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Author: Don Obrien

NIGC Issues New Guidance On Financing Document Reviews And Declination Letters – Finance and Banking



United States:

NIGC Issues New Guidance On Financing Document Reviews And Declination Letters


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The National Indian Gaming Commission
(“NIGC“) issued guidance this week for
tribes and tribal lenders who submit loan documents to the NIGC for
a so-called “declination letter.” Bulletin No. 2021-4,
“Submission of Loan Documents and Financing Documents for
Review,” summarizes criteria the agency has developed in the
last decade for determining whether loan documents constitute
“management” contracts, which under federal law must be
approved by the NIGC Chairman or they are void. The Bulletin states
that while the Office of General Counsel will continue to review
loan documents and issue opinions as to whether the documents
provide the lender with the ability to manage the gaming operation,
contracts that “adhere to the principles and analyses”
outlined in the Bulletin would likely receive an opinion letter
that the contract does not need to be submitted for approval as a
management contract.1

The criteria and the agency’s conclusions are:

  • Security interest in gross gaming revenues:
    the pledge of a security interest in the gross gaming revenue of a
    tribal gaming operation does not constitute control if (1)
    operating expenses are exempted from the security interest; or (2)
    the lender is expressly prohibited from exercising management
    controls using what has become standard “IGRA savings”
    language developed by the agency.

  • Appointment of a receiver: the appointment of
    a receiver over gross gaming revenue may give a third party
    substantial management control over a tribal gaming operation
    unless (1) the provision providing for appointment of a receiver
    includes express management limitations or (2) operating expenses
    are removed from the receiver’s authority.

  • Consent from outside parties: contracts that
    require consent or approval of any party other than the tribe prior
    to the tribe taking management actions, such as hiring or firing a
    management company, general manager, or making capital
    expenditures, constitutes management of the operation. A contract
    does not become a management contract, however, if a tribe makes a
    management decision that is reflected in the contract, such as the
    qualifications for a general manager or a minimum amount to spend
    on capital expenditures during a specific time

  • Mandatory implementation of others’
    recommendations
    : if the contract requires the tribe to
    implement the recommendations of another party, a consultant or
    other persons as to its gaming operation, it constitutes
    management. A tribe can agree at the outset in a contract to take
    specific acts or refrain from taking specific acts, including
    acting or refraining from acting as a consequence of the occurrence
    of events specified in the contract. A contract does not become a
    management contract if it includes specific, objective criteria for
    the selection of consultants, employees, or auditors, and the
    like.

  • Insurance purchases and proceeds: a contract
    that requires the tribal party to purchase a specific type and
    amount of insurance or to engage an insurer who meets objective
    criteria and standards is not a management contract. Contracts may
    provide how insurance proceeds will be distributed, grant a
    security interest in insurance proceeds, and permit the lender to
    purchase insurance without becoming management contracts.

The criteria issued this week developed after a decision of the
U.S. Court of Appeals for the Seventh Circuit in which a bond
indenture was found to be void as an unapproved management
contract.

The agency also issued Bulletin No. 2021-6, “Sole
Proprietary Interest,” providing guidance as to when a
contract violates IGRA’s requirement that the tribe retain the
sole proprietary interest in its gaming.2 While the Office of
General Counsel will continue to review contracts submitted by
tribes and opine as to whether they violate the sole proprietary
interest requirement, contracts that “adhere to the principles
and analyses” outlined in the Bulletin would likely receive an
opinion letter that the contract does not violate IGRA’s sole
proprietary interest requirement.

The criteria the agency uses to determine whether a tribe has
the sole proprietary interest in its gaming operation are:

  • Term of relationship with a third party;

  • Amount of revenue paid to the third party;

  • Right of control provided to the third party over the gaming
    activity.

Any one factor or a combination of the factors may constitute a
violation of the sole proprietary interest requirement. The
Bulletin provides eight examples of violations of the requirement
which include: (1) a third party possessing a security interest in
a gaming operation if the interest gives the party the right to
control in the event of default the operation or its operating
revenue; (2) a third party’s right to seek the judicial
appointment of a receiver over the gaming operation or its
operating revenue; (3) a third party having control or the right to
control a tribe’s gaming regulations; and (4) a vendor
controlling gaming devices in a tribe’s gaming facility.

Tribes and lenders who seek a declination letter from the Office
of the General Counsel as to their loan documents usually request
in the same letter that the Office of General Counsel find the loan
documents do not violate IGRA’s sole proprietary interest
requirement.3

For most commercial lenders and tribal borrowers, the NIGC’s
recent guidance comports with current practice in the tribal gaming
lending industry. In the future, each financing party will need to
decide on a case-by-case basis if a declination letter is required
for a particular financing transaction. We expect such
determination will be based upon a number of factors, including a
financial institution’s individual credit and risk assessment,
whether a financing transaction raises novel terms and the extent
to which legal counsel can provide sufficient legal comfort that
the loan documents are not management contracts.

Footnotes

1.
Bulletin No. 2021-4 at 2.

2. 25
U.S.C. ยง 2710(b)(2)(A).

3.
Bulletin 2021-6 at 2.

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.

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