How the Tribe Got Swindled by Duluth Over the Fond-du-Luth Casino

As we understand it today, the conflict over Fond–du–Luth Casino started in 2009 when the Fond du Lac Band of Lake Superior Chippewa stopped paying the City of Duluth a 19 percent share of the casino’s gross slot machine revenue. What’s rarely examined is why the Band was making those payments in the first place.

The 19 percent revenue sharing dates back to 1994, when the City and the Band negotiated the second of two casino agreements. Prior to that, the City had received 24.5 percent of total casino revenue under an agreement when the casino opened in 1986.

Two years later, Congress passed the Indian Gaming Regulatory Act, which required tribes to have "sole proprietary interest" in their gaming operations. Because Fond–du–Luth was managed by a seven–member commission comprised of Band and City representatives, the original agreement was out of compliance with federal law, leading to a 1994 agreement that handed the casino’s management to Fond du Lac, and gave the City a 19 percent cut.

It’s hard to fathom why these two were ever sharing revenue. The Band purchased the building privately from Sears and Roebuck in 1985. The Band was the sole financial investor in the casino and has always carried 100 percent of the risk in the event the venture failed—a real possibility in the early days.

How the 19 percent arrangement came about can be found in court documents, public records, and newspaper archives that, combined, chronicle much of the history of Fond–du–Luth.

Under the original 1986 agreement, the Band leased the building to the commission. Under the 1994 agreement, the commission leased the building back to the Band for the price of 19 percent, to be distributed to the City for use at the City’s discretion.

Thus, for the next 15 years, the Fond du Lac Band paid rent to the City of Duluth on a building that the Band already owned. The 1994 casino agreement was a shell game, and all three shells were empty.

But it certainly didn’t seem that way back in 1983, when unemployment in Duluth was close to 20 percent; on the Fond du Lac Reservation, it was 40 percent. The climate was primed—if not desperate—for something to alleviate the economic pain.

The Band had been managing Big Bucks Bingo on the reservation since 1981. Then–Band Chair William Houle and then–Mayor John Fedo reasoned that a high–stakes bingo parlor in downtown Duluth—the only one in the nation outside Las Vegas—would attract more patrons, benefitting both parties.

For the plan to work, the City needed the Band, but the Band didn’t need the City.

In the 1980s, high–stakes, non–charitable gambling (prizes higher than $500 per person or $2,500 per night) was illegal in Minnesota, with only one exception—when operated on tribal land. In order to open a high–stakes casino, the land beneath the former Sears building would have to go into tribal trust.

Tribal trust is defined by the federal Department of the Interior as "a process whereby the secretary of the Department of the Interior acquires title to property and holds it for the benefit of a Native American tribe or individual tribal members."

Tribal trust was developed to help Native people reclaim land lost to broken treaties. Off–reservation trust acquisitions were rare and had never before been used for an off–reservation casino, making the deal a hard sell to the feds. "Their job was to say no. Ours was to get them to say yes," a City representative told the Minneapolis Star Tribune in 1986.

It remains a point of contention whether the City’s assistance was needed for the land to go into trust. According to the Department of the Interior, the decision resides solely with the Department, based on whether the acquisition will benefit the tribe. There is a public comment period, but local government permission—even their input—is not required.

What appears to have held up the trust acquisition for Fond–du–Luth was a clause in the original version of the agreement that, if the new casino folded, the land would become City property. Several versions of this clause were floated, including one in which the City would lease the land from the Band for $1.

But the feds weren’t buying any of it. When land is placed into tribal trust, only an act of Congress can take it back out. Once that clause was abandoned, the Department took the land into tribal trust, at which point it came under Fond du Lac’s jurisdiction.

Hopes were high in 1986 for the "ritzy, glitzy piece of Vegas in downtown Duluth," as the Star Tribune was calling it at the time. Actor Telly Savalas made an appearance at the grand opening.

The 1986 agreement established a seven–member commission to manage the casino and divide up the profits—25.5 percent to the Band, 24.5 percent to the City, and 50 percent to the commission for economic development in both the city and the reservation.

