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Plaintiff/Appellant, |

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| MEMORANDUM OPINION

BBC ENTERTAINMENT, INC., | AND ORDER

|

Defendant/Appellee.

Per Curiam (Chief Justice Frank Pommersheim and Associate Justices Leroy Greaves and Pat

Lee). (Associate Justice Greaves files a separate concurrence in the judgment, but does not agree

with the discussion in Part III of this opinion).

1. Introduction

This case involves a dispute between the Rosebud Sioux Tribe, Plaintiff-Appellant, and

BBC Entertainment, Inc., Defendant/Appellee, over a management contract entered into by the

parties pursuant to the National Indian Gaming Regulatory Act, 25 U.S.C. §§ 2701 et seg.

(IGRA). On February 11, 1993, BBC signed a contract to provide gaming management for the

Tribe’s casino to be operated on Tribal trust land within the exterior boundaries of the Rosebud

Sioux Reservation. The management contract was approved on June 14, 1994 by the Chairman

of the National Indian Gaming Commission (NIGC) as required by federal law, 25 USS.C. §

2711 and its implementing regulations found at 25 C.F.R. part 533. The five year contract began

when the Rosebud Sioux Tribe Casino was opened on August 16, 1994 and ended at midnight on

August 15, 1999,

At the conclusion of the contract and after the final disbursement of funds, the Tribe

concluded that BBC had breached the management contract in several material respects. The

Tribe thereupon filed a complaint against BBC in Rosebud Sioux Tribal Court based on eight

different causes of action and sought a total of $843,754.09 in damages.’

Count 1, the sole subject of the appeal, alleged that BBC wrongfully took $415,857 from

the Casino’s bank accounts; more precisely that this sum came from the Operation Expense

Reserve (OER) account that was required to be established by the Manager. Art. 6.4(c)(5) of the

Management Contract expressly states “There shall be an ‘Operation Expense Reserve’” and that

it shall be funded solely by the Manager via a discretionary “initial funding” and “in addition, the

Manager agrees to make contributions from gross receipts to such reserve from time to time as

the Manager determines to be necessary to accumulate funds in such reserve in an amount

reasonably required to provide financial stability to the Project.” Art. 6.4(c)(5).

The Tribe alleged that BBC made no initial contribution and that the Tribe and BBC

subsequently and mutually agreed orally that each side would contribute 7.5% of its net profits

each month to the OER. This oral modification is not disputed by the Tribe. The Tribe alleged

that at expiration of the contract, BBC took $415,856 from the OER account in accordance with

BBC’s view that it was entitled to 35% of the OER account balance as provided by the

Management Contract’s division of net profits with 65% going to the Tribe and 35% to BBC.

The Tribe’s central contention on the single count involving the OER account is

straightforward enough. It contends that oral modification as how to fund the OER and agreed to

by both parties is void as a matter of federal law for failure to obtain the NIGC’s approval of the

1 The Management Contract expressly states that “any litigation relating to a dispute over the terms, rights, or

obligations set forth in the agreement shall first be initiated in Rosebud Sioux Tribal Court.” Management

Agreement between Rosebud Sioux Tribe and BBC Entertainment, Inc. (1993), Art. 21.

modification as required by federal law.” The Tribe contends that because the modification is

void BBC was not entitled to any of the money in the OER account.

Special Judge B.J. Jones ruled to the contrary on July 12, 2004. While he agreed that

there was an oral and mutually agreed upon modification as how to fund the OER account, he

made no express determination whether this violated NIGRA. Instead he found “that nothing in

the agreement prohibited the parties from using their respective net earnings to fund an account

such as the OER account.” Slip Opinion at 9.

A timely notice of appeal was subsequently filed. Oral argument was held on April 24,

2006.

I. Issues

This appeal raises two issues, namely:

A. Whether the mutual oral modification of the Management Contract as how to fund the

OER account is void as a matter of federal law for failure to comply with the Indian Gaming

Regulatory Act and its implementing regulations; and

B. If the Management Contract modification is void, what is the appropriate remedy for

the failure to comply with the contract modification provisions of IGRA.

Each issue will be decided in turn.

