General Considerations In Tribal Debt Finance -

Scope of Tribal Debt Markets

As American-Indian tribes have developed more stable sources of revenue and diversified their governmental and commercial activities over the past 20 years, they are increasingly using debt to finance their economic growth and prosperity. This debt ranges from small local bank loans (sometimes backed with federal government) to multi-hundred million dollar bond and note offerings to finance large scale economic development projects.

Sources of Financing

Tribal debt covers the full range of available financing sources, including:

Conventional bank loans and lines of credit.
Syndicated revolving credit and term loans.
Capital leasing.
Institutional private placements.
High-yield note and Rule 144A offerings.
SEC registered debt offerings.
Tax-exempt debt.

Tribal projects that can be financed with these sources include reservation infrastructure projects such as the building of:

Roads, bridges, schools, health clinics, and water and sewer facilities.
Large scale solar, biomass and similar energy projects.
Most visibly, gaming and resort facilities.

Legal Considerations

Lending to an Indian tribe or entity presents a unique set of legal considerations with which every lawyer representing a tribe or a lender to a tribe should be familiar. This Note is not a "how to" on tribal lending or a comprehensive survey of federal Indian law. Instead, this Note introduces the principal legal issues differentiating Indian tribal finance from conventional governmental or corporate finance. These include:

Tribal status and governance.
General principles of sovereign immunity and jurisdiction.
Government regulations applicable to Indian tribes.
Certain loan documentation issues.
Restrictions on granting of liens and security interests.

Tribal Status and Governance

While there are many Indian cultural groups, there are currently 565 federally recognized Indian tribes (including Native Alaskan entities) in the US. The Department of the Interior periodically publishes a current listing of recognized tribes in the Federal Register (click here to see the current List of Federally Recognized Indian Entities).

Tribal Status

Federal recognition of tribal status is necessary for a tribe to:

Be legally recognized as a sovereign entity with sovereign immunity.
Be exempted from federal income tax.
Access many governmental grant and loan programs.
Secure restricted or trust status to lands.
Operate legal gaming facilities that have become the financial engine for many tribes.

Non-federally recognized tribes may become recognized or acknowledged through a lengthy and difficult process administered by the Department of the Interior. However, many tribes have been historically recognized under long-standing federal treaties and continuous government-to-government dealings with the US, and others have been recognized through court order.

Tribal Government

In considering the financing of tribal activities, it is essential to understand that:

An Indian tribe is a quasi-independent governmental entity.
Its activities constitute governmental functions.
Its governing authority is a political body accountable to the tribal membership as a whole.

In this regard, a tribe is more like a state or local government, or even a foreign sovereign nation, than a typical business corporation. Tribes have sovereign powers as to matters of internal governance and regulation, and are generally immune from most state and local regulation as to matters on tribal lands (see General Principles of Sovereign Immunity and Jurisdiction below). However, they are subject to the ultimate sovereign authority of the federal government (see Government Regulation Applicable to Indian Tribes).

Tribes are self-governing with most organizing under written constitutions. A tribe's governing authority is vested in its general membership. However, this authority is often delegated to a representative council or other elected governing body. The activities of the tribe, no matter how commercial they may seem, or their designation as such by federal agencies, must be viewed as governmental activities designed to promote the provision of benefits and services to tribal members and tribal communities. Just like a state or local government, these benefits and services may include public safety, health, education, housing, pension and direct economic support (often in the form of per capita cash distributions).

Other Tribal Entities

Like state and local governments, tribes often conduct activities through separate instrumentalities, agencies, authorities or other corporate entities. Generally, these are created under tribal law as limited purpose entities, with varying degrees of separate corporate or governmental existence to:

Separate the administration of various activities.
Facilitate financing and investment.
Separate and limit liabilities.

Note, however, that these instrumentalities, agencies, authorities or other corporate entities are generally creatures of tribal and not state law, with their existence, governance, purposes and powers established by the tribal governing authority.

