REBECCA R. PALLMEYER, United States District Judge.
A. Emerald Casino, Inc. is created and issued a license to operate a riverboat casino...60
B. Donald Flynn takes control of Emerald...61
C. Emerald lobbies for relocation...64
D. 1999: Emerald's golden year...66
E. An unfortunate association: Emerald relocates in Rosemont...68
F. The IGB doggedly investigates Emerald...70
G. The IGB revokes Emerald's license...72
H. Procedural History...74
A. Emerald lays the groundwork to move to Rosemont...75
B. Emerald attempts to relocate to Rosemont...83
A. Emerald's September 24, 1999 Renewal Application...104
B. Construction Agreements...113
C. Kevin Flynn...119
A. Amendment to Emerald's Shareholders' Agreement...137
B. Transfer of shares to Kevin Flynn, Joseph McQuaid, John McMahon, Kevin Larson, and Walter Hanley, the "Officer Defendants"...139
C. Transfers of shares to and from Donald Flynn...143
D. Emerald sells shares to the Statutory Investors...148
E. Defendants' communication with the IGB about the transfers of shares...151
A. IGB revocation proceedings...161
B. Bankruptcy proceeding...163
C. Payton Plaintiffs' litigation...165
D. District court...171
A. The Trustee's fiduciary duty claim is barred by the statute of limitations...172
A. The Trustee's breach of contract claim is not barred by res judicata ...180
B. Merits...190
A. Defendants are severally liable...208
B. The value of Emerald's license...211
Appendix A: Procedural History Chart
Appendix B: Selected IGB Rules
Appendix C: Contract Liability Chart
A license to operate a casino in Illinois should have great value. In 1999, Emerald Casino, Inc. ("Emerald") held such a license, permitting it to operate a riverboat, but its East Dubuque location was not profitable. When the Illinois General Assembly passed legislation authorizing a land-based casino, it appeared Emerald's problems were in the past. But on January 30, 2001, the Illinois Gaming Board ("IGB") revoked the license after an unprecedented and aggressive investigation of Emerald and its officers, directors, and shareholders. The IGB's primary concern appears to have been that "organized crime" was somehow involved in Emerald's proposed new location — Rosemont, Illinois. Emerald was less than forthcoming in its communications with the IGB, which heightened regulators' suspicions. Ultimately, the IGB concluded that Emerald had violated several IGB rules and, for the first time in the IGB's history, revoked a gaming license as a sanction. Emerald appealed the revocation order, but the Illinois Appellate Court affirmed. The license was Emerald's only significant asset, and when Emerald was stripped of it, this bankruptcy proceeding swiftly followed.
Plaintiff in this case, Frances Gecker, is the Trustee appointed by the Bankruptcy Court on behalf of Emerald. Defendants are the former officers, directors, and shareholders of Emerald. The Trustee alleges that the individual Defendants were responsible for Emerald's loss of its license. The Trustee claims that Defendants'
As explained below, the court concludes that the Trustee's breach of fiduciary duty claim is barred by the statute of limitations. She has established her claim of breach of contract, however, and the court finds Defendants Kevin Flynn, Donald Flynn, Joseph McQuaid, John McMahon, Kevin Larson, and Walter Hanley severally liable for breach of Emerald's Amended Shareholders' Agreement. The court awards the Trustee $272,000,000.00, and finds the Defendants severally liable for that amount, in equal proportions. Claims against Defendant Peer Pedersen are dismissed.
In addition, three motions remain pending: Donald Flynn's motion to dismiss the Trustee's claims for joint liability and punitive damages [64]; Defendants' motion to dismiss Count II (breach of contract) as duplicative of Count I (breach of fiduciary duty) [113]; and Certain Defendants' motion for judgment as a matter of law on Counts I and II as barred by the statute of limitations and res judicata, respectively [246]. Because the court has dismissed the breach of fiduciary duty claim and has declined to impose joint liability on the breach of contract claim, Donald Flynn's motion [64] is denied as moot, and Defendants' motion to dismiss the breach of contract claim [113] is denied. Certain Defendants' motion to dismiss on the basis of the statute of limitations and res judicata [246] is granted in part and denied in part. Finally, Defendants urge this court to reconsider their motion [72] for leave to file a third-party complaint against Eugene Heytow. Heytow's involvement was, however, similar to that of Peer Pedersen. As the court has dismissed claims against Peer Pedersen and has not imposed joint liability under the Amended Shareholders' Agreement, the request for reconsideration is also moot.
Defendants are former officers, directors, and shareholders of an Illinois corporation, now named Emerald Casino, Inc., which was created in 1991 to operate a riverboat casino. Until January 30, 2001, Emerald held one of the ten licenses issued by the Illinois Gaming Board ("IGB"). On January 30, 2001, the IGB voted to revoke Emerald's license, on findings
On December 17, 1991, Emerald Casino, Inc.
Emerald, then known as HP, Inc., was founded by Eugene Heytow and Peer Pedersen, both of whom served on the original Board of Directors. (Trustee's SOF ¶ 7; C. Defs.' SOF ¶ 63.) Peer Pedersen was the corporation's President and Gene Heytow was its Vice President. (PX1316 at 1.)
(PX1008 at 120, ¶ 10.) At least initially, life on the Mississippi appeared to be profitable. In 1993, Emerald's first full year of operation, the company generated $32 million in gross receipts. (Trustee's SOF ¶ 90.)
By 1994, however, problems emerged. First, Emerald received a Disciplinary Complaint from the IGB on December 1, 1994 for failure to obtain IGB approval before changing the corporation's equity and debt capitalization. (PX332; Trustee's SOF ¶ 94.) Specifically, Emerald sought to restructure the debt it had acquired when it purchased the Jo Daviess Corporation (PX332; Trustee's SOF ¶ 94.) Emerald entered into two new loan agreements to provide funds to pay off the corporation's outstanding debts. (PX332 at 2, ¶¶ 8-10.) Emerald did not seek or obtain the required IGB approval for the new loan agreements, however, and also failed to notify the IGB of the source of the funds. (PX332 at 2, ¶ 11.) In its Disciplinary Complaint, the IGB found that Emerald had violated two IGB rules. (PX332 at 3.) IGB also fined Emerald $30,000 for the violations. (PX332 at 3.) It was Defendant Joseph McQuaid, who later became a principal of Emerald but was at the time working for the IGB, who signed the Disciplinary Complaint on the agency's behalf. (PX332 at 3; Trustee's SOF ¶ 94.)
A second source of concern for the corporation was competition: The Iowa riverboat casinos and a dog track opened in Dubuque, Iowa. (C. Defs.' SOF ¶ 69.) The Silver Eagle remained subject to Illinois' cruise protocol, which required that a riverboat leave the dock and be floating in the Mississippi River before any gaming operations could take place. (Id. at ¶ 70.) But in 1994, Iowa lifted its cruise protocol and began to allow dockside gambling, so that patrons could come and go freely, making Iowa casinos more attractive to potential patrons. (Id.) Furthermore, the dog track in Iowa provided patrons with access to slot machines, creating still more competition. (Id.)
On February 1, 1995, in response to these financial challenges, Emerald hired Joseph McQuaid, who had previously been employed at the IGB, to manage development and compliance. (C. Defs.' SOF ¶ 6.) Emerald operated the Silver Eagle through Aerie Hotels & Resorts Management, which was owned by Pedersen. (Trustee's SOF ¶ 92.) McQuaid initially worked for Emerald through Aerie. (Trustee's SOF ¶ 55.) Tasked with addressing Emerald's deteriorating market position, McQuaid quickly concluded that the only remedy was to relocate the casino. (C. Defs.' SOF ¶ 118.) In 1995, McQuaid, on behalf of Emerald, petitioned the IGB to relocate the license to the Vermillion River at Danville, a market less vulnerable to competition from Iowa. (PX338 at 2; C. Defs.' SOF ¶ 118.) The IGB renewed Emerald's license in July of 1995 (Trustee's SOF ¶ 96), but determined that it lacked authority to authorize a relocation of the license. (Tr. at 508.) In September, in response to an inquiry from Senator James "Pate" Phillip, the Illinois Attorney General issued an opinion seconding the IGB's conclusion that it lacked authority to relocate Emerald's license. (PX338.) By December of 1995, confined to its East Dubuque location, the Silver Eagle's business languished and the company shut down its gaming operations. (Trustee's SOF ¶ 96.)
In 1996, while the Silver Eagle was still shuttered, Donald Flynn took on a much
According to Defendants, Donald Flynn was primarily interested in investing in HP of Indiana, but Peer Pedersen required that he invest in Emerald as well. (C. Defs.' SOF ¶ 73.) Donald Flynn, therefore, also entered into a series of agreements to provide capital to Emerald in exchange for Emerald stock or stock options. (Trustee's SOF ¶¶ 19-21; see also C. Defs.' SOF ¶ 73) ("in the summer of 1996, Donald Flynn increased his investment in HP"). Buoyed by the infusion of capital to Emerald, the Silver Eagle re-opened in May or June of 1996. (Trustee's SOF ¶ 96; C. Defs.' SOF ¶ 71.) Donald Flynn's stock purchases increased his ownership to 40%. (Trustee's SOF ¶ 20.) In exchange for this investment in Emerald, Pedersen granted Donald Flynn control over Emerald's Board and discretion over the officers. (PX899 at 17, 19; Peer Pedersen Estate's Proposed Findings of Fact & Conclusions of Law [241], hereinafter "Pedersen's SOF," ¶¶ 3-4.) The Stock Purchase Agreement executed by Emerald and Donald Flynn specifically stated that so long as Donald Flynn was the largest shareholder, "the Company shall take all actions within its control to cause a majority of the Company's board of directors to be designees" of Donald Flynn. (PX899 at 17.) Furthermore, Emerald promised to deliver "the written resignations of the directors of the Company and the written resignations of such officers of the Company as may be requested by" Donald Flynn. (Id. at 19.) Donald Flynn did in fact proceed to replace Emerald's management team with his own. On June 7, 1996, Pedersen wrote a letter assuring Donald Flynn that Flynn would receive control of Emerald's management at the "earliest possible date." (PX528.) Later that month, on June 23, 1996, Pedersen resigned his position as President. (PX1316 at 69.) Donald Flynn also terminated Emerald's contract with Aerie Hotels & Resorts Management, which was Pedersen's company, and had been running the casino until then. (Trustee's SOF ¶ 101; C. Defs.' SOF ¶¶ 596-97.) After obtaining control of both Emerald and HP of Indiana, Donald Flynn installed essentially the same management team to run both corporations. (See C. Defs.' SOF ¶ 109.)
Although Pedersen had transferred management control to Donald Flynn, Pedersen did retain his own shares in the company and his position on the Board of Directors. (Trustee's SOF ¶¶ 9, 12.) On September 9, 1996, as part of the leadership transition, Donald Flynn also became a member of the Board of Directors, consisting at that time of Eugene Heytow, Peer Pedersen, and Donald Flynn. (Trustee's SOF ¶ 102; C. Defs.' ¶ 74.)
The management team at Emerald overlapped substantially with the team at Blue Chip. (See C. Defs.' SOF ¶ 109) ("Each of the Officer Defendants was a member of Blue Chip's management team.") Defendant Kevin Larson was appointed President of both casinos and the Chief Operating Officer of Blue Chip Casino. (Trustee's SOF ¶¶ 42-43; C. Defs.' SOF ¶¶ 16, 21.) Joseph McQuaid, who was the Vice President of Development and Compliance at Blue Chip, became Vice President of Emerald (PX676 at 3; PX1316 at 67; Trustee's SOF ¶¶ 57, 102), and was tasked with development and compliance. (C. Defs.' SOF ¶ 6.) In 1996,
In 1996, Defendant Kevin Flynn, Donald Flynn's son, was named Blue Chip's Chief Executive Officer and the Chairman of the Board. (C. Defs.' SOF ¶ 29.) Emerald had no named CEO at this time. (PX1316 at 1) (listing original officers.) According to the Trustee, Kevin Flynn was actively managing Emerald's day-to-day operations and routinely acting on behalf of Emerald in negotiations, although he was not officially employed by Emerald. (Trustee's SOF ¶ 29.) Defendants acknowledge Kevin Flynn's presence and participation at several important meetings, but they maintain that he was simply attending on behalf of his father, Donald Flynn, who had entered partial retirement and was frequently traveling on his boat. (C. Defs.' SOF ¶ 77.) In a later investigation, the IGB concluded that Kevin Flynn had acted as Emerald's primary spokesperson in negotiations and entered into agreements on behalf of Emerald as early as 1997, and that Kevin Flynn's statements minimizing that activity constituted "dissembl[ing]." (PX162 at 16, 17.)
Finally, Defendant Walter Hanley worked for Blue Chip as Senior Vice-President, General Counsel, and Secretary. (Trustee's SOF ¶ 49; C. Defs.' SOF ¶ 109.) The Trustee asserts that Hanley, who attended all but one of Emerald's board meetings, was also a de facto manager of Emerald. (Trustee's SOF ¶ 52.) Defendants insist, however, that Hanley's only function at these meetings was to compile minutes. (C. Defs.' SOF ¶ 117.)
Shortly after Donald Flynn took control of Emerald, the IGB issued a second Disciplinary Complaint on July 24, 1996. (PX125; Trustee's SOF ¶ 103; C. Defs. SOF ¶ 99.) This Complaint charged Emerald with (1) failing to disclose or seek IGB approval for a stock option that Donald Flynn had received in exchange for his providing loans and capital to Emerald and (2) failing to disclose or seek IGB approval for loans from Pedersen and Heytow to Emerald. (PX125 at 2-3; Trustee's SOF ¶¶ 103-04; C. Defs. SOF ¶ 99.) On June 14, 1996, the IGB discovered Donald Flynn's receipt of this stock option, and on July 19, 1996, the IGB learned about the loans from Heytow and Pedersen, both as a result of Emerald's letters to the IGB disclosing those transactions. (PX125 at 2-3; Trustee's SOF ¶ 103.) The IGB concluded that Emerald had violated IGB Rule 230(d)(3), 86 ILL. ADMIN. CODE § 3000.230(d), which requires licensees to immediately inform the IGB of and obtain approval for a change in equity or capitalization.
Unfortunately, the $3 million credit line was not enough to meet the needs of the Silver Eagle. By February 20, 1997, Kevin Larson sought IGB approval from Administrator Michael Belletire for two more loans from the shareholders to Emerald totaling $2.5 million dollars. (PX924; PX933; Trustee's SOF ¶¶ 116-17; C. Defs.' SOF ¶ 91.) Administrator Belletire approved Emerald's request for the loans on February 21, 1997 and April 22, 1997. (PX925; PX938; Trustee's SOF ¶¶ 116-17; C. Defs.' SOF ¶ 91.)
Also in the spring of 1997, Emerald sought to renew its license for an additional year, submitting a Renewal Application on April 10, 1997. (PX363 at 1; Trustee's SOF ¶ 121; C. Defs,' SOF ¶ 94.) The IGB initially cited deficiencies in the Renewal Application and requested additional information (PX363; Trustee's SOF ¶ 121); then on June 24, 1997, the IGB unanimously voted to deny Emerald's Renewal Application. (PX129; Trustee's SOF ¶ 122; C. Defs.' SOF ¶ 94.) In a letter from Administrator Belletire, the IGB cited six standards that Emerald had failed to meet: Emerald "[1] Submitted a non-responsive application. [2] Maintains an inadequate gaming operation. [3] Lacks financial viability. [4] Exhibits significant compliance shortcomings. [5] Does not provide for positive economic development and impact. [6] Does not adhere to the overall requirements of the Act." (PX129 at 2.) The IGB focused primarily on the Silver Eagle's financial difficulties, but also asserted that Emerald had violated IGB Rule 236(b)(5), 86 ILL. ADMIN. CODE § 3000.236(b)(5). (PX129 at 6.) One of the shortcomings was that Emerald "was subject to discipline during the past year for failing to disclose and obtain approval for certain financial transactions," a reference to the second Disciplinary Complaint. (PX129 at 6.) Following the notice of denial, Emerald ceased operations at the Silver Eagle on July 29, 1997; the casino never opened again. (Trustee's SOF ¶ 124; C. Defs.' SOF ¶ 101.)
In August of 1997, Emerald requested an administrative hearing to review the IGB's decision to deny the Renewal Application. (Trustee's SOF ¶ 126.) Emerald retained the license during the pendency of the appeal (Trustee's SOF ¶ 123; C. Defs.' SOF ¶ 104), but had no plan to re-open the Silver Eagle in East Dubuque. Instead, Emerald's stated goal in pursuing the appeal was to delay the loss of the license long enough to obtain legislative approval for relocation of the license. (C. Defs.' SOF ¶ 104.)
Over the course of the next few years, until 1999, while the administrative hearings were ongoing, various members of Emerald's management team spent time lobbying the Illinois General Assembly to revise the Illinois Riverboat Gambling Act in order to allow Emerald to relocate its license. (See C. Defs.' SOF ¶ 119.) Donald
Starting in November 1998, during the lobbying efforts, there were a handful of meetings between Kevin Flynn, Joseph McQuaid, Donald Stephens, the Mayor of the Village of Rosemont, and representatives of two other organizations, the Davis Companies and Duchossois Industries. (Trustee's SOF ¶ 260, 272, 274-75, 277-78; 285; 289; C. Defs.' SOF ¶ 133, 135, 495-96, 499-500, 504, 515.) Marvin Davis, a principal and owner of the Davis Companies, was an entrepreneur involved in real estate development and other businesses. (C. Defs.' SOF ¶ 488.) Richard Duchossois was the owner of Duchossois Industries, a company which owned Arlington International Racecourse, a horse racing track in Arlington Heights, Illinois. (C. Defs.' SOF ¶ 133.) The Trustee alleges that the Davis Companies and Duchossois Industries were interested in investing in a relocated casino, and that at these meetings, McQuaid and Kevin Flynn, agreed, on behalf of Emerald, to move the license to Rosemont and that Kevin Flynn agreed to sell ownership interests in Emerald to Davis, Duchossois, and to the Mayor of Rosemont upon relocation of the casino. (Trustee's SOF ¶¶ 257, 330.) The Trustee also asserts that after the joint ownership deal was reached, in December of 1998, Davis and Duchossois worked with Kevin Flynn and other principals of Emerald on a joint lobbying strategy to obtain legislation that would permit relocation of Emerald's license. (Trustee's SOF ¶ 294.) The IGB, in its later investigation, found that although Emerald planned to move to Rosemont as early as 1998, Emerald's principals did not disclose that plan to the IGB until July 1999. (PX162 at 10.) The IGB found, further, that Kevin Flynn and McQuaid did enter into agreements to sell ownership interests, and further that Emerald did not inform the IGB of these agreements. (PX162 at 7-8.) Defendants maintain that no agreement to sell ownership interests ever existed and that the joint lobbying activities were no more than an effort to secure mutually beneficial legislation. (C. Defs.' SOF ¶¶ 506, 520.)
After several failed attempts in previous legislative sessions, in 1999 the lobbying activities bore fruit. On May 25, 1999, the Illinois General Assembly passed Public Act 91-40 which amended the Riverboat Gambling Act to allow relocation of Emerald's license. (Trustee's SOF ¶ 129; C. Defs.' SOF ¶¶ 141-42.) Governor Ryan signed the bill into law on June 25, 1999. (Trustee's SOF ¶ 129; C. Defs.' SOF ¶ 142.) The new legislation added Section 11.2 to the Act. In language directly beneficial to Emerald, Section 11.2 provided:
230 ILCS 10/11.2 (emphasis added). Emerald, the only licensee that was not conducting riverboat gambling on January 1,
230 ILCS 10/11.2. Just weeks before the legislation passed, on May 5, 1999, an Administrative Law Judge had upheld the IGB's decision to deny Emerald's 1997 Renewal Application. (Trustee's SOF ¶ 128; C. Defs.' SOF ¶ 139.) The IGB later determined that the new legislation rendered the ALJ's decision moot and instead began developing a new renewal application form to conform with the new statutory language. (Trustee's SOF ¶¶ 134-35.)
Just after passage of the legislation allowing Emerald to relocate, Emerald underwent several changes in leadership, at least on paper. On June 23, 1999, the Board of Directors approved a new management structure for Emerald. (PX1316 at 125-26.) Donald Flynn stepped down from his positions as Secretary, Treasurer, and Vice-President. (Trustee's SOF ¶ 22.) John McMahon, Kevin Larson, and Joseph McQuaid essentially retained their previous functions, but were awarded new titles: McMahon was named a Senior Vice President, the Chief Financial Officer, and Treasurer (PX1316 at 126), after serving as director of finance from 1996. (C. Defs.' SOF ¶ 1.) McQuaid was named Senior Vice President of Development and Compliance (PX1316 at 126) after being hired for development in compliance in 1995 and serving as Vice President starting in 1996. (PX1316 at 67; C. Defs.' SOF ¶ 6.) Larson maintained his position as President but was also named Chief Operating Officer of Emerald. (PX1316 at 126; Trustee's SOF ¶ 46; C. Defs.' SOF ¶ 151.) Larson and McQuaid were also elected to the Board of Directors. (PX1316 at 124.)
The Board of Directors officially named Kevin Flynn and Walter Hanley officers of Emerald. Hanley was named Senior Vice President, Secretary, and General Counsel. (PX1316 at 126.) Kevin Flynn was named Chairman of the Board and was appointed to the new position of Chief Executive Officer. (PX1316 at 126; C. Defs.' SOF ¶ 151.) The addition of Kevin Flynn and Walter Hanley was a mere formality, according to the Trustee. She alleges that both Flynn and Hanley had been acting on behalf of Emerald in practice since 1996 when they started working for Blue Chip and sharing offices with Emerald. (Trustee's SOF ¶ 29.) According to the Trustee, Larson served primarily as a figurehead; Kevin Flynn had been managing the operations of Emerald since 1996. (Trustee's SOF ¶ 102.) The IGB itself later found in its Final Board Order that Kevin Flynn had been acting on behalf of Emerald prior to his appointment as CEO in 1999 and that he had misled the IGB about the extent of his involvement with Emerald. (PX162 at 18.) The IGB did not make any
Also at the June 23, 1999 Board meeting, the Board of Directors approved a Restricted Stock Award Plan (PX1316 at 130), and several agreements to sell restricted stock under the Plan. (PX521; PX1316 at 113.) The Restricted Stock Award Plan was intended to provide "grants of awards of Restricted stock" to "key officers and employees" as part of their compensation. (PX521 at 2.) By its terms, the Plan would "become effective on June 23, 1999 (subject to approval, to the extent required, by the Illinois Gaming Board or its Administrator)." (PX521 at 2.) In a letter dated June 30, 1999, McQuaid notified the IGB of the Restricted Stock Award Plan and asked for prompt consideration of the Plan. (PX304 at 1.) McQuaid's letter also included a document titled "Proposed Awards on June 23, 1999," listing the amounts of shares issued to Emerald employees under the Restricted Stock Plan. (Id. at 14.)
