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ALTHEIMER & GRAY v. SIOUX MFG. CORP.

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION


November 14, 1991;

ALTHEIMER & GRAY, Plaintiff,
v.
SIOUX MANUFACTURING CORPORATION, Defendant. HEALTH CARE SERVICES, LTD. and JOHN VELERIS, Plaintiffs, v. SIOUX MANUFACTURING CORPORATION, Defendant

Suzanne B. Conlon, United States District Judge.

The opinion of the court was delivered by: CONLON

MEMORANDUM OPINION AND ORDER

In this consolidated diversity action for breach of contract, plaintiff Health Care Services, Ltd. ("Health Care"), its president, John Veleris ("Veleris"), and the law firm of Altheimer & Gray (collectively "plaintiffs") sue defendant Sioux Manufacturing Corporation ("Sioux Manufacturing"). *fn1" Health Care and Veleris allege that a March 7, 1990 letter of intent between Sioux Manufacturing and Health Care constituted a binding contract under which Health Care would develop and manage a manufacturing facility within the borders of the Devils Lake Sioux Tribal Reservation in Fort Totten, North Dakota. Altheimer & Gray seeks legal fees it is allegedly due as a purported third party beneficiary under the same March 7 letter of intent. Alternatively, Sioux Manufacturing moves for dismissal or summary judgment. Sioux Manufacturing contends that the tribal court exhaustion rule counsels that the court decline to exercise its diversity jurisdiction until plaintiffs exhaust available tribal court remedies. Alternatively, Sioux Manufacturing asserts that the letter of intent is void, as a matter of law, because it does not bear the approval of the Secretary of the Interior, as required under 25 U.S.C. § 81.

 BACKGROUND

 Health Care is an Illinois corporation with its principal place of business in Cook County, Illinois. Health Care complaint para. 1; Sioux Manufacturing 12(m) Statement of Material Facts ("Sioux Manufacturing facts") para. 6. Sioux Manufacturing is a tribally chartered corporation and governmental subdivision of the Devils Lake Sioux Tribe ("the Tribe"), organized under the Tribe's Law and Order Code, § 10, ch. 4. Id. para. 2; Sioux Manufacturing facts para. 1. Sioux Manufacturing's offices and sole facility is located within the exterior boundaries of the Devils Lake Sioux Tribal Reservation in Fort Totten, North Dakota. Id.; Sioux Manufacturing facts para. 5. Sioux Manufacturing is the largest employer and source of government revenue on the Devils Lake Sioux Tribal Reservation. Sioux Manufacturing facts paras. 12-14; Altheimer & Gray 12(n) Statement of Material Facts ("Altheimer & Gray facts") paras. 12-14.

 On March 7, 1990, Veleris, acting in his capacity as president of Health Care, entered into an agreement designated as a "letter of intent" with Sioux Manufacturing. Id. para. 3; Exh. B. The agreement contemplated a relationship in which Health Care would sell to Sioux Manufacturing the necessary industrial equipment for and provide its expertise in the production and marketing of various latex medical products in facilities to be located on the tribal reservation. Letter of intent at 1. The letter of intent stated that Health Care would act as exclusive management consultant to Sioux Manufacturing regarding the operation of the business, in return for which Health Care would receive a consulting fee and a significant share of net profits for as long as six and one-half years. Id. §§ 3-8. The agreement further stated an understanding that Health Care and Sioux Manufacturing subsequently would enter into a series of contractual agreements setting out in greater detail the nature of their respective obligations. Id. at 1. Additionally, the terms of the agreement expressly stated that neither party was obligated to enter the future agreements unless certain express conditions precedent had been met. Id. § 1.

 The letter of intent contained an expenses clause obliging "the Sioux" to Pay "all reasonable legal and accounting fees and expenses" incurred by Veleris and Health Care in the negotiation of the letter of intent and any of the contemplated subsequent contracts in the event that the parties did not consummate the contracts by the designated closing date. Id. § 13. Altheimer & Gray, a Chicago-based law firm, provided Health Care with legal services in connection with the negotiation of the letter of intent.

 The agreement contemplated the closing of all subsequent contracts within sixty days of the acceptance of the letter of intent. Id. However, Sioux Manufacturing and Health Care executed two subsequent agreements that extended the closing deadline until November 1, 1990. Health Care complaint para. 6; Sioux Manufacturing facts para. 23. Following the execution of the letter of intent, but prior to the consummation of any of the contracts contemplated under the letter of intent, Health Care and Veleris began operations on the Devils Lake Sioux Reservation. Sioux Manufacturing facts paras. 21, 22; Altheimer & Gray facts paras. 21, 22.