III. Discussion

A. Management Contract Modification

The Management Contract expressly states that “There shall be an ‘Operation Expense

Reserve.’” Management Contract at 6.4(c)(5) (emphasis added). This account was to be funded

by the Manager with initial funding provided at the ‘discretion’ of the Manager. Jd. This section

225 C.F.R. § 535.1 provides “Modifications that have not been approved by the Chairman in accordance with the

requirement of this Part are void.”

also expressly permitted repayment of any initial contribution, “The Manager shall be entitled to

repay itself for such initial contribution at such time as the Manager determines to be feasible

without jeopardizing the financial stability of the operation of the project. Id.

Sec. 6.4(c)(5) goes on to state the “Manager agrees to make monthly contributions from

gross receipts to such reserve from time to time as the Manager determines to be necessary to

accumulate funds in such reserve in an amount reasonably required to provide financial stability

to the Project." Id. No such (unilateral) contributions were made by the Manager, rather as

noted above, there was an oral agreement by the parties to fund the OER through monthly

contributions by each side in the amount of 7.5% of net profits. Slip Opinion at 6-7.

The crux of this issue is whether these facts constitute modification of Management

Contract and thus required approval by the NIGC in accordance with 25 U.S.C. §§ 2701 ef seg.

and 25 C.F.R. Part. 533. Judge Jones found “that nothing in the agreement prohibited the parties

from using their respective net earnings to fund such an OER account.” Slip Opinion at 9.

While such a reading is literally true, the resulting interpretation is neither reasonable nor

possible within the language of the Management Contract itself and the plain meaning and

history of the National Indian Gaming Regulatory Act. The Management Contract is quite

specific; the OER is to be funded solely by the Manager. Sec. 6.4(c)(5) identifies contributions

to be made by the Manager and no one else. Any change in this funding arrangement is indeed a

modification of the Management Contract.

> Both parties agree that no initial contribution was made by the Manager. Apparently, the Manager was willing to

make a $300,000 initial contribution, but was (orally) dissuaded from doing so by the Tribe. Slip Opinion at 4.

“ Sec. 6.4(c)(5) further provides that the “contributions from gross receipts to such reserve shall be part of the

Annual Budget. Such reserve shall be used for project expenses such as, but not limited to, prize money,

maintenance, contingent liabilities, taxes and assessments to the extent applicable, insurance, other future expenses,

and working capital.

Such a plain meaning reading of the Management Contract language is reinforced by the

history and structure of the National Indian Gaming Regulatory Act. A primary thrust of the Act

—and duty of the National Indian Gaming Commission - is to protect tribes from improvident

management contracts. The NIGC approved this Management Contract which called for all

funding to the OER to be provided by the Manager. Any change from unilateral funding by the

Manager to bilateral funding by the Manager and the Tribe could potentially disadvantage the

Tribe and expose it to substantial financial risk. For example, what if the Tribe had orally agreed

that it would completely fund the OER account? Under the rationale of the Special Judge, this

would be okay because such a funding arrangement was not expressly prohibited by the

Management Contract. Such an approach would eviscerate and gut the entire NIGC approval

process that is designed to protect tribes.

This Court therefore finds that the oral agreement of the parties to fund the OER through

mutual monthly contributions of 7.5% for their net profits was a modification of the

Management Contract. Such a modification expressly requires approval of the NIGC. 25 U.S.C.

§ 2711. Failure to obtain the required NIGC approval for any management contract modification

renders the modification “void.” 25 C.F.R. 535.1. Turn Key Gaming v. Oglala Sioux Tribe, 164

F.3d 1092 (8" Cir. 1999).

B. Remedy for Illegal Management Contract Modification

The question of the appropriate remedy is not so readily apparent. The Tribe argues that

because the Management Contract modification was “void” it automatically gets all the proceeds

remaining in the OER account. Yet it is not that clean or simple. The structure of the NIGRA is

to protect tribes in carrying out their management responsibilities for Class II] gaming activities,

but it is not designed to give tribes an unfair advantage or to condone potential unjust enrichment

of the Tribes. It is this latter concern that clearly troubled the Special Judge in this matter when

he noted that allowing the Tribe to recover al/ the remaining proceeds to the OER account

“would visit an inequity upon the Defendant herein.” Slip Opinion at 9 and “would also result in

unjust enrichment to the Tribe.” Slip Opinion at 11. In this regard, it is worth noting that the

federal court in the Turn Key Gaming case did not hold that an unjust enrichment claim was

automatically foreclosed by an unapproved contract modification. In fact, the Eighth Circuit

expressly remanded the unjust enrichment claim. 164 F.3d 1092, 1095.