As an example most relevant to financing transactions, it is fairly common for tribal gaming activities to be operated separately from the tribe itself through one or more tribal development corporations or authorities. For lenders, this may have the benefit of segregating the gaming revenues on which the credit underwriting decision is based, permitting the use of experienced and independent management and governance (subject to tribal oversight), and facilitating the creation of security interests in specific revenues or other non-tribal assets. The proliferation of separate tribal entities is not, however, limited to gaming. Tribes frequently establish housing authorities to operate tribal housing programs, energy corporations to participate in energy development programs and other economic development corporations or authorities to promote all manner of development projects. Through these special purpose vehicles, tribes may engage in special purpose project financing much like non-tribal governmental and corporate projects.

General Principles of Sovereign Immunity and Jurisdiction

Fundamental to tribal finance is the understanding that Indian tribes possess sovereign status under long-standing legal principles and federal treaties. In brief, a tribe's sovereign power is derived from:

Their first right to occupy tribal lands.
Historical degrees of recognition by conquering colonial powers and later the US government.
An inherent power of limited sovereignty not extinguished by the establishment of the US constitutional government.

In the US, these rights have been recognized in treaties, cases, and in federal statutory law such as the Indian Reorganization Act of 1934 (P.L. 73-383), which, while imperfect, first established a statutory blueprint for Indian self-governance.

The Foreign Sovereign Immunities Act (FSIA) is a federal statute establishing the limitations as to whether a foreign sovereign nation may be sued in a US state or federal court. The FSIA is primarily a jurisdictional and procedural statute. It may be tempting to consider an Indian tribe as a "foreign state" under and subject to the FSIA. However, US case law has consistently held that Indian tribes are "domestic sovereign nations" and not "foreign states". Consequently, the FSIA does not apply to Indian tribes or their instrumentalities.

Sovereignty and Sovereign Immunity

As sovereign governments, tribes:

Have almost exclusive authority over internal tribal matters, subject to the power of the federal government.
Enjoy sovereign immunity from unconsented lawsuits.
Are generally immune from most state laws and regulations for activities on tribal lands.

The sovereign immunity of a tribe, of course, could pose a significant hindrance to any lender seeking to enforce its rights to repayment and performance of a loan. Accordingly, it is essential that loan documents contain a comprehensive waiver of sovereign immunity adequate to ensure the availability of judicial enforcement of the lender's rights. As a general rule, express waivers of tribal sovereign immunity, properly approved by the appropriate governing body of the tribe according to tribal law, are recognized as a matter of tribal and federal law. However, immunity waivers are enforced strictly according to their terms. Thus, carefully drafting an immunity waiver in the loan documents is essential to protecting the rights of the lender to enforce its claims for repayment. Effective waiver clauses generally:

Identify the courts in which the tribe consents to be sued. This is typically the state court of original jurisdiction most closely incorporating the location of the tribe or the activities that are the subject of the loan transaction and the corresponding US district court. However, a US district court may not have original jurisdiction (see Jurisdiction).
Identify the nature of the claims to be adjudicated. These claims are typically limited to the interpretation and enforcement of the applicable loan documents as a matter of contract law. Claims arising from a tort, including fraud, are generally excluded.
Limit remedies or damages to specific performance of the contract, payment of amounts due, contract damages (frequently excluding punitive or consequential damages), and give lenders the right to foreclose against any collateral securing the loan.
Impose procedural limitations on claims, often requiring prior written notice to the tribal governing body of the nature and amount of the claim.
Include a waiver by the tribe of any right for the matter to be heard in any tribal court under the "exhaustion of tribal remedies" requirement before starting any judicial proceeding, to the extent permitted by law (see Tribal Courts and the Exhaustion Doctrine).
Provide for an alternate dispute resolution mechanism (for example, arbitration instead of, or in addition to, the jurisdiction of any state or federal court).
Include a waiver of any right to enforce any claim or liability against any individual tribal member or any officer, board member or other tribe member participating in tribal governance.

A tribe can, and typically does, extend its sovereign immunity to its separate instrumentalities and other entities, and may (or may not) delegate to such instrumentalities the right to waive sovereign immunity as to the particular entity. When dealing with a separate tribal authority or other body, it is important to confirm whether it, or the tribe on its behalf, has properly authorized any waiver.