Emerald did not, however, wait for IGB approval before executing the Stock Agreements with its "key officers and employees." John McMahon, Kevin Larson, Joseph McQuaid, Kevin Flynn, and Walter Hanley ("Officer Defendants") each signed a Restricted Stock Agreement on June 23, 1999, under which each was awarded Emerald stock subject to the terms of the Restricted Stock Award Plan. (PX521 at 14, 22, 26, 30, 34; Trustee's SOF ¶ 76; C. Defs.' SOF ¶ 155.) On July 26, 1999, after Emerald had issued the stock certificates, the IGB responded to McQuaid's letter. (PX521 at 43.) The IGB explained that Emerald did not need approval to adopt the Restricted Stock Award Plan, but did need to obtain IGB approval prior to transferring any ownership interests. (PX521 at 43.) IGB Rule 235(a) only permits the transfers of ownership interests in a gaming license "with leave of the Board." 86 ILL. ADMIN. CODE § 3000.235(a). Furthermore, any individual shareholder of a company with a gaming license must submit an application, called a Personal Disclosure Form 1 ("PDF 1") so that the IGB can investigate and determine the "suitability" of the prospective shareholder. 86 ILL. ADMIN. CODE § 3000.235(a)(1). The IGB recommended that the stock be put in escrow until the IGB had approved the shareholders. (PX521 at 43.) The IGB never approved the Defendants as shareholders. (C. Defs.' SOF ¶ 251.)
Instead of waiting for IGB approval, Emerald began treating Officer Defendants as all other existing shareholders. They were each issued certificates for their stock. (PX521 at 14, 22, 26, 30, 34; Trustee's SOF ¶ 76.) Defendants assert that the shares were held in escrow, but admit that they were not held by a neutral third party; instead, they were held in Hanley's own office. (C. Defs.' SOF ¶ 251; see also Bankr.Tr. 2745:19-2746:24 (Hanley testifying that the "corporation held the shares").) Practically speaking, Hanley was therefore holding his own shares in "escrow." Hanley testified at the bankruptcy trial that he does not believe that "escrow" means third-party escrow. (Bankruptcy Tr. 2744:13-47:11; C. Defs.' SOF ¶ 319.) Officer Defendants were also allowed to attend shareholder meetings and vote their shares. (Trustee's SOF ¶ 81; C. Defs.' SOF ¶ 160 (acknowledging that Restricted Stock Plan participants would be allowed to vote their shares).) They also entered into the same Amended Shareholders' Agreement on August 6, 1999 that existing shareholders, including Donald Flynn and Peer Pedersen, had signed. (PX1008 at 36, 39-41, 43.) The parties do not dispute that Donald Flynn and Peer Pedersen are Emerald shareholders. (See PX880 ¶ 406; Donald F.
The Amended Shareholders Agreement, signed by all Defendants, updated the provision in the original Shareholders' Agreement that required shareholders to comply with IGB Rules:
(PX1008 at 33 ¶ 10.) Prior to finalizing the Amendments, Emerald's General Counsel, Walter Hanley consulted outside counsel from two law firms for advice on making amendments to the original Shareholders' Agreement. (C. Defs.' SOF ¶¶ 240-42.) One of these attorneys, Thomas Brett, testified that "it was important to include paragraph 10 because the operations of Emerald are going to be regulated by the IGB." (Bankr.Tr. 2435:12-21.) Officer Defendants nevertheless now assert that they are not bound by the Shareholders' Agreement because, absent IGB approval, they never became shareholders under the Agreement. (C. Defs.' SOF ¶¶ 249-53.) The Trustee contends that Defendants were indeed bound; they consistently represented themselves as shareholders after signing the Amended Shareholders' Agreement, and Emerald consistently treated Defendants as shareholders. (Trustee's SOF ¶¶ 81-88.)
The new team installed by Donald Flynn in June of 1999 began to take significant steps towards building a casino in Rosemont almost immediately after Section 11.2 became law. On June 30, only five days after the Governor signed Public Act 91-40 into law, Joseph McQuaid sent a letter to the Village of Rosemont, requesting approval to relocate Emerald. (PX307 at 3; Trustee's SOF ¶ 131.) Mayor Donald Stephens replied the same day, stating that Rosemont would be pleased to welcome Emerald. (PX307 at 4; Trustee's SOF ¶ 133; C. Defs.' SOF ¶ 174.) On July 7, 1999, the Village of Rosemont officially approved the relocation of the casino. (PX307 at 6-10; Trustee's SOF ¶ 133; C. Defs.' SOF ¶ 174.)
Defendants proceeded promptly to negotiate with Rosemont and initiate construction. As they read the language of Section 11.2 of the Riverboat Gambling Act, the use of the word "shall" in that provision meant that the IGB was required to grant the renewal application for the new location immediately once Emerald acquired approval from the new municipality. (C. Defs.' SOF ¶ 148.) Defendants also took note of Section 7(e) of the Riverboat Gambling Act, which provides: "the Board may revoke the owners' license of a licensee which fails to begin conducting gambling within 15 months of receipt of the Board's approval of the application if the Board determines that license revocation is in the best interests of the State." 230 ILCS 10/7(e). Although the statutory language implies that the 15-month clock starts upon IGB approval, Defendants, reading these two provisions together, assert that they believed the 15-month period would begin to run as soon as Emerald submitted its application to the IGB for renewal and relocation. (C. Defs.' SOF ¶¶ 162-64.)
The IGB spent several months revising the renewal application form after the passage of Section 11.2 in order to ensure the new form complied with the statute. (C. Defs.' SOF ¶¶ 225-26.) On September 22, 1999, the IGB sent a copy of the newly-revised renewal application form to Emerald, specifically to Joseph McQuaid in his capacity as Vice President of Emerald. (PX544; Trustee's SOF ¶ 136; C. Defs.' SOF ¶ 285.) McQuaid prepared the second Renewal Application, with the assistance of Hanley, Larson, and McMahon. (C. Defs.' SOF ¶ 287.) On September 24, 1999, Emerald submitted a completed application for renewal of its license and for permission to move to Rosemont. (Trustee's SOF ¶ 138; C. Defs.' SOF ¶ 287.)
Even before Emerald had submitted its Renewal Application, Defendants had been making arrangements with the Village of Rosemont to lease from Rosemont the land on which Emerald wanted to build the casino. (Trustee's SOF ¶ 362.) From July to December of 1999, Emerald and Rosemont executed several documents, in the form of letters, that memorialized the terms of the lease agreement and allowed Emerald to start construction prior to finalizing that agreement. (PX192; PX365; PX367; PX377; PX380.) Emerald did not disclose these documents, created between July and December 1999, to the IGB until December 5, 2000. (PX1106; Trustee's SOF ¶ 403.) Defendants contend Emerald was not obligated to disclose them earlier because these documents were not binding or final agreements. (C. Defs.' SOF ¶ 305.) The IGB, however, ultimately concluded that Emerald had violated regulations by failing to disclose the draft agreements. (PX162 at 13-14.) Emerald and Rosemont executed a final Lease and Development Agreement on February 10, 2000 and did send a copy of that final agreement to the IGB, but did not ever obtain IGB prior approval. (PX188; Trustee's SOF ¶¶ 392, 394; C. Defs.' SOF ¶ 568.)
Emerald and Rosemont quickly began construction activities at the Rosemont site. Site clearing started in July and August 1999 (C. Defs.' SOF ¶ 227), and actual construction activities began in October of 1999. (Trustee's SOF ¶ 477; C. Defs.' SOF ¶¶ 383, 385) (citing DX782-84, DX786, DX788-89, DX791, photographs taken of the construction site at this time.) In order to complete this construction work, Emerald reached out to and entered into contracts with various construction companies, architects, and contractors. Some meetings occurred even before the legislation was passed. (Trustee's SOF ¶ 421.) After its passage, from June 1999 through January 2000, several of the Defendants, including Kevin Flynn, John McMahon, Joseph McQuaid, Kevin Larson, and Walter Hanley attended meetings with various companies and authorized contracts to perform construction, engineering, and architectural services. (Trustee's SOF ¶¶ 421-440.)
The Trustee alleges that Emerald failed to disclose these construction agreements to the IGB, despite the fact that McQuaid, Hanley, and McMahon attended several meetings with IGB staff and received several requests for disclosures of construction agreements between September 30, 1999 and January 25, 2000. (Trustee's SOF ¶ 441.) Defendants claim that they disclosed the construction agreements when they submitted the Renewal Application on September 24, 1999. (C. Defs.' SOF ¶ 304.) The Renewal Application disclosed
To provide financing for the expenses associated with constructing the casino, Emerald began to sell more shares. (C. Defs.' SOF ¶ 257.) In August and September 1999, Emerald sold stock to female and minority shareholders as called for by Section 11.2(b) (the "Statutory Investors") with unanimous Board approval. (Trustee's SOF ¶¶ 603, 610; C. Defs.' SOF ¶ 257.) Joseph McQuaid was responsible for identifying the proposed Statutory Investors. (C. Defs.' SOF ¶ 260.) The Trustee contends that Pedersen was involved in preparing the documents necessary to effectuate the sales, (Trustee's SOF ¶ 607), and that Kevin Flynn also met with some of the Statutory Investors. (Trustee's SOF ¶ 609.) Defendants deny Kevin Flynn's involvement. (C. Defs.' SOF ¶ 271.) Pedersen's involvement appears to be limited to directing one of the attorneys working at his law firm, Thomas Brett, to draft the stock purchase agreements. (Trustee's SOF ¶ 607; Pedersen's SOF ¶ 34.) Although the agreements called for Emerald to return the Statutory Investor's purchase price if the IGB did not approve the investor, Emerald immediately spent the funds it received from the sales of shares, using those funds to pay for the design and construction of the Casino. (Trustee's SOF ¶ 603; C. Defs.' SOF ¶¶ 259, 265.) Defendants maintain that this plan to spend the funds immediately was properly disclosed to the IGB on several occasions, including in the Statutory Investors' applications to the IGB; in letters from Emerald to the IGB in August and early September 1999; in the September 24, 1999 Renewal Application; and at meetings with the IGB between July and October 1999. (C. Defs.' SOF ¶¶ 266-68.) Although the Statutory Investors began submitting applications to the IGB in August and September 1999, the IGB never approved any of Statutory Investors. (C. Defs.' SOF ¶ 269.) There is evidence that the IGB never even began their investigations of the Statutory Investors. (C. Defs.' SOF ¶ 284.)
After receiving the Renewal Application from Emerald on September 24, 1999, the IGB conducted an investigation of Emerald that continued for the next 16 or 17
During its investigation, the IGB focused on the extent of the construction in Rosemont. On February 22, 2000, the IGB adopted a resolution requiring Emerald to submit to the IGB Administrator a memorandum explaining "a) the reasons the company has failed to comply with the requirements set forth under the Riverboat Gambling Act and Board Rules; and b) the reasons the company should not be required to immediately cease and desist construction in Rosemont." (PX858 at 755-56; C. Defs.' SOF ¶ 461.) On February 24, 2000 Emerald's Board unanimously decided to suspend construction activities in Rosemont until Emerald received IGB approval of its application for renewal and relocation. (C. Defs.' SOF ¶ 466.)
After an extensive investigation of Emerald, its directors, officers, and other key persons, on January 30, 2001, IGB voted (1) to deny Emerald's Renewal Application and (2) to revoke Emerald's license. (PX135 at 35-37; Trustee's SOF ¶ 141: C. Defs.' SOF ¶ 706.) On March 6, 2001, the IGB issued its formal notice of nonrenewal and filed a five-count Complaint for Disciplinary Action against Emerald to revoke Emerald's license. (PX151; Trustee's SOF ¶ 144; C. Defs. SOF ¶ 714.) Emerald answered the Disciplinary Complaint on March 26, 2001, denying any IGB rule violations. (PX41; Trustee's SOF ¶ 145; C. Defs.' SOF ¶ 715.) The administrative hearing on the Disciplinary Complaint began on May 29, 2002 (Trustee's SOF ¶ 148; C. Defs.' SOF ¶ 744), but was swiftly brought to a halt on June 13, 2002, when certain of Emerald's creditors filed an involuntary Chapter 7 bankruptcy proceeding. (Trustee's SOF ¶ 148; C. Defs.' SOF ¶ 802.)
Shortly after the bankruptcy proceedings began, on August 26, 2002, Emerald's Board voted to "terminate[]" several Defendants from their positions as officers and employees of Emerald including Kevin Flynn, Kevin Larson, Walter Hanley, and Joe McQuaid.
Both before and during the administrative hearings and bankruptcy proceeding, Emerald attempted to challenge the IGB's action in state court.
The IGB's Final Board Order listed five Counts against Emerald. (PX162 at 32-37.) The conduct that IGB took issue with falls generally into three categories: (1) Emerald's attempted relocation of the casino to Rosemont; (2) Emerald's failure to seek IGB approval or keep the IGB informed of key decisions; and (3) Emerald's failure to obtain pre-approval for transfers of Emerald shares.
The IGB found that Emerald violated several IGB Rules in its efforts to relocate to Rosemont. Specifically: (a) Emerald failed to disclose agreements between Emerald and Rosemont, which were purportedly entered into prior to the passage of Section 11.2 (PX162 at 33); (b) Emerald failed to disclose construction agreements between Rosemont and Emerald entered into after the passage of Section 11.2 (Id.); (c) the terms of the final Lease and Development Agreement between Emerald and Rosemont violated IGB rules by allowing
The IGB concluded that Emerald failed to inform the IGB about Kevin Flynn's involvement in management prior to his appointment as CEO in 1999. (PX162 at 33, 36.) Emerald also failed to inform IGB of construction agreements or keep the IGB informed of the status of construction activities in Rosemont. (PX162 at 33, 36.)
The IGB identified several transactions for which Emerald did not obtain IGB pre-approval, including transfers to Emerald insiders, to minority and female investors ("Statutory Investors"), and to outside non-statutory investors. (PX162 at 33-36.) The IGB also cited Emerald for unauthorized transfers of stock to public officials. (PX162 at 11) (identifying one shareholder as a relative of State Representative Ralph Caparelli and "two other public officials.") The other two public officials appear to be Susan Leonis, who was Vice Chairman of the Board of the Chicago Transit Authority (Trustee's SOF ¶¶ 645-46), and Robert Martwick who was the Norwood Park Township Democratic Committeeman and whose son, Robert Martwick, Jr. was the Trustee for the Village of Norridge. (Trustee's SOF ¶¶ 651-52.)
The IGB Final Board Order found that Emerald violated five IGB rules:
But the IGB concluded that violation of any one of the rules would have been sufficient to support the revocation of the license. (PX162 at 32.)
Emerald returned to the Illinois courts, seeking judicial review of the IGB's Final Board Order in the Illinois Appellate Courts. (Trustee's SOF ¶ 152.) This time, Emerald's efforts were less successful. On May 30, 2007, the Illinois Appellate Court affirmed the IGB's Final Board Order, though it concluded that the findings relating to organized crime were "against the manifest weight of the evidence."
The bankruptcy action commenced on June 13, 2002, when certain creditors filed an involuntary petition. (Involuntary Petition, In re: Emerald Casino Inc., Debtor, No. 02-22977[1].) On September 10, 2002, the action was converted to a Chapter 11 proceeding. (Order Converting Chapter 7 to Chapter 11 and an Order for Relief Under Chapter 11, In re: Emerald Casino Inc., Debtor, No. 02-22977[113].) Years later, on March 19, 2008, the bankruptcy action was converted back to a Chapter 7 (Order Converting Case Under Chapter 11 To Case Under Chapter 7, In re: Emerald Casino Inc., Debtor, No. 02-22977 [1985]),
The IGB found that Emerald violated IGB Rules 140(a), 140(b)(3), and 110(a) by withholding information about its efforts to relocate its license to Rosemont. First, the IGB found that Emerald began making efforts to relocate to Rosemont — including an agreement to split ownership interests in a Rosemont casino with the Mayor of Rosemont and two interested investors — before the legislation allowing relocation had passed. The IGB found the alleged pre-legislation agreement violated IGB rules because Emerald failed to disclose the agreement to the IGB. Second, the IGB further found that once the legislation passed, Emerald repeatedly failed to disclose its decision to move to Rosemont and failed to keep the IGB fully informed of (1) its agreements with the Village of Rosemont and (2) the status of construction on the new site. IGB Rules 140(a) and 140(b)(3) and (7) specifically require gaming licensees to disclose these agreements. Finally, the IGB found that the terms of one of the agreements Emerald executed with the Village of Rosemont violated IGB rules.
The parties dispute when Emerald decided to relocate the casino to Rosemont and whether any of Defendants made an agreement with the Village of Rosemont to relocate. Defendants maintain that Emerald did not consider Rosemont a viable site until after the legislation passed. (C. Defs.' SOF ¶ 130.) The Trustee alleges, and the IGB concluded, that Emerald in fact made the decision to relocate to Rosemont long before the legislation passed and entered into a secret agreement with the Mayor of Rosemont and other interested investors. (Trustee's SOF ¶ 330.) The IGB inferred the existence of an agreement from several circumstances: (1) Kevin Flynn met in 1997 with Mayor Stephens (PX162 at 7-8); (2) Kevin Flynn and Joseph McQuaid met with representatives of the Davis Companies and Duchossois Industries and, according to the IGB, made deals to sell interests in Emerald (PX162 at 8-9); (3) Emerald, the Davis Companies, and Duchossois Industries engaged in joint lobbying efforts after December 1, 1998 (PX162 at 9); (4) the Davis Companies, Duchossois Industries, certain Defendants, and other Emerald contractors made contributions to Mayor Stephens' campaign fund in October 1999 (PX162 at 10); and (5) the fact that "[e]verybody else seemed to know," even before passage of the legislation, that Emerald's license was going to Rosemont. (PX162 at 9-10.) From this, the IGB concluded that Kevin Flynn, on behalf of Emerald, had entered into an agreement to relocate to Rosemont and to "divide the pie" without disclosing the agreement to the IGB, in violation of Rules 140(a) and 140(b)(7) which require disclosure and IGB approval of such agreements.
The Trustee alleges that efforts to relocate to Rosemont began in 1997. Sometime
Attorney Casini testified that the purpose of the 1997 meeting was to introduce Kevin Flynn to Mayor Stephens because "Kevin Flynn had just completed developing this world-class casino in Indiana" and "[i]t was common knowledge that the mayor of Rosemont was interested in a casino in Rosemont." (Bankr.Tr.2088:1-8.) Casini denied that the meeting was intended to obtain Mayor Stephens' support for Emerald's relocation. (Bankr. Tr.2088:9-16.) Isaac Degen, who also was present, testified that "the best [he] recall[s]," is that Kevin Flynn and Mayor Stephens discussed "maybe a license from Galena for a casino coming to — possibly one of the locations was the Village of Rosemont." (Bankr.Tr. 1874:25-1875:3.) Degen did not recall hearing Kevin Flynn discuss the Blue Chip Casino. (Id. 1875:8-12.) Casini testified that he did not recall any specific statements concerning the Blue Chip or Emerald's possible relocation to Rosemont. (Bankr.Tr.2073:19-2075:4.)
Both at trial and in earlier statements to the IGB, Kevin Flynn maintained that he and Mayor Stephens only discussed Blue Chip at the meeting, and not Emerald's possible relocation of the Silver Eagle operation to Rosemont. (PX1095 at 110 ("The whole notion of Rosemont was not anything that was considered as far as I know until the legislation [allowing relocation] passed."); PX1222 at 31-33 (IGB Disciplinary Proceeding); Bankr.Tr. 3307:12-3309:3; Tr. 2358:2-21.)
Citing an internal memorandum written by Stephen J. O'Neil, a Bell, Boyd & Lloyd attorney retained by Emerald for representation in the Davis litigation, described below, the Trustee asserts that Kevin Flynn's testimony, denying any discussion of relocating the Emerald license to Rosemont, is not credible. (Trustee's SOF ¶ 219) (citing PX651 (dated 11/22/99).) The memorandum purports to summarize a November 17, 1999 interview with Kevin Flynn and Joseph McQuaid, and tracks the history of Mayor Stephens' interest in a Rosemont casino. The parties dispute the accuracy of the memorandum. The Trustee observes that Defendants had "less ... motive to lie" when talking to their own attorneys. (Trustee's SOF ¶ 255.) Defendants maintain that the memorandum is unreliable because the attorney was hearing the facts for the first time, from five individuals. (C. Defs.' SOF ¶ 529.) Furthermore, the memo was written five days after the meeting and according to the attorney who prepared the memo was "likely based on no notes or sketchy notes." (C. Defs.' SOF ¶ 529) (quoting Bankr.Tr. 1339:9-11.) The memo observes that: "Stephens was not, however, interested in having Davis obtain a gaming license. He was looking for a municipal license, not a relocation of the existing
The IGB concluded that "Kevin Flynn lied" concerning the purpose of his meeting with Mayor Stephens. (PX162 at 16.) The version of events set forth in O'Neil's memorandum, however, is not inconsistent with Kevin Flynn's testimony that Mayor Stephens was only interested in a land-based casino (and thus, not interested in Emerald's license for a casino on a waterway), and that Kevin Flynn was seeking the opportunity to manage a land-based casino for Rosemont in the event that an amendment to the Riverboat Gambling Act allowed it.
The court concludes that the Trustee has failed to present sufficient evidence to conclude what exactly was discussed at the meeting in 1997. It appeared to be common knowledge that Mayor Stephens was interested in a land-based casino in Rosemont, and while Kevin Flynn admits that he attended the meeting and that he briefly discussed gaming with Mayor Stephens, he emphasizes that the meeting concerned Blue Chip, and not relocating Emerald's license. This account is consistent with the account in the O'Neil memorandum, in which Kevin Flynn reportedly told his attorneys at Bell, Boyd & Lloyd that Mayor Stephens was interested only in a land-based casino, and that this was discussed at the 1997 meeting. And, while Degen and Casini admit to arranging the meeting, Casini cannot recall what was discussed (Bankr.Tr.2073:19-2075:4), and Degen (the only witness to testify that relocation was discussed) appears to be uncertain of the accuracy of his own testimony. (Bankr.Tr. 1874:25-1875:3.) There is insufficient evidence to conclude that Kevin Flynn was acting on behalf of Emerald at the 1997 meeting with Mayor Stephens or that he attempted to sell an interest in Emerald or make a deal to relocate to Rosemont.
The IGB Final Board Order found that during Emerald's efforts to relocate, prior to the legislation passing, Emerald officials made oral agreements to sell ownership interests in a Rosemont casino to Mayor Stephens, and two companies (Davis Companies and Duchossois Industries) but failed to disclose the agreements to the IGB. (PX162 at 8-9, 17-19.)