The Tribe’s sweeping claim for all the proceeds in the OER is thus not directly supported

by statute or caselaw.” But what is the appropriate remedy then? The Court concludes at this

point that it is not possible to identify or to fashion the necessary remedy without a detailed

accounting and a set of findings on a number of issues. They include the following:

1. Whether a specific OER account was ever established. This bedrock concern

is not answered by the Special Judge’s opinion. For example, the opinion cites without

qualification the Defendant Manager, Charles Colombe’s, testimony that “there was never

actually an accountant maintained as the OER accountant, but it was maintained on the books as

a liability accountant and was used for various purposes including purchasing new machines,

building a new gaming administration office, and other primary capital improvements.” Slip

Opinion at 8. Special Judge Jones himself characterized the relevant account as “an alternative

OER account.” Slip Opinion at 9. If an OER account was not established, what account was

established?

5 The Court does agree with the Special Judge as to the following: /fat the end of the day after all debts have been

properly paid there is still a balance in the OER account, that balance becomes an asset to be divided according to

the terms of the Management Contract with 65% going to the Tribe and 35% to the Manager. This is the plain

meaning of Sections 11(e) and (f) of the Management Contract.

2. Whether any expenditures from the account were used for ‘capital

improvements.’ Mr. Colombe’s testimony was in the affirmative. /d. at 9. The Special Judge’s

opinion also cited testimony of Mr. Paul Valandra, the Chief Gaming Officer Commissioner for

the Tribe from 1997-1999 that he “was aware of the OER account and he understood the account

to be used for capital improvements.” Slip Opinion at 7. The Special Judge’s opinion also noted

that “it does appear that much of the money in that account were used to fund capitol (sic)

improvement projects that Defendant did not have an interest in at the time of the termination.”

Slip Opinion at 12.

This is particularly problematical. The OER account as described in the Management

Contract makes no mention of permissible expenditures for ‘capital improvements’ rather it

envisions a separate “Capital Improvement Reserve” account for such expenditures. Section

6.4(c)(6). Such a Reserve was to be funded in an amount “agreed upon by the parties” with a

“cap of $100,000.” Jd. It does not appear that such a “Capital Improvement Reserve” was ever

set up, but there needs to be an express finding on that question along with a determination of

how much money — including its source — was expended on such capital improvements and

whether such capital improvements were within the scope of the “Capital Improvement

Reserve.” This is particularly important in the context of potential benefits that accrued to the

Tribe, but not to the Manager.

3. How much money was contributed in full by each side and what were the

individual expenditures paid for from the OER account (or whatever account was established)?

While some of these specifics may be difficult to ascertain with any degree of certainty

due to a certain murk or confusion over what was written in the Management Contract, what

® “Capital improvements to project building, including but not limited to, major repairs or replacement of the

heating, air conditioning, roof, exterior walls or standard building components, drainage or the like.” Sect. 6.5(c)(6).

some of the terms in the contract actually mean, what was actually done with the casino receipts,

and what oral understanding existed between the parties, nevertheless the Court requires such an

undertaking on remand. Without it, the requirements of law and justice will remain unfulfilled

and a disservice will be rendered to all concerned.

IV. Conclusion

For all of the above-stated reasons, the judgment of the Special Judge is reversed and

remanded. Specifically, this Court reverses the finding of the Special Judge that no illegal

modification of the Management Contract occurred. The focus of the remand is to hold a

hearing and an accounting sufficient to answer in full the three questions set out in Part ITI(B) of

this opinion. The Special Judge may receive evidence and legal argument as he deems proper.

IT IS SO ORDERED.

For the Court:

a a

Frank Pommersheim

Chief Justice

Dated July 20, 2006.

ATTEST:

Mert: Sh : AA ar

Chief Clerk of Courts