Jurisdiction

Tribes are subject to the same restrictions on court jurisdiction as other citizens, with one important caveat. Under existing federal case law, a tribe, as a sovereign government, is not considered to be a citizen of any state for purposes of federal diversity jurisdiction. As a result, federal court jurisdiction generally will be unavailable without specific subject mater jurisdiction. Although tribes are sovereign entities, because they are ultimately subject to the jurisdiction of the federal government, diversity jurisdiction is also unavailable for the tribe as a foreign sovereign entity. Moreover, because most claims for enforcement of a loan are governed by state law, a lender should expect to seek enforcement of claims against a tribe in a state court. However, a claim that the tribe violated Rule 10b-5 or another provision of the Exchange Act would be brought in a federal court. It should be noted, however, that the law is less well settled with respect to federal diversity jurisdiction in the case of a lawsuit involving a corporation or other entity formed or created under tribal law rather than the tribe itself, with the prevailing view being that a tribal corporation is a citizen of a state similar to a typical corporation organized under state law (see, e.g., Wells Fargo Bank, N.A., as trustee v. Lake of the Torches Development Corporation, ___ F.3d ___ (7th Cir. 2011), which is discussed below (see Tribal Gaming; Is an Indenture a Management Contract? below)).

Tribal Courts and the Exhaustion Doctrine

Under a legal theory known as the tribal exhaustion or exhaustion of tribal remedies doctrine, a federal or state court otherwise having jurisdiction may postpone hearing or decline to hear a matter involving a tribe and instead refer the matter to that tribe's court system or other dispute resolution process practiced by the tribe. Usually, a well-crafted waiver of sovereign immunity will contain a waiver of the tribal exhaustion doctrine that should be upheld by the courts (see Sovereignty and Sovereign Immunity below). If, however, the waiver is determined to be ineffective, a federal or state court may require that the claim against the tribe be heard first in the tribe's own court, or at the very least, the tribe's own court may be asked by the federal or state court to determine whether it elects to exercise original jurisdiction. In addition, some courts have held that matters involving the interpretation of tribal law (for example, claims involving a tribal secured transactions ordinance) must be heard first in a tribal court.

Bankruptcy

It is generally assumed, although it is not entirely free from doubt, that a tribe (or a tribal gaming authority or instrumentality holding tribal gaming-related assets) cannot be a debtor in a bankruptcy proceeding. As a consequence, certain bankruptcy principles (for example, the automatic stay, the rules on preferential transfers and the limitations on secured claims) that ultimately provide order and some measure of predictability to the competing claims of creditors against a borrower likely do not apply when the borrower is a tribe. The absence of bankruptcy as a remedy removes the common backdrop against which US debt transactions generally operate, leaving both the lender and the borrower with uncertain protections and remedies. As yet, no alternative to bankruptcy has emerged. In fact, most tribal lending documents prohibit a tribe from adopting a tribal debt relief or similar scheme under tribal law. With the economic downturn that started in 2007, tribal debt defaults have been managed with an array of informal, lengthy and cumbersome workout processes to achieve necessary consensus among creditors and the borrower.

Government Regulation Applicable to Indian Tribes

Indian tribes are subject to several layers of federal and, occasionally, state oversight that lenders must take into consideration when embarking on a financing transaction with a tribe.

General Federal Regulation

The sovereignty of tribes is ultimately subject to the discretion of the US Congress. Accordingly, tribes are subject to many federal laws and regulations. These federal laws, most of which are administered through the Department of the Interior, generally govern, among other things:

The recognition of tribes under federal law.
The establishment of Indian lands, including reservation or trust property.
The taxation of income to tribe members, although any income of a tribe that is not distributed to members is generally exempt from federal income tax. These laws are administered through the Internal Revenue Service.
Tribal gaming (see Tribal Gaming below).