 Health Care contends that Sioux Manufacturing failed to act in good faith to satisfy contractual conditions precedent, and in particular, failed to arrange project financing. Health Care complaint para. 7. Sioux Manufacturing's failure to meet its obligations precluded a November 1, 1990 closing. Id. para. 8. After November 1, 1990, Sioux Manufacturing refused to undertake further efforts satisfy the terms of the letter of intent. Id. para. 9. Health Care contends that Sioux Manufacturing's conduct constitutes a unilateral breach of contract and a breach of the express and implied covenant of good faith governing the agreement. Id. para. 10. Health Care seeks over $ 7,000,000 in damages for expenses and loss of earnings. Altheimer & Gray, filing a claim as a purported third party beneficiary to the letter of intent, seeks payment for legal services it provided in connection with the Health Care-Sioux Manufacturing venture.

 DISCUSSION

 Sioux Manufacturing characterizes its motions as alternative motions for dismissal or summary judgment. Both Sioux Manufacturing and plaintiffs extensively rely upon affidavits and exhibits submitted in connection with the present motions. Consequently, Sioux Manufacturing's motions are treated as summary judgment motions. See Fed. R. Civ. P. 12(c).

 Summary judgment must be granted when the record shows that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Marcial v. Coronet Ins. Co., 880 F.2d 954, 959 (7th Cir. 1989). A party opposing a properly supported motion for summary judgment may not rest upon mere allegations or denials in the pleadings, but must set forth specific facts showing that there is a genuine issue for trial. Fed.R.Civ.P. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 324, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986); Schroeder v. Lufthansa German Airlines, 875 F.2d 613, 620 (7th Cir. 1989). The nonmoving party must present affirmative evidence in order to defeat a properly supported motion for summary judgment. Renovitch v. Kaufman, 905 F.2d 1040, 1044 (7th Cir. 1990). All reasonable inferences must be viewed in favor of the nonmoving party. Holland v. Jefferson Nat'l Life Ins. Co., 883 F.2d 1307, 1312 (7th Cir. 1989).

 I. Tribal Exhaustion

 Sioux Manufacturing contends that the tribal exhaustion rule articulated in Iowa Mutual Ins. Co. v. LaPlante, 480 U.S. 9, 94 L. Ed. 2d 10 , 107 S. Ct. 971 (1987), and National Farmers Union Ins. Cos. v. Crow Tribe, 471 U.S 845, 85 L. Ed. 2d 818 , 105 S. Ct. 2447 (1985), warrants dismissal or a stay of federal court proceedings until Health Care and Altheimer & Gray exhaust their tribal remedies. Under the rule, exhaustion of tribal remedies is regarded as a prerequisite to a federal court's exercise of diversity jurisdiction in certain cases related to reservation affairs. Id. In both Iowa Mutual and National Farmers Union, a non-Indian challenged a tribal court's exercise or claim of jurisdiction in a prior-filed tribal court action. The Supreme Court, noting the federal government's longstanding policy of encouraging tribal self-government and self-determination, held that a federal court, as a matter of comity, should defer the exercise of its jurisdiction in a case "relating to reservation affairs" to give a tribal court a full opportunity to determine and exercise its own jurisdiction. Iowa Mutual, 480 U.S. at 15.

 In the present action, there is no competing tribal court case to bring this case directly within the facts of National Farmers Union and Iowa Mutual. The scope of the tribal exhaustion rule is a question of first impression in this circuit. The courts of appeal in other circuits, however, have applied the tribal exhaustion rule to cases in which there existed no first-filed tribal court action competing with the federal action. See, e.g., Brown v. Washoe Housing Authority, 835 F.2d 1327 (10th Cir. 1988); Weeks Construction, Inc. v. Oglala Sioux Housing Authority, 797 F.2d 668 (8th Cir. 1986). But even in extending the application of the rule, circuit courts appear internally divided over the full extent of its scope.

 Within the Ninth Circuit, for example, some decisions suggest that the rule applies mandatorily to all cases relating to tribal or reservation affairs, see, e.g., Burlington Northern R. Co. v. Crow Tribal Council, 940 F.2d 1239 (9th Cir. 1991); see also Weeks Constr., Inc., 797 F.2d 668 (8th Cir. 1986). Yet, in cases within the same circuit, the court expressly held that the rule does not apply mandatorily, but instead "countenance[s] an examination of the circumstances of the action before a decision to defer is made." Stock West Corp. v. Taylor, 942 F.2d 655, 660-61 (9th Cir. 1991); see also United States ex rel. Kishell v. Turtle Mountain Housing Authority, 816 F.2d 1273 (8th Cir. 1987); Myrick v. Devils Lake Sioux Manufacturing Corporation, 718 F. Supp. 753 (D.N.D. 1989). The limited circumstances where the Supreme Court has applied the tribal exhaustion rule suggest the latter measured and contextual application of the rule.