The first meeting between any of the Defendants and the Davis Companies took place in 1997, when Kevin Flynn and Michael Colleran, the Chief Financial Officer for the Davis Companies, met at Presidential Towers in Chicago. (Trustee's SOF ¶ 249; C. Defs.' SOF ¶ 490.) There is conflicting testimony about what was said at the meeting and whether or not Kevin Flynn attempted to sell Emerald's license. (Trustee's SOF ¶¶ 253-55; C. Defs.' SOF ¶¶ 490-92.) But the IGB Final Board Order neither refers to this 1997 meeting nor relies on it in its revocation order, instead finding that the undisclosed agreement was reached in late 1998. (PX162 at 8.) The details of the Presidential Towers meeting are therefore not relevant to determine
During the fall of 1998, there were several meetings between certain Defendants and representatives of the Davis Companies and Duchossois Industries. The parties present significantly different accounts of what happened at these various meetings. The dispute over these meetings has also been the subject of separate litigation between the Davis Companies and Emerald. See Davis Companies, Inc. v. Emerald Casino, Inc., No. 99-c-6822, 2003 WL 22113414 (N.D.Ill. Sept. 11, 2003) (granting Defendants' motion for summary judgment on breach of contract and civil conspiracy claims and denying Defendants' motion with respect to fraudulent misrepresentation claim). The Trustee alleges that Kevin Flynn, acting on behalf of Emerald, entered into an agreement with the Davis Companies and Duchossois Industries to sell ownership interests to those companies. (Trustee's SOF ¶ 257.)
Precisely what Davis and Duchossois purportedly promised in return for the ownership interests in Emerald is not clear. The Trustee seems to adopt the IGB's suggestion that Davis and Duchossois agreed to support Emerald's lobbying efforts to amend the Riverboat Gambling Act to allow relocation in exchange for an ownership interest in a relocated casino. (PX162 at 8; PX1231 at 7-8; Trustee's SOF ¶¶ 257-63.) Defendants' theory is that the ownership interests were instead part of Davis and Duchossois's proposal to "remedy [Emerald]'s licensure situation." (Tr. 559:5-6; C. Defs.' SOF ¶¶ 496-96.) Specifically, Defendants suggest, Michael Colleran, on behalf of Duchossois Industries, requested that Emerald give up its appeal of the IGB's revocation order and simply surrender the license, so that the license could be re-issued to Rosemont and the Davis Companies could manage the casino. (Tr. 653:5-16; C. Defs.' SOF ¶ 497.) In exchange for giving up the license, Emerald would receive a percentage ownership in the new casino. (Tr. 563:14-20; C. Defs.' SOF ¶ 497.) Kevin Flynn and Defendants ardently maintain that they did not agree to that proposal or reach any other agreement with Davis and Duchossois. (C. Defs.' SOF ¶¶ 506, 518-520.)
The parties do agree on a few basic facts. First, on October 28, 1998, Kevin Flynn, Donald Flynn, and Joseph McQuaid met with Richard Duchossois, the owner of Duchossois Industries and Arlington International Race Course. (Trustee's SOF ¶ 260; C. Defs.' SOF ¶ 133.) Also present at the meeting was David Filkin, the Executive Vice President and General Counsel at Arlington Park (Trustee's SOF ¶ 261; C. Defs.' SOF ¶ 133), and Scott Mordell, President of Arlington Park. (Trustee's SOF ¶ 262; C. Defs.' SOF ¶ 133.) At this meeting, the Emerald representatives expressed Emerald's desire to move its license to a more profitable market. (Trustee's SOF ¶ 267; C. Defs.' SOF ¶ 493.) Kevin Flynn expressed that Rosemont would be a great location for a casino, specifically referring to such a move as a "no-brainer." (Trustee's SOF ¶ 268; C. Defs.' SOF ¶ 493.) Defendants also sought to enlist Duchossois in their relocation lobbying efforts and discussed common legislative goals shared by the gaming and horse racing industries. (Trustee's SOF ¶ 267; C. Defs.' SOF ¶ 493.) After the October 28, 1998 meeting, McQuaid met with Duchossois lobbyist, Jim Fletcher, to discuss the specifics of coordinating lobbying efforts. (Trustee's SOF ¶ 272; C. Defs.' SOF ¶ 135.)
The parties also agree that on November 20, 1998, Michael Colleran and Richard Duchossois met to discuss Duchossois' potential involvement in a Rosemont casino
The next day, November 25, 1998, McQuaid, Colleran, and Mayor Stephens met at a coffee shop in Rosemont. (Trustee's SOF ¶¶ 277-278; C. Defs.' SOF ¶ 499-500.) This is where the parties' accounts radically diverge. Colleran testified that State Representative Ralph Capparelli, whose district included the Rosemont area, was also at the meeting for part of the time. (Bankr.Tr. 2253:6-10, 2255:2-6.) The Trustee asserts, based on Colleran's account, that Mayor Stephens successfully brokered a deal between McQuaid and Colleran regarding joint ownership of a Rosemont casino. (Bankr.Tr. 2254:7-18; Trustee's SOF ¶ 280-81.) As Colleran reported, he and McQuaid reached an agreement about specific percentage splits in ownership. (Bankr.Tr. 2254:10-18.) Emerald and Davis would each receive a 37.5% interest, with 20% reserved for Duchossois, and 5% for local investors. (Bankr.Tr. 2254:14-15; Trustee's SOF ¶¶ 280-81.) Colleran believed that the Mayor would designate the local investors who would receive the 5%. (Bankr.Tr. 2255:10-12.) The IGB, on the other hand, in its Final Board Order, based on the recommendations of ALJ Mikva, concluded that the five percent interest was for the Mayor personally. (PX162 at 18.) The IGB interviewed Mayor Stephens in September 2000 — as part of its extensive investigation of Emerald before it denied Emerald's Renewal Application. In that sworn interview, Stephens claimed the five percent for local investors "was for me." (PX162 at 18.)
Defendants, relying primarily on the accounts of McQuaid and Kevin Flynn, insist that no agreement was ever reached. McQuaid testified that, although he knew the Mayor and Emerald wanted different things, he met with Mayor Stephens on November 25, 1998 to ensure that Mayor Stephens would not block Emerald's efforts to seek legislation allowing relocation. (Tr. 567:19-568:22; C. Defs.' SOF ¶¶ 501-503.) According to McQuaid, Colleran repeated the proposal he had made the night before, but increased the percentage he offered to the Flynns slightly. (Tr. 573:8-16.) McQuaid testified that Colleran asked McQuaid to present the proposal to Donald Flynn (Tr. 573:17-21), and McQuaid admitted that he agreed to do so. (Tr. 574:1-2.) According to McQuaid, the discussion then shifted towards Emerald's
The parties agree that McQuaid sent Colleran to speak with Kevin Flynn, but disagree about the reason. The Trustee alleges, citing Colleran's testimony, that McQuaid claimed Kevin Flynn was the only one with authority to enter into a joint ownership deal and McQuaid, therefore, suggested that Colleran meet with Kevin Flynn. (Bankr.Tr. 2254:19-2255:1; Trustee's SOF ¶ 282.) Defendants maintain that McQuaid sent Colleran to Kevin Flynn because Donald Flynn was not interested in speaking to Colleran. (Tr. 580:5-15.) McQuaid apparently acted as the go-between for Colleran and Donald Flynn: First, McQuaid called Donald Flynn to report on his meeting with Mayor Stephens and convey Colleran's proposal about surrendering the license. (Tr. 577:11-578:15.) Donald Flynn was not interested. (Tr. 578:17-19.) When McQuaid called Colleran to let him know that Donald Flynn was not interested in a joint ownership deal, Colleran asked if he might discuss non-gaming interests with Donald Flynn. (Tr. 579:9-16.) McQuaid conveyed that request to Donald Flynn, but Donald Flynn suggested that Colleran speak with Kevin Flynn instead. (Tr. 580:5-15.)
Kevin Flynn and Colleran did meet privately on December 1, 1998. (Trustee's SOF ¶ 285; C. Defs.' SOF ¶ 504.) Based again on Colleran's account, the Trustee alleges that this is the meeting at which an agreement to sell ownership interests in Emerald was ultimately reached. (Trustee's SOF ¶ 285.) Colleran testified that he and Kevin Flynn discussed the same percentage split he had discussed with McQuaid: 37.5% each for Davis and the Flynns, 20% for Duchossois and 5% for local investors. (Bankr.Tr. 2258:2-5.) Colleran testified that he and Kevin Flynn ended the conversation agreeing, at Kevin Flynn's suggestion, to keep the deal confidential. (Bankr.Tr. 2258:8-13, 2259:7.)
Defendants deny that the agreement was reached. (C. Defs.' SOF ¶¶ 506, 518-520.) By Kevin Flynn's account, McQuaid had filled him in on Colleran's proposals before the December 1, 1998 meeting. (Bankr.Tr. 3295:12-13.) At that meeting, Kevin Flynn testified, Colleran did propose a deal in which Emerald would give up its license, the Village of Rosemont would acquire it, and then Davis would take a majority interest, and "the Flynns" would take a minority interest. (Tr. 2641:21-25.) Kevin Flynn admitted that Colleran also spoke about a different deal, one in which the Davis Companies and the Flynns would have equal shares and Duchossois would have a 20% share. (Tr. 2644:14-19.) Kevin Flynn recalled that Colleran also discussed the tax structure of the proposed entity and stated that "the Flynns" could run the day-to-day operations. (Tr. 2646:1-8.) Kevin Flynn testified that he "stopped [Colleran] and said the casino in Rosemont is illegal," (see Bankr.Tr. 3298:19-20), presumably referencing the ban on gaming in Cook County. In response to Kevin Flynn's concerns, Colleran said he had already talked to Duchossois about getting a legislative change. (Bankr.Tr. 3298:21-25.) Specifically, Colleran asserted that Duchossois could get it "taken care of, and for that Davis was going to give Duchossois 20 percent of the casino and the Flynns and
Immediately after his conversation with Colleran, Kevin Flynn ran into Richard Duchossois and David Filkin, Duchossois's lawyer, on Michigan Avenue. (Bankr.Tr. 916:1-4; Tr. 2646:9-13.) Kevin Flynn had arranged to meet with the two or them at a nearby restaurant, but was running late. (Bankr.Tr. 952:10-19; Tr. 2464:13-15.) When he saw them on the street, Duchossois and Filkin informed Kevin Flynn that they knew he had just met with Colleran and that they themselves planned to meet Colleran later that day. (Bankr.Tr. 954:3-10; Tr. 2647:9-15.) Kevin Flynn testified that there was no agreement made during this conversation, either. (Bankr.Tr. 3303:9-11; Tr. 2649:5-13.) Later that day, Duchossois, Filkin, and Colleran met at the Ritz Carlton without Kevin Flynn. (Trustee's SOF ¶ 289; C. Defs.' SOF ¶ 515.) In his notes from this meeting, Filkin stated that the three men discussed a proposal where Davis and the Flynns would each have a 37.5% interest, Duchossois would have a 20%, a 5% interest would be reserved for local investors. (PX55.)
After the meetings in 1998, some of the Defendants began joint lobbying efforts with Duchossois. The Trustee alleges, and the IGB agreed, that these efforts are evidence that a joint ownership agreement was reached in late 1998. (Trustee's SOF ¶ 294.) The court notes, however, that Joseph McQuaid, who oversaw Emerald's lobbying activities, attended lobbyist meetings with other representatives from the horse racing and riverboat gambling industries, as well. (Trustee's SOF ¶ 296; C. Defs.' SOF ¶¶ 122, 520.) In March or April of 1999, Kevin Flynn, Richard Duchossois, and Jim Fletcher, one of Duchossois's lobbyists, flew in Duchossois's helicopter to Springfield, where Kevin Flynn and Duchossois met with representatives from the horseracing and gaming industries. (Tr. 2658:15-17, 2660:17-20; Trustee's SOF ¶ 299.) Thus, as Defendants assert, gaming and horseracing interests acted as political allies in a joint effort to get legislation passed. (C. Defs.' SOF ¶ 520.) And, although Duchossois and representatives from Emerald worked together on lobbying, it does not appear that the Davis Companies had a large role. The only evidence the Trustee presents on the Davis Companies' involvement is that Kevin Flynn met with Colleran on February 9, 1999 (Trustee's SOF ¶ 295), but there is no specific evidence of what was discussed at the meeting. (see Bankr.Tr. 965:18-966:3.)
Notably, the Davis Companies filed a breach of contract action to enforce the alleged deal on October 18, 1999. (Trustee's SOF ¶ 319; C. Defs.' SOF ¶¶ 321, 524.) Judge Ronald Guzman of this court ultimately granted summary judgment on the breach of contract claim in favor of Defendants in that case. See Davis Corporation, Inc. v. Emerald Casino, No. 99-c6822, 2003 WL 2213414 (N.D.Ill. Sept. 11, 2003).
This court concludes that there is insufficient evidence that an agreement between
The Trustee presents several other pieces of evidence to show that Emerald did enter into an agreement with Davis and Duchossois. First, the Trustee points with suspicion at contributions that Emerald, the Davis Companies, and the Duchossois Industries all made to Mayor Stephens' campaign fund in October 1999. (PX162 at 9-10; Trustee's SOF ¶ 352.) The IGB concluded that "it is reasonable to infer from these contributions, their timing and the lobbying efforts acknowledged by the parties involved, that there was an agreement in 1998-99 to get legislation passed to relocate the Emerald gaming operations to Rosemont and to divide the pie in some kind of secret agreement." (PX162 at 10.)
This court respectfully disagrees. The contributions were made in October 1999, well after the legislation passed on May 25, 1999, and after the Governor signed it into law on June 25, 1999. By October, Rosemont had already accepted Emerald's request to relocate to Rosemont under the terms of the legislation. (Trustee's SOF ¶ 132; C. Defs.' SOF ¶ 174.) Contributions made months after the legislation allowing relocation had passed do not readily support the inference that there was a secret agreement to relocate and divide ownership of a casino in 1998, prior to the legislation's passage. Furthermore, as the Trustee herself points out, the Davis Companies filed suit in October 1999 arguing that the Flynns, McQuaid, and Emerald had repudiated the alleged agreement. It does not seem likely that Davis, Duchossois, and Emerald would all make contributions to Mayor Stephens' campaign as part of a secret agreement that Emerald and the Flynns had already repudiated. What is far more likely is that Defendants' contributions were made in order to encourage Mayor Stephens' cooperation going forward. The Davis Companies and Duchossois Industries may also have wanted to participate in a casino in Rosemont now that legislation allowed for it, or they may have sought to curry favor with Mayor Stephens for independent reasons. Either way, the court does not infer from these belated campaign contributions the existence of an agreement in 1998.
Next, the Trustee points to a November 22, 1999 internal memo prepared by Stephen O'Neil of Bell, Boyd & Lloyd. The
As the Trustee emphasizes, Rosemont representatives participated in the lobbying efforts to amend the Riverboat Gambling Act. (Trustee's SOF ¶ 347.) Yet there is reason to believe that Rosemont had its own interests in the legislation, independent of any relationship with Emerald. Casinos were prohibited in Cook County, where Rosemont is located, prior to the legislation. (See Trustee's SOF ¶ 259; C. Defs.' SOF ¶ 143.) The new law lifted that restriction. (Trustee's SOF ¶ 306; C. Defs.' SOF ¶ 143.) Defendants contend they were in fact opposed to Stephens's lobbying efforts because those efforts were location-specific and Emerald "fear[ed] that they would lose support from legislators from other municipalities." (C. Defs.' SOF ¶¶ 132, 137.) The participation of Rosemont representatives in lobbying efforts is more likely evidence of the Village's own interest in lifting the Cook County restriction than it is of a secret deal between Davis, Duchossois, and Emerald.
Finally, the Trustee points to evidence that "[e]verybody else seemed to know," even before passage of the legislation, that Emerald's license was going to Rosemont. (Trustee's SOF ¶ 330) (quoting PX162 at 9.) The IGB Final Board Order noted that "[t]he legislative history of the debate during which Section 11.2 of the Act was approved was replete with references to Rosemont as the designated city for the relocation." (PX162 at 8.) Several legislators made public comments confirming that the license would be relocated to Rosemont even before the legislation passed. (Trustee's SOF ¶ 350) (citing four different senator's statements.) Victor Casini testified that "[i]t was common knowledge that the mayor of Rosemont was interested in a casino in Rosemont." (Bankr.Tr.2088:1-8.) Again, however, these circumstances do not satisfy the court that Defendants had entered a secret agreement to sell ownership interests in a Rosemont casino.
The record reveals that Rosemont was a desirable location for the license, that the Mayor and Defendants were interested in establishing a casino there, and that Defendants discussed the possibility of relocating to Rosemont with Mayor Stephens, the Davis Companies, and Duchossois Industries. But the Trustee has not established by a preponderance of the evidence that there was an agreement to relocate a casino and "divide the pie." Because the court is unable to find that the agreement existed, the court is unable to conclude that the Defendants violated IGB rules by failing to notify the IGB of an agreement to sell ownership interests in Emerald.
Once Emerald decided on Rosemont as a site, Emerald sought official approval from the Village of Rosemont. Within one week after the legislation passed, McQuaid met with the Mayor of Rosemont, Mayor Donald Stephens, to discuss potential locations for the casino within the Village of
On July 1, 1999, McQuaid and Walter Hanley met with IGB staff: then-Administrator Robert Casey, Chief Legal Counsel Mareile Cusack, and Deputy Administrator of Audit and Financial Analysis Al McDonald. (C. Defs.' SOF ¶ 192.) McQuaid and Hanley informed the IGB that Emerald had decided on Rosemont as a location and that they expected the Rosemont Village Board to act upon their pending request soon. (C. Defs.' SOF ¶ 192.) A July 1, 1999 letter from McQuaid to Administrator Casey, summarizing the July 1, 1999 meeting, confirms this account. (PX306 at 1.) McQuaid's letter stated that at the July 1, 1999 meeting, Emerald had submitted a "proposal to relocate to Rosemont" along with "copies of HP's correspondence with the Village of Rosemont and a preliminary site plan." (PX306 at 1.) The minutes from a July 20, 1999 IGB meeting also show that at that meeting Michael Ficaro, Emerald's outside counsel, gave formal public notice of Emerald's intention to relocate to Rosemont. (PX858 at 693-94.) The minutes reflect that Emerald provided the IGB with copies of the June 30, 1999 letters between McQuaid and Mayor Stephens, the official approval from the Village of Rosemont, and a diagram of the proposed casino. (PX858 at 693-94.) The court concludes that the IGB was on notice of Emerald's intentions to relocate to Rosemont no later than July, 1999.
The IGB Final Board Order found that Emerald violated IGB Rules 140(a), 140(b)(3), and 110(a) by (1) failing to keep the IGB informed about the status of construction in Rosemont; (2) failing to disclose the existence of specific agreements between Emerald and the Village of Rosemont; and (3) including terms in the Lease and Development Agreement with Rosemont that violated IGB Rules. (PX162 at 32-36.)
The IGB concluded that Emerald had violated Rules 140(a), 140(b)(3) and 110(a) by failing to disclose or misrepresenting to the IGB the status of construction in Rosemont, including that Emerald began construction in the summer of 1999. (PX162 at 14, 31-35.) The Illinois Appellate Court affirmed, finding sufficient evidence that the IGB did not have "detailed knowledge of Emerald's construction activities," as the IGB requested construction plans on both September 17, 1999 and again on January 31, 2000. (PX1233 at 114.) The court interprets "status of construction" to mean whether Defendants disclosed to the IGB that construction activities were occurring, and not disclosures related to financing.
Soon after the legislation allowing relocation passed the Illinois legislature, Emerald's Board of Directors met on June 23, 1999 and discussed relocation and construction plans. (PX18 at 6.) Emerald's target date for opening the casino was August 1, 2000. (C. Defs.' SOF ¶¶ 170, 350.) McMahon testified that in the summer of 1999, Emerald understood the
In order to meet this deadline, Emerald used a "design-build" approach to construct the casino, which would allow it to begin construction before the casino's design was complete. (C. Defs.' SOF ¶ 179.) Under this approach, the architect, Aria Architects, would design an "overall, conceptual schematic," and then "proceed to design specific components of the structure, so that construction could begin on those components, while design continued on other components of the structure." (C. Defs.' SOF ¶ 179.) At the June 23 meeting, the Board "authorized [Emerald's] officers ... to prepare construction plans and budgets ...." (PX18 at 6.) John McMahon became Emerald's "point person" for design, construction, and financing of Emerald's proposed casino that same month. (Trustee's SOF ¶ 457; C. Defs.' SOF ¶ 179.) Kevin Flynn "oversaw all of the activities of the company as CEO," but was not involved in Emerald's day-to-day operations related to construction. (C. Defs.' SOF ¶ 395.) McMahon began to meet with construction professionals as early as June 1999 (see PX218 at 2), and testified that he attended "status meetings" regarding "ongoing projects" at the construction site weekly. (Tr. 202:9-203:6.)
At an Emerald Board meeting on August 12, 1999, McQuaid reported that Emerald had "engaged numerous professionals, including architects and engineers" for design and construction of the casino, and "described ... the timetable for clearing the site, excavating the foundation and basin, ordering steel, and other key milestones." (PX20 at 1.) The Board of Directors specifically "discussed the risk[] of... expending ... capital prior to obtaining all required approvals (including IGB approvals) ...." (PX20 at 1.) The Board nevertheless unanimously "authorized [Emerald's] officers to proceed with the Development (and expend resources) in accordance with the timetable reviewed by the [B]oard." (PX20 at 1.) Joseph McQuaid and Donald Flynn each testified that they believed that they were acting in Emerald's best interest in voting to proceed with construction. (Bankr.Tr. 2258:6-18 (Donald Flynn); Tr. 756:8-14 (McQuaid).) The Trustee notes that each of the Defendants attended this meeting. (Trustee's SOF ¶ 467; see PX20 at 1.)
As the Trustee sees things, Defendants sought to begin construction immediately, regardless of the necessary IGB approvals, in order to begin making money on the casino as soon as possible. Some evidence supports this theory: For example, at his first meeting with Aria Architects, on June 7, 1999, Kevin Flynn "emphasized the importance for speed in this development, since every weeks [sic] delay is potentially missing over $2,000,000.00 dollars worth of
Emerald had other reasons to set a short deadline for completing construction, however. As noted above, Defendants contend that they understood that under the Riverboat Gambling Act they had a finite time period to complete construction or risk losing their license. (C. Defs.' SOF ¶ 168.) Because Section 7(e) permits the IGB to revoke the license if a licensee "fails to begin conducting gambling within 15 months of receipt of the Board's approval," 230 ILCS 10/7(e), and Section 11.2 directed that "the Board shall grant the application and approval upon receipt by the licensee of approval from the new municipality or county" 230 ILCS 10/11.2(a) (emphasis added), Defendants believed, upon the advice of their attorney Michael Ficaro, that the fifteen-month time limit would begin to run as soon as Emerald submitted its application to the IGB for renewal and relocation. (C. Defs.' SOF ¶¶ 162-64; D. Flynn's SOF ¶¶ 88-89.) McMahon repeatedly referred to the fifteen-month provision when testifying about Emerald's construction timeline. (See Tr. 138:20-140:1.) Emerald hoped to have its application for renewal and relocation approved by September 1999. (C. Defs.' SOF ¶ 222; D. Flynn's SOF ¶ 91.) In at least one meeting with Hanley and McMahon on September 30, 1999, the IGB, too, appeared to encourage a swift construction timeline, asking whether Emerald could complete construction of the casino "sooner" than the anticipated August 1, 2000 deadline. (PX65 at 2.)
