Tribal Casino Debt Restructurings

1. Tribal Casino Debt Restructurings Navigating Uncharted and Turbulent Waters Presented by Kevin C. Quigley IMGL 2010 New York Conference May 20, 2010

2. Overview Any Indian casino debt restructuring will involve – 1. complex mix of bankruptcy and creditor issues intersecting with 2. unique legal and political challenges arising from federal gaming and tribal laws

3. Growth Of Indian Gaming • 1988 – Handful of modest-sized bingo facilities in a few states • Today - $26 billion industry with over 425 tribal gaming establishments operated by over 230 tribes in 28 states. • Many such operations being large-scale casino destination resorts offering Class III gaming

4. Financing Indian Gaming Growth • Many parties leveraged significant investments to fuel growth. • Tribes • Bondholders • Bank Syndicates • Development/management companies

5. What Happens IfThe Bet Goes Bad? • Commercial gaming debt restructurings are generally conducted against backdrop of well defined and understood set of legal parameters Uncertainty as to interplay of bankruptcy laws and state gaming regulatory requirements • Attempts to restructure tribal gaming debt will only add a number of other variables to equation and impact several different interested parties Each of these parties will have own perspective about how the law should address such tribal gaming debt restructurings

6. Questions That NeedTo Be Resolved • Do U.S. bankruptcy laws apply to tribal gaming debt restructurings? • What impact will tribal sovereignty and gaming laws have on restructuring attempts? • How will the Indian Gaming Regulatory Act, and regulations adopted by the National Indian Gaming Commission, interplay with “usual” debt work-out negotiations?

7. Bankruptcy Laws • May a tribe file for relief under the U.S. Bankruptcy Code, Title 11? • Question has never been directly decided by federal courts • Generally “presumed” tribe cannot • Because tribe is “governmental unit” under Bankruptcy Code • Section 101(41) defines person” qualified to file and specifically excludes “governmental units”

8. Bankruptcy Laws • What about tribal gaming “authority” or “instrumentality”? A “municipality” is permitted to file for protection under Chapter 9 of Bankruptcy Code, but applies to only “political subdivision, or public agency or instrumentality” of a “State” Thus, Chapter 9 should not apply to a tribal gaming authority or instrumentality holding the tribe’s gaming related assets

9. Restructuring Restrictions • Nature of tribal sovereignty impacts negotiations with tribal entities • Will be major influence shaping negotiations (i.e. what dispute process and forum is permitted, applicable laws, etc.) • Tribal laws may dictate how and when judgment or arbitration award against tribal gaming operator can be enforced on tribal land • Creditor priority issues under tribal law may be argued under tribal secured transaction laws

10. Restructuring Restrictions • Effect of federal gaming laws on collateral subject to negotiations • May impact creditor’s efforts to sell off “gambling devices” to recover part of debt (Johnson Act limitations). • May complicate efforts to enforce rights as to collateral and collection See Marshall Bank action against Nooksack Indian Tribe (Whatcom County Superior Court, Washington, filed August 5, 2009)

11. Restructuring Restrictions • Restructuring negotiations may pull in state government parties To increase funds available to pay tribal gaming debt obligations • Creditor attempts to “eliminate” revenue-sharing provisions required by tribal-state compact • Creditor “suggests” that gaming operation switch to more Class II machines not subject to revenue-sharing

12. IGRA and NIGC Considerations • Tribal gaming debt restructuring negotiations will take place in more restricted space than general commercial gaming debt • Creditor cannot generally take ownership or security interest in tribal land where Indian casino is located or its gaming facility building as a bargaining chip

13. IGRA and NIGC Considerations • Federal gaming law (IGRA) prohibits anyone but tribe from having a “proprietary interest” in the tribal gaming operations • Eliminates common Chapter 11 plan option of giving creditors an equity stake in the gaming operation in exchange for forgiveness of debt

14. IGRA and NIGC Considerations • In order to right ship, creditor may not take over “management functions” (i.e. determining slot floor mix, marketing plan, department budgets) for a period of time • Unless willing to first undergo scrutiny of suitability investigation by NIGC • See Wells Fargo receivership action against Lac du Flambeau (W.D. Wisconsin., January 6, 2010)

15. IGRA and NIGC Considerations • Few creditors will want or be willing to undergo the time and expense of NIGC suitability investigation • Best option may for tribal operator and creditor to agree to “work-out” management company for a limited time (6 to 36 months) • Selected by tribal operator pursuant to defined set of objective criteria (i.e. manager is currently found suitable by NIGC, has 15+ years Indian gaming management experience, has adequate financial resources, etc.)

16. IGRA and NIGC Considerations • IGRA requires tribe receive some “minimum guaranteed payment” that, contrary to bankruptcy laws, has preference over retirement of development and construction debt obligations (although specific amount of payment is subject to negotiations) • IGRA also places limits as to compensation and duration of management by a non-tribal party

17. IGRA and NIGC Considerations • Impact of “revenue allocation plans” approved by Department of the Interior • Usual ability of creditor to cut off payments from debtor’s operations to the equity owner during restructuring period is severely limited by revenue allocation plans • Modification to RAP per capita payments to tribal members must be approved by DOI before change implemented • Complicates restructuring negotiations because tribal leaders will be under pressure politically to continue per capita payments

18. IGRA and NIGC Considerations • Many tribal bond offerings often have unique provisions governing the form and timing of any tribal distributions which will impact the negotiations specific to that debt financing • Any change in the economic terms and conditions of the debt obligations achieved through negotiations may inadvertently require NIGC review and approval of the new provisions

19. Three Practical ConsiderationsTo Remember First Any tribal gaming debt restructuring must begin with a knowledgeable analysis of what tribal entity, and in what form, actually owns the tribal gaming assets at issue

20. Three Practical ConsiderationsTo Remember Second Determining whether tribal immunity from forced suit has been properly applied under applicable tribal and federal laws will require extensive analysis of the debt financing documentation and tribal records

21. Three Practical ConsiderationsTo Remember Third A complete analysis of the restructuring by Indian gaming business counsel will be necessary to avoid any major pitfalls and refine the work-out terms consistent with federal gaming laws

22. Practice Alert • Watch for rise of derivative actions re legal opinions for tribal debt financings • NIGC pre-screenings recommended Well Fargo’s purported reliance upon the Tribe’s initial failure to pursue an NIGC opinion was completely unreasonable. . . Given the size of the transaction and the complicated nature of the regulatory scheme, it is a bit surprising that Wells Fargo did not insist upon NIGC review and approval. “Because the regulatory landscape appears uncertain to the untrained observer and because transactional attorneys seek to minimize risk and uncertainty, it is common for parties to obtain NIGC review of transactional documents for the finance of Indian gaming operations, even when the parties assert that the financing arrangement does not constitute a management contract.” (emphasis added) SeealsoIn re SRC Holding Corp., 352 B.R. 103, 176 (Bkrtcy. D. Minn. 2006)