 The present case offers truly unique circumstances that make it a poor candidate for a precedent-setting application of the tribal exhaustion rule. However, in deference to the considerations of comity animating the rule, the following observations are appropriate.

 The principal dispute between the parties concerns the validity of the letter of intent. Sioux Manufacturing asserts that the letter of intent is invalid because it does not bear the approval of the Secretary of Interior, required under 25 U.S.C. § 81. Health Care contends that the letter of intent is not subject to § 81 protection. The application of the tribal exhaustion rule with respect to this potentially determinative issue would place before the tribal court a dispute essentially dependent upon the construction and application of federal law.

 The second observation assumes that the letter of intent is valid. Section 9 of the letter of intent reads:

 [Sioux Manufacturing] and the Fort Totten Tribe of the Sioux Nation (the "Tribe") will waive all sovereign immunity in regards to all contractual disputes. This agreement and all agreements contemplated hereunder will be executed and interpreted in accordance with the laws of the State of Illinois. [Sioux Manufacturing], [Health Care] and the Tribe agree to submit to the venue and jurisdiction of the federal and state courts located in the State of Illinois and agree to be bound by final and unappealable judgments rendered by such courts. [Sioux Manufacturing] and the Tribe appoint [a named designee] to accept service of process in any such dispute. [Sioux Manufacturing], [Health Care] and the Tribe hereby waive their respective rights to demand a jury trial.

 This language manifests an unambiguous intent that all disputes be resolved under Illinois law in the federal and state courts located in Illinois. Sioux Manufacturing takes issue with any construction of the letter of intent that regards the forum selection clause as constituting a waiver of exhaustion. Sioux Manufacturing's position is plainly contrary to the clear import of the forum selection language. Its position arguably raises the specter of a bad faith assertion of tribal jurisdiction, which the Supreme Court has recognized as an exception to the tribal exhaustion rule. National Farmers Union, 471 U.S. at 856 n.21. However, the court need not address the issue of Sioux Manufacturing's good faith in asserting tribal jurisdiction. It is irrefutable that Illinois law governs the execution and interpretation of the letter of intent, regardless of venue. In this respect, application of the tribal exhaustion rule would place before the tribal court a dispute that must be resolved by application of the law of a distant state.

 Because these consolidated cases raise issues that principally depend upon application of federal law on the § 81 issue and Illinois law on the merits of the contractual dispute, many reported exhaustion rule cases in which the disputes principally involved issues of tribal law are inapposite. In Burlington Northern, for example, the validity of a tribal ordinance regulating common carriers operating on reservation land was challenged. The ordinance had yet to be construed because Burlington Northern had not challenged the new ordinance in either the tribal administrative or judicial court system. The Ninth Circuit held that deferring the exercise of jurisdiction would allow the tribal court to interpret its own ordinance and thus "'provide other courts with the benefit of their expertise in such matters.'" 940 F.2d at 1246, quoting National Farmers Union, 471 U.S. at 857; see also Weeks Constr., Inc., 787 F.2d at 673 (exhaustion required where facts show that contract dispute "raises questions of tribal law interpretation within the province of the tribal court"). Where "there is no pending tribal court proceeding, the principal issues presented are of state or federal law, and the tribal court possesses no special expertise in the subject matter," comity does not suffice as a basis for deferral of the exercise of federal jurisdiction. Stock West, 942 F.2d at 663; see also Myrick v. Devils Lake Sioux Manufacturing Corp., 718 F. Supp. 753 (D.N.D. 1989) (tribal exhaustion not required in age and race discrimination suit brought by Indian living on reservation against corporation of which tribe was majority owner because federal law issues predominated). Accordingly, Sioux Manufacturing's motion for a stay of proceedings based on tribal exhaustion rule is denied.