Beginning in July and August 1999, the Village of Rosemont began to clear the site on which the casino would be built. (C. Defs.' SOF ¶ 227.) In October 1999, Rosemont issued Emerald a building permit for construction of a basin foundation for the casino (PX256); the Trustee notes that Emerald failed to disclose this permit to the IGB. (Trustee's SOF ¶ 485.) Excavation of the basin that would hold the barge on which the casino would sit began in October 1999, and construction crews began to pour the concrete foundation for the basin the following month. (Trustee's SOF ¶ 477; C. Defs.' SOF ¶¶ 383, 385 (citing DX782-84, DX786, DX788-89, DX791, photographs taken of the construction site at this time).) In December 1999, the basin walls were built. (C. Defs.' SOF ¶ 386) (citing DX793, a photograph taken on December 2, 1999, which shows construction of concrete walls.) At an Emerald Board meeting on December 22, 1999, McQuaid reported on the status of construction, and noted that "[Emerald] has paid or incurred approximately $4 million and the general contractor has made commitments for an additional $26 million of Development costs." (PX25 at 1.) Again, the Board "discussed various aspects of the Development, including the risks of expending capital ... prior to obtaining all required approvals (including IGB approvals)" but proceeded unanimously to "authorize [Emerald's] officers to proceed
The project proceeded in late December 1999 and early January 2000, when construction crews began to build a land-based structure beside the basin, and the barge structure (the casino itself) that would float in the basin. (C. Defs.' SOF ¶¶ 391-92) (citing DX795-96, photographs of construction taken on January 6, 2000.) Emerald received another building permit from Rosemont in January 2000 for "structural — bld shell" (PX419 at 17), which again, the Trustee notes, Emerald did not disclose to the IGB. (Trustee's SOF ¶ 485.) The design for the land-based structure included "IGB's on-site office, restaurants and other non-gaming facilities." (C. Defs.' SOF ¶ 391.) By early February, construction crews had completed laying the structural steel for the land-based structure. (C. Defs.' SOF ¶ 429.) Attorney Ficaro advised Emerald to stop construction after the February 22, 2000 IGB Meeting, where the IGB indicated that Emerald needed prior approval to begin construction, and the Emerald Board unanimously voted to stop construction on February 24, 2000. (Trustee's SOF ¶¶ 491, 494; C. Defs.' SOF ¶¶ 465-66.)
By the time Emerald stopped construction, in February 2000, the concrete foundations for the barge and land-based structure were complete, the barge and structural steel for the land-based structure were nearly complete, and construction crews were beginning to lay the structural steel for the casino facility on the barge. (Trustee's SOF ¶ 497; C. Defs.' SOF ¶ 469.) Aria's design work at the time was nearly complete as well, as the architect had completed drawings and specifications for the entire casino, but needed to perform "contract administration." (Trustee's SOF ¶ 498.) Between March and December 2000, Defendants note, "Emerald continued to prepare to open the casino," by completing the casino design
To finance construction, Emerald used the money that it had received from the female and minority investors who had contracted to purchase Emerald shares ("Statutory Investors"). The IGB noted this in its Final Board Order, observing that Emerald had spent the approximately $30 million it had received from Statutory Investors on construction "because it could not secure financing for construction," and that Emerald had failed to inform the Statutory Investors that it would use the funds they had provided before the investors were approved as shareholders by the IGB. (PX162 at 13-14.) The IGB did not, however, conclude that Emerald's use of
After Section 11.2 passed, Emerald prepared a proposed budget for design and construction of the casino, estimating the cost for the casino's development at $135 million. Emerald also prepared a financing proposal under which Emerald would seek equity from current and proposed shareholders and would obtain senior secured bank financing, as well as subordinated debt. (C. Defs.' SOF ¶ 176.) John McMahon was responsible for obtaining subordinated and senior secured financing for Emerald. (C. Defs.' SOF ¶ 178.) At a December 22, 1999 Emerald Board Meeting, Joseph McQuaid reported that Emerald had sold 16.8 percent of stock for approximately $26.7 million, and that Emerald still needed to sell 3.16 percent of stock to minority shareholders in order to satisfy the female and minority shareholder requirement. (Trustee's SOF ¶ 478.) Emerald increased the price of stock to $2.5 million per one percent interest for the remaining 3.16 percent, and the Board unanimously authorized McQuaid to sell the shares for the maximum price possible. (PX25 at 1.) At the same meeting, the Board also considered and unanimously authorized the Company's officers to execute a proposal for financing $82 million from LaSalle Bank. (PX25 at 2-3.)
Emerald's Board unanimously approved the sale of shares to Statutory Investors on August 12, 1999, after discussing Emerald's "immediate need for equity investments to finance the [Rosemont] Development and facilitate a debt financing." (PX1316 at 149.) In a letter dated October 20, 1999, McMahon wrote to Terry Graber of the Joint Venture (Power Construction/Degen & Rosato), and copied Harris Bank, to inform the Joint Venture that "[Emerald] currently has over $25 million of equity capital in the bank, and [Emerald] is currently in negotiations with potential lenders to obtain debt financing, subject to the approval of the [IGB]." (PX254.) The Trustee notes that the "$25 million of equity capital" was a reference to the funds Emerald had obtained for the sale of shares to the Statutory Investors. (Trustee's SOF ¶ 464.) In the end, Emerald received approximately $30 million from the sale of shares to the Statutory Investors, never obtained additional financing from other sources, and used the funds it received from the Statutory Investors for design and construction of the casino. (Trustee's SOF ¶¶ 459, 465, 466; C. Defs.' SOF ¶¶ 224, 257, 259, 365.)
At the same time that Emerald was using the Statutory Investors' contributions for construction, the Trustee notes, Emerald informed the Statutory Investors
Defendants maintain that IGB rules did not require that Emerald obtain IGB approval before beginning construction. (C. Defs.' SOF ¶ 375; D. Flynn's SOF ¶ 92; Pedersen's SOF ¶ 103.) At least some history supports that understanding: William Kunkle, the IGB's first chairman, testified that between 1990 and 1999, the IGB did not require a casino licensee to obtain IGB pre-approval for construction. (Tr. 2511:13-24, 2527:16-19.) He further testified:
(Tr. 2527:21-2528:20.) Joseph McQuaid, himself a former IGB staffer, said much the same thing. He testified that "[p]reapproval or approval in general [of construction] for the riverboats was not necessary" (Tr. 622:1-15), and that none of the original ten licensees had received pre-approval from the IGB before beginning construction. (Bankr.Tr. 3379:12-16.) McQuaid testified that this was his understanding of the IGB's position in June 1999. (Tr. 622:16-22.) Though the Defendants did not believe that pre-approval was required, they did understand that the IGB would inspect the casino facilities, and possibly require changes, before Emerald Casino could open. (C. Defs.' SOF ¶¶ 375-76; D. Flynn's SOF ¶ 93.)
The IGB gave mixed signals about the pre-approval requirement. The minutes of an IGB meeting on September 7, 1999 state:
(PX858 at 700) (emphasis added.) Chairman Vickrey and Mareile Cusack, Chief Legal Counsel to the IGB, disagreed publicly, in a January 2000 Chicago Sun-Times article, about the pre-approval requirement. (DX276.) The article quoted Cusack as stating that Rule 230 requires any "prior board approval" for any "capacity or design change," including barge construction, while Chairman Vickrey stated, "I don't see it as a violation. What [Emerald is] doing is obviously trying to ready the casino so they can open at the earliest possible date to start generating patrons
The language of Rule 230 is open to some interpretation. Rule 230(d) provides that an "owner licensee must immediately inform the Board and ... obtain prior formal Board approval thereof whenever a change is proposed in the following areas:... G) Riverboat cruising schedules or routes, capacity or design change." 86 ILL. ADMIN. CODE § 3000.230(d)(1)(G). The Rule does not specifically mention construction of a new facility, and Defendants maintain that they did not believe that this rule applied to such construction. (C. Defs.' SOF ¶ 380-81.) The IGB itself did not find that Emerald violated Rule 230(d), but it did conclude that because Emerald's Lease and Development Agreement with Rosemont contained a term that allowed Rosemont to "waive" the pre-approval requirement (discussed below), Emerald violated Rule 110(a), which in broad terms prohibits any activity the IGB determines is a detriment to the gaming industry, the State of Illinois, or the public generally. (PX162 at 14, 34-35; see infra Background II.B.3.) Furthermore, the Illinois Appellate Court expressly rejected Defendants' argument, reasoning "[c]ommon sense would suggest that if Emerald could not change the design of its riverboat without prior formal Board approval, Emerald could not build an altogether new boat and associated structures without prior formal Board approval."
Defendants did not obtain pre-approval for construction. Defendants did, however, inform the IGB that they planned to begin construction as early as August 10, 1999, and updated the IGB on September 30, 1999. (See infra Background II.B.1.c.) And while the IGB never gave express approval for beginning construction, the court concludes that it tacitly approved the construction when it failed to object as Defendants updated them about the status of construction.
The parties dispute what knowledge the IGB had about the ongoing construction in Rosemont. Defendants insist that they discussed the status of construction several times with IGB staff and were never directed to stop construction or warned that they were in violation of IGB rules. (C. Defs.' SOF ¶ 396.) As discussed supra, John McMahon began to meet with construction professionals as early as June 1999 (PX218 at 2), and Emerald's Board approved a construction timetable on August 12, 1999. (PX20 at 1.) Rosemont began "preliminary site-clearing activities" in July and August 1999 (C. Defs.' SOF ¶ 227), and excavation of the basin began in October 1999. (Trustee's SOF ¶ 477; C. Defs.' SOF ¶¶ 383, 385.) As described below, the record reveals that the IGB was aware that Emerald began construction of the casino as early as October 1999, and it was public knowledge at least as early as November 4, 1999.
Defendants assert that the IGB was on notice even earlier. They maintain that on July 1, 1999, McQuaid and Hanley informed the IGB that construction would begin immediately. (C. Defs.' SOF ¶¶ 192-93) (citing DX602.) The record contains little evidence to support this. Hanley's handwritten notes, allegedly taken
Defendants McQuaid and Hanley did inform the IGB as early as August 10, 1999 that site-clearing activities were underway.
(PX310 at 2.) Acosta testified that he understood "steps and expenditures" to mean "preliminary site clearing activities that were taking place at the site in Rosemont," and "were preliminary to the start of construction." (Bankr.Tr. 3634:8-25.) Defendants interpret this letter as evidence that the IGB was aware that Emerald had begun started construction efforts, and that the "risk" Acosta referred to was the risk that the IGB would make changes to the final construction design before granting approval. (C. Defs.' SOF ¶¶ 229-30; D. Flynn's SOF ¶ 97.) McQuaid also wrote a "follow-up" letter after the August 10 meeting, telling Acosta, "I want to keep the Board fully informed of our progress. I am concerned that [Emerald] may be portrayed in an undesirable perspective if media attention is directed toward construction in Rosemont." (PX311.) McQuaid's testimony reflects that he and Acosta defined "construction" differently: while McQuaid believed that construction began with site-clearing activities, which he disclosed to the IGB, Acosta did not understand these activities to constitute construction. At a minimum, however, Defendants did put the IGB on notice at the August 10, 1999 meeting that Emerald was preparing to begin construction.
A few weeks later, at another meeting on September 30, 1999, Defendants Hanley and McMahon informed the IGB that site-clearing activities had begun. Minutes from that IGB meeting show that, in response to Cusack and McDonald's question whether construction had started, McMahon stated that Rosemont had begun preliminary site-clearing activities, but that these activities have not been "part of [Emerald's] costs at this point."
Emerald began excavation of the basin in October 1999 — the first construction activity that occurred after site-clearing. (Trustee's SOF ¶ 477; C. Defs.' SOF ¶¶ 383, 385.) Walter Hanley provided Deputy Administrator McDonald a copy of Emerald's "unaudited financial statements through September 30, 1999" in a letter dated October 29, 1999. (PX319 at 1, 4-7.) The financial statements showed that Emerald had assets identified as "[c]onstruction-in-progress" worth $281,921. (PX319 at 5.) In addition, the financial records revealed that while Emerald had, as of September 30, 1999, $40,465,924 of "paid-in-capital," it had just $26,256,016 in cash and cash equivalents. (PX319 at 5.) Nicholas Wilke, a financial and auditing consultant for the IGB, reviewed these financial statements for the IGB in the fall of 1999. (C. Defs.' SOF ¶ 366; see Tr. 1613:3-24.) Wilke testified that after reviewing the financial statement and speaking with Hanley, he concluded that the "construction in progress" figure showed that the casino was being constructed; that the "paid-in-capital" figure demonstrated that there had been an "influx of capital from minority investors"; and finally, that because "[t]he financial statement shows $26 million in cash" and "at that time, there was about $30 million collected from minority investors," then "some of those funds had to have been used" by Emerald. (Tr. 1615:7-1619:6.)
The IGB knew that construction had started as early as October 1999 — IGB investigators visited the construction site, and Acosta communicated with Joseph McQuaid about Emerald's construction activities during this time. Based on the IGB's physical presence at the site, and its communications with McQuaid, Defendants McMahon and McQuaid believed that Emerald's earlier statements had effectively communicated to the IGB that construction had begun. McMahon testified that sometime between October 1, 1999 and early January 2000, he learned from the project manager that IGB investigators had visited the site and had taken photographs. (Tr. 224:18-229:2; see also Tr. 693:2-16.) In addition, McQuaid testified that Acosta called him in October 1999 and asked McQuaid to schedule a tour of the
For his part, Acosta testified that he learned about Emerald's construction activity in "approximately December of 1999... either through media accounts or a statement made to me by IGB staff." (Bankr.Tr. 374:2-8.) But, in an IGB interview of McQuaid that he conducted on September 26, 2000, Acosta admitted to calling McQuaid about Vickrey's plan to visit the construction site. When McQuaid testified that he received that call in October or November 1999, Acosta stated, "[y]es, I do recall there was a conversation." (PX1094 at 247-48 (293-94).) And in a preliminary report to the IGB concerning Emerald's Renewal Application, Acosta noted that IGB agents frequently visited the construction site after Emerald submitted its Renewal Application on September 24, 1999. (DX662 at 38.) Acosta's testimony that he was unaware of construction activities in the fall of 1999 is not convincing — it demonstrates significant failures of communication within the IGB itself,
The Trustee argues that Defendants both failed to disclose the status of construction at Rosemont, and affirmatively attempted to keep it "discreet." (Trustee's SOF ¶ 451) (quoting Emerald Meeting Minutes of 8/6/99, PX218 at 48.) She notes that Emerald never placed a sign at the construction site identifying it as the future site of Emerald Casino. (Trustee's SOF ¶ 454.) Defendants explain that the decision not to place a sign on the site was an effort to avoid negative media attention and to be "deferential" to the IGB. (C. Defs.' SOF ¶ 397.) Thus, at a meeting on August 6, 1999, various construction professionals and McMahon discussed a plan to place a sign "contain[ing] the names of all of the parties involved and a rendering" at the site, but McMahon cautioned that Emerald should "hold before placing the sign on the site until the [IGB] comes back with their approval of the documents" and "any construction on the site needs to be kept discreet as we prepare the site in anticipation of [IGB] approval." (PX218 at 48.) Terry Graber, who attended this meeting and others like it on behalf of Power Construction, understood "discreet" to mean that McMahon wanted "to keep everything a low profile." (Bankr.Tr. at 1110:12-1111:1.) McMahon and McQuaid represented Emerald at another meeting with construction professionals on September 24, 1999. Minutes from this meeting, similarly, state that "Emerald Casino noted that signage should not be placed on the site when the excavation starts." (PX218 at 102, 107.) Notably, however, on January 20, 2000, McQuaid contacted Joe Haughey, the IGB Deputy Administrator and Director for Enforcement, to ask for the IGB's input on the appropriate location for the IGB regulator's offices at the proposed casino. (Trustee's SOF ¶ 486; C. Defs.' SOF ¶ 409.) McQuaid's contact with Haughey on this question is inconsistent with any concerted attempt to conceal the status of construction from the IGB.
Indeed, the construction of the casino was public knowledge. The construction site was visible from Interstate 294. (C. Defs.' SOF ¶ 390; see Tr. 208:8-209:2; Bankr.Tr. 1154:2-22.) Wilke testified that he could see work being performed when he drove past the construction site. (Tr. 1620:8-23.) And, a Chicago Tribune article published on November 4, 1999 discussed the status of construction at the site, reporting that "Emerald Casino is already working on the Rosemont site between Bryn Mawr and Balmoral Avenues, east of the Tri-State Tollway. The company has excavated the pond that will hold the boat and is set to start pouring the concrete bottom by early next week." (DX249.) Finally, during public comments at a December 16, 1999 IGB Meeting, a citizen noted "that construction is still going on in Rosemont at the proposed casino site" and asked the IGB whether that violated IGB rules. (PX858 at 735.) No member of the IGB commented in response. (Id.)
The Trustee maintains that McQuaid's phone call to Haughey on January 20, 2000
(DX279 at 1; see also DX300 at 1-2 (March 15, 2000 Letter from Ficaro to Acosta stating "Emerald ... has had numerous contacts with the Board's staff regarding the subject of construction work in Rosemont. These contacts go back to prior to our meeting on August 10, 1999, and have occurred as recently as our meeting on March 9, 2000").) As Hanley's letter reflects, the Trustee's argument that the IGB only learned of construction in January 2000 is belied by the facts that Defendants (McQuaid, Hanley, McMahon) repeatedly informed the IGB in August and September 1999 that the site was being cleared for construction; that Hanley disclosed construction expenditures to the IGB in October 1999; that IGB personnel visited the construction site on several occasions in the fall of 1999.
In addition to the concern about IGB knowledge of construction, the IGB's Final Board Order revoking the license separately relied on Emerald's failure to disclose specific agreements between Emerald and the Village of Rosemont. (PX162 at 32; see also PX1233 at 112 (stating that the Board appeared more concerned about Emerald's failure to disclose agreements and plans relating to construction than concerned about commencing construction without approval or notice).) The IGB identified a total of five documents that Emerald failed to disclose related to the agreement between Emerald and the Village of Rosemont to relocate the casino in Rosemont.
Emerald did not provide copies of the Letter of Intent, the Site Access Agreement, or the Extension Agreements to the IGB until December 5, 2000. (PX41 at 26; Trustee's SOF ¶ 403. See also PX1106 at 2.) The parties dispute the reason for Emerald's failure to disclose these documents earlier. The Trustee maintains that Emerald was purposefully withholding information despite the IGB's consistent requests that Emerald submit documents and be "over-inclusive" in their submissions. (Trustee's SOF ¶¶ 388-90; ¶¶ 395-96.) Defendants contend that McDonald told them that IGB lacked the staffing capacity to review draft agreements and asked Emerald not to send drafts. (C. Defs.' SOF ¶¶ 348-49.) Emerald, therefore, waited until it executed final agreements to submit documents. (C. Defs.' SOF ¶ 212-13.) The IGB concluded in its Final Board Order that Emerald was under an obligation to disclose the earlier agreements and that Emerald did not make the required disclosures. (PX162 at 13, 36-37.) The Illinois Appellate Court affirmed this finding. (PX1233 at 114-18.)
The evidence shows that at various times between August 1999 to December 5, 2000, Defendants McQuaid, McMahon, and Hanley had knowledge of the agreements and opportunities to disclose the agreements to the IGB. On August 10, 1999, soon after the Letter of Intent and Site Access Agreement were executed, Hanley and McQuaid met with then newly-appointed IGB Administrator Acosta for the first time. (Trustee's SOF ¶¶ 371-72; C. Defs.' SOF ¶ 225.) McQuaid and Hanley attempted to submit a copy of the old Renewal Application to Acosta, but he informed them that the IGB was developing a new version of the application form, in light of Section 11.2. (C. Defs.' SOF ¶ 226.) Defendants maintain that McQuaid disclosed in that meeting that the Village of Rosemont had begun site-clearing activities. Acosta later admitted that he knew about the preliminary site clearing. (Bankr.Tr. 3634:16-35:6; C. Defs.' SOF ¶ 227.) It is undisputed, however, that Hanley and McQuaid did not provide copies of the Site Access Agreement or the Letter of Intent at this meeting. (See PX41 at 26 (Emerald's Verified Answer admitting that the documents were not disclosed until December 2000.))
On September 24, 1999, McQuaid submitted Emerald's Renewal Application, using the new form the IGB had developed. (PX418.) McQuaid prepared this second Renewal Application, with the assistance of Hanley, Larson, and McMahon. (C. Defs.' SOF ¶ 287; see infra Background III.A.) Question 47 of the renewal application form asked Emerald to "Submit any agreements between LICENSEE and municipality(ies) not elsewhere disclosed in this application, and any other agreements between the municipality(ies) regarding funds, revenues or other benefits to be derived from this license." (DX213 at 10) (capitalization in original.) Emerald's Renewal Application disclosed that "[p]reliminary discussions have been held with representatives of the Village of Rosemont. These discussions are continuing and will eventually result in a development agreement, but to date no formal agreement has been executed." (C. Defs.' SOF ¶¶ 315-16.) Emerald's Application also disclosed that it intended to enter into a development agreement with the Village of Rosemont, but did not submit any of the preliminary letters or agreements with the Renewal Application. (PX418 at 94.) Emerald did identify and submit two agreements with Rosemont: (1) a resolution by the Board of Trustees of the Village of Rosemont approving Emerald's request to relocate the license to Rosemont, and (2) a tax-revenue sharing agreement with Rosemont to share the revenue from the casino with dozens of other Cook County communities. (PX418 at 94.) The application did not include the Letter of Intent, the Site Access Agreement, or the existing Extension Agreements. (PX418.)
On September 30, 1999, Hanley and McMahon met with Administrator Acosta and several other IGB staff. (Trustee's SOF ¶ 380; C. Defs.' SOF ¶ 341.) According to Defendants, the primary purpose of the meeting was to discuss debt financing. (C. Defs.' SOF ¶ 341.) The parties also discussed the progress of construction, however. McMahon was aware that site clearing activities were happening at the site pursuant to the Letter of Intent and Site Access Agreement. As he testified at trial, as of late July and early August of 1999, the Village of Rosemont was "clearing those structures, making the site ready for us as part of our lease agreement with them." (Tr. 159:22-160:1, 160:21-161:15.) At the September 30, 1999 meeting, McMahon stated that the Village of Rosemont was conducing site-clearing activities and that Rosemont was incurring the costs. (C. Defs.' SOF ¶ 346.) McMahon also stated that there was "no lease agreement" yet, but that the parking garage
On October 19, 1999, McDonald wrote to Hanley, requesting copies of "agreements reached with governmental entities," (PX318 at 2; Trustee's SOF ¶ 385), and "all significant contracts or agreements you may have executed since your last submission." (PX318 at 2; C. Defs.' SOF ¶ 362.) Emphasizing the use of the word "executed," Defendants urge that they interpreted this request to mean final agreements (C. Defs.' SOF ¶ 52); but the IGB Final Board Order concludes that the IGB had a broader scope in mind. Furthermore, although labeled a "Letter of Intent," the document signed by Emerald and the Village of Rosemont on July 21, 1999 was a contract that bound the Village of Rosemont and Emerald. In fact, the Letter stated that it was intended to "memorialize key terms that have been agreed to." (PX192 at 1.) The Illinois Appellate Court found that the Letter of Intent, the Site Access Agreement, and three Extension Agreements were contracts. (PX1233 at 104.) Even accepting Defendants' contention that the IGB wanted only final, not draft agreements, the Letter of Intent, Site Access Agreements and Extension Agreements fell into the category of "executed agreements."