Other Federal Regulations

Some courts have found that certain federal regulations do not apply to Indian tribes based on the principles of tribal self-government and sovereign immunity. However, there are many federal regulations that apply to Indian tribes, including:

The Employee Retirement Income Security Act of 1974 (ERISA). Before the enactment of the Pension Protection Act of 2006, the general consensus, though it was not completely settled, was that tribal employee benefit plans were subject to ERISA's provisions. The Pension Protection Act clarified that tribal employee benefit plans are considered governmental plans and exempt from ERISA requirements if the participants in the plan are employees "substantially all of whose services ... are in the performance of an essential governmental function but not in the performance of commercial activities".
The Fair Labor Standards Act of 1938 (FLSA). A recent decision of the US Court of Appeals for the Ninth Circuit held that the FLSA applies to on-reservation tribal businesses (see Solis v. Matheson, 563 F.3d 425 (9th Cir. 2009)). If the case is not overturned, it would appear to indicate that all such tribal businesses are subject to the FLSA. However, if the underlying activity is considered "governmental" and not "commercial" then the FSLA most likely does not apply.
Environmental regulations. Regulations promulgated by the Environmental Protection Agency (EPA) have been found to apply to Indian tribes. In 1984, the EPA adopted a policy of working with federally recognized tribes whereby these tribes take an active role in making and managing EPA standards and regulations of reservation land.

This list of federal regulations and their applicability to Indian tribes is certainly not exhaustive, but it does identify issues that a lender must understand when dealing with tribal entities.

Tribal Gaming

A significant portion of all tribal financing transactions, and virtually all large ($50 million and greater) financing transactions, involve the financing of tribal gaming operations. Tribal gaming on Indian lands is subject to three levels of regulation:

The federal Indian Gaming Regulatory Act of 1988 (25 U.S.C. §2701 et seq) (IGRA), which is administered mainly by the National Indian Gaming Commission (NIGC). Under the IGRA, the NIGC has the authority to:
issue regulations governing tribal gaming activities;
approve tribal ordinances regulating Class II and Class III gaming (see Different Classes of Gaming below);
approve management contracts for gaming facilities;
conduct investigations and generally monitor Class II and Class III gaming, although there is some dispute as to the scope of the NIGC's jurisdiction over Class III gaming;
inspect and audit all Indian gaming facilities;
conduct background checks on non-tribal parties to management contracts;
hold hearings on rules and regulations pertaining to Indian gaming;
issue subpoenas and take depositions;
adopt regulations and assess fees; and
impose civil penalties for violations of the IGRA.

The IGRA also provides for federal criminal penalties for illegal gaming on Indian land and for theft from Indian gaming facilities.

For Class III gaming (Las Vegas style), the IGRA requires a tribe to enter into a tribal state compact with the surrounding state, which typically includes:
provisions allocating criminal and civil jurisdiction between the state and the tribe to enforce applicable laws and regulations;
remedies for breach of the compact; and
standards for the operation of the Class III gaming activity and maintenance of the gaming facility, including licensing and any other subjects that are directly related to the operation of gaming activities.
Finally, tribal gaming must be conducted under a tribal gaming ordinance approved by the NIGC, which establishes tribal supervision of all gaming activities, subject to the terms of the IGRA and the applicable state compact.

It is important for lenders relying on tribal gaming revenues for the repayment of a loan to understand the gaming regulatory scheme. In particular, lenders should confirm and understand:

The status of the tribe as federally recognized, entitling it to conduct gaming on its "Indian lands" as defined under the IGRA and over which the tribe has jurisdiction.

For Class III gaming, the existence of a tribal-state compact that is in effect, properly approved by the Department of the Interior and authorizing all tribal gaming activities.
The existence of a validly adopted tribal gaming ordinance, approved by the NIGC and authorizing and regulating all gaming activities.
The status of any lands on which gaming is conducted as Indian lands and over which the tribe has governmental jurisdiction within the meaning of the IGRA.
The steps the tribe has taken to establish a gaming oversight authority and whether such authority functions as intended.
The effect of gaming regulations on the lender's ability to enforce its rights against gaming collateral and the liquidation of gaming collateral.

Different Classes of Gaming

The IGRA defines what constitutes Class I, Class II and Class III gaming.

Class I Gaming. Includes social games played solely for prizes of minimal value or traditional forms of Indian gaming engaged in by individuals as part of, or in connection with, tribal ceremonies or celebrations.

