Business on Reservation Has Its Own Legal Terrain

For a handful of reasons, the notion of an outsider launching a business on an Indian reservation sounds good: cheap land, a tribal government that can speed projects along, minimal environmental restrictions, various tax incentives and federally guaranteed bank loans.

So it is with great optimism that the Cabazon Band of Mission Indians is developing its Resource Recovery Park, situated on 640 acres of desert north of the Salton Sea, to host various types of recycling businesses.

But two of the three business deals struck between the tribe and non-Indian investors have dissolved in financial disputes. And the businessmen say they are frustrated that resolution may only come in a legal venue where they feel most vulnerable: tribal court, where the judge is also the chairman of the very tribe with whom they are feuding.

Their experiences, they say, illustrate the risks of partnering with tribal governments, where litigation ultimately may be resolved by the tribe itself.

The tribe’s director of legal affairs, Patrick Schoonover, says that when businesses partner with Indian tribes, they are signing contracts with sovereign government entities with unique legal systems that differ from conventional civil courts where business disputes are usually resolved.

“And that would be true if you do business with another country--Mexico or Canada, for instance,” Schoonover said. “If you are going to expand your business to arenas that involve other jurisdictions, then those jurisdictional issues are matters people should contemplate.”

The investors who are taking action against the Cabazon Indians say that such an analogy is disingenuous. There is a presumption, they say, that when lawsuits are filed in foreign countries, at least the judge is not a direct investor in the entity being sued. Not so in Indian country, they maintain.

The Cabazon cases involve start-up companies and disputes over issues including whether the non-Indian businessmen invested as much money and expertise in the ventures as they contractually promised, and whether the investors should be able to reclaim their investments.

One group of investors planned to manufacture fine wire for computer applications. In court papers, the group says it invested $150,000 to fund the venture and installed manufacturing equipment valued at about $400,000. The tribe was to invest 50% of the start-up costs, and be awarded 51% control of the partnership, called Specialty Alloys.

For most of 1998, the company was gearing up to make its product. But within months, the tribe filed a notice of default against the investors, claiming they should have invested an additional $150,000 in the partnership. In January 1999, the tribe closed the facility at the Resources Recovery Park.

Christopher Real, the Torrance attorney representing the two businessmen, acknowledges that his clients were obligated to invest more money, a condition he says they did not fully understand when the initially signed their contract with the advice of a different lawyer.

But still, he said, the pair should be able to recover their investment.

As agreed in a business contract, the dispute was first heard by a neutral arbitrator. She ruled that the investors were due the return of their equipment plus $300,000 (their $150,000 initial investment plus damages for the depreciation of the manufacturing devices).

Real took that ruling to U.S. District Court for approval. But there, the tribe filed a motion to reject the arbitration findings. The federal judge refused the tribe’s request--but did agree with its attorneys that before any arbitration could be enforced, the tribe’s own court should decide whether it also has jurisdiction in the matter.

Months after Real said he requested it, a June 29 date was set for a hearing in tribal court. At that time, tribal chairman John James will determine whether tribal court has jurisdiction to decide whether the arbitration ruling--against his own tribe--should be upheld.

If so, James would then decide if he should sit in judgment or whether a judge from another jurisdiction should be brought in, tribal officials said. Once that decision is made, the tribal court would rule on whether to honor the arbitration decision or rule in favor of the tribe.

Real says he is not confident the tribal court will be unbiased in its handling of the litigation.

“The deck is clearly stacked against us,” he said. “I have no opportunity to have anyone hear this matter who is independent of the tribe.”

Both Real and Schoonover say it is legally ambiguous whether Real’s clients would ultimately be able to appeal a tribal court ruling to a federal court. Carole Goldberg, a law professor at UCLA specializing in Indian law, agrees, saying that federal challenges to a tribal court’s jurisdiction are difficult to make.

The other dispute with the Cabazon Indians involves the tribe’s efforts to start a business to shred tire rubber into tiny granules that are used in asphalt and similar products.

To that end, the tribe in 1998 hired Hugh Marcy, who was president of an Ohio company called EcoPave, which had developed such a “crumb rubber” process. Marcy said he agreed to be paid monthly management consulting fees as well as receive half of the company’s net profits in exchange for investing $300,000. He moved to the Coachella Valley and said he invested all of his savings into the business.

The tribe then received a $5-million loan from a Palm Springs bank, guaranteed by the U.S. Bureau of Indian Affairs.

Ten months into the five-year contract, Marcy was fired. The plant is now operated by a person Marcy had hired, and continues to market a crumb-rubber product under the EcoPave name.

Schoonover, the tribe’s attorney, said Marcy was let go because of “a dispute relative to his performance.”

Marcy disagrees that he failed to do his job and claims that, if nothing else, he should be returned his $300,000 equity investment in the tribal company, called First Nation Recovery Inc.

Marcy said he will seek arbitration--as did the non-Indian investors in Specialty Alloys--and pursue the matter in federal court. But, like attorney Real, Marcy said he is not optimistic about the outcome.

“They’ve destroyed me and I have no doubt we’ll prevail in arbitration,” he said. “I’ll have to brace myself for having to deal in tribal court. But I’ll be damned if I’m going to let them get away with this.”

Schoonover said that, because of the pending litigation, he would not discuss the merits of either dispute.

Businessmen Didn’t Know the Rules

Neither Marcy nor Real’s clients realized, when they signed their separate contracts, that any disputes would end up in tribal court, both men said. Real now concedes that his client’s original lawyers should have realized it. Marcy said he was not allowed to examine the tribe’s legal codes, which claim final authority over reservation-based litigation--even if both sides also agree to have disputes heard by neutral arbitrators.

Said Marcy: “The lesson I’ve learned is that I’ll never do business on an Indian reservation again.”

Schoonover, the tribe’s attorney, said the issue of using tribal court to resolve business disputes goes with the territory when doing business on reservations.

“Regardless of whether a particular party is unhappy with the . . . end result, that’s the system we have,” he said.

Business disputes are resolved in tribal courts “all the time, outside of California,” said Goldberg of UCLA.

In California, she added, most tribes have not established their own courts, so that legal reality is not commonly understood here.

The Bureau of Indian Affairs offers little advice to businessmen who pursue partnerships with tribes, and generally doesn’t review business contracts, said Ray Brown, in the bureau’s Office of Economic Development in Washington.

“Each side has its attorneys, and that’s what they’re paid for, to look out for those kinds of issues” involving business disputes, he said. “Our best advice is for [non-Indian businessmen] to get attorneys who are familiar with these kinds of deals.”

Despite criticisms in the Cabazon cases, many tribes and non-Indian businessmen have pursued successful business arrangements around the country. Most common are hotel, retail and restaurant operations on land leased from tribes.

The third business at the Cabazon’s Resource Recovery Park is Colmac Energy, a Canadian-based company that in 1991 began operating a $175-million wood-waste-burning power generation plant on the reservation.

The tribe’s primary involvement in that venture is in leasing land to the company and holding a “nominal equity position” with the operation, said Mark Nichols, the tribe’s chief executive officer.

Colmac selected the reservation site because the land price was attractive and “the Cabazons were receptive in co-developing the project” by bringing in utilities and fast-tracking environmental approvals, said Graeme Donaldson, Colmac’s plant manager. “The problem with these kinds of plants is, everybody wants them--but not in their backyard,” he said. “We were able to site it here with little difficulty.”

Non-Indian investors should have no fear doing business with Indians, Nichols said. “Good, honest people who know what they’re doing will have an excellent success ratio in Indian country,” he said.