Is bank branch on reservation? Courts won't decide

Northwestern Financial Review, Feb 15-Feb 28, 2005 by Bengtson, Tom

The First National Bank of Milaca, Minn., operates a branch that may - or may not - be located on an Indian reservation. Pete Allen, chairman, president and CEO of the bank, thought it was a matter for the courts to decide but the U.S. Supreme Court disagreed. Last November, the court declined to hear a case on the question, leaving the boundaries of the reservation for the Mille Lacs Band of Ojibwe Indians ambiguous.

Although Allen says important progress was made during the three-year legal process, he adds that the uncertainty of the reservation boundaries has negatively impacted the bank's business.

The family-owned bank, founded in 1897, operates a branch in Isle, a town affected by the disputed reservation boundaries. The branch accounts for about one-third of the $129 million bank's business. Nearly 200 loans originated at the branch are secured by $11 million in real estate. Allen contends that real estate in the disputed area suffers a 10 percent negative affect on its price relative to similar property in undisputed areas.

"The band's assertion of regulatory authority over property the bank owns or on which it holds a security interest will depress the market value of that property," Allen said in a deposition. "As a result, the bank is concerned about taking a mortgage interest on property that is adjacent to land owned by the band due to the potential for conflicting land use regulations. The band's efforts to regulate dealings with its members, through its licensing system, will also affect the bank's business and its profitability."

The origins of the dispute about the reservation boundaries go back to 1989 when the then-chief of the band, Arthur Gahbow, declared that the band would go "on the offensive" to claim boundaries that were established in a treaty reached in 1855. Those boundaries define a reservation of 61,000 acres; operating on the basis of treaties signed in 1863-64 and federal law passed in 1889, locals had recognized a reservation of about 4,000 acres.

In 1992, the band wrote letters to businesses located within the broader boundaries informing them of a tribal requirement that they obtain a license from the tribe. The band also established a series of statutes, including some affecting banking. The First National Bank never received one of those letters, but Allen said it applied to his bank.

During the 1990s, concern arose among county officials about members of the band who were operating on the disputed land without regard for county zoning laws and permit requirements. Furthermore, the Environmental Protection Agency and the U.S. Department of the Interior complicated matters by recognizing the 1855 treaty boundaries.

In 2002, the Mille Lacs County Board filed a lawsuit seeking a declaration from the courts that the boundaries of the 1855 treaty had long since been disestablished. First National Bank filed to intervene and joined the county in the suit. The bank's attorney, Scott Knudson of the Briggs and Morgan law firm in St. Paul, said in a court document "the bank wanted the boundary issue determined, for the resulting uncertainty has had an impact on the bank's assets. Indeed, the specter of bank regulation poses significant operational concerns to the bank, because the band in its statutes has asserted enforcement authority over federal banking laws and UCC Article Nine secured creditor remedies."

In other documents, Allen comments, "In Isle, the bank competes directly with Woodlands National Bank, which is owned by the band. If the Isle branch is deemed to be within the former 1855 reservation, and subject to tribal court jurisdiction, I am concerned that the Isle branch could be at a competitive disadvantage."

The bank and the county cite examples that demonstrate the negative affect of the jurisdictional uncertainty. Court documents noted the case of a couple that purchased 8.25 acres of undeveloped land on Lake Mille Lacs in 1994. When the property owners prepared to build on the land, they received a notice from the band claiming the land was a burial ground and could not be developed. It took three years of investigation from the state archaeologist to clear the matter up. In another example, the bank and county cited the sale of a boat shop in the disputed area for a price that was 12 percent to 22 percent below market.

The Mille Lacs County Board and the bank filed suit in U.S. District Court in 2002. Judge James Rosenbaum ruled on May 7, 2003, to dismiss the case, saying no harm had come from the band's claim about the reservation's boundaries. The ruling was made "with prejudice," which means the plaintiffs could not bring the matter before the courts again.

The plaintiffs appealed on Oct. 24, 2003 before a three-judge panel of the 8th U.S. Circuit Court of Appeals. Attorneys General for Minnesota and South Dakota filed "friend of the court" briefs on behalf of the bank and the county. The appeal, however, failed. But this time, the panel ruled "without prejudice," which gives the county and the bank the opportunity to file suit in the future if they feel the band's actions result in additional negative consequences.