Lower Brule default leads to $20 million lawsuit

SIOUX FALLS, S.D. (AP) – An insurance company that purchased a $20 million federal loan guarantee from a Lower Brule Sioux tribal entity has filed suit against the federal government after the tribe defaulted on the loan.

Great American Life Insurance Co. claims in its filing that the federal government fleeced the company by failing to make good on the loan guaranty. The company argues the federal government was obligated to pay the loan after LBC Western Holding defaulted.

LBC Western Holding was a tribal shell company used to purchase Westrock Advisors, a New York-based brokerage firm. The tribe managed to purchase the heavily-indebted Westrock with a Bureau of Indian Affairs loan guarantee for $22.5 million. The loan guarantee was originally issued to the Lower Brule Community Development Enterprise, which then sold the guarantee to Great American Life. The proceeds of the sale were used to buy Westrock.

Westrock went bankrupt three years after the tribe purchased the brokerage, and in 2013, LBC Western stopped paying Great American Life, triggering a default and Great American’s efforts to enforce the BIA’s guarantee.

“The loan guarantee was used to induce (Great American) to part with a considerable sum of its private money -- $20,043,618.67 - to purchase a loan to an Indian-owned business,” the company’s lawsuit said. “But when the Indian business defaulted on that loan, the agency reneged on the loan guaranty, relying on a procedure that violated (Great American’s) due process rights under the Fifth Amendment of the United States Constitution.”

Great American is a subsidiary of American Financial Group. A spokeswoman declined to comment on the company’s lawsuit.

The Westrock saga was one of several scandals highlighted in a Human Rights Watch report that detailed allegations of malfeasance at Lower Brule under the longtime chairman of the tribal government, Michael Jandreau. Jandreau died last year, three months after the report’s release.

The report triggered federal audits and investigations into the tribe’s finances, including from the Internal Revenue Service and the Interior Department’s Office of Inspector General. It also stoked tensions between Jandreau loyalists and reformers who had won seats on the tribal council, leading to an impasse that has yet to be resolved.

Jandreau allies have defended the former leader, saying the investigations yielded no actions by federal authorities that discredited his time as chairman.

The Human Rights Watch report, relying on public documents from lawsuits against the Lower Brule Community Development Enterprise, cited New York Judge Eileen Bransten, who concluded that the Lower Brule Community Development Enterprise used more than $12 million from the Great American loan to pay some of the preferred shareholders in Westrock.

“There is evidence from Judge Bransten’s ruling and other official documents that suggests tribal council members who served on the LBCDE’s board may have personally enriched themselves by obtaining free shares in the company and then paying themselves using the proceeds of the sale of the federal loan guarantee,” the Human Rights Watch report concluded.

Regardless of the details surrounding the Lower Brule-Westrock transaction, it appears Great American took a big risk when it agreed to purchase the loan guarantee from the Lower Brule Community Development Enterprise.

The BIA isn’t alone in offering federal loan guarantees. The Small Business Administration and the United States Department of Agriculture also offer loan guarantees in an effort to spur economic activity. The BIA loan guaranty program is meant to spur economic activity in Indian Country.

But unlike the SBA and USDA guarantee programs, the wording in the BIA guarantee is weak, according to Ross Hill, the CEO and president of Bank2 in Oklahoma City, Okla. and an expert on finance in Indian Country. Because the guarantee language is weak, there is not a secondary market for selling the guarantees.

“I don’t know of anybody else - any third parties - who have purchased any guarantees by the BIA,” he said.

Hill, who testified about the BIA loan process during a U.S. Senate hearing last summer, said his bank has never been able to sell a BIA guarantee. Instead, those loans have all remained in-house. His bank has made BIA guaranteed loans since the mid-1990s, and in that time, only two required the BIA to step in and guarantee a default.

“The vast majority of them repay without any hiccups,” Hill said. “They’re good loans. They pay on time. They perform well.”

That was not Great American’s experience. Prior to filing its lawsuit, the company appealed the government’s decision to not pay on the guarantee through the Interior Board of Indian Appeals. The board ruled that there was insufficient evidence to show that the Lower Brule Community Development Enterprise had actually funded the loan to LBC Western Holdings.

Nedra Darling, a spokeswoman for the BIA, said she could not comment on pending litigation.

In its lawsuit, Great American claims the decision to deny the guarantee was “untethered to the facts and law.”

“It is also arbitrary and capricious because, when balancing the evidence, there is absolutely no evidence in the record that the loan failed to fund,” the lawsuit says. “No document, no email, no memoranda, no letter, no testimony. Nothing.”

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Information from: Argus Leader, http://www.argusleader.com