Class II Gaming. Includes bingo and pulltabs, lotto, punch boards, tip jars, instant bingo, and other games similar to bingo if those games are played at the same location as bingo is played, as well as non-banked card games, if authorized (or not explicitly prohibited) by the state in which the tribal operation is located.

Class III Gaming. Class III gaming is all gaming not covered in Class I or Class II gaming, and includes slot machines, video casino games, table games, and other commercial gaming, such as sports betting and pari-mutuel wagering.

Regulation of Lenders

Similar to non-tribal gaming, some state (pursuant to the applicable compact) and tribal regulations contain financial source provisions requiring the licensing of those providing financing for gaming facilities. However, these regulations often provide a standard exemption for banks and other regulated entities generally in the business of lending money. It is important for any lender providing financing for a tribal gaming facility to determine if licensing is required and by whom. The failure of a lender to be properly licensed, or to be exempt from licensing requirements, may limit the ability of the lender to enforce repayment of the loan.

More widely distributed loan transactions commonly contain special gaming redemption provisions authorizing the borrower to either:

Require that an unlicensed, nonexempt lender transfer its loan interest to a properly licensed or exempt lender within a specified time.
Redeem the unlicensed lender's loan interest, often at a favorable redemption price (for example, the lowest of par, the lender's cost, or then determined fair market value).

Management Contracts

Several tribal gaming facilities are managed by third-party managers, often affording professional and independent day-to-day management of the gaming facility. Tribal gaming is permitted under federal law to provide needed economic development and financial support for tribes and tribal members. As a result, the IGRA requires NIGC approval of any agreement providing for the management of gaming activities to ensure that the ultimate financial benefit of the gaming activity inures to the tribe and its members rather than the manager. Accordingly, if the existence or continuation of a third-party management contract is an important factor in credit underwriting, it is important to verify that the management contract has been approved by the NIGC. By the same token, it can sometimes be difficult to establish if a particular agreement, for example a development agreement for a casino construction project, constitutes a management contract within the meaning of the IGRA. To ensure regulatory compliance, a tribe should either seek approval or seek a so-called "declination" letter from the NIGC to the effect that approval is not required. Under the IGRA, an unapproved management contract is "void ab initio" so it is critical that contracts which may implicate the statute be reviewed carefully.

Of perhaps more direct consequence, sometimes a lending arrangement itself might be deemed to constitute a management contract. Some of the covenants that lenders typically use in non-tribal financings might convert unknowingly the loan documents into management contracts. These include loan provisions:

Requiring lender approval of management changes or certain operational activities.
Restricting management discretion with respect to, for example, operating expenses or capital spending.
Permitting lender direction of gaming activities.
As a consequence, it is common to include in loan agreements for gaming facilities, provisions expressly limiting the lender's rights to direct or to otherwise interfere in the tribe's gaming activities.

Is an Indenture a Management Contract?

A management contract should be an easy thing to spot. However, that is not always the case, as a secured lender discovered in early 2010. In 2008, the Lac du Flambeau Tribe in Wisconsin issued $50 million in bonds through its instrumentality, the Lake of the Torches Economic Development Corporation, to support its existing seasonal operations in Wisconsin and finance the Tribe's investment in a separate gaming facility in Mississippi. The bonds were acquired by a single lender. The Tribe found that it could no longer service the bond debt and ultimately stopped making payments to the lender. The bond trustee, acting at the direction of the lender, subsequently filed a lawsuit in federal court for breach of contract and seeking to appoint a receiver to collect the Tribe's pledged gaming revenues as expressly authorized under the bond indenture. (The court found diversity jurisdiction because (i) the amount in controversy exceeded $75,000, and (ii) there was diversity of citizenship because the principal place of business of the issuer of the bonds was located in a different state than the state of citizenship of Wells Fargo. This was possible because the issuer of the bonds was an instrumentality and not the tribe itself. The District Court rejected the trustee's request and went further by finding that the indenture and the loan documents were "void ab initio" as a management contract that had not been approved by the NIGC (see Wells Fargo Bank, N.A. v. Lake of the Torches Econ. Dev. Corp., 677 F. Supp. 2d 1056 (W.D. Wis. 2010)).