But for the first several years, there was precious little to divide. Despite dizzying first–year projections ranging from $5.5 million to $15 million, the casino saw a net loss of more than $200,000 in its first year. For the next three years, Fond–du–Luth ran in the red.

Tempers flared. Commissioners resigned. The commission fired its attorney. They couldn’t retain a casino manager. Meetings ran long and contentious, fueled by a policy requiring a six–out–of–seven vote to get anything done.

Advertising money hadn’t been budgeted because, in Fedo’s words, the venture was "so unique it will promote itself…Come February, we’ll be hard–pressed to find a seat."

February came and went. By 1989, the Band was on the hook for $7 million and facing bankruptcy if the casino went out of business.

The City agreed to loan the Band $175,000 to avert the immediate crisis—on one condition: The commission’s president, a City appointee who was Fedo’s friend and campaign manager, would be given unilateral authority to run the casino.

It was an offer the Band could refuse. "The ultimate goal of that crew is to take over the business," then–Band Chair Robert Peacock told the Duluth News–Tribune. "If they can’t have it, they’ll destroy it. And if they can have it, they’ll take it, and make the Indians pay for it."

But the whole commission itself was about to be upended by the Indian Gaming Regulatory Act (IGRA) and its requirement that tribes retain exclusive ownership of their gambling operations.

IGRA had been in the works for almost as long as Fond–du–Luth. In 1987, the US Supreme Court heard California v. Cabazon Band of Mission Indians.

The Cabazon Band operated a bingo parlor on its reservation in Southern California. The state sought to shut it down because high–stakes gambling was illegal in California. However, California ran a lottery at the time. Therefore, the Court ruled, gambling was a civil matter, not a criminal one, and as such it fell outside the state’s jurisdiction over tribal affairs.

Congress responded by passing IGRA, establishing federal jurisdiction over Indian gaming and a regulatory agency to carry out this function—the National Indian Gaming Commission (NIGC).

Because states don’t have taxing authority on reservations, Indian gaming was ripe for exploitation. Shady management companies, or even the Mafia, could negotiate a casino on Indian land, then walk away with a hefty chunk of tax–free money—hence, the "sole proprietary interest" clause, which now put Fond–du–Luth’s commission in a precarious spot.

The commission’s precise status was unclear. Fond–du–Luth is, and always has been, a government enterprise owned by the Fond du Lac Band. So did that make the commission a government entity, the managers of a business, or a law unto themselves? The Duluth News–Tribune often referred to them as "America’s newest type of government."

When IGRA went into effect, the commission wanted to avoid it by having themselves declared an Indian tribe, never mind that half the commissioners were not Native American.

The required six–out–of–seven vote prevented them from even trying. "I’d feel like the laughingstock of Ojibway Country," said one Band–appointed commissioner. "I can’t support this. I almost fell out of my chair when I saw this."

The commission sued the City and the Band; the City sued the Band and the commission; the Band sued the commission and the City. Then, as today, the City accused the Band of trying to wriggle out of its promises and having some kind of special influence with the feds—not something Indians have historically ever had with the United States government.

"[The Band] sought and obtained almost immediate approval by the Secretary of Interior," the City’s attorney told the court in 1989. "The ordinance is clearly a unilateral effort by the Band to cancel its obligations under the existing agreements."

Then, as now, the Band attempted to settle the lawsuits and the City refused. Unlike today’s litigation, however, the City actually agreed to a stipulation and then reneged on it.

Both parties agreed to have the NIGC review the situation, but the City backed out, claiming one of the commission members said, "Fond du Lac would take over the casino"—a statement the commissioner denied making and that he had little reason to say, given that Fond du Lac owned the casino. IGRA merely affirmed that ownership by requiring tribes to actually get the money they make in their gaming ventures.