Hanley responded to the letter on October 29, 1999. (Trustee's SOF ¶ 386; C. Defs.' SOF ¶ 364.) Hanley included financial statements and information, but again did not include the relevant Rosemont agreements. (PX319.) On January 25, 2000, Administrator Acosta wrote to Hanley again, warning that the IGB had not yet received any contracts from Emerald. (Trustee's SOF ¶ 388.) Hanley responded the next day, but still did not include the Letter of Intent, Site Access Agreement, or Extension Agreements, presumably on the understanding that these did not constitute executed contracts.
Then on January 31, 2000, McDonald wrote to Hanley, again requesting the submission of documents, but this time using much broader language; McDonald specifically asked for "letters of intent" and other non-final agreements entered into since July 1, 1999. (Trustee's SOF ¶ 391; C. Defs.' SOF ¶ 419.) On February 10, 2000, Emerald executed the final Lease and Development Agreement with the Village of Rosemont. (C. Defs.' SOF ¶ 422.) Four days later, on February 14, 2000, Hanley responded to McDonald's letter with a list of written agreements and not-fully-executed
Whatever mixed signals or misunderstandings there may have been about whether Emerald was required to submit the documents, the IGB Final Board Order concluded that Emerald was required to send the Letter of Intent, the Site Access Agreement, and the Extension Agreements. (PX162 at 13.) The evidence largely supports the conclusion that Emerald did not in fact submit those materials to the IGB until December 5, 2000. Only McQuaid's testimony suggests that the documents were submitted by Emerald to the IGB at an earlier date. (See C. Defs.' SOF ¶ 216.) Before the Bankruptcy Court, McQuaid testified that he submitted the documents to then-Administrator Casey at a meeting in early August 1999. (Bankr.Tr. 3401:7-19, 3436:8-16.) McQuaid admitted that he was unable to find any record of the transmittal, however (Bankr.Tr. 3403:6-9, 3451:22-3452:9), and that the documents were not submitted to the IGB on any other occasion. (See Tr. 990:19-22.)
Other contemporaneous evidence supports the conclusion that the documents were not submitted in response to IGB's requests for contracts before December 5, 2000. On November 27, 2000, McQuaid wrote to Acosta, explaining that the Letter of Intent had not been submitted because he did not believe it was a final executed contract. (PX384 at 1.) In a letter dated December 5, 2000, Hanley apologized to the IGB for not providing the documents earlier and attached copies of the relevant documents with this letter, evidently for the first time. (PX1106 at 2; Trustee's SOF ¶ 403.) Finally, in its Answer to the IGB's Disciplinary Complaint for revocation of the license, Emerald asserts that the letters were not submitted because Emerald did not believe they were required to submit them. (PX41 at 26.) McQuaid's testimony that he submitted the documents to then-Administrator Casey is not credible in light of the weight of this contemporaneous evidence.
In short, although the parties dispute the reasons that Emerald failed to disclose the documents, they do not seriously dispute that Emerald did fail to disclose the documents until December 5, 2000. This failure to disclose violated IGB Rules 140(a) and 140(b)(3). (PX162 at 32-33.) The evidence reveals that Defendants McQuaid, Hanley, and McMahon were responsible for this failure to disclose.
The IGB also found that the final Lease and Development Agreement, which was submitted to the IGB on the day it was executed, contained multiple provisions that violated the IGB's rules. (PX162 at 14-15, 34-35.) First, the IGB found that the Agreement "allowed the Village of Rosemont to waive the requirement that Emerald obtain necessary regulatory approval from the IGB prior to commencing construction of the casino." (Id. at 14.) Second, the Agreement also "committed Emerald to fund the construction of a parking garage even though Emerald did not have sufficient financing dedicated to do so." (Id. at 14-15.) Third, according to the IGB, the Agreement "failed to provide Emerald the ability to exercise appropriate control or supervision over the management of the contractor or sub-contractors for the casino and parking garage construction project." (Id. at 15.) The last finding related to the fact that D & P Construction Company, an organization "controlled by Peter and John DiFronzo," worked on the construction site. (Id.) According to an FBI memo that the IGB had access to, but which was not produced here, John DiFronzo had been identified "as a known member of the Chicago Outfit" and "Peter DiFronzo was considered to be a member of the Chicago Outfit." (PX162 at 16.) The Illinois Appellate Court, however, found that the IGB's findings related to organized crime "against the manifest weight of the evidence" and overturned these findings. (PX1233 at 105.) Therefore, only the first two provisions of the Lease and Development Agreement are at issue here.
The Lease and Development Agreement authorized Emerald to commence construction "subject to [Emerald's] performance to the satisfaction of, or waiver by, the Village prior to or on the Construction Commencement Date of every covenant required to be performed by [Emerald] prior thereto including the following conditions precedent." (PX188 at 45, Art. 8.) Among the "conditions precedent" the Village was authorized to waive were "Required Construction Approvals" (PX188 at 46, § 8.4), including specifically "the approval of the Gaming Board of the relocation of the home dock for Developer's Owner's License to the Village." (PX188 at 26, § 1.50.)
The Defendants do not dispute the inclusion of these terms, but do dispute the overall meaning of the contract. Citing Article 7, Defendants maintain that the entire agreement was contingent on IGB approval. (C. Defs.' SOF ¶ 445.) Specifically, they point out that the Agreement provides "[t]he obligation of the Developer to proceed with the development of the Casino site ... shall be subject to fulfillment to the satisfaction of, or waiver by, [E]merald ... of the following conditions precedent," including that Emerald "shall have obtained all Required Construction Approvals." (PX188 at 42.) But this term, cited as evidence that the Agreement was contingent on IGB approval, itself includes the "waiver" language that the IGB took issue with. The only difference between this provision and the provision the IGB took issue with is that Emerald, rather than Rosemont, is the party authorized to waive the condition. The IGB interpreted the contract as providing the Village of Rosemont with the authority to "waive" the requirement for IGB approval before construction could begin. (PX162 at 15.) This court notes that a contractual provision could not give the Village power to "waive" a state regulatory requirement; as the Appellate Court noted in another context, "[w]aiving the Board's
The parties also dispute now whether the IGB even had a rule requiring licensees to obtain approval prior to commencing construction. The Trustee alleges that Emerald was required to obtain prior approval for construction activities and failed to do so in violation for Rule 230(d). (Trustee's SOF ¶ 448.) Defendants note that Rule 230(d) only requires IGB prior approval "whenever a change is proposed" in the design of a casino. 86 ILL. ADMIN. CODE § 3000.230(d). The Illinois Appellate Court rejected this interpretation of Rule 230(d): "Common sense would suggest that if Emerald could not change the design of its riverboat without prior formal Board approval, Emerald could not build an altogether new boat and associated structures without prior formal Board approval." (PX1233 at 113-14.) However the language of Rule 230(d) is interpreted, Defendant contend, it was not the normal practice of the IGB to require advance approval for casino construction. (C. Defs.' SOF ¶ 372.) To the contrary, all the original licensees commenced physical construction or contracted for construction without obtaining IGB approval. (C. Defs.' SOF ¶ 375.) The IGB itself gave mixed signals about whether prior approval was necessary, Defendants observe, and Chief Legal Counsel Cusack and Board Chair Vickery themselves publicly disagreed about whether there was such a requirement. (C. Defs.' SOF ¶¶ 403-06.) Though the pre-approval requirement may have been poorly, if ever, communicated to Defendants, the IGB ultimately decided that prior approval for construction was necessary, and the Illinois Appellate Court agreed. (PX1233 at 113.)
The IGB found, further, that the inclusion of the "waiver" term in the Rosemont agreement, a term that purportedly contemplated a violation of Rule 230(d), violated Rule 110(a). (PX162 at 35.) Emerald itself admitted, in its Verified Answer to the Disciplinary Complaint for revocation of the license, that the Lease and Development Agreement "among other things, allows the Village of Rosemont to waive the requirement that Emerald first obtain the necessary regulatory approval from the Board prior to commencing construction of the casino." (PX41 at 28.) A contract term could not, of course, authorize the Village of Rosemont to "waive" a state regulatory requirement; as the court understands this contract language, it meant that Rosemont was willing to permit progress on construction of the casino before the IGB itself had approved it. Although Defendants may have genuinely believed that the contract nevertheless remained contingent on IGB approval (C. Defs.' SOF ¶ 445), the IGB disagreed and cited that provision as a basis for its revocation order.
The second term in the Lease and Development Agreement that the IGB took issue with was the term outlining the financing to build a parking garage. The IGB found that the Lease and Development Agreement "obligated Emerald to fund the construction of a parking garage even though [it] did not have sufficient financing to do so." (PX162 at 36.) Defendants assert that Emerald's obligation to build the Parking Garage was subject to a condition precedent that Emerald first obtain financing. (C. Defs.' SOF ¶ 446.) The Trustee argues there was no condition. Article 12.1 of the contract simply required Emerald, "at its cost and expense, [to] design the Parking Facility Addition." (Trustee's SOF ¶ 411) (quoting PX188 at 57, § 12.1.) As this court reads
The Trustee has established that the Lease and Development Agreement included one term that the IGB determined violated its rules — the term permitting Rosemont to "waive" the requirement of IGB approval. For purposes of this case, in which the Trustee seeks to impose liability on the individual Defendants, the inclusion of an unlawful term in the final Lease and Development Agreement is insufficient. The Trustee must also establish which individual Defendant was responsible for the term. As Defendants note, the Lease and Development Agreement was the product of negotiation between Emerald, Emerald's outside counsel, the Village of Rosemont, and Rosemont's attorneys. Several drafts were exchanged and various individuals added and subtracted terms. (C. Defs.' SOF ¶¶ 433-38, 444.) The Trustee does not specify which terms she believes Defendants were responsible for including (or subtracting).
The Trustee has presented evidence that Walter Hanley was the point person on behalf of Emerald for drafting the Lease and Development Agreement. Defendants admit that Hanley communicated with Rosemont's attorney and reviewed and edited the various drafts of the Agreement. (C. Defs.' SOF. ¶¶ 432-40.) Hanley also routinely consulted with outside counsel regarding the drafts. (C. Defs.' SOF ¶¶ 433, 435-36, 438.) McQuaid, too, was involved in some of the meetings with outside counsel regarding the drafts of the Lease and Development Agreement. (C. Defs.' SOF ¶ 436.) At an Emerald Board meeting on December 22, 1999, Hanley reviewed the draft of the Lease and Development Agreement and discussed its key elements. (C. Defs.' SOF ¶ 439.) The Emerald Board, including at that time, Eugene Heytow, Defendants Donald Flynn, Peer Pedersen, Kevin Larson, and Joseph McQuaid, unanimously approved the Agreement. (PX25 at 2; Trustee's SOF ¶ 412; C. Defs.' SOF ¶ 439.) Heytow was not personally present at the meeting but was represented by his attorney Richard Levy. (C. Defs.' SOF ¶ 439.) Finally, Hanley and McQuaid signed the Lease and Development Agreement on behalf of Emerald. (PX188 at 117.)
The court's review of the draft Lease and Development Agreement shows that the waiver term that the IGB took issue with was in the initial draft that Rosemont's lawyer, Peter Rosenthal, sent to Hanley. (See PX472 at 41) ("The right of the Developer to commence construction of the Casino and to take other affirmative actions under this Lease in connection with the development of the Casino Site, including the right to possession of the Casino Site, shall be subject to the Developer's
Because the term remained in the final Lease and Development Agreement, it is clear Defendants did not remove it. Yet Defendants' failure to remove the term appears to be based on their understanding that the IGB had already tacitly approved the start of construction. As discussed above, on August 10, 1999, McQuaid and Hanley met with Acosta and Casey. (C. Defs.' SOF ¶ 225.) McQuaid testified that he told Acosta that "construction had begun at our site." (Tr. 655:9-656:17.) Acosta admitted that he did not tell Defendants not to proceed with the site-clearing activities. (Bankr.Tr. 3635:7-22.) Hanley's August 18, 1999 handwritten comments on the draft Lease and Development Agreement appear to take this into account; he wrote: "Do we need a waiver to commence construction prior to all these things? (e.g., Gaming Board approved Common Areas, etc.?)" (PX472 at 41; C. Defs.' SOF ¶ 432-433 (stating that Hanley received the first draft of the LDA, reviewed it and made comments throughout).) Hanley otherwise did include language recognizing the need for IGB approvals. In the section defining "Required Approvals," Hanley added terms requiring that Gaming Board approval. (See PX472 at 24, § 1.45.) The Trustee, therefore, has not established that any individual Defendant was responsible for the inclusion of the improper "waiver" term.
Emerald submitted a revised
In its Final Board Order, the IGB concluded that in response to Question 16 of the Renewal Application, Emerald failed to identify three prospective shareholders who either were themselves public officials or were or relatives of public officials. (PX162 at 11.) The Illinois Appellate Court affirmed, reasoning that the IGB could reasonably find that Emerald's answer to Question 16 was false in violation of IGB Rules 110(a)(2) and 110(a)(5) for "failing to comply" or "failing to cooperate" with the IGB. (PX1233 at 126-27.) Question 16 asked:
(PX418 at 4.) The IGB's Personal Disclosure Form 1
In fact, two prospective shareholders were public officials and one was a relative of a public official — Susan Leonis was Vice Chairman of the Board of the Chicago Transit Authority, Robert Martwick was Democratic Committeeman for Norwood Park Township, and John Sisto was nephew of Illinois State Representative Ralph Capparelli. (Trustee's SOF ¶¶ 646, 651, 654; C. Defs.' SOF ¶¶ 296-99.) Susan Leonis, who agreed to purchase stock from Donald Flynn on September 10, 1999, was Vice Chairman of the Board of the Chicago Transit Authority ("CTA") as of September 24, 1999. (Trustee's SOF ¶¶ 645-46; see C. Defs.' SOF ¶ 299.) As an appointed official to the CTA Board, Leonis was a "public official" under the IGB's definition. (See 70 ILCS §§ 3605/19, 3605/20.) The Trustee contends McQuaid knew about Leonis' position on the CTA Board, but the evidence is equivocal: Leonis testified that she told McQuaid in a September 1999 telephone conversation that she was a CTA Board member, and asked McQuaid whether she could nevertheless invest in Emerald. According to Leonis, McQuaid responded that she was free to do so despite her status as an appointed official. (Trustee's SOF ¶ 647) (citing Bankr.Tr. 2388:19-2390:6.) In an affidavit submitted to the IGB in September 2006, Leonis stated that no one advised her that as a CTA Board member she was barred from investing in Emerald (C. Defs.' SOF ¶¶ 300-01) (citing Bankr.Tr. 2406:12-2407:3.) McQuaid testified that he did not recall any conversation with Leonis about her position as a CTA Board member (C. Defs.' SOF ¶ 299) (citing Bankr.Tr. 2375:3-2376:19.) Leonis did not disclose her position on the CTA Board in her PDF 1. (PX1036 at 3.) The court finds that there is insufficient evidence to conclude that McQuaid was aware that Leonis was a public official at the time of the Renewal Application. McQuaid may have known (or perhaps should have known) that Leonis was a public official, but it is equally likely, given his denial of the conversation, that he was unaware of her position with the CTA.
The Trustee urges that Emerald's response to Question 16a of the Renewal Application was "inadequate" because the instructions clearly stated that it was Emerald's burden to prove that it qualified for renewal of its license. (Trustee's SOF ¶ 659) (quoting PX544 at 3.) Defendants, on the other hand, maintain that because prospective shareholders submitted their PDF 1s directly to the IGB, Emerald and its officers were unaware of their status as, or relationship to, public officials when they completed the Renewal Application, and Emerald qualified its response by stating that "[a]ll disclosures made in this application are subject to any matters disclosed on any PDF 1." (Trustee's SOF ¶ 644; C. Defs.' SOF ¶¶ 292, 294.) This understanding, Defendants assert, is consistent with their past experience with the IGB; in the past, proposed investors would submit their PDF 1s directly to IGB (and not to Emerald), and the IGB would be responsible for investigating these individuals.
The Trustee has not admitted that this was the IGB's past practice, and the court recognizes that the IGB was free to change its practice. The court nevertheless concludes that the Trustee has not shown by a preponderance of the evidence that Defendants' response to Question 16a failed to comply or cooperate with an IGB order under Rule 110(a). There is no IGB rule that required Emerald to review the PDF 1s of proposed shareholders or otherwise screen them. See 86 ILL. ADMIN. CODE §§ 3000.240(b), 3000.235(a)(1). Additionally, not only was Emerald's answer to Question 16a of the Renewal Application expressly contingent on disclosures made by individual proposed shareholders in their PDF 1s, but Emerald had repeatedly informed the IGB that the proposed shareholders were sending their PDF 1s directly to the IGB without any prior review by Emerald. (PX306 at 2; PX369 at 1; PX376 at 1; PX544 at 2.) And Emerald's Renewal Application explicitly disclosed
The IGB also found that Emerald's response to Question 21, disclosing certain agreements into which it had entered, was incomplete and inaccurate, in violation of Rules 140(a) and 140(b)(3). (PX162 at 11-12, 31-32.) Question 21 instructed Emerald to "Provide all ... instruments, agreements or contracts which have been initiated or changed since your last renewal" including "contracts, leasing or rental agreements, or other agreements relating to GAMING," and "all agreements, arrangements and commitments related to proposed gaming facility and related projects." Emerald submitted the following five agreements:
(PX418 at 54.) In addition, Emerald disclosed that it had "engaged numerous professionals and consultants ... to work on its casino development," identifying those individuals and companies, but noting that it "has not executed any agreements except for those [five] described above."
(Trustee's SOF ¶¶ 664-65.) The IGB Final Board Order identified, as agreements that Emerald failed to disclose only the Letters of Intent with Rosemont and the December 1997 Davis-Duchossois Agreement. (PX162 at 12.)
The court finds, first, that McQuaid's
There were other agreements that McQuaid failed to disclose however: the Aria Proposal as well as agreements with DeJong & Lebet and Michael Toensmeyer. And McQuaid and Hanley failed to disclose Emerald's agreements with Rosemont. Defendants admit that they did not submit the Letter of Intent with Rosemont, the Rosemont Site Access Agreement, or the Rosemont Extension Agreement. (PX401 at ¶ 908; C. Defs.' SOF ¶ 206.) Defendants explain this failure by emphasizing that in Question 21, the IGB requested only final agreements, and did not seek "preliminary, non-binding documents" from Emerald until January 31, 2000. (C. Defs.' SOF ¶ 305.)
Defendants' characterization of the Rosemont agreements is disingenuous; each of these agreements entered into by Emerald with Rosemont was a binding agreement. The Letter of Intent (and the subsequent extension agreement) agreed on key terms of an anticipated Lease and Development Agreement, and the Site Access Agreement granted Emerald permission to begin construction before the Lease and Development Agreement was executed, but required Emerald to bear the costs. (See infra Background II.B.2.) Moreover, IGB Rule 140(b)(3) clearly specifies that Emerald was required to disclose "oral or written" agreements "relating to... construction contracts." 86 ILL. ADMIN. CODE § 3000.140(b)(3). McQuaid's disclosure that Emerald had "engaged" Aria, Michael Toensmeyer, and DeJong & Lebet was insufficient (see PX418 at 54), as, by September 24, 1999, Emerald had entered into a Letter of Intent with Aria, and had incurred expenses for work performed by Aria, DeJong & Lebet, and Michael Toensmeyer — evidence that Emerald had entered into agreements with each of these vendors. (See infra Background III. B.4.a.)
In addition, the IGB found, Emerald failed to disclose the threatened Davis litigation, and therefore, provided incomplete and inaccurate information in response to Question 31. (PX162 at 12.) Question 31 asks: "Has LICENSEE or any of its Affiliates, during the past three years been a
Before this court, the parties dispute whether the Davis Companies had, in fact, threatened Emerald with litigation before Emerald submitted the Renewal Application. (Trustee's SOF ¶¶ 669-70; C. Defs.' SOF ¶ 308.) In a letter dated August 18, 1999, Wayne Whalen of Skadden, Arps, Slate, Meagher & Flom, counsel for the Davis Companies, wrote to Michael Ficaro, Emerald's attorney, explaining that his firm represented the Davis Companies "in connection with the Agreement reached among Mike Colleran and Kevin Flynn and others ... for the operation, development and financing of a Casino Riverboat and Entertainment Complex in Rosemont, Illinois and a sharing of appropriately $30 Million dollars of investment and expenses previously incurred by the parties." (PX339 at 1.) The agreement, Whalen continued, "requires ... [the Davis Companies'] prior approval for material business decisions." (Id.) Whalen concludes the letter by requesting a meeting with Ficaro, and stating that "[u]nless we hear from you, we will need to present the Agreement as an interested party to the Gaming Board at its September meeting to avoid any misunderstanding which requires we act this week." (Id.) Whalen called Ficaro and left a voicemail on August 20, 1999 to inform Ficaro that the Davis Companies "filed with the Gaming Board an expression of interest," and to reiterate that the Davis Companies would like to meet with Emerald regarding the Agreement. (PX341 at 2.) He also stated that "[McQuaid] apparently was concerned that a lawsuit might be filed before any such meeting occurred" but emphasized "that at least as to us that will not happen." (Id.)
Then, in a letter dated August 23, 1999, Whalen again wrote Ficaro requesting a meeting between the Davis Companies and Emerald "to sit down and discuss the open issues." (PX342.) On August 25, 1999, Whalen left another voicemail for Ficaro, stating, "I understand that the way has been cleared for at least you and me and possibly for the principals to sit down and have a conversation about the status of things," and asking Ficaro to return his call to set up the meeting. (PX343 at 2.) The following day, Mark Filip, another
Emerald responded to the Davis Companies' efforts, through counsel, to set up a meeting to discuss the alleged Agreement. In a letter dated August 27, 1999, Ficaro informed Whalen that Emerald had "notified the Gaming Board that [the Davis Companies'] claims are spurious and without legal basis." (PX345.) Ficaro concluded: "Emerald Casino, Inc. will take all necessary action to protect its existing riverboat license. The company will also seek legal redress for all damages caused by any interference with the rights or interests of the company and/or its shareholders." (Id.) In other words, Emerald itself threatened legal action on August 27, 1999. Hopkins & Sutter's billing records during this time period refer to the Davis Companies' communications both as "N. Bluhm and M. Davis Threats" and as the "Marvin Davis issue" or the "Whalen, Blum issue." (PX340 at 6-7.)
On September 20, 1999, Kevin Flynn at last spoke to Marvin Davis by telephone. During their conversation, Davis reiterated that the Davis Companies and Emerald had an agreement, and asked Kevin Flynn to meet with him to discuss it. (Trustee's SOF ¶¶ 675-76; C. Defs.' SOF ¶ 313.) When Kevin Flynn responded that there was no agreement, Defendants claim, "Davis became agitated, threatened other action, and hung up." (Trustee's SOF ¶ 675; C. Defs.' SOF ¶ 313, quoting PX1065 at 7).) Hanley testified that he was in Kevin Flynn's office when Kevin Flynn spoke with Davis on the telephone, and that though he "did not hear anything that Mr. Davis said during that call," he spoke with Kevin Flynn after the call, and understood that "there was a disagreement" between Davis and Kevin Flynn. (Tr. 1517:20-1518:22.) Hanley testified that he understood the "other action" threatened by Davis as a plan to "take the complaint to the Illinois Gaming Board — or not the complaint, the allegations of a deal" at a public meeting. (Tr. 1522:14-1523:6.)
