Saybrook Tax Exempt Investors, LLC v. Lake of the Torches Econ. Dev. Corp.

• Decision Date: 11 March 2013
• Docket Number: No. 12–cv–255–wmc.,12–cv–255–wmc.
• Citation: 929 F.Supp.2d 859
• Parties: SAYBROOK TAX EXEMPT INVESTORS, LLC and LDF Acquisition, LLC, Plaintiffs, v. LAKE OF the TORCHES ECONOMIC DEVELOPMENT CORPORATION; Stifel Nicolaus & Company, Inc.; Stifel Financial Corp.; and Godfrey & Kahn, S.C., Defendants.
• Court: U.S. District Court — Western District of Wisconsin

929 F.Supp.2d 859

SAYBROOK TAX EXEMPT INVESTORS, LLC and LDF Acquisition, LLC, Plaintiffs,

v.LAKE OF the TORCHES ECONOMIC DEVELOPMENT CORPORATION; Stifel Nicolaus & Company, Inc.; Stifel Financial Corp.; and Godfrey & Kahn, S.C., Defendants.

No. 12–cv–255–wmc.

United States District Court,

W.D. Wisconsin.

March 11, 2013.

Charles Samuel Bergen, Jessica Shay Nolan, Laura Kathleen McNally, Matthew Sexton Buckley, Grippo & Elden LLC, Chicago, IL, Heidi L. Vogt, Mark F. Foley, Von Briesen & Roper, S.C., Milwaukee, WI, for Plaintiffs.

Monica M. Riederer, Thomas S. Reynolds, II, Timothy Michael Hansen, Hansen Riederer Dickinson Crueger & Reynolds LLC, Daniel J. Kennedy, David J. Turek, Brian George Cahill, Gass Weber Mullins LLC, James R. Clark, Eric G. Pearson, Foley & Lardner LLP, Milwaukee, WI, Jessica Intermill, Vanya S. Hogen, Jacobson, Buffalo, Magnuson, Anderson & Hogen, P.C., Saint Paul, MN, for Defendants.

OPINION AND ORDER

WILLIAM M. CONLEY, District Judge.

Plaintiffs here purchased taxable gaming revenue bonds and seek to either enforce payment of the bonds or to obtain other legal and equitable relief from defendants—the tribal corporation that issued the bonds, an intermediary brokerage firm that sold the bonds, and the law firm that opined on the legality of the bonds at the time of the sale. While the issuing tribal corporation, defendant Lake of the Torches Economic Development Corporation, has arguably waived its sovereign immunity to suit in state court, the contractual waiver is conditional, triggered only “in the event ... [the Federal District Court for the Western District of Wisconsin] fails to exercise jurisdiction.” ( See Bond Specimen, dkt. # 1, ex. A, p. 5.) With the admitted aim of triggering this waiver, plaintiffs took the unusual step of filing suit in this court mainly to establish that it lacks jurisdiction to hear their case.¹

At the outset of proceedings, therefore, this court agreed to conduct a threshold jurisdictional analysis. Having done so, the court now finds that it lacks federal question jurisdiction, but requires more information to determine if diversity jurisdiction nonetheless exists. Before issuing a final ruling on this court's jurisdiction, therefore, plaintiffs will be required to provide additional proof regarding the citizenship of plaintiff LDF Acquisition, LLC.

BACKGROUND ²

Defendant Lake of the Torches Economic Development Corporation (“Lake of the Torches”) is a tribal corporation wholly owned by the Lac du Flambeau Band of Lake Superior Chippewa Indians (“the tribe”), an Indian tribe organized under Section 16 of the Indian Reorganization Act of 1934 (25 U.S.C. §§ 461 et seq.) and recognized by the federal government. In January 2008, Lake of the Torches issued $50 million in bonds and sold them all to a brokerage firm, Stifel, Nicolaus & Company, Inc. (“Stifel Nicolaus”), which resold them to plaintiff LDF Acquisition, LLC (“LDF”). Plaintiff Saybrook Tax Exempt Investors, LLC (“Saybrook”) is a member of, and the manager of, LDF. Defendant Godfrey and Kahn, S.C., a law firm, advised the parties on the transaction.

As part of the bond issue, Lake of the Torches executed multiple, written contracts, including the bonds themselves (which constitute a promise to pay back the money) and a corresponding Trust Indenture Agreement (which provided the means by which Lake of the Torches would repay its debt). Wells Fargo Bank was designated as the trustee under the Indenture.

When Lake of the Torches allegedly repudiated the bonds and failed to comply with the Indenture, Wells Fargo Bank brought suit in this court to enforce the Indenture. Lake of the Torches responded with the affirmative defense of sovereign immunity. When Wells Fargo protested that the Indenture had waived sovereign immunity, Lake of the Torches replied that the Indenture was an unapproved “management contract” that violated the Indian Gaming Regulatory Act, 25 U.S.C. §§ 2701–2721 (“IGRA”) and its implementing regulations, making it void and unenforceable.