On September 6, 2011, the US Court of Appeals for the Seventh Circuit issued an opinion affirming in part and reversing in part the District Court's opinion (see Wells Fargo Bank, N.A. v. Lake of the Torches Econ. Dev. Corp., _F.3d _(7th Cir. 2011) (No. 10-2069, September 6, 2011). The Seventh Circuit held that:

The District Court properly exercised diversity jurisdiction in the initial acceptance of the case, concluding that a tribal corporation, as a separate corporate entity formed under tribal law, is treated for diversity purposes as a resident of the state in which it is located similarly to any other a domestic civil corporation (as opposed to an Indian tribe itself, which is not a resident of any state for diversity purposes) (see General Principles of Sovereign Immunity and Jurisdiction; Jurisdiction above).
The indenture under which the tribal corporation's bonds were issued constituted an invalid management contract.
The invalid provisions of the indenture, including the tribal corporation's waiver of sovereign immunity, may not be severed under the indenture's severability clause as the NIGC management contract rules are comprehensive and "categorical" in their policy of invalidating unapproved contracts.
he District Court erred in denying the plaintiff trustee leave to amend its complaint to establish a valid waiver of sovereign immunity under related transaction documents (for example, the bonds themselves and the various tribal and corporate resolutions), concluding that agreements related to an invalid management contract constitute invalid "collateral agreements" only if they include provisions for the management of a gaming facility and accordingly, Wells Fargo should be permitted an opportunity to prove at the District Court that the related documents, apart from the indenture, evidence an intent to waive sovereign immunity as to legal and equitable claims other than breach of the bond indenture (see General Principles of Sovereign Immunity and Jurisdiction; Sovereignty and Sovereign Immunity above).
The District Court on remand should consider whether Wells Fargo's standing as trustee to assert claims on behalf of the bondholders survives the invalidity of the indenture.

The Circuit Court's decision demonstrates the highly fact-sensitive nature of the management contract question. In ruling that the indenture constituted an invalid management contract, the Seventh Circuit considered a number of specific provisions of the indenture militating both for and against a finding of an illegal management contract. Militating against such a finding were the following:

The absence of a transfer of any direct responsibility for daily operations.
The absence of compensation for management responsibilities.
Affirmative covenants on the part of the tribal corporation to manage and operate the casino and to maintain books, records, licenses and permits, etc.
The absence of provisions for payment of development or construction costs.
A fixed repayment schedule.

However, militating in favor of such a finding were the following:

The requirement for the daily deposit of gross revenues from the casino.
The requirement that the trustee approve payment of operating expenses.
A covenant limiting the ability of the tribal corporation to make capital expenditures with respect to the casino.
A requirement for the appointment of a management consultant upon the occurrence of any financial covenant default and an affirmative covenant by the tribal corporation to follow its recommendations.
A covenant limiting the ability of the tribal corporation to replace management.
A covenant permitting the bondholder to require new management upon the occurrence of an event of default.

Taken together, the Circuit Court found that the indenture "transfer[red] significant management responsibility to Wells Fargo and the bondholder" and, thus, constituted a management contract subject to approval under IGRA.

The Seventh Circuit's decision in Wells Fargo is required reading for anyone drafting loan documents for tribal gaming enterprises. However, many of the specific indenture provisions relied upon by the Circuit Court in finding that the indenture was a management contract are, it is believed, somewhat atypical in tribal loan transactions. By contrast, the US District Court for the Eastern District of Wisconsin, in a recent similar case, rejected similar arguments by a tribe seeking to invalidate a debt agreement, specifically comparing and contrasting the bond indenture in that case to the Lac du Flambeau case (see Wells Fargo Bank, N.A., as Trustee v. Sokaogon Chippewa Community (Mole Lake Band of Lake Superior Chippewa Indians) and Sokaogon Gaming Enterprise Corp., No. 10-C- 1039-WCG). Accordingly, the result can be avoided with the exercise of care in utilizing operational covenants with respect to a gaming facility that are otherwise common in non-tribal loan transactions and a request for NIGC approval or a declination letter if there is any question that a loan agreement could constitute a management contract. Similarly, the Circuit Court's ruling with respect to the non-severability of a sovereign immunity waiver should cause tribes and their lenders to exercise greater care in drafting such waivers to operate independently of any particular agreement and to craft permitted legal and equitable remedies with sufficient breadth to ensure the availability of economic recovery notwithstanding the invalidity of any specific agreement.