Though the Davis dispute was not disclosed in Emerald's Renewal Application, the IGB appeared to be aware both that the Davis Companies claimed that it had entered into an agreement with Emerald to obtain an interest in the casino, and that Emerald denied the existence of such an agreement. Both Ficaro and Hanley testified that Ficaro notified the IGB sometime before August 27, 1999 of the Davis Companies' claims.
Emerald and the Davis Companies obviously disagreed about the existence of any agreement giving the Davis Companies an interest in Emerald, but Defendants maintain that the Davis Companies never threatened litigation in their August and September 1999 communications with Emerald. (C. Defs.' SOF ¶ 308 (8/18/99 letter); ¶ 309 (8/20/99 voicemail); ¶ 309 (8/23/99 letter); ¶ 310 (8/26/99 letter).) Rather, the "M. Davis threats" referred to in Hopkins & Sutter's billing records, Defendants assert, were "Davis's threat to inform the Gaming Board of the alleged agreement." (C. Defs.' SOF ¶ 310.) There is no evidence that Whalen, on behalf of the Davis Companies, ever did disclose the existence of the alleged Davis agreement at a public IGB meeting.
This court concludes that the communications between the Davis Companies and Emerald in August and September 1999 escalated to such a point, that, as of September 24, 1999, when Defendants submitted the Renewal Application, McQuaid and Hanley knew or reasonably should have suspected that the claims could form the basis for a suit against Emerald, a suit that the Davis Companies were prepared to file. The Davis Companies had forcefully asserted a claim of ownership in Emerald's most valuable asset, its license, and after Emerald rebuffed its requests for a meeting, Whalen threatened to publicly disclose such claims to the IGB. Emerald itself had made clear that it was prepared to take legal action to defend its interest in Emerald's license (and against allegedly false ownership claims in it). The next logical step, after Emerald denied any agreement with the Davis Companies, was for the Davis Companies to file suit, which it did on October 18, 1999, less than a month after Marvin Davis's conversation with Kevin Flynn. (Trustee's SOF ¶ 319; C. Defs.' SOF ¶¶ 321, 524.) The Trustee has presented sufficient evidence that McQuaid and Hanley failed to disclose the Davis claims even though they knew about the claims, and that such claims could lead to litigation.
Defendants argue that McQuaid and Hanley did not disclose the Davis claims because they were not credible, and that the IGB already knew about them. (C. Defs.' SOF ¶¶ 311, 314.) Neither of these arguments moves the court. Both ignore the language of Question 31, which asked whether Emerald was party to threatened litigation. (PX418 at 6.) The question swept broadly, and by asking Emerald for all threatened litigation in the past three years unless "elsewhere disclosed in this application," the IGB certainly contemplated disclosure of such claims, whether or not Defendants found them credible or believed they had somehow otherwise been disclosed to the IGB.
The IGB Final Board Order also found that Emerald's responses to Questions 46 and 47 were incomplete and inaccurate in violation of Rules 140(a), 140(b)(3), and 110(a). (PX162 at 12, 31-32, 34-35.) Question 46 asked Emerald to "Describe LICENSEE's negotiations and dealings with any and all communities in which LICENSEE has initiated steps to locate its GAMING OPERATION." (PX418 at 7.) In addition, Question 47 required Emerald to "Submit any agreements between LICENSEE and municipality(ies) not
The parties disagree about whether Emerald's response to these questions was completely forthcoming. The Trustee argues that Emerald should have disclosed that it had negotiated and entered into a Letter of Intent, Site Access Agreement, and Extension Agreement with Rosemont, and should have submitted those agreements with its Renewal Application. (Trustee's SOF ¶ 679) (citing PX192 (July 21, 1999 Letter of Intent); PX366 (August 2, 1999 Site Access Agreement); PX367 (August 26, 1999 Extension).) Defendants contend that Emerald did sufficiently disclose that it had identified Rosemont as the community to which it intended to relocate, that it was in negotiations with Rosemont concerning the relocation and development of the casino, and that those negotiations would ultimately be memorialized in a development agreement. (C. Defs.' SOF ¶¶ 315-16) (quoting PX418 at 93-94.) Again, however, like their answer to Question 21, in which McQuaid and Hanley failed to disclose construction agreements and these same agreements with Rosemont, McQuaid and Hanley's response to Questions 46 and 47 was incomplete in violation of Rules 140(a), 140(b)(3), and 110(a). (See also supra Background II.B.2.)
The IGB found that Emerald violated Rules 140(a) and 140(b)(3) by failing to disclose or "providing false, misleading or incomplete information" to the IGB regarding Emerald's agreements with "construction professionals, contractors, subcontractors and vendors." (PX162 at 31-33.) The Illinois Appellate Court agreed. (PX1233 at 104-05.) As explained below, this court, too, finds that McQuaid and Hanley failed to disclose various construction agreements to the IGB.
In June 1999, before Section 11.2 became law, Defendants Kevin Flynn, John McMahon, and Kevin Larson met with
Soon after the legislation passed, Kevin Flynn and Joseph McQuaid also met with Isaac Degen and Ray Rosato (owners of Degen & Rosato Construction Company) and Terry Graber and Tom Settles (representatives from Power Construction, LLC) to discuss hiring the joint venture of Degen & Rosato/Power Construction as Emerald's general contractor. (Trustee's SOF ¶ 427.) The Joint Venture issued its proposal to act as general contractor for construction of the casino in a letter dated July 2, 1999, addressed to McQuaid, which stated that the Joint Venture would "perform all the pre-construction and construction services on a fast track basis for a fee equal to five percent (5%) of the total construction cost." (PX238.) Similar to Aria's letter, the Joint Venture's letter to McQuaid stated that it expected to execute a final contract with Emerald in the future, and that "[w]e anticipate the contract form to be consistent with AIA document `Cost of the Work plus a fee' modified to our mutual satisfaction considering the particulars of this project and to reflect the extent of our services and obligations." (Id.) The letter also identified certain additional costs that would not be part of the "fee." (Id.) Later, in October 1999, McMahon, on behalf of Emerald, executed a Letter of Intent dated October 4, 1999 to enter into a final contract with the Joint Venture. (PX252.) The October 4 Letter of Intent, again, anticipated execution of a final contract, providing that "[a] formal contract will be submitted by [the
In addition, Emerald hired and paid the following professionals for services performed on the casino project:
In addition to agreements with Rosemont (see supra Background II.B.2), the IGB found that Emerald failed to disclose various construction agreements, but it only specifically identified the October 4 Letter of Intent with the Joint Venture. (PX162 at 14, 31-32.) Defendants maintain that Rule 140(b)(3), which required Emerald to disclose "changes in or new agreements, whether oral or written, relating to: ... [c]onstruction contracts," applied only to final, executed agreements and not to draft agreements. (C. Defs.' SOF ¶¶ 305, 347-48.) Under the "design-build" approach to construction, which "allow[ed] a project to proceed in advance of finalizing and executing a contract," Defendants note, "a guaranteed maximum price contract can only be issued after all costs had been determined, based upon the final plans and specification." (C. Defs.' SOF ¶ 428.) As a result, Defendants maintain, they never executed final agreements with many of these construction professionals. But the record clearly shows that Emerald entered into some sort of agreement with these construction professionals, who performed services for Emerald, in exchange for payment or an agreement to pay from
In their revised Renewal Application, submitted on September 24, 1999, Emerald (McQuaid)
IGB Rule 140(b)(3) requires licensees to submit "changes in or new agreements"
The minutes of the meeting do not distinguish between preliminary and final contracts, however. Rather, they state that
(PX65 at 3.) Acosta denied that either he or any other IGB representative told Defendants McMahon and Hanley to submit only final, executed contracts, and instead, when McMahon expressed concern that the IGB staff would be overrun with submissions, testified that "my response was to be over-inclusive, give us everything they got. If there were contracts or agreements we do not believe we needed, we would let them know please don't continue to send us this type of agreement." (Bankr.Tr. 367:20-368:25.) Even McDonald, who admitted at trial that this was not consistent with the IGB's past practice, stated that at the September 30, 1999 meeting "Mr. Acosta made that very clear about the — being over-inclusive regarding the documents. I certainly was not in a position to counter him." (See also Bankr. Tr. 1893:21-1894:20.)
In a letter dated October 19, 1999, McDonald requested from Hanley "[s]ignificant contracts or agreements you may have executed since your last submission." (PX318 at 2.) Hanley responded in a letter dated October 29, 1999, stating only that "governmental agreements and significant contracts will be provided when available." (PX319 at 1.) Hanley understood "significant contracts" to mean "one that I would submit to the Board of Directors for their consideration, review and approval before the company would enter into such an agreement." (Bankr.Tr. 2896:14-24.) McDonald's letter did not define "significant
Additionally, Hanley failed to disclose that Emerald had engaged and paid the following professionals for services related to the casino's construction.
In addition, like McQuaid, Hanley failed to disclose agreements with Aria (PX222 at 3), DeJong & Lebet (PX245 at 3), and Michael Toensmeyer for construction services. (PX402.)
Acosta wrote Hanley on January 25, 2000, expressing surprise at the progress of construction, and summarizing the conversation that he and McDonald had had with McMahon and Hanley about submission of contracts to the IGB on September 30, 1999. (PX69 at 1.) Acosta wrote, "[i]t is my understanding that since the time of that meeting, we have not received any contracts from Emerald." He demanded that Emerald produce "copies of all construction contracts pertaining to your proposed facility." (PX69 at 2) (emphasis in original.) Acosta's letter included language that, Defendants contend, communicated that they were required to submit (and the IGB wanted) only copies of final, executed contracts and not draft agreements: Acosta wrote, "If I am mistaken in my belief that such contracts have already been entered into, please advise me accordingly. If, on the other hand, such contracts have been executed and copies have not been timely provided to the IGB, please provide all such contracts immediately." (PX69 at 2) (emphasis added.) Even if Acosta's arguably ambiguous language is interpreted as Defendants suggest, however, the court notes that the agreements they failed to disclose were, in fact, actual agreements — to exchange construction services for payment — regardless of the labels Defendants attached to them. Defendants also took the position that these agreements were not final, because they were subject to change; but Rule 140(b)(3) required disclosure of agreements, even if they were subject to change.
Hanley responded to Acosta's January 25, 2000 letter the following day, disclosing that Emerald had "executed a letter of intent with [the Joint Venture] and two change orders with [DeJong & Lebet], but Emerald has not yet executed construction contracts with either of those firms. Drafts of those and all other construction contracts are either being negotiated or will not be executed until Emerald obtains financing." (DX279 at 1.) Hanley's letter contained the same list of "professionals and consultants" "engaged" by Emerald as set forth in the September 24, 1999 Renewal Application, but failed to disclose that Emerald had entered into subcontractor agreements with Gurtz Electric (PX408), Plote Excavating (PX407), Zalk Joseph Fabricators (PX248), Standard-Hayes Boiler & Tank (PX409), and had incurred, as of January 26, 2000, expenses for services provided by Michael Toensmeyer ($173,012.49), McGuire Engineers
McDonald followed up on January 31, 2000 with a request that Emerald furnish "additional information as it relates to the construction project," including "[a] listing of all written and/or oral contracts, arrangements, work orders, change orders, engagements, hires, commissions of work, requests for performance, exchanges of mutual promises, letters of intent, etc. entered into since July 1, 1999 by Emerald Casino, Inc. If an executed copy has not been negotiated, please submit the most recent draft. If the terms, conditions and/or basis of compensation has not been reduced to writing, please submit a summary of the nature of the business transaction or relationship." (PX72 at 1.) Hanley, with the assistance of McQuaid, responded in a letter dated February 14, 2000, with an enclosure listing "completed written agreements," "agreements not yet fully executed," and "other agreements." (PX405 at 10-11; C. Defs.' SOF ¶ 423.) This time, Hanley and McQuaid submitted a contract with James McHugh Construction Company; a draft contract with Aria; a draft contract with Christopher Burke Engineering; the October 4 Letter of Intent as well as a draft contract and change proposals, with the Joint Venture; a draft contract and change orders with DeJong and Lebet; and a draft contract with Michael R. Toensmeyer. (PX405 at 10.) In addition, Hanley and McQuaid disclosed that McGuire Engineers is a subcontractor of Aria, but that "Emerald does not intend to enter into a contract with ... McGuire." (Id. at 11.)
Hanley and McQuaid still failed to disclose, however, Emerald's relationships with the following subcontractors: Plote Excavating, Zalk Joseph Fabricators, and Standard-Hayes Boiler & Tank. (Id. at 10-11.) Emerald took the position, at an IGB meeting on February 22, 2000, that "Emerald does not enter into any agreements with subcontractors," and Hanley observed that "he does not know who the subcontractors are." (PX858 at 754-55.) Emerald's procedure with the Joint Venture for hiring subcontractors, however, required McMahon, on behalf of Emerald, to provide signature approval of the Joint Venture's subcontractor recommendation. (See, e.g. PX407.) Whether or not this signature approval requirement was an agreement between Emerald and the subcontractor, the IGB found that Emerald had violated Rules 140(a) and 140(b)(3) by failing to disclose "agreements between Emerald and ... subcontractors." (PX162 at 31-32.) And, regardless, in addition to failing to disclose their agreements with contractors, both McQuaid and Hanley failed to disclose agreements between Emerald and construction professionals other than subcontractors.
The IGB concluded in its Final Board Order that Emerald violated Rules 140(a) and 110(a) by "failing to disclose and actively misleading the IGB as to Kevin Flynn's involvement in the operation and management of Emerald." (PX162 at 15-20, 31-32, 34-35.) The IGB also noted that Kevin Flynn "did not tell the truth to the IGB" about his involvement in Emerald before June 1999. (PX162 at 18.) Though Emerald maintained before the IGB (and the Defendants assert in this litigation) that Kevin Flynn did not become involved in Emerald matters until he became Emerald's CEO on June 23, 1999, the IGB found that Kevin Flynn represented Emerald in various meetings with outside gaming interests, some of which
In response, Defendants maintain that between 1996 and 1999, Kevin Flynn's primary responsibility was as CEO of Blue Chip, and to the extent that he was "involved" in Emerald matters, it was solely as the president of Flynn Enterprises, where Kevin Flynn "attended to the day-to-day issues relating to Donald Flynn's investments," and acted as a liaison for his father on behalf of Donald Flynn's investments, including Emerald. (C. Defs.' SOF ¶¶ 77, 79, 82, 117; D. Flynn's SOF ¶ 202.) Defendants explain, further, that because there was at least some overlap between Blue Chip and Emerald — they shared an office space and at times held board meetings on the same days — Kevin Flynn was present for communications concerning Emerald and some Emerald board meetings. (C. Defs.' SOF ¶ 85.) Finally, though Kevin Flynn admitted that he was interested in Emerald's activities preceding June 1999 as a proposed shareholder, Defendants insist that the Emerald Board never gave Kevin Flynn the authority to act on behalf of Emerald before June 23, 1999. (PX1222 at 47; C. Defs.' SOF ¶ 570; D. Flynn's SOF ¶ 201.)
Defendants Kevin Flynn, Joseph McQuaid, Kevin Larson and Donald Flynn made similar representations to the IGB. In two interviews with the IGB on June 29 and September 27, 2000, Kevin Flynn denied becoming involved in Emerald prior to June 1999. (See PX433 at 2; PX1095 at 8-9.) Joseph McQuaid and Kevin Larson similarly told the IGB that Kevin Flynn had no official role with Emerald before June 1999. (PX1094 at 57-58, 237-38 (McQuaid); PX803 at 1 (Larson).)
An IGB report summarizing an IGB interview with Kevin Larson on September 28, 2000, reveals that IGB Agent Kevin Pannier asked Larson "to explain Kevin Flynn's role in HP Inc.," and Larson responded that "Kevin had no role in HP Inc." (PX803 at 1.) Defendants argue that Pannier's question and Larson's response fail to specify a time frame or to define the term "role." (C. Defs.' SOF ¶ 583.) The report itself distinguishes between "HP Inc." and "Emerald," however. (PX803.) "HP Inc." became "Emerald" at Emerald's June 23, 1999 Board Meeting, and therefore, in referring to "HP Inc.," it was clear that Pannier and Larson were discussing Emerald's management before June 1999. (PX1316 at 127.) Additionally, while Pannier did not define the term "role," Larson's flat denial unfortunately erred on the side of under-inclusiveness, where the IGB, and its rules, emphasized full disclosure.
The court acknowledges that this appears to be the only statement that Larson made about Kevin Flynn's involvement in Emerald before June 1999. But this single statement was an important one, as it misled the IGB. To carry out its responsibility to ensure the integrity of gaming in Illinois, the IGB needs to know precisely who has control over gaming licenses and operations. Kevin Larson, who was president of Emerald between 1996 and 1999, was in the best position to know about Kevin Flynn's involvement in Emerald's management. Despite Larson's own title as president, there is evidence that Larson reported to Kevin Flynn and allowed him to act on behalf of Emerald during this
Donald Flynn likewise testified before the IGB on October 10, 2000 that "Kevin Flynn really had no role with [Emerald]" before June 1999, and asserted that Kevin Flynn had not represented Donald Flynn's interest in Emerald in any "significant transactions" during this time. (PX1097 at 11, 13.) Donald Flynn's statement was important to the IGB. In addition to Kevin Flynn's own statements, Donald Flynn was the only Defendant whose testimony the IGB specifically referenced in its Final Board Order to support the conclusion that "the record is replete with clear and convincing evidence" that Emerald dissembled about Kevin Flynn's role. (PX162 at 19.)
Walter Hanley told the IGB that Kevin Flynn did not have an official role with Emerald before June 1999, explaining that "[Kevin Flynn] was an employee. He wasn't an officer." (PX1093 at 47.) Hanley disclosed that Kevin Flynn attended "some of [Emerald's] Board of Directors meetings," but that he was "not aware" whether Kevin Flynn was otherwise involved in Emerald matters before June 1999. (PX1093 at 7, 47.) Pedersen, too, testified on October 31, 2000, that he did not know what Kevin Flynn's role at Emerald was during this time, and recanted an earlier statement to the IGB that Kevin Flynn was active in Emerald's lobbying efforts, testifying instead that he "overstated" Kevin Flynn's role "because it was Joe McQuaid who was involved in that." (PX1100 at 19-21.) The Trustee admits that McMahon made no individual statements to the IGB concerning Kevin Flynn's pre-June 1999 involvement in Emerald, but asserts that McMahon is also liable for these misrepresentations. The Trustee notes that McMahon helped to prepare Emerald's Answer to the IGB's Disciplinary Complaint, submitted on March 26, 2001, denying Kevin Flynn's involvement. Further, McMahon was Emerald's only officer during the IGB Disciplinary Proceedings, in which Emerald denied that Kevin Flynn was involved in Emerald before June 1999. (Trustee's SOF ¶ 183.)
In its Final Board Order, the IGB found that Kevin Flynn in fact did represent Emerald in several meetings and agreements with other individuals and companies with an interest in gaming before June 1999. (PX162 at 16-18.) The Trustee notes that because of the breach of contract action filed by the Davis Companies on October 18, 1999 against Kevin Flynn, Joseph McQuaid, Donald Flynn, and Emerald, "Kevin Flynn had an incentive to minimize his involvement with Emerald with respect to his meeting with the Davis Companies and/or the Duchossois Group" (Trustee's SOF ¶ 319), and more broadly, his authority to act on behalf of Emerald before June 1999.
In November 1997, Glenn Seidenfeld, Jr., president and CEO of Lake County Riverboat L.P., contacted Joseph McQuaid
The Trustee asserts, and the IGB concluded, that Kevin Flynn "negotiated on behalf of Emerald." (PX162 at 16; Trustee's SOF ¶¶ 224-25.) Defendants admit that Kevin Flynn was aware of Emerald's negotiations with Lake County Riverboat
The IGB concluded that no one at Emerald disclosed Emerald's negotiations or
As described in detail earlier, in 1997, Isaac Degen, a friend of Mayor Stephens and principal of Degen & Rosato Construction Company, and Victor Casini, an attorney at Flynn Enterprises, arranged a meeting between Mayor Stephens and Kevin Flynn. (Trustee's SOF ¶¶ 208, 210-11, 213-14; C. Defs.' SOF ¶ 614.) There was a discussion of establishing a land-based casino in Rosemont, but the details of that discussion are disputed. Kevin Flynn asserted, both at trial and in prior statements to the IGB, that he and Mayor Stephens only discussed Blue Chip at the meeting, and not Emerald's possible relocation to Rosemont. The IGB concluded that "Kevin Flynn lied" concerning the purpose of his meeting (PX162 at 16), but, for the reasons explained earlier, the court concludes that the Trustee has failed to present sufficient evidence to definitively conclude what exactly was discussed at the meeting. The court therefore concludes, as well, that the evidence is insufficient to establish that Kevin Flynn was acting on behalf of Emerald at the 1997 meeting with Mayor Stephens.
The IGB found that Kevin Flynn actively participated in negotiations, which culminated in the Davis Agreement on behalf of Emerald. The court agrees that the evidence demonstrates that Kevin Flynn acted on behalf of Emerald at the December 1, 1998 meeting.
On October 28, 1998, Kevin Flynn, Donald Flynn, and Joseph McQuaid met with Duchossois Industries representatives Richard Duchossois, Scott Mordell, and David Filkin at Flynn Enterprises' offices. (Trustee's SOF ¶ 265; C. Defs.' SOF ¶ 133.) At the meeting, the parties discussed collaborative lobbying efforts for legislative amendments favorable to their respective gaming interests. (Trustee's SOF ¶¶ 266-67; C. Defs.' SOF ¶ 134.) Filkin testified that at this meeting Kevin Flynn spoke the most for the Flynn family, though he was "not sure what his [Kevin's] role at the meeting was." (Bankr.Tr. 1466:12-1468:12.) The IGB credited Filkin's testimony, rejecting Kevin Flynn's assertion that he "had no role" at the meeting. (PX162 at 16-17.) In his communications with the IGB, Kevin Flynn admitted that he attended and spoke at the October 1998 meeting, but emphasized that he "had no role as it related to [Emerald] at the meeting." (PX1095 at 66) (9/27/00 Interview.) Instead, Kevin Flynn asserted in a later representation to the IGB, Donald Flynn had invited him to attend, and that "[a]ny misunderstanding
The IGB concluded that these meetings ended with an agreement entered into by Kevin Flynn on behalf of Emerald with the Davis Companies and Duchossois Industries. (PX162 at 17.) Defendants deny that Emerald (through Kevin Flynn or otherwise) entered into any agreement on December 1, 1998, (C. Defs.' SOF ¶ 518), and the court agrees there is insufficient evidence to find an agreement was reached. (See supra Background II.A.2.) It is undisputed, however, that Kevin Flynn met with Colleran, the Davis Companies' Chief Financial Officer, in the late afternoon on December 1, 1998, and that Emerald's license was discussed at the meeting. (C. Defs.' SOF ¶ 504.) Kevin Flynn testified that he thought the purpose of the meeting was to discuss other non-gaming business opportunities with Colleran, but that at the meeting, Colleran mentioned Emerald's license, proposing that the Flynn family enter into a deal with Davis and Duchossois to use Emerald's license for a casino in Rosemont. (Bankr.Tr. 3295:15-25, 3296:24-3299:2.) In addition, he testified that he told Colleran: "I didn't think [Emerald] was going to lose its license, and if for some reason [Emerald] did lose our license, that [Colleran] should call us then." (Bankr.Tr. 3299:17-22) (emphasis added.) The terms of the alleged deal refer only to the "Flynn family" and not to Emerald itself, but Kevin Flynn testified that "I don't know whether [Colleran] meant [Emerald] in that particular transaction or whether it was the Flynn family." (Tr. 2641:7-2642:4.)