 II. Failure to Obtain Approval of Secretary of Interior Under 25 U.S.C. § 81

 Sioux Manufacturing asserts that the letter of intent creates no enforceable contractual obligations because it does not bear the approval of the Secretary of the Interior required under 25 U.S.C. § 81. Section 81 provides in relevant part:

  No agreement shall be made by any person with any tribe of Indians, or individual Indians not citizens of the United States, for the payment or delivery of any money or other thing of value, in present or in prospective, or for the granting or procuring any privilege to him, or any other person in consideration of services for said Indians relative to their lands, or to any claims growing out of, or in reference to, annuities, installments, or other moneys, claims, demands, or thing, under laws or officers thereof, or in any way connected with or due from the United States, unless such contract or agreement be executed and approved as follows. . . . It shall bear the approval of the Secretary of the Interior and the Commissioner of Indian Affairs indorsed upon it.

 The Seventh Circuit, in Wisconsin Winnebago Business Committee v. Koberstein, 762 F.2d 613 (7th Cir. 1985), after thorough examination of the history of § 81, concluded that the broad statutory language extending protection to transactions "relative to [Indian] lands" must be liberally interpreted to effectuate its purpose of protecting Indian interests. Id. at 617-18. The Court thus regarded § 81 as covering nearly all transactions relating to Indian land. Id.

 Health Care and Veleris effectively contend that the letter of intent bound Sioux Manufacturing to enter into the contemplated venture of developing and operating a manufacturing facility to produce latex products. Altheimer & Gray characterizes the letter of intent as merely an agreement for the allocation of negotiation costs relating to the contemplated business venture between Health Care and Sioux Manufacturing. The differing constructions of the letter of intent are of no significance to the question of the applicability of § 81 in the present case.

 The letter of intent is expressly directed toward the development and management of a manufacturing facility to be located "on the Sioux Reservation." Exh. B. at 1. Sioux Manufacturing contends that this language clearly demonstrates that the letter of intent relates to Indian lands and thus is governed by § 81. Plaintiffs do not dispute the import of this language as indicating that the contemplated facility would be located within the exterior boundaries of the Fort Totten Sioux tribal reservation. Instead, plaintiffs respond that the contemplated operation is not relative to Indian land because the facility was to be located on land that has been assigned by the Devils Lake Sioux Tribal Council to Sioux Manufacturing. Therefore, plaintiffs argue, the land should be regarded as private corporate land beyond the scope of § 81 protection rather than tribal land. The application of § 81 thus depends on the proper characterization of land that is indisputably located on the Sioux Reservation.

 Significantly, plaintiffs fail to justify their position in light of the fact that Sioux Manufacturing does not own the land in question, but merely leases trust land from the tribe. McKay Aff. § 5. Regardless how one characterizes its present use, the land remains tribal land. Moreover, plaintiffs' argument also fails to address the significance of Sioux Manufacturing's status as an arm of the Sioux tribal government.

 Under its articles of incorporation, Sioux Manufacturing is chartered expressly as "a tribal corporation and government subdivision of the Devils Lake Sioux Tribe pursuant to Title 10, Chapter Four of the Devils Lake Sioux Law and Order Code." Sioux Manufacturing Corp. Articles of Confederation §§ 1.2, 4.1 ("Articles") (appended to Altheimer & Gray memorandum in opposition to Sioux Manufacturing's motion for summary judgment) (emphasis added). As a governmental subdivision, Sioux Manufacturing is "clothed by federal and tribal law with all privileges and immunities of the Tribe." Id. § 4.21. Additionally, despite its corporate designation, Sioux Manufacturing is "owned in its entirety by the Devils Lake Sioux Tribe," Id. § 1.5; McKay Aff. § 3; see Exh. B. at p.1.

 In determining the significance of Sioux Manufacturing's status as an arm of the tribal government, Pueblo of Santa Ana v. Hodel, 663 F. Supp. 1300 (D.D.C. 1987), is instructive. In Pueblo of Santa Ana, the Pueblo tribal governing body created a non-profit enterprise whose stated purpose was to provide for the health, education, and welfare of the Pueblo through the creation of business opportunities and utilization of tribal resources. To this end, the tribal enterprise was empowered to encumber its interests in specifically assigned or leased tribal lands, and to make contracts and sue and be sued in its organizational name. Any agreements made by the tribal enterprise were binding on the corporation alone, with the Pueblo tribe and its officers protected from any resulting liability.

 The tribal enterprise executed a long-term contract with a non-Indian consultant for the development, management and operation of a greyhound racing track on tribal property leased to the enterprise. The Secretary of the Interior was not favorably disposed to the project. The tribal enterprise, in conjunction with the tribe, filed an action in federal court contesting whether § 81 governed the contract between the tribal enterprise and the non-Indian management consultant. The tribal enterprise contended that it was not a tribal entity for purposes of the contract with the non-Indian consultant. It argued that its contract with the non-Indian consultant was not subject to § 81 review. The district court rejected this argument, concluding that "Congress could not have mandated that the Secretary review all leases and contracts between Indian and non-Indian only to permit tribes to avoid review when they deem provident." 663 F. Supp. at 1306. Thus, the district court held that § 81 review and approval applied.