Loan Document Issues

Loan documents in tribal financing transactions may take the form of loan agreements, notes and security agreements, and so forth, as typically used in non-tribal transactions. However, tribal lending often requires the modification of these standard documents to reflect unique tribal issues.

Loan Documents

Standard representations and warranties and covenants for corporate transactions are generally modified or supplemented to reflect:

The status of the tribe as a federally recognized tribe.
The proper creation under tribal law of any separate tribal entities.
The waiver of sovereign immunity.
For Class III gaming (Las Vegas style), the IGRA requires a tribe to enter into The applicability or satisfaction of necessary approvals.
The existence and continuation of a tribal secured transactions law (see Liens and Security Interests below).
The need for any approval under the Non-Intercourse Act of 1790 (25 U.S.C. § 177) (NIA) with respect to real estate collateral (see Liens and Security Interests; Real Property below).
Where a separate entity is the borrower, assurances from the tribe itself as to the preservation of the entity's existence and business and assurance of the waiver of sovereign immunity, as well as assumption by the tribe of the entity's liabilities in the event of dissolution.

For gaming transactions:

assurances that the lending arrangements do not create a management contract subject to approval by the NIGC, and do not grant to the lender a proprietary interest in the tribe's gaming operation including appropriate representations of the tribe or tribal borrower, as well as limitations on the exercise of the lender's remedies to provide assurance of non-interference with gaming management;
provisions addressing any applicable financial source regulatory requirements; and
representations, warranties and covenants as to the proper authorization under federal, state and tribal law for tribal gaming.
assurances that the project site is "Indian lands" under the IGRA and over which the tribe has governmental jurisdiction.

Legal Opinions

It is common for lenders to require legal opinions in tribal lending transactions similar in form and substance to corporate loan opinions. Such opinions will also include coverage of the unique tribal issues described (see Loan Documents above). However, many of the typical opinions, including the existence of the tribe or tribal entity, the authorization, execution delivery and enforceability of the loan documents, the non-contravention opinion and other similar provisions, present mixed questions of tribal and non-tribal law. Often, the legal conclusion as to a matter under state or federal law will rest on the validity of the matter first under tribal law. Accordingly, it is important that counsel representing both the tribal borrower and the lender have familiarity with legal practice in this area.

Tribal Economics

As noted at the outset (see Tribal Status and Government; Tribal Government above), an Indian tribe functions as a governmental body providing services and benefits to tribal members. Among these services and benefits is often the provision of economic benefits through the payment for housing, health care and education, for example, as well as direct cash support though per capita distributions to tribal members. Similar to a state or local government, the tribal government fails if it cannot meet the tribal members' service needs.

It is not unusual for lenders new to tribal finance to view these benefits and services, particularly the direct economic support of tribal members, as the residual benefit of tribal economic development activities, akin to the payment of a dividend to stockholders in a corporate financing. From the tribal perspective, however, these services are fundamental governmental activities, no less so than operating schools or a state government paying Medicaid benefits.

As a consequence, the most sensitive area of discussion between tribal borrowers and lenders, particularly in gaming or other project finance transactions based on a limited revenue stream, is the extent to which various tribal functions may be funded from the pledged revenues while the loan is outstanding. For a project finance transaction, it was fairly common in good economic times to permit without restriction a minimum distribution amount for general tribal activities, and to permit greater distribution amounts on compliance with specified performance criteria. The deteriorating economy and tightening credit markets since 2007 have changed the balance of these discussions between lender and borrower, with greater reluctance from lenders to permit, for example, the funding of direct cash distributions to members without some restriction (such as compliance with certain financial covenants).

Liens and Security Interests

The granting and perfection of security interests in real and personal property of tribes are subject to certain anomalies that are purely a function of tribal finance.