After his meeting with Colleran, Kevin Flynn also met with Filkin and Duchossois. (Trustee's SOF ¶ 286; C. Defs.' SOF ¶ 509.) Kevin Flynn testified that he spoke with Filkin and Duchossois about Colleran's offer, and again stated that he did not think Emerald would lose its license. (Bankr.Tr. 3302:21-3303:8.) He also denied entering into any agreement with Filkin and Duchossois during this meeting. (Bankr.Tr. 3303:9-11.) Filkin testified that Kevin Flynn told him and Duchossois that "the deal was the same," which Filkin understood, from "prior discussions" meant "[t]hat the Flynn family would own 37 and a half percent of [Emerald], that the Davis Companies would own 37 and a half percent, that the Duchossoises [sic] would have the opportunity to purchase 20 percent, and that there would be some residual for some local investors." (Bankr.Tr. 1480:1-1481:7) After meeting with Colleran and Duchossois, Filkin testified that he called Kevin Flynn to confirm the deal. (Bankr.Tr. 1482:20-1484:17.)
Whether Kevin Flynn met with Colleran, Filkin and Duchossois on December 1, 1998 on behalf of himself, the Flynn family, or Emerald, is not entirely clear. What is clear, however, is that Kevin Flynn thought at the time that he had some authority
As one final example of Kevin Flynn's involvement in Emerald before June 1999, the Trustee identifies an alleged meeting between Kevin Flynn and Gary Armentrout, Senior Vice President of Business Development and Governmental Relations for Harvey's Casino Resorts. (Trustee's SOF ¶ 236.) The IGB did not discuss this meeting in its Final Board Order.
At trial, Armentrout testified that in June 1997, he met with Kevin Flynn to discuss opportunities for Harvey's to enter into a joint venture with or to invest in Emerald. (Bankr.Tr. 2208:12-2209:9.) At the time, Armentrout was responsible for finding new gaming opportunities for Harvey's. (Trustee's SOF ¶ 237; C. Defs.' SOF ¶ 631.) Armentrout testified that he had spoken with Kevin Flynn prior to this meeting (Bankr.Tr. 2209:10-2211:19), and Kevin Flynn's phone records indicate that he received at least one message from Armentrout and another from Emerald's lobbyist Tim Hennessey concerning a possible meeting with Armentrout. (PX560 at 13.) According to Armentrout, in June 1997, Kevin Flynn picked him up from the airport in Chicago, and drove him to Blue Chip Casino. (Bankr.Tr. 2208:16-24.) Kevin Flynn testified that he did "not specifically" remember meeting with Armentrout in June 1997. (Bankr.Tr. 3316:15-21.)
In a letter dated June 5, 1997, Armentrout wrote to Kevin Flynn: "I appreciated the opportunity to finally meet with you to discuss the status of your riverboat casino gaming license in East Dubuque (Galena)." (PX561 at 1.) Throughout the letter, Armentrout directs statements concerning Emerald and Emerald's license at Kevin Flynn — "[y]ou have a casino license that will expire in July;" "The Illinois Legislature adjourned Saturday night without passing a gaming bill that would give you a legislative solution;" "With your license expiring in July it appears that you only have three options" — language demonstrating that Armentrout understood Kevin Flynn to represent Emerald. (PX561 at 1-2.) The letter concludes by outlining a potential agreement with Harveys. (Id. at 2-3.) The letter was addressed to Kevin Flynn at Blue Chip Casino, with a copy to Hennessey, Emerald's lobbyist. (Id. at 1, 3.) Kevin Flynn testified that he did not remember receiving this letter. (Bankr. Tr. 881:3-5.) Armentrout testified that he spoke with Kevin Flynn about a possible joint venture on the phone after this meeting (Bankr.Tr. 2216:17-23), and Kevin
There is sufficient evidence to conclude that Kevin Flynn, acting on behalf of Emerald, met with Armentrout in June 1997, contrary to Kevin Flynn's insistence that he had no role in Emerald before June 1999.
The Trustee asserts that Kevin Flynn was "actively involved" in lobbying for a legislative amendment to allow Emerald to relocate its license. (Trustee's SOF ¶ 201.) The IGB made no specific findings with respect to Kevin Flynn's involvement in these lobbying efforts, instead referring to the lobbying activities only in support of its finding that Emerald failed to disclose or misrepresented its plan to move the casino to Rosemont, and Kevin Flynn's involvement in Emerald's agreement with the Davis Companies and Duchossois Industries. (See PX162 at 6-10, 17.)
Defendants maintain that Joseph McQuaid, not Kevin Flynn, was responsible for Emerald's lobbying efforts, and McQuaid reported to Kevin Larson about his progress. (C. Defs.' SOF ¶¶ 122-24, 611.) Kevin Flynn remained informed about Emerald's lobbying efforts, Defendants assert, solely on behalf of Donald Flynn, who funded the lobbying efforts and wanted information on how the money had been spent after each legislative session to determine whether to continue funding it. (C. Defs.' SOF ¶¶ 120-21, 124, 610, 612.) Additionally, Kevin Flynn testified at trial that he interacted with Emerald's lobbyists Hennessey and Leone, and engaged in some lobbying efforts on behalf of Flynn Enterprises. Neither McQuaid nor Kevin Flynn was convincing on this issue.
The Trustee presented evidence that in 1997 Kevin Flynn received at least two memorandums from Emerald's lobbyists Tony Leone and Tim Hennessey concerning Emerald's lobbying efforts. (PX587; PX588; Trustee's SOF ¶ 203.) In addition,
In addition to his trip to Danville, the record shows that Kevin Flynn also traveled to Springfield on at least two occasions, and admitted to doing so when questioned by the IGB. (PX1095 at 20-22, 79-80; C. Defs.' SOF ¶ 612.) In April or May of 1999, Kevin Flynn traveled to Springfield with David Filkin, Richard Duchossois, and Duchossois's lobbyist Jim Fletcher, and Defendants have admitted that the "[d]uring the trip the parties discussed pending legislation." (PX1065 at 13; Trustee's SOF ¶¶ 299-300; C. Defs.' SOF ¶ 612.) In Springfield, Kevin Flynn, Duchossois, and Leone, but not McQuaid, attended a meeting concerning the legislation. (Trustee's SOF ¶ 300; C. Defs.' SOF ¶ 612; see also Tr. 2660:11-16, 21-22.) Kevin Flynn and Leone went out to lunch after the meeting and continued to discuss the legislation. (Tr. 2660:23-266 1: 1.) Kevin Flynn told Sergio Acosta at an interview on September 27, 2000 that he attended the meeting to witness Emerald's lobbying efforts on behalf of his father and as a "pending applicant" in Emerald, but that he "didn't really have a capacity" or role at the meeting. (PX1095 at 87:3-88:6.) Again, on May 25, 1999, the day that the legislation was passed, Kevin Flynn traveled to Springfield with Hanley and McQuaid. (Trustee's SOF ¶ 303; C. Defs.' SOF ¶ 612.)
Finally, David Filkin and Richard Levy testified that they spoke with Kevin Flynn multiple times before the legislation was passed in May 1999 about Emerald's lobbying efforts for legislation that would allow it to relocate its license. (Bankr.Tr. 1488:5-1494:15 (Filkin); Bankr.Tr.2015:1-2016:18 (Levy).) And Kevin Flynn admitted that he met with Colleran in February 1999. (Bankr.Tr. 965:24-966:3.)
The court concludes that Kevin Flynn did participate in lobbying efforts, and likely did so on behalf of Emerald — though he testified that he did so on behalf of Flynn Enterprises and/or Donald Flynn, he admitted that Flynn Enterprises had no interest in Emerald. Nor did Blue Chip, where Kevin Flynn was CEO, have an interest in Emerald's license. Yet Kevin Flynn appeared to interact with other individuals such as David Filkin, Duchossois, and Levy, on behalf of Emerald itself. The court agrees with the Trustee that Kevin Flynn's lobbying activities support the finding that he was involved with Emerald
In 1996, Donald Flynn attained control of Emerald through the purchase of shares. Thereafter, the Trustee maintains, though Kevin Larson held the title of President of Emerald, Kevin Flynn was the "de facto CEO of Emerald." (Trustee's SOF ¶¶ 184, 329; C. Defs.' SOF ¶¶ 596, 598.) The IGB Final Board Order did not make such a finding, but did note Kevin Flynn's attendance at Emerald Board of Directors meetings (and the testimonies of Kevin and Donald Flynn concerning his attendance) as additional evidence of Emerald's failure to disclose and/or misrepresent Kevin Flynn's involvement in Emerald before June 1999. (PX162 at 18.)
Between January 1997 and April 1999, Kevin Flynn attended four of six total Emerald Board of Directors meetings — on April 29, 1997, June 19, 1997, June 30, 1997
Kevin Flynn told the IGB that he attended Emerald Board meetings because they coincided with Blue Chip Board meetings, and later, that he was interested as a proposed shareholder. In a report prepared by IGB Agent Kevin Pannier summarizing his interview with Kevin Flynn on June 29, 2000,
Donald Flynn and McQuaid provided a similar explanation to the IGB for Kevin Flynn's presence at Emerald Board meetings. On October 10, 2000, Donald Flynn stated that Emerald and Blue Chip's Board of Directors "for the most part met at the same time because it was an overlap of directors, and Kevin sat in on most of the meetings as a result of that." (PX1097 at 29.) McQuaid, similarly, stated in a September 26, 2000 interview with the IGB, that Kevin Flynn did not represent Donald Flynn at these meetings, and attended Emerald Board meetings because they took place either before or after Blue Chip Board meetings. (PX1094 at 237-38.)
In fact, however, only one of the meetings that Kevin Flynn attended prior to June 23, 1999, the April 28, 1999 meeting, coincided with Blue Chip's Board of Directors' Meetings. (Trustee's SOF ¶ 322.) Half of the Emerald Board meetings Kevin Flynn attended during this time took place telephonically. (PX1316 at 89-92, 98.) Defendants argue that when Kevin Flynn, Donald Flynn, and Joseph McQuaid were asked about Kevin Flynn's presence at Emerald Board meetings, the question did not specify a time frame, implying that these Defendants may have overstated the number of times Emerald and Blue Chip Board meetings overlapped. (C. Defs.' SOF ¶¶ 601, 605-06.) But, even assuming that there was more overlap of meetings, Defendants still fail to explain why, other than because Kevin Flynn was "curious," he attended a majority of Emerald's Board meetings before he became CEO and Chairman of Emerald on June 23, 1999.
As noted, Kevin Flynn repeatedly told the IGB that he did not have any management role with Emerald until June 1999. (PX353 at 3 (Letter from Kevin Flynn to
After Donald Flynn took control of Emerald in 1996, Flynn Enterprises employees replaced Aerie Management Company staff as managers of Emerald, and Donald Flynn delegated Emerald's day-to-day operations to Kevin Flynn,
Providing Kevin Flynn with information to convey to his father may have been in Kevin Larson's best interest, but contemporaneously-drafted documents provide evidence of Kevin Flynn's own management role in Emerald before 1999.
Additionally, Richard Levy, who participated in Emerald's management on behalf of Board member Eugene Heytow, testified that he worked "almost exclusively with Kevin Flynn" on Emerald management issues between June 1996 and May 1999, and that he was "told by Kevin [presumably Kevin Flynn] and others that I should deal with Kevin [Flynn], he was running the company, and so I did." (Bankr.Tr.1996:1-1997:2.) During this time, Levy testified, he spoke with Kevin Flynn about Emerald's financial situation; Levy recalled that Kevin Flynn asked him whether Heytow would loan or invest additional money in Emerald, and told Levy, regarding a loan that Emerald was seeking from Bank of America, that he [Flynn] "hoped he could get this loan done for [Emerald]." (Bankr.Tr.1999:8-2001:13.) Kevin Flynn denied telling Levy that Levy should contact him regarding Emerald matters because he was "running the company" and knows of no one else at Emerald who told Levy that. (Bankr.Tr. 3290:13-18.) Defendants note that, too, that Kevin Flynn had informed Levy that he was not an officer or director in a letter dated April 27, 1999, implying that Levy knew that Kevin Flynn had no authority for Emerald. (PX15; C. Defs.' SOF ¶ 637.)
Yet other activities are consistent with Levy's apparent understanding that Kevin Flynn was involved in managing Emerald. In November 1996, Kevin Flynn and Donald Flynn met with IGB Administrator Michael Belletire regarding Emerald matters, including an employee stock award plan. (Trustee's SOF ¶ 196; C. Defs.' SOF ¶ 83; see also PX114 at 13-17; Bankr.Tr. 834:18-835:2.) Donald Flynn explained to the IGB that Kevin Flynn accompanied him to the IGB meeting because he was interested in gaming, was a proposed shareholder in Emerald, and acted as a "liaison" to Donald Flynn regarding Emerald matters. (PX1097 at 22-23.) Kevin Larson, Emerald's president, did not attend the meeting. (Trustee's SOF ¶ 196; see also PX114 at 13.) And, as indicated above, Kevin Flynn wrote to Pedersen on June 26, 1996 stating "[w]e are preparing [Emerald's] license renewal materials." (PX865 at 1.)
In addition, Kevin Flynn negotiated loan financing with Bank of America on behalf of Emerald. When Donald Flynn increased his control in Emerald in 1996 pursuant to a Stock Purchase Agreement, he committed to making "reasonable best efforts to cause Bank of America to release
Instead, the evidence is that Kevin Flynn participated in Emerald's negotiations with Bank of America to restructure the line of credit. (Trustee's SOF ¶ 189.) In July 1996, Kevin Flynn met with John Compernolle from Bank of America regarding restructuring Emerald's line of credit. (Trustee's SOF ¶ 189; see PX284; PX865 at 1 (June 26, 1996 letter from Kevin Flynn to Pedersen, stating "I have scheduled a meeting with John Companelle [sic] for Monday, July 9 and expect to get things moving there.").) After the meeting, Compernolle wrote Kevin Flynn a letter on July 12, 1996, enclosing "[Bank of America's] term sheet for the proposed restructuring of the [Emerald] credit facility." (PX284.) The letter was addressed to Emerald in care of Kevin Flynn at Flynn Enterprises, Inc., and both Heytow and Pedersen were sent copies. (Id.) Kevin Flynn admitted receiving the letter. (Trustee's SOF ¶ 190.) Defendants assert that "there was no `negotiation' of the guaranty," which resulted in the line of credit restructuring, because the "restructuring" only referred to the change in guarantors. (C. Defs.' SOF ¶ 591.) Kevin Flynn participated in the transaction, Defendants maintain, "on behalf of the Flynn family" and "as President of Flynn Enterprises" representing Donald Flynn's investment in Emerald. (C. Defs.' SOF ¶¶ 592, 594.) Kevin Flynn testified that he did not know who negotiated the terms of the restructuring, and denied doing it himself. (Bankr.Tr. 831:1-19.) His testimony is not credible; the court finds that Kevin Flynn was actively involved in negotiating the terms of the loan. Regardless of the details, both parties agree that the restructuring was for a line of credit from Bank of America to Emerald, and resulted in an Amended and Restated Term Loan Agreement between Emerald and Bank of America, ultimately executed by Kevin Larson. (PX425; Trustee's SOF ¶¶ 189-92; C. Defs.' SOF ¶¶ 590, 595.) As describe earlier, Larson testified that he did not negotiate the restructuring, and in fact, that he "[did not] know who negotiated it." (Bankr.Tr. 1594:2-1595:15.)
Given the porous connections between Flynn Enterprises, Donald Flynn individually, and Emerald, it is not surprising that different individuals such as Richard Levy and David Filkin, and even Defendants themselves, would have varying understandings of the capacity in which Kevin Flynn was working on Emerald matters during this time. Donald Flynn admitted that, though his ownership interest in Emerald was held by himself individually, he did not treat his investments through Flynn Enterprises any differently than those he held individually. (C. Defs.' SOF ¶¶ 80, 84; D. Flynn's SOF 198.) Between 1996 and June 1999, Kevin Larson was president of both Blue Chip and Emerald, as well as COO of Blue Chip, and Kevin Flynn was CEO and Chairman of Blue Chip. (Trustee's SOF ¶¶ 43-44; C. Defs.' SOF ¶¶ 21, 29.) In June 1999, Larson and Kevin Flynn adopted the same positions in both corporations — Larson remained president
The IGB Final Board Order concluded that Kevin Flynn, a Key Person
Between 1996 and 1999, several of Emerald's principals also were principals for Blue Chip Casino. (Trustee's SOF ¶¶ 43-44, 55, 57, 102; C. Defs.' SOF ¶¶ 6, 9, 16, 21.) In June 1999, Boyd Gaming,
Under those terms, Boyd Gaming agreed to pay Kevin Flynn an annual salary of $500,000 plus expenses for the term of five years, with the potential for a $5 million bonus if no Native American casinos
Kevin Flynn submitted two filings to the IGB in which he failed to disclose the existence of the Field Street Agreement. In June or July 1999,
Around the same time, in late July or early August 1999
Kevin Flynn was not yet a party to the Amended Shareholders' Agreement, which he executed on August 6, 1999 (PX1008 at 36; see infra Background IV.B.3), at the time that he submitted his Form 1 and PDF 1, but IGB Rule 140(a)
The IGB did not become aware of the Field Street Agreement until June 29, 2000, when Kevin Flynn disclosed its existence in an interview with IGB Agent Kevin Pannier. (Trustee's SOF ¶ 701.) In response to Pannier's question regarding updates to Kevin Flynn's Form 1 since it was submitted in July 1999, Kevin Flynn disclosed that he had an interest in Field Street, Inc., which had entered into the Field Street Agreement.
In addition to Kevin Flynn, only Kevin Larson appears to have been aware of the Field Street Agreement. (Trustee's SOF ¶ 704.) Kevin Larson testified that he learned about the Field Street Agreement when reviewing a draft of sales documents related to the sale of Blue Chip to Boyd Gaming in April or May 1999. (PX1228 at 11-12; Bankr.Tr. 1616:4-19.) But, Kevin Larson testified that he thought that it was Kevin Flynn's responsibility to disclose the agreement. (Bankr.Tr. 1616:20-1618:2.) There is no evidence that Kevin Larson communicated this belief to Kevin Flynn, but this court agrees that it was Kevin Flynn's responsibility, and finds that only Kevin Flynn failed to disclose the Field Street Agreement. The court notes, as well, that the irony (if not hypocrisy) of his anti-gambling lobbying activities appeared to be lost on Kevin Flynn.
Emerald's original Shareholders' Agreement, dated December 31, 1991 and executed by the eighteen original shareholders (PX1008 at 122-38; C. Defs.' SOF ¶ 239; D. Flynn's SOF ¶ 127), required that shareholders seeking to sell their shares give Emerald and existing shareholders 90 days' notice and the first option to purchase before shares were made available to outsiders. (PX1008 at 116-17; Trustee's SOF ¶ 512.) In August 1999, however, Emerald amended its Shareholders' Agreement, including the provisions governing the transfer of shares. (PX1008 at 4, 5.) The Amended Shareholders' Agreement required only that shareholders intending to sell shares provide Emerald with 10 days' notice of the sale, eliminating altogether the notice requirements to existing shareholders and the first option provision. (PX1008 at 5; Trustee's SOF ¶ 515.)
Emerald's General Counsel, Walter Hanley, consulted outside counsel from two law firms for legal advice on making amendments to the original Shareholders' Agreement. He did so, Defendants assert, in order to ensure compliance with Section
On July 29, 1999, McQuaid sent existing Emerald shareholders a letter explaining the amendments to the Shareholders' Agreement along with a copy of the Amended Shareholders' Agreement, and a marked-up version of the Shareholders' Agreement identifying the proposed changes. (Trustee's SOF ¶ 517; C. Defs.' SOF ¶ 243; D. Flynn's SOF ¶ 132.) The letter explained that one reason for the amendments was because "[t]he IGB has requested that all licensees address certain regulatory issues in a shareholders' agreement, and ours needs to be modified to address these regulatory concerns." (PX359 at 2.) Hanley testified that the "regulatory concerns" cited by McQuaid in the July 29, 1999 Letter were based on Will McMaster's advice that Emerald's Shareholders' Agreement needed to include several new provisions, such as a mechanism to add new shareholders, and a provision making them subject to the Shareholders' Agreement. (Tr. 1222:21-1223:16.)
The Trustee notes, however, that the amendments to the Shareholders' Agreement removed provisions that Emerald had previously added at the IGB's request. (Trustee's SOF ¶ 517.) In a letter to Joseph Duellman of Aerie Management (then Emerald's operations management firm) dated April 25, 1996, IGB Administrator Belletire explained that "[a] recent occurrence involving the transfer of an ownership interest in an owner licensee without prior Board approval has caused the Board concern," and therefore, in order to ensure that transfers comply with IGB rules, the IGB required owner licensees to add provisions in their "by-laws, shareholders' agreements or other agreements," specifying the following:
(PX896 at 1.) The letter identifies other provisions to ensure that these requirements are met, such as: "a mechanism by which [owner licensees], or their existing ownership interest holders, may immediately purchase or redeem the stock of an interest holder in the event the interest holder fails to meet [IGB requirements];" and "provisions which give the company, and/or existing interest holders, the right to purchase a shareholder's interest in the event of death, bankruptcy, insolvency or other involuntary transfer, subject to the Board's approval." (PX896 at 2.) Kevin Larson had responded to Belletire's letter on November 11, 1996, and identified the mechanisms created by Emerald in its original Shareholders' Agreement to address the IGB's transfer concerns, which included the ninety-day notice requirement, and the right of first option available for existing shareholders. (PX915 at 1.)