 Sioux Manufacturing bears many of the same attributes of the tribal enterprise in Pueblo of Santa Ana. The stated purposes of Sioux Manufacturing include providing general and specific "revenue to the Tribe to fund programs regarding public health, safety, welfare and for other tribal purposes," Articles §§ 3.2, 3.11-.20; McKay Aff. § 3. The letter of intent between Health Care and Sioux Manufacturing itself reflects another of Sioux Manufacturing's enumerated governmental purposes by expressly stating that Health Care will aid Sioux Manufacturing in implementing hiring guidelines that accord with Sioux Manufacturing's "desire that the Business be operated in a manner which reduces unemployment among the people of the Fort Totten Tribe of the Sioux Nation." Letter of Intent § 3; see Articles § 3.1.

 That the purposes of Sioux Manufacturing are closely tied to the advancement of core tribal governmental concerns is not surprising in light of the fact that Sioux Manufacturing is the "chief source of tribal income and employment." Devils Lake Sioux Tribe Resolution No. A05-89-191; McKay Aff.'s 7. The interrelationship of Sioux Manufacturing and the Tribe is further reflected in the organizational structure of Sioux Manufacturing. As in Pueblo of Santa Ana, the Tribal Council, the governing body of the Sioux Tribe, controls all appointments to the Sioux Manufacturing board of directors. McKay Aff. § 4. Moreover, half of the Sioux Manufacturing board must be comprised of the six sitting members of the Sioux Tribal Council, with the Tribal Council Chairman sitting as the chairman of the Sioux Manufacturing board. Id.

 Finally, the letter of intent strongly suggests that plaintiffs themselves viewed the Tribe and Sioux Manufacturing as closely interrelated. According to plaintiffs, the parties to the letter of intent were Health Care, its officers, and Sioux Manufacturing. Yet the language of the letter of intent clearly suggests that plaintiffs regarded the Tribe as an active participant in the contemplated transactions. Various provisions of the letter of intent, including the allocation of expenses clause upon which Altheimer & Gray bases its claim, are directed to both the Tribe and Sioux Manufacturing, referring to them collectively as "the Sioux." Letter of intent § 13.

  The letter of intent does refer to the Tribe individually, as distinct from Sioux Manufacturing. For instance, the provision containing the waiver of sovereign immunity, choice of law and forum selection clauses is directed individually to the Tribe, as well as to Sioux Manufacturing. Letter of intent § 9. Yet the letter of intent contains only signature blocks for representatives of Health Care and Sioux Manufacturing. Id. at p. 9. Thus, plaintiffs appear to have regarded the signature of Sioux Manufacturing as generally binding the Tribe itself to the terms of the letter of intent.

 Sioux Manufacturing's enumerated purposes, organizational structure, and impact on the tribal community are fully consistent with its express designation as an arm of the tribal government. The plaintiffs, as drafters of the letter of intent, also appear to have regarded Sioux Manufacturing and the Tribe as essentially the same entity. Under these circumstances, the tribal law designation of Sioux Manufacturing as a corporation for the apparent purpose of protecting the Tribe's larger trust holdings should not be viewed as removing Sioux Manufacturing and the leased tribal land on which its facilities are located from the broad scope of § 81 review. The letter of intent relates to a business venture between an Indian and a non-Indian organization to be located on tribal land and thus required the approval of the Secretary of Interior. Absent that approval, the letter of intent is null and void under § 81. Sioux Manufacturing is entitled to judgment as a matter of law because plaintiffs' breach of contract claims are based upon an invalid contract. *fn3"

 CONCLUSION

 Sioux Manufacturing's motion to stay proceedings under the tribal exhaustion rule is denied. Sioux Manufacturing's motion for summary judgment on the grounds that the letter of intent is null and void under 25 U.S.C. § 81 is granted. Judgment is entered for defendant Sioux Manufacturing Corporation and against plaintiff Altheimer & Gray (Case No. 91 C 3496), and for defendant Sioux Manufacturing Corporation and against plaintiffs Health Care Services, Ltd. and John Veleris (Case No. 91 C 3653).

 ENTER:

 Suzanne B. Conlon

 United States District Judge

 November 14, 1991


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