Real Property

NIA, first enacted in 1790, broadly prohibits the sale or other disposition of tribal land without the previous approval of the US government (which, in this case, acts through the Bureau of Indian Affairs (BIA)). As a practical matter, since reservation land is generally owned by the US and held in trust for a tribe, it is impossible to create a valid lien on reservation property. However, the full scope of the NIA as applied to tribal lands owned in fee is unclear. It is not uncommon for tribal loans to be secured by a mortgage or deed of trust encumbering fee-owned real estate. In this regard, a lender requiring real property collateral, at a minimum, should seek a legal opinion as to whether the NIA applies and confirm that any title insurance covering the lien does not exclude coverage for any transfer requiring government approval that is not obtained (title companies have differing practices in this regard). If there is any doubt as a result of legal review of the relevant land status, consideration should be given to seeking BIA approval of a mortgage or deed of trust with respect to tribal-owned fee lands, or a determination from the BIA that such approval is not required.

Personal Property

It is not uncommon for loans to tribes to be secured by a security interest in personal property, ranging from individual items of equipment (as in capital lease transactions), to receivables, inventory and other property typically the subject of security interest under the Uniform Commercial Code (UCC) in corporate finance (including gaming or other limited project revenues). However, tribes are typically exempt from most state laws, so the applicability of the UCC to a tribe is questionable (see General Principles of Sovereign Immunity and Jurisdiction; Sovereignty and Sovereign Immunity above). To provide an added layer of assurance with respect to the effectiveness of personal property claims, sophisticated lenders will typically require that a tribe have in place a tribal secured transactions law providing for:
The adoption of the UCC under a specified state as the law governing the creation and perfection of security interests.
The location of the tribe for purposes of Section 9-301 of the UCC with respect to the law governing perfection and priority of security interests.
A provision negating the effect of Section 9-109 of the UCC, which would otherwise limit the applicability of the UCC as applied to a governmental entity.
Any appropriate exceptions or deviations from the UCC as enacted under state law (for example, it is not uncommon to provide in a tribal secured transactions law that a security interest may be created in money without possession). Under the UCC, a lender must take possession to perfect its security interest in money that is not in a deposit account.

Perfection of Security Interests

Under Article 9 of the UCC, the local law of a debtor's location governs the perfection and priority of a security interest in personal property. However, it is not clear whether a tribe is located within a state for this purpose. Accordingly, as noted previously, a properly drafted tribal secured transactions law incorporating the UCC will generally establish the tribe's location, which is usually in the state where the tribe's principal reservation property and government is located. Therefore, UCC filings would be required to be made in that state's filing office. To eliminate any doubt, however, as to the effectiveness of any filing in that state, the careful lender will file a duplicate financing statement in the Office of the Recorder of Deeds for the District of Columbia, which serves as the default location for an entity under Section 9-307(c) of the UCC. Consequently, in searching lien records with respect to a tribe or tribal entity, a lender or prospective lender should always be careful to search the records of the Office of the Recorder of Deeds of the District of Columbia in addition to any other applicable state filing office.

Additional Issues to Consider

Lending to Indian tribes represents a unique opportunity for lenders, but it also presents considerations that are peculiar to tribal finance. When considering or engaging in a financing with a tribe, the following questions should be asked:

What is the tribal governance structure? Is the lender dealing with the decision makers?
Does the lender have a viable, comprehensive waiver of sovereign immunity from the tribe that will allow the lender to exercise its remedies if the financing goes bad?
What federal regulations are applicable to the tribe and are germane to the financing? Has the lender confirmed that tribal mechanisms are in place to ensure compliance with any applicable regulations?
If the financing involves a gaming facility, is the tribe in compliance with the IGRA and state gaming compacts for Class III gaming? What are the terms of the state gaming compacts?
Have the documents in connection with the financing been modified to address any and all peculiarities intrinsic to a transaction involving an Indian tribe?
Does the lender fully understand the revenue stream that will service the tribal debt? Are there any required distributions to tribal members that could affect this revenue stream?
Does the lender fully understand the collateral package being offered by the tribe? Has the lender taken steps to ensure its security interests are valid and perfected?

These are just a few of the question a lender may need to ask. Each specific transaction may generate additional questions or considerations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

United States: General Considerations In Tribal Debt Finance