U.S Supreme Court's or Congress's attention.  In the short term, however, this is a major victory for proponents of Tribal sovereign immunity, as the Ninth Circuit has now insulated official actions of Tribal employees under the doctrine.