The Patchak Decision and Tribal Gaming Investments

On June 18, 2012, the U.S. Supreme Court handed down a decision that most Indian law experts are viewing as a legal setback. In Match-E-Be-Nash-She-Wish Band of Potawatomi Indians v. Patchak, the court held that a private landowner complaining of potential adverse impacts from a tribal gaming enterprise could sue to challenge the 2009 decision by the Secretary of the Interior to acquire the site of the enterprise in trust for the tribe. Justice Sotomayor was the sole dissenter in the court’s 8–1 ruling.

The historical facts are as follows. In 2009, the secretary, pursuant to his authority under the Indian Reorganization Act (IRA), approved an application to acquire 147 acres of fee land in Michigan in trust for the Match-E-Be-Nash-She-Wish Band of Potawatomi Indians (more commonly known as the “Gun Lake Tribe”) for gaming purposes. Patchak, a neighboring landowner, had sued under the Administrative Procedures Act (APA), asserting a standing based on alleged adverse impacts on his property from gaming, such as an “increase in traffic and crime and irreversible change the area’s rural quality.” Patchak challenged the secretary’s authority to acquire the land on the ground that the tribe was not under federal jurisdiction as of June 18, 1934, the date the IRA was enacted, as required pursuant to the court’s 2009 decision in Carcieri v. Salazar. While the suit was pending, the government took title to the land in trust for the tribe. The district court then dismissed the suit under the Quiet Title Act (QTA), which waives the immunity of the United States to permit suits challenging the government’s title, but explicitly excludes suits challenging title to Indian lands. It is interesting to note that in the meantime, the tribe developed, built and opened their casino, which continues to operate currently. Then the D.C. Circuit Court of Appeals reversed and reinstated Patchak’s suit, holding that the QTA exclusion did not apply because Patchak was not asserting his own title in the land. On June 18 this year, the Supreme Court affirmed Patchak’s standing to sue.

It is important to note that no decision has been made and no real attention has been paid to the merits of Patchak’s claims. This legal decision was solely to determine his standing and right to bring a suit based on his alleged claims. To those of us that live and work in Indian country and believe we face more than our share of challenges with the current system as is, this was rather unwelcome news.

According to a National Indian Gaming Association (NIGA) press release issued June 19, 2012, at the Mid-Year National Congress of American Indians Subcommittee on Tribal Gaming, NIGA Chairman Ernie Stevens Jr. said of the decision: “It is disappointing and surprising to find that the Supreme Court has created a new way to sue the federal government over Indian lands.”

Shortly after the decision was released, I listened in on a conference call led by the Native American Finance Officers Association (NAFOA), where three guests offered insight. They were John L. Shagonaby, chief executive officer of the Gun Lake Tribal Gaming Authority; Wilda Wahpepah, special counsel, Sheppard Mullin Richter and & Hampton LLP; and Jeff Carey, managing director, Bank of America Merrill Lynch.

As a tribal member and employee, Shagonaby could not speak about the details of the case itself, but he did offer that the tribe was confident in its legal counsel and would be very involved and engaged as the case goes forward. He advised tribes to stay very involved and hire their own special legal experts whenever a court case arises.

Wahpepah, who is of American Indian heritage, gave a very concise recap of the case and shed light on many aspects of the situation. In her recap, she said she had three different reactions to this decision, based on wearing “different hats.” When she wears her tribal member hat, she is frustrated as to why tribal property rights don’t seem to matter, and when she wears her legal hat she has great concern about the direction courts are taking, but when she wears her securities counsel hat (capital raising counsel), she believes this decision will have limited impact due to its unique fact pattern, since it is very specific.

Carey, who is a senior banker in the tribal gaming sector, also agreed that there may only be limited impact related to investors; he concurred with Wahpepah about the specificity of this case. He did acknowledge that this decision may make capital raising for new projects more difficult and expensive, but he felt the mitigation is to define and contain issues and legal challenges in advance, “smoke out” opponents, and increase the due diligence process around the financing up front so there are no surprises.

I personally feel increasingly frustrated and am incredulous about this decision, as I can only assume it will serve to encourage the numerous opponents to tribal gaming. All of the experts I have spoken with believe there is little to no merit to Patchak’s claims, and therefore one has to assume that he is either an opportunist seeking a settlement or is backed by non-gaming or competing gaming interests. I speak from experience, I once testified for a legislative body regarding the financial viability of a proposed new tribal casino and an anti-abortion rights activist interrupted my testimony. I initially thought he was in the wrong courtroom. He, however, brought in “evidence” that an additional casino in the proposed location would cause a wave of new abortions. We later found out these statistics were false and he was not really an activist, but had been brought in by a competing casino interest. But frivolous or not, his testimony did have the effect of throwing the day’s hearing off balance. In another case, the tribe for which I was advising had a three-year delay in their casino development because certain citizens claimed that the proposed casino traffic would cause air pollution. This is a much more common claim—and one that Patchak is evidently also citing. However, in the case of my tribal client, the opposing citizens settled for a monetary fee award to drop their case, which appeared to have been their intent and motivation all along (as opposed to any true air quality threat concerns). So it would seem that the Supreme Court has simply opened the door for more frivolity from opponents, opportunists and competing interests—just when Indian country is trying so very hard to establish rational economic independence and recovery.

