The city of Duluth suffered a $10 million setback in its running court battle with the Fond du Lac band of Lake Superior Chippewa.

The neighboring governments have been locked in lawsuits since 2009, when the tribe stopped sharing revenue from its downtown casino with the city. On Tuesday, a U.S. District Court judge ruled that the band does not owe Duluth some $10 million in back payments.

"The Band continues to hope that the whole matter can be put to rest," Fond du Lac Chairwoman Karen Diver told Northland News. "At the settlement talks earlier in the year, the Band made great effort to get these funds, along with a payment for services, into the City's hands in a manner that was compliant with the Indian Gaming Regulatory Act."

The lawsuit has been cycling through the courts and appeals courts for years, and Diver told local media her attempts to put the case to rest were rejected: "The mayor rejected those efforts, citing his confidence in prevailing in the court. The City's numerous failures in the courts has been ineffective in helping them understand the law."

At the heart of the dispute is a square block of downtown Duluth — miles north of Fond du Lac territory — that the city turned over to the band in 1986 so they could build the Fond-du-Luth Casino. In return for the prime location, the band agreed to share millions of dollars in casino profits with the city for the next 50 years.

Between 1994 and 2009 alone, the casino pumped an estimated $75 million into city coffers. But that was money that wasn't reaching the reservation to the south in Cloquet. Band leaders began questioning why they were the only tribe in Minnesota that had to split their casino revenue with an outside government.

In 2009, a federal commission ruled that the Fond du Lac could stop making annual profit-sharing payments to the city. The city sued.

In 2009, the National Indian Gaming Commission — which had modified but upheld the arrangement with Duluth in 1994 — ruled that Fond du Lac could stop making its annual payments to the city. The modified agreement had diverted almost 20 percent of the tribal casino's profits — about $6 million a year — to the city.

That freed up millions of dollars Fond du Lac was able to return to reservation schools, housing and social programs. But it left Duluth officials with a sizable hole in their budget, and a strong sense that they had given up valuable downtown real estate and gotten nothing in return.

"It's significant dollars for the city of Duluth that will have to be replaced," said Duluth City Attorney Gunnar Johnson.

City officials fume that they are now saddled with all the costs that come from having a casino in town — increased traffic, increased demands on police and emergency services — with none of the benefits.

"We end up with nothing, and the band continues to receive the benefits of the casino in downtown Duluth, which was part of the deal," Johnson added, noting that the city is still weighing its options, including a possible appeal. "That's frustrating."

Much of the revenue went to fund street repairs around Duluth.

Tuesday's ruling by U.S. District Judge Susan Richard Nelson of St. Paul dealt with one sliver of the funds Duluth thought it was owed: back payments from 2009, when the band stopped making payments to the city, until 2011, when the National Indian Gaming Commission ruled that the original agreement was unlawful.

Twice before, Nelson had ruled that the band owed the city for those back payments, and twice she was overruled by the appellate courts and the case was kicked back to her. This time, her decision sided with the band.

"[D]irecting millions of dollars away from the band is directly contrary to the [Indian Gaming Regulatory Act's] goals of promoting tribal economic development, tribal self-sufficiency, and strong tribal government," she wrote in the 11-page decision.

With accumulated interest, the city had estimated the band owed it more than $13 million.

Jennifer Brooks • 612-673-4008