Judge Rudolph Randa, sitting by designation in the Western District of Wisconsin, agreed that the Indenture was void under IGRA and his ruling was affirmed by the Seventh Circuit Court of Appeals. Wells Fargo Bank, N.A. v. Lake of Torches Econ. Dev. Corp., 09–CV–768, 2010 WL 1687877 (W.D.Wis. Apr. 23, 2010), aff'd in part sub nom. Wells Fargo Bank, Nat. Ass'n v. Lake of the Torches Econ. Dev. Corp., 658 F.3d 684 (7th Cir.2011). The Seventh Circuit Court of Appeals, however, reversed Judge Randa's determination that there could be no alternative relief through asserting equitable and legal claims arising out of the other bond offering documents, including the bonds themselves. Wells Fargo Bank, Nat. Ass'n v. Lake of the Torches Econ. Dev. Corp., 658 F.3d 684, 700–01 (7th Cir.2011). The Seventh Circuit explained that the bond purchasers could bring claims based on the bonds, as well as any similar offering documents that did not independently meet the definition of a “management contract,” but the bond purchasers would first have to overcome Lake of the Torches' sovereign immunity defense. Id. The court, therefore, remanded the case to Judge Randa to determine whether the waivers contained in the offering documents “when read separately or together, ought to be construed as dependent on the validity of the waiver in the Indenture and [whether these documents] ... make clear the Corporation's intent to render itself amenable to suit for legal and equitable claims in connection with the bond transaction.” Id. at 701.

Before that issue could be resolved on remand, Wells Fargo was required to address what the Seventh Circuit flagged as another, “more fundamental” issue: “the standing of Wells Fargo to seek the return of the funds to the bondholders” once the Indenture is found void. Wells Fargo, 658 F.3d at 701. After failed attempts to avoid the standing issue by adding Saybrook and LDF as plaintiffs, Wells Fargo voluntarily dismissed its suit pursuant to Federal Rule of Civil Procedure 41(a)(1). Saybrook and LDF then immediately filed a 24–count complaint in Waukesha County Circuit Court against Lake of the Torches, Stifel Nicolaus and its parent, Stifel Financial Corp. (“Stifel Financial”), and Godfrey & Kahn. (Dkt. # 32, ex. E.) The plaintiffs asserted a breach of bond claim against Lake of the Torches, and various alternative claims for misrepresentation, securities fraud, malpractice and equitable rescission—essentially the same complaint now filed in this new federal case. Because the ability to proceed in state court hinges on waiver of sovereign immunity, which in turn hinges on whether this court has jurisdiction, the state court stayed those proceedings and awaits this court's decision to accept or decline jurisdiction over the dispute.

OPINION

A. “Breach of Bond” Claim

1. Well–Pleaded Complaint Rule

Article III, section 2 of the Constitution and 28 U.S.C. § 1331 provide federal district courts with jurisdiction over cases “arising under the Constitution, laws, or treaties of the United States.” A cause of action arises under federal law only when federal law is part of the plaintiff's “well-pleaded complaint.” Metro. Life Ins. Co. v. Taylor, 481 U.S. 58, 63, 107 S.Ct. 1542, 95 L.Ed.2d 55 (1987). This means that the court looks only at the complaint, not at asserted defenses, Gully v. First Nat'l. Bank, 299 U.S. 109, 113, 57 S.Ct. 96, 81 L.Ed. 70 (1936), or at counterclaims, Holmes Group, Inc. v. Vornado Air Circulation Sys., Inc., 535 U.S. 826, 831, 122 S.Ct. 1889, 153 L.Ed.2d 13 (2002). It also means that the court refers only to the portions of the complaint that are necessary for a plaintiff's cause of action, and not at pleadings that merely anticipate a defense. Louisville & Nashville R.R. Co. v. Mottley, 211 U.S. 149, 153, 29 S.Ct. 42, 53 L.Ed. 126 (1908).

A federal court may only exercise federal question jurisdiction if the “well-pleaded” federal issue is substantial and central to the case. This threshold is automatically met if the suit pleads a cause of action arising under federal law. Am. Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 260, 36 S.Ct. 585, 60 L.Ed. 987 (1916). When state law is the underlying basis for the substantive claim, the United States Supreme Court has recognized a substantial and central federal question may still exist provided that: (1) the cause of action necessarily raises a federal issue; (2) the issue is actually disputed; (3) the issue is substantial; and (4) federal jurisdiction will not disturb any congressionally-approved balance of federal and state judicial responsibilities. Grable & Sons Metal Prod's v. Darue Eng'g, 545 U.S. 308, 314, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005).

The Supreme Court offered some further clarification to the latter, rather ambiguous four-part test by explaining that this “special and small category” of qualifying cases must closely resemble the claim in Grable, presenting a “nearly pure issue of law,' ” that is “both dispositive of the case and would be controlling in numerous other cases.” Empire Healthchoice Assurance., Inc. v. McVeigh, 547 U.S. 677, 700, 126 S.Ct. 2121, 165 L.Ed.2d 131 (2006). More recently, the Court acknowledged that in “outlining the contours of this slim category ... the canvas looks like one that Jackson Pollock got to first.” Gunn v. Minton, 568 U.S. ––––, 133 S.Ct. 1059, 1064–65, 185 L.Ed.2d 72 (2013) (citing 130 C. Wright, A. Miller, E. Cooper & R. Freer, Federal Practice and Procedure § 3562, pp. 175–76 (3d ed. 2008)).

On the face of the pleading here, plaintiffs' claim against Lake of the Torches for “breach” of the $50 million in bonds is unambiguously one for breach of contract under Wisconsin common law, requiring plaintiffs to show the existence of a valid contract and an unwarranted breach. Indeed, defendant Lake of the Torches underscores the nature of the claim by arguing that plaintiffs will have to prove...