My greatest focus is always access to capital for tribes. So the overriding question is how this decision impacts investor confidence, comfort and appetite for tribal gaming investments. After the Patchak decision was released, I interviewed several investors who are currently, or have been previously, active in the tribal gaming sector. One must first understand that tribal gaming investing is not a space for the inexperienced investor. Most funds and analysts we work with are extremely savvy in their legal and regulatory knowledge and have their own experts either on staff internally or readily available as established advisors.

Concurring with Carey and Wahpepah’s positions, most of the investors I spoke with first pointed out how specific the Patchak case is and how it does not appear to apply to many other projects around the country. For example, another new tribal gaming project involving fairly recent land-into-trust is Graton Rancheria in Northern California. Graton’s land-into-trust, however, was determined by a Congressional Act, so the Patchak decision evidently is irrelevant. Another newer land-into-trust gaming project is the Nottawaseppi Potawatomi’s FireKeepers Casino; however, their land is noted as having been taken into trust when the final agency action was recorded, and the six-year window for challenges has therefore expired. So, in line with the experts’ thoughts, the investors concur that specificity around each land-into-trust case does help with clarification and comfort. But specificity aside, the greatest concern unanimously from all investors I spoke with is time. In the world of finance, time is money. Everyone agreed that this decision allows for the possibility of long and extended deliberations, which will have to be defended. That is a serious added cost consideration even for highly successful operations. Regardless of the lack of merits in the Patchak case, the return on investment of the Gun Lake Casino has just been reduced for the tribe and its developers due to mounting legal costs.

On the NAFOA call, Carey mentioned that financing in Indian country is never easy, and this really just adds to the typical extensive due diligence, coverage of issues, full and thorough disclosures, expert Indian legal counsel, and specific opinions as necessary for each financing.

I don’t believe the Patchak decision means pulling the investor alarm in the tribal gaming space; however, it does seem to make an already difficult sector even more so. All of the experts I spoke with do not believe there will be any effect from this decision on existing operating tribal casino properties (i.e., financing expansions and additional facilities), but tribal gaming financing for new projects will undoubtedly take longer—and the cost of capital may be more expensive. One investor indicated that even though from a regulatory standpoint all tribal gaming financing in the U.S. is structured as debt instruments, from a practical standpoint we should not think of tribal gaming financing of new projects as debt financing at all, but instead as a private equity model. From both a risk and pricing perspective, the cost of new tribal projects should be estimated with private equity returns in mind.

From a legal and political standpoint, the Patchak ruling by the Supreme Court was surprising, frustrating and seemingly unusually biased against American Indian tribes. However, as a practical matter, it does not appear to change anything within the already stringent financing process, and if added due diligence is the result, there is certainly no harm there. We will all grow old trying to understand the political system and hoping for true justice, but in the meantime we can continue to pursue strong relationships between tribal governments and the private sector, such as the investor base that is already supportive of Indian country and empowers and stimulates our tribal economies with its funding. To do so, we must continue on the same positive path of communication, flow of information and disclosure. Education and detailed due diligence are key ingredients to successful financings, as they always have been. Tribal leaders, staff, gaming management, as well as professional and experienced legal, regulatory and financial experts working together with tribal gaming investors can mitigate most potential issues, problems and challenges. Yep … business as usual.

Author’s Note: When the Patchak decision was first announced, the Indian law community weighed in with helpful and immediate descriptions and responses. I would direct readers to a few online articles that directly discuss the legal decision at the following websites:

•Brian Pierson, Godfrey & Kahn Indian Nations Law Flash, June 2012; “The Patchak Decision Will Encourage Challenges to Fee-to-Trust Acquisitions.”

•Snell & Wilmer: Legal Alert – “Supreme Court Decision May Make it Easier to Challenge IRA Land-Into-Trust Acquisitions,” June 20, 2012; by Heidi McNeil Staudenmaier and Erin Szajna.

•Gaming Legal News – June 29 2012 • Volume 5, Number 16: “The Gun Lake Decision: What Does It Mean For Indian Gaming?” By Dennis Whittlesey, Dickinson Wright.

Leave a Comment