Tribal Pledge of Gross Gaming Revenues: a "Management Contract" Subject to NIGC Approval?
As a means of protecting tribes, the Indian Gaming Regulatory Act requires, among other things, the National Indian Gaming Commission (“NIGC”) Chairman’s approval of management contracts for the operation and management of Indian gaming operations. The NIGC defines a “management contract” as “any contract, subcontract, or collateral agreement between an Indian tribe and a contractor or between a contractor and a subcontractor if such contract or agreement provides for the management of all or part of the gaming operation.” Even if a consulting, development, lease or financing agreement says it is not a management contract, yet contains terms which provide the contracting entity with management of the tribe’s gaming operations, the NIGC might consider it a management contract subject to the Chairman’s approval.
Management encompasses many activities, such as planning, organizing, directing, coordinating, and controlling. In some cases, the NIGC has found that certain consulting, development, lease and financing documents confer management authority to the consultant, developer, landlord or lender, as the case may be, thereby constituting a management contract that is void unless approved by the NIGC. These agreements provided that if the tribe defaults, the contracting party will control the use of pledged security, usually future gross gaming revenues.
The current NIGC takes the position that an agreement containing a security interest in a gaming facility’s future gross revenues, without further limitation, authorizes management of the gaming facility. Why? Because in the event of a default, a party with a security interest in a gaming facility’s gross revenues has the authority to decide how and when operating expenses at the gaming facility are paid, which is itself a management function. Further, a party that controls gross revenue potentially can control everything about the gaming facility by allocating or putting conditions on the payment of operating expenses. Therefore, agreements with such a security interest might, in the eyes of the NIGC, constitute management contracts that are void unless and until they are approved by the Chairman.
Several limitations can be drafted into any consulting, development, lease or financing agreement to provide comfort to the NIGC, and the parties to the deal, that the agreement is not a management contract. One such limitation is to designate net—not gross—gaming revenues as security. The designation of net revenues ensures that the tribe maintains control of operating expenses, while providing the contracting party with a source of revenue to secure its interest. The agreement should also be carefully drafted such that it does not provide the contracting party with considerable authority to plan, direct, organize, coordinate or control the gaming operation, including: making personnel decisions, establishing policies and procedures of the casino, controlling the placement of gaming machines on the casino floor, and determining payment of operating expenses of the gaming facility, to name a few. Tribes should make sure such protections are drafted into any agreement whereby the tribe pledges its gaming revenues as security to the contracting party. In turn, the NIGC should stay out of the tribe’s business.
