Arizona Tribe Sues Steptoe & Johnson

PHOENIX (CN) - The Fort McDowell Yavapai tribe claims it lost tens of millions of dollars after attorney at Steptoe & Johnson did not notify it that they had changed terms on loans the tribe had made. The tribe claims it did not have any experience in commercial lending, and Steptoe & Johnson knew that when it began representing the Yavapai in 2005.

In its complaint in Maricopa County Court, the tribe says it borrowed money from its $50 million margin account to fund three loans. When the borrowers defaulted, the tribe says, it lost most of its money.

In 2007, the tribe and Fort McDowell Enterprises say they loaned $16 million to Silverhawk Commons "for the purposes of paying off debt secured by the property and to provide pre-development funds for the development of a 45-acre business park located in Murrieta, Calif."

The loan guaranty, procured by Drew Ryce with Steptoe & Johnson, guaranteed only losses that the "nation would suffer as a result of certain acts by the guarantors named in the Silverhawk guaranty" and excluded any losses the nation "would suffer as a result of nonpayment by Silverhawk of the Silverhawk loan," according to the complaint.

Neither the tribe nor Fort McDowell Enterprises received a copy of the guaranty, they claim.

The tribe claims Steptoe & Johnson authorized changes in loan terms without tribal approval. The Yavapai claim the changes included unreasonably high fees that "were paid to third parties that did not benefit the project"; that the loan provided for more than 100 percent financing; and that "the loan was grossly under-collateralized." Silverhawk Commons defaulted and filed for bankruptcy in 2009, costing the nation its investment, according to the complaint.

Steptoe & Johnson knew that the tribe was using money borrowed "from a credit line obtained by margining its stock and bond investment portfolio," and knew that the nation "had no knowledge of the risks incurred in commercial lending, such as those reflected in the loans," but failed to secure tribal approval for changes in the loan term, the tribe claims.

Also, the tribe and We-Ka-Jassa Investment Fund loaned $17.8 million to Mammoth Specialty Lodging after Ryce, the tribe's general counsel, "assured the tribal council that 'on the Mammoth deal we are going to make $6-$7 million for sure,'" according to the complaint. But after the tribal council approved the loan, it claims, several changes were made without its approval.

The tribe claims the Mammoth loan "was grossly under-collateralized; it lacked appropriate guaranties; it failed to reflect the completion of adequate due diligence; it reflected the disbursement of excessive fees to the borrower, or to parties associated with or affiliated with the borrower; there was inadequate borrower equity in the project; and no provision was made for repayment of the loan."

The tribe says it also loaned $10.8 million, with Fort McDowell Enterprises and We-Ka-Jassa Investment Fund, to 1 E. Jackson St. LLC after Ryce "made a material misrepresentation to the tribal council that the land was worth as much as the loans; the property was value more than the loans, the loans would be made with the owner of the Diamondbacks, and that Ryce (or his subordinates) had performed adequate due diligence on the proposed transaction prior to seeking approval from the council."

These loan terms also were changed without tribal approval, the Yavapai say. They claim that the loan-to-value ratios "were far too high in view of the fact that the only source of repayment of the loans was the real property, no personal guaranties were obtained from the principals of the borrowers," and the borrowers did not have equity in any of the property to secure the loans.

The Yavapai, Fort McDowell Enterprises and We-Ka-Jassa Investment Fund seek damages for negligence, breach of contract and breach of fiduciary duty. They are represented by Leo R. Beus with Beus Gilbert of Scottsdale.

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