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...