On September 24, 1993, the NIGC notified the Band that the 1986 agreement was now illegal. IGRA required a tribe to receive at least 70 percent of its gaming profits; the 1986 agreement only gave them 25.5 percent. Fifty percent went to the commission, which had ultimate control over Fond–du–Luth.

Then–Mayor Gary Doty didn’t need the City Council’s permission to enter negotiations with the Band, but the final deal would require the Council’s approval—and the Council was decidedly not happy.

"The NIGC’s decision is totally wrong," said then–Council President Neil Atkins at their next meeting. "I don’t know which documents they’re reading, but they were reading the wrong documents."

"A deal is a deal," said then–Councilor M. George Downs. "If [the Band] is not going to hold their end of the deal up, do we get the property back?"

This reflected a fundamental misunderstanding that persists today—the City never owned the property; the Band purchased it directly from Sears.

The court turned the case over to the NIGC to negotiate a settlement, which took a while. The Band and the City quit speaking to each other. After the commission paid the City its first 24.5 percent cut ($350,000) in the first quarter of 1992, the Band pulled three of its appointees off the commission.

In the second quarter, the commission did not pay the City or the Band, precluded by a 4–3 vote, with Band–appointed commissioners opposing the payout on the basis that the commission itself was illegal. The commission continued to withhold the money from both parties until the case could be resolved.

A deal was finalized on June 20, 1994. The first term of the settlement would become the basis for all the conflict and litigation between them today:

…the Band shall sublease the premises from the Commission…As rental for the Sublease, the Band agrees to pay to the Commission a nominal rental payment of $1.00 per month, plus a percentage of gross revenues from video games of chance…such percentage payment being assigned to the City and will be paid directly to the City…

From then until 2009, the Band paid 19 percent of gross slot machine revenues to the City as rent—on a building the Band itself already owned.

To be fair, back in the early ’90s, it was still 19 percent of not–much. The casino finally turned a profit in 1990, after it was licensed to operate "video games of chance" (informally called "slot machines," but they’re not, technically, slot machines, which would require a higher classification from the NIGC). But the casino didn’t see enough revenue to pay either the City or the Band until 1992.

Both Peacock and Doty had proven themselves tough negotiators, but neither side had any way of knowing that, by 1996, the casino would be pulling in $21.2 million and giving $3.275 million of that to the City. They couldn’t have imagined that, by 2000, the City’s cut would exceed $6 million.

In addition, the Band was staring down the barrel of multiple lawsuits and, by its own decision, wouldn’t receive any money until negotiations were signed. If the two sides failed to reach an agreement, the NIGC could shut down the casino altogether. The Band was under tremendous pressure to settle.

The City estimated that its 19 percent cut would equal 30 percent of the casino’s net profits and insisted on a clause in the ’94 agreement that if gross slot machine revenue ever amounted to less than 80 percent of total revenue, the City could call for renegotiations. The new agreement also allowed the City to review the casino’s books at any time.

Once the ink on the deal was dry, Duluth began developing a "wish list" for what to do with its new "windfall," including zoo improvements, new sports fields, and a maintenance facility for Northwest Airlines. The City also established a Community Trust Fund that became its street repair piggy bank.

That same year, the Band voted to give every man, woman, and child in the Band a check for $1,500.

Indian gaming is a unique business in that it functions in lieu of a tax base. Casinos pay for tribal housing, infrastructure, elder care, and schools.

While federally recognized tribes have taxation authority, there’s often been nothing to tax. Few, if any, have a fully functioning economy and the federal government owns their land.

Gaming also has a long cultural history among Native people. It was a logical business to supplant a tax base and to help tribes—which are declared sovereign governments by the United States Constitution—to attain self–sufficiency.

That’s a far cry from the ill–gotten "windfall" Duluth received each year for 15 years. During the 1992 negotiations, one commissioner said, "You’re giving Fond–du–Luth to Duluth a second time."

What the City has never understood is that Fond–du–Luth Casino was never Duluth’s to begin with.

> The article above was written by Jennifer Martin-Romme, and is reprinted from the May 27, 2014 edition of the Zenith City News.