Though the parties do not dispute the substance of the 1999 changes, they disagree about their purpose and effect, including whether the Amended Shareholders' Agreement did satisfactorily ensure compliance with IGB rules. According to the Trustee, Donald Flynn and some of the other Defendants sought to amend the Shareholders' Agreement in order to make it easier for existing shareholder Donald Flynn to transfer shares to "local investors," specifically affiliates of Mayor Donald Stephens of Rosemont, in exchange for his support of legislation that allowed Emerald to move its license. (Trustee's SOF ¶¶ 522-23, 536.) Defendants do not deny that the amendments they proposed in 1999 made it easier for existing shareholders to transfer their shares, but instead assert that these amendments were necessary to comply with another legal requirement: Section 11.2's requirement that twenty-percent of Emerald shares be held by female and minority investors. (C. Defs.' SOF ¶¶ 240, 244; D. Flynn's SOF ¶¶ 128, 133.) The Amended Shareholders' Agreement did contain several of the provisions addressed by Belletire; paragraph 4.03 requires a shareholder intending to transfer his shares to give Emerald 10 days' written notice; paragraph 4.07 makes all transfers to outsiders subject to IGB approval; paragraph 2 states that "any transfer of Shares made in conflict with or in derogation of any such terms, provisions or conditions of this Agreement shall be of no legal force and effect and have no validity;" and paragraph 5.01 required a shareholder to "promptly sell his Shares to the Corporation or another Shareholder thereof" if the IGB does not approve that shareholder. (PX1008 at 4, 5, 6.)
The Amended Shareholders' Agreement became effective upon execution by all original shareholders. (Trustee's SOF ¶ 521.) Emerald provided the IGB with a copy of the Amended Shareholders' Agreement in their Renewal Applications submitted on August 10 and September 24, 1999. (C. Defs.' SOF ¶ 246.)
Defendants Kevin Flynn, McQuaid, McMahon, Larson, and Hanley argue that they are not shareholders (or otherwise
On June 23, 1999, Emerald's Board of Directors approved a Restricted Stock Award Plan ("1999 Restricted Stock Plan"), under which "key officers and employees" would receive shares of Emerald stock. (PX521 at 2; Trustee's SOF ¶ 74; C. Defs.' SOF ¶ 153.) Under the 1999 Restricted Stock Plan, the Officer Defendants could not sell stock before certain dates, and were subject to forfeiture requirements in the event that they were no longer employees of Emerald. (PX521 at 4.) "Except for such restrictions," the 1999 Restricted Stock Plan provided that "the Participant, as owner of such shares, shall have all the rights of a shareholder of the Corporation, including (but not limited to) the right to receive all dividends paid on such shares ... and the right to vote such shares." (PX521 at 4.)
Kevin Flynn, Joseph McQuaid, John McMahon, Kevin Larson, and Walter Hanley each executed Restricted Stock Agreements on June 23, 1999. (PX521 at 18, 22, 26, 30, 44.) Each agreement recited the following: "Company hereby grants to Key Employee and Key Employee hereby accepts from Company [number of shares] shares of common stock of [Emerald] (`Shares')." (PX521 at 11, 19, 23, 27, 31.) Though the Restricted Stock Agreements do not explicitly state that the transfer of shares under the agreement is subject to IGB approval, they do state that "the terms of the [1999 Restricted Stock Plan] are incorporated herein by reference and Key Employee's rights hereunder are subject to such terms to the extent they are inconsistent with or in addition to the terms set forth herein and Company and Key Employee hereby agree to comply with requirements of the Plan." (PX521 at 9.) The 1999 Restricted Stock Plan refers to the requirement of IGB approval, stating that the Plan would "become effective on June 23, 1999 (subject to approval, to the extent required, by the Illinois Gaming Board or its Administrator)...." (PX521 at 2.) Defendants Kevin Flynn, McQuaid, McMahon, Larson, and Hanley all executed stock certificates the same day. (Trustee's SOF ¶ 77; C. Defs.' SOF ¶ 158.) Each stock certificate stated, "This certifies that [name] is the owner of [number of shares] full paid and non-assessable shares of the capital stock of [Emerald]...." (PX1282 at 81-95.)
Defendants now contend that they never actually received the stock certificates because their stock certificates were "held in escrow in Hanley's office." (C. Defs.' SOF ¶ 251.) Notably, Hanley was one of the "key employees" to whom Emerald had issued stock under the 1999 Restricted Stock Plan, and as a result, his own stock certificate was "escrow[ed]" in his office. Hanley testified that in his view escrow did not necessarily mean that these items were required to be held by a "neutral third party," and acknowledged that the stock certificates were "held by [Emerald]." (Bankr.Tr. 2745:5-21.)
In addition to the 1999 Restricted Stock Plan, Defendants Kevin Flynn, McMahon, Hanley, and McQuaid purchased Emerald shares from Donald Flynn on November 15, 1999 pursuant to an Amended and Restated Purchase Agreement. (PX413; Trustee's SOF ¶ 80; C. Defs.' SOF ¶ 325.) In the agreement, Donald Flynn agreed to "sell, transfer, assign and deliver" and Defendants agreed to "purchase from [Donald Flynn]" shares of Emerald "effective as soon as practicable after the date (a) the
Significantly, each of the Officer Defendants executed, as "shareholder[s]," and as such are parties to, the Amended Shareholders' Agreement on August 6, 1999.
In addition, the Officer Defendants acted as if they were shareholders, and adhered to the terms of the Amended Shareholders' Agreement. Emerald's bylaws provided that only shareholders of record were entitled vote at shareholders' meetings. (PX1317 at 5, 22.) All of the Officer Defendants attended Emerald shareholder meetings, and voted their shares according to the terms of the Amended Shareholders' Agreement. (PX23 (8/12/99 Shareholders' Meeting); PX29 (2/25/00 Shareholders' Meeting); PX40 (3/6/01 Shareholders' Meeting); PX1008 at 7, ¶ 9.)
Emerald treated all of its proposed shareholders (those awaiting IGB approval) as bound by the Amended Shareholders' Agreement. Prior to the 2001 Shareholders' Meeting, Hanley mailed a letter to twelve of the proposed shareholders (the "Twelve Outsiders") and the statutory investors informing them of their voting rights and obligations under the Amended Shareholders' Agreement. (PX1124; Bankr.Tr. 2755:8-22.) At trial, Hanley explained that he sent this letter because "[u]nder [Emerald's] bylaws the definition of shareholder is a holder of record of units of proprietary interest in [Emerald]. These individuals had proprietary interest in [Emerald].... The Gaming Board allowed individuals to act in the capacity after they had Personal Disclosure Form 1 applications submitted to the Gaming Board. All of these individuals had done that." (Bankr.Tr. 2758:6-2759:4.) Hanley's testimony reflects the understanding that individuals could be shareholders of Emerald (with all the attendant rights and responsibilities) before receiving IGB approval. The Officer Defendants, like the Statutory Investors and Twelve Outsiders, were treated as shareholders by Emerald though they were never approved by the IGB as such. (C. Defs.' SOF ¶¶ 269, 338.)
Emerald also referred to its issuance of stock to the Officer Defendants in 1999 as income to those individuals for tax purposes. (See PX18 at 8) (Emerald's Board authorized Emerald's officers to value the restricted stock issued under the 1999 Restricted Stock Plan at $100,000 "for tax purposes.") Emerald identified the Officer Defendants as shareholders on its own Subchapter S federal tax returns in 1999 and 2000. (PX404 at 67-81, 236 (1999 Tax Return); PX1128 at 60-74, 217-18 (2000 Tax Return); C. Defs.' SOF ¶ 480.)
Finally, the Officer Defendants represented themselves as shareholders to the Bankruptcy Court. In Emerald's Statement of Financial Affairs, filed on September 26, 2002, Emerald identified Kevin Flynn, Larson, McQuaid and McMahon
Between June and November 1999, existing shareholder Donald Flynn both acquired and sold shares of Emerald stock. In June 1999, Donald Flynn significantly increased his interest in Emerald by exercising two options which he had received in exchange for a 1996 loan to Emerald, and by converting to equity some debt that Emerald owed him under a 1997 Credit Agreement. (Trustee's SOF ¶ 506; D. Flynn's SOF ¶ 124.) On July 14, 1999, Emerald issued Donald Flynn 2,633 shares of Emerald common stock, and as a result, as of July 15, 1999, Donald Flynn owned 3,600 shares of Emerald stock, a seventy-four percent ownership interest. (Trustee's SOF ¶¶ 509, 511; D. Flynn's SOF ¶ 124.) In a letter to IGB Deputy Administrator McDonald dated July 15, 1999, McQuaid provided the IGB with a list of Emerald shareholders and the total number of shares and corresponding percentage ownership interest held by each shareholder. (Trustee's SOF ¶ 510.)
Just a few weeks later, between September 1 and September 17, 1999, Donald Flynn sold 294 shares of Emerald stock to twelve outsiders ("Twelve Outsiders")
Shortly thereafter, Donald Flynn agreed to purchase all of the shares owned by five existing shareholders in the Pedersen group ("Five Insiders")
The Trustee contends the transfers had two purposes: first, Donald Flynn's sale to the Twelve Outsiders satisfied Emerald's obligation under the alleged Davis agreement to sell five percent of its shares to "local" investors, specifically those affiliated with Rosemont and Mayor Stephens, (Trustee's SOF ¶¶ 583-84), and second, Donald Flynn's subsequent purchase of the same number of shares ensured that he retained majority control of Emerald. (Trustee's SOF ¶¶ 537, 584-85.) With respect to the first of these purposes, the Trustee refers, again, to the deal allegedly entered into on December 1, 1998, in which Emerald allegedly agreed to provide five percent of its shares to local investors in exchange for the support of the Davis Companies and Duchossois Industries in seeking legislation that would allow Emerald to move its license. (Trustee's SOF ¶ 583.) Consistent with the terms of that alleged agreement, the local investors were, as the IGB Final Board Order recognized, closely associated with Mayor Stephens. (PX162 at 25.)
Defendants deny that these transfers were part of any deal. (C. Defs.' SOF ¶¶ 322, 340; D. Flynn's SOF ¶¶ 151, 154, 176.) Contrary to the Trustee's assertion that at least some of the Twelve Outsiders were chosen because of their affiliation with Rosemont, Defendants maintain that these investors were in fact selected from a list kept by McQuaid of approximately twenty individuals who had expressed interest,
The Trustee argues that in addition to complying with the term of Emerald's alleged "deal," Donald Flynn's sales reflect his effort to maintain control of Emerald. Thus, the Trustee notes, Donald Flynn purchased the 294 shares from the Five Insiders at a loss.
According to Donald Flynn, it was no more than "some kind of strange coincidence" that his sale to the Twelve Outsiders amounted to the same number of shares he subsequently purchased from the Five Insiders. (Trustee's SOF ¶ 557; see also D. Flynn's SOF ¶ 176.) And, in fact, the overall deals did not involve identical numbers of shares; Donald Flynn agreed to sell 2,804.9513 shares to twenty-three individuals and trusts, including 294 shares to the Twelve Outsiders, and then later agreed to purchase 325.44286 shares from Pedersen and the Five Insiders. (D. Flynn's SOF ¶¶ 149, 176.) Donald Flynn testified that he chose to sell because he wanted to lower his financial exposure to Emerald, which contained certain risks as an investment, including the possibility that Emerald's license would not be renewed, and possible "political backlash" from the choice of Rosemont as a site. (Bankr.Tr. 2608:1-2611:5.) He later chose to purchase shares from the Five Insiders who were "unhappy" with their investment in Emerald.
On August 10, 1999, Acosta informed Emerald that the IGB had not yet determined how Section 11.2 affected the ALJ's recommendation to deny Emerald's 1997 application for renewal of its license. (D. Flynn's SOF ¶ 141.) On September 7, 1999, IGB approved a motion finding the ALJ's recommendation moot in light of new legislation. (D. Flynn's SOF ¶ 164.) Though Donald Flynn apparently began to sell shares to the twenty-three proposed shareholders, including the Twelve Outsiders on September 1, 1999 (PX416), he did not notify Emerald of his intent to sell shares until September 13, 1999, after the risk of non-renewal of Emerald's 1997 application had passed. (PX324.) Further casting what she deems a cloud of suspicion over the Donald Flynn transactions, the Trustee notes that Donald Flynn turned down at least two potential offers to sell shares in July 1999. He declined to sell shares to at least one friend interested in investing and, like the other existing shareholders, Donald Flynn did not sell any of his own shares to Emerald in July 1999 for resale to prospective female and
The Trustee asserts that McQuaid and Donald Flynn's testimony concerning these transfers is contradictory, and therefore, not credible. (Trustee's SOF ¶ 528.) For example, while McQuaid testified that Donald Flynn approached McQuaid about possibly selling approximately $5 or $6 million in shares, Donald Flynn testified that it was McQuaid who asked him if he would be interested in selling shares. (Trustee's SOF ¶¶ 529, 531.) And, while McQuaid testified that he gave Donald Flynn a list of interested, non-minority investors, Donald Flynn denied speaking with McQuaid about prospective shareholders or receiving such a list. (Trustee's SOF ¶¶ 530-31.) The Trustee notes, further, that Peer Pedersen told the IGB in June 2000
The amendment to Section 11.2 of the Riverboat Gambling Act, enacted in June 1999, mandated that twenty percent of Emerald's shareholders be female or minority investors (the "Statutory Investors"), specifically, at least sixteen percent minority and four percent female investors. 230 ILCS 10/11.2(b).
McQuaid
At Emerald's Board Meeting on August 12, 1999, the Board unanimously approved EVI's stock valuation, which concluded that the fair market value for twenty percent of Emerald stock as of July 31, 1999 was $30,750,000, or $1,537,500 per one-percent interest. (PX20 at 2-3; PX317 at 2-3.) Emerald's Board then unanimously approved Emerald's sale of twenty percent of the common stock to the Statutory Investors, based on EVI's valuation, effective immediately. (PX20 at 2-3; Trustee's SOF ¶ 610; C. Defs.' SOF ¶ 257; D. Flynn's SOF ¶ 76.) Before the meeting, Walter Hanley had provided Emerald's directors with copies of the application packet given to the Statutory Investors, including the notice that any sale of stock would be subject to IGB approval. (C. Defs.' SOF ¶ 256; D. Flynn's SOF ¶ 72.) At the meeting, Hanley presented information about issuance of stock, and Joseph McQuaid informed the Board that Emerald would try to satisfy the statutory requirement of twenty-percent female and minority investors by August 31, 1999. (Trustee's SOF ¶ 610; C. Defs.' SOF ¶ 256; D. Flynn's SOF ¶ 74.) The Board consented unanimously to Emerald's sale of stock to the Statutory Investors, authorizing Emerald to offer to sell to, and accept documents and payment from, interested investors. The Board also determined that funds paid by the Statutory Investors (approximately $30 million for twenty-percent of Emerald's common stock) would be placed in Emerald's "paid-in capital account." (PX522; Trustee's SOF ¶ 611.) The Board directed, as well, that Emerald "issue such shares and ... execute and... deliver to the respective minority persons and females stock certificates ... representing such shares" only "upon receipt of any necessary approvals of such minority persons and females by the Illinois
Defendants assert that the vote to authorize the immediate sale of shares to the Statutory Investors was in Emerald's best interest. (C. Defs.' SOF ¶ 258; D. Flynn's SOF ¶ 79.) Defendants acknowledge that Emerald needed capital from those investors to proceed with construction and development of the casino (id.), and McQuaid also was concerned that the price of shares would rise and become cost-prohibitive. (C. Defs.' SOF ¶¶ 188, 254.) Peer Pedersen asserts that Joseph McQuaid and Walter Hanley informed the Board that using the funds received for sale of shares to the Statutory Investors was either approved by IGB and/or permitted under IGB rules. (Pedersen's SOF ¶ 45; see also D. Flynn's SOF ¶ 78 (referring to the July 1, 1999 meeting with Casey).) All of the Directors voted to approve the sale of shares to the Statutory Investors subject to IGB approval, and the Trustee has sued them all, except for Eugene Heytow. (D. Flynn's SOF ¶ 80; Pedersen's SOF ¶ 44.)
In exchange for agreeing to sell stock to approximately twenty-three prospective Statutory Investors,
The parties dispute only the significance of the transfers to and from Donald Flynn and from Emerald to the Statutory Investors. In its Final Board Order, the IGB concluded (1) Emerald violated Rules 140(a), 140(b)(5), and 110(a) by "failing to disclose" and/or "providing false, misleading or incomplete information to the IGB" concerning the transfer of Emerald shares (PX162 at 33, 34-35), and (2) Emerald violated Rule 235(a) in "fail[ing] to apply for or obtain pre-approval to transfer ownership" for transfers related to the Statutory Investors. (Id. at 33-34.) The Appellate Court concluded that the IGB's findings "were not against the manifest weight of the evidence." (PX1233 at 123-25.)
The parties do not dispute that these transactions occurred; they only disputed the relative significance of these transactions. The parties disagree about whether Emerald was required to seek pre-approval from the IGB for agreeing to sell shares to the Statutory Investors. In its Final Board Order, the IGB concluded that Emerald had "failed to apply for or obtain pre-approval to transfer ownership," which included the Donald Flynn transfers. (PX162 at 33-34) (emphasis added.) The Trustee claims that none of these transfers of shares — neither Donald Flynn's transfers of Emerald stock (both his sales and purchases) nor Emerald's sale of shares to the Statutory Investors — comply with IGB rules. (Trustee's SOF ¶¶ 501-04, 602-03.) Defendants maintain that because the IGB never approved any of the prospective shareholders, Emerald never actually transferred any shares in violation of any IGB rules.
Both the IGB in its Final Board Order, and the Trustee in this litigation, cite IGB Rule 235 for the requirement that Emerald seek pre-approval of these transactions. The rule itself is less than explicit about such a requirement:
86 ILL. ADMIN. CODE § 3000.235(a)(emphasis added). Regardless of any lack of clarity in the rule, the Trustee asserts that Defendants understood they were required to obtain pre-approval for all transfers of shares and intentionally ignored that requirement. The Trustee points out that McQuaid acknowledged the pre-approval requirement at an August 12, 1999 Emerald Board of Directors' meeting, noting that the offering "would not occur unless and until ... the IGB approves the sale of equity" and that "the IGB probably would require two public meetings to approve the equity offering." (Trustee's SOF ¶ 626) (quoting PX18 at 6.) Defendants were directly aware of the pre-approval requirement, the Trustee continues, because of two IGB Disciplinary Complaints, one in 1994 and another in 1996, for which Emerald was fined for failure to receive pre-approval for equity changes. (Trustee's SOF ¶¶ 562, 627, citing PX286 at 2, ¶ 12 (July 23, 1996 Disciplinary Compl.); PX332 at 2, ¶ 13 (Dec. 1, 1994 Disciplinary Compl.).) Donald Flynn, Kevin Flynn, Kevin Larson, Joseph McQuaid and Peer Pedersen were all aware of this history. (PX401 ¶¶ 178-82; Trustee's SOF ¶ 627.) Defendant Peer Pedersen observes, however, that these previous Disciplinary Complaints related to IGB Rule 230(d),
Defendants deny that the IGB Rules required it to seek pre-approval for agreeing to sell Emerald shares, so long as the sales agreements were, by their terms, subject to IGB approval. Each of the subscription agreements completed by the Statutory Investors met that test, Defendants assert, as those agreements provide: "Upon payment by the undersigned of the Purchase Price and written approval of the undersigned by the IGB, the Shares shall be issued to the undersigned and shall consist of fully paid, non-assessable, no par value common stock of the Issuer." (See, e.g., PX543 at 2.) The subscription agreements also contemplated the possibility that the IGB might not approve the prospective shareholder:
(See, e.g., PX543 at 1.)
This language, Defendants contend, demonstrates that the transfers of shares to the Twelve Outsiders were always subject to IGB approval.
Defendants urge that their interpretation of the IGB rules is consistent with Emerald's past experience with the IGB. In the past, Defendants insist, the IGB had never previously required prior approval of transfers, so long as the sale of shares was subject to IGB approval. (D. Flynn's SOF ¶¶ 148, 173; see also Trustee's SOF ¶¶ 597-98; C. Defs.' SOF ¶¶ 50, 52.) According to Michael Ficaro and Joseph McQuaid, all of the original applicants for the ten licenses received and used money from proposed shareholders before those shareholders were approved by the IGB. (C. Defs.' SOF ¶ 259; D. Flynn's SOF ¶ 82.) These funds were used for leasing or purchasing the vessel or property, for purchasing gaming equipment, for conducting environmental studies, and for paying accountants and legal fees. (Id.) McQuaid testified that the Jo Daviess Riverboat Corporation itself purchased its riverboat using proposed investors' funds before the IGB approved them as shareholders. (Tr. 496:6-497:4; see also Tr. 608:11-611:1.) And, if the IGB did not approve the proposed shareholder, McQuaid testified, then the licensee would
McQuaid provided other illustrations as well. After the IGB did not approve two prospective investors in the Alton Riverboat Casino who had already contributed money, McQuaid testified, the casino, which had used the money for "general use," returned it to the prospective investors. (Bankr.Tr. 3383:20-3386:23.) Similarly, after the IGB objected to a prospective shareholder of Empress Casino, who had already contributed money that Empress had used, Empress returned the investment to that shareholder. (Bankr.Tr. 3386:24-3387:11.) Neither Alton Riverboat Casino nor Empress Casino faced discipline from the IGB for their use of prospective shareholders' money. (Bankr. Tr. 3389:2-16.)
The Trustee claims that regardless of how Rule 235(a) is interpreted, Emerald violated it by treating the proposed shareholders as shareholders before receiving IGB approval. (Trustee's SOF ¶ 542.) None of the consideration exchanged between Donald Flynn and the Twelve Outsiders and between Donald Flynn and the Five Insiders was escrowed, and Emerald instead began spending the Statutory Investors' money immediately. (Id. ¶¶ 459, 465-66, 599.) With respect to the Twelve Outsiders who agreed to purchase shares from Donald Flynn, the Trustee observes that each of them received a letter from Joseph McQuaid and Walter Hanley addressed to "Shareholder of Emerald Casino, Inc.," which provided relevant information for shareholders and invited them to attend shareholders' meetings. (Id. ¶ 543.) Though Emerald's bylaws only permitted shareholders to vote, these proposed shareholders were permitted to vote at shareholders' meetings, and at least some of the Twelve Outsiders did vote either in person or by proxy at the February 25, 2000 and March 6, 2001 shareholders' meetings. (Id. ¶ 544.) Additionally, the proposed shareholders were treated by Emerald as shareholders for tax purposes; McMahon sent the Twelve Outsiders K-1 tax forms between 1999 and 2007 to claim their shares of Emerald losses on their tax returns, and Emerald reported the Twelve Outsiders as shareholders on its own tax returns. (Id. ¶ 545.) During bankruptcy proceedings, on November 18, 2002, Emerald listed the Twelve Outsiders as holders of common shares on the "List of Equity Security Holders." (Id. ¶ 546.) Similarly, the Trustee claims, Donald Flynn became a shareholder of additional shares held by the Five Insiders and Pedersen because Donald Flynn was issued stock certificates for these shares, and the stock certificates for the Five Insiders were cancelled on Emerald's Stock Ledger. (Trustee's SOF ¶ 600; D. Flynn's SOF ¶¶ 171-72.)
In the Trustee's view, the Statutory Investors were also treated as shareholders "in all important respects" — the Statutory Investors voted at shareholders' meetings on February 25, 2000 and March 6, 2001; Emerald reported the Statutory Investors as shareholders on its tax returns, and sent them K-1 forms; McQuaid and Hanley addressed the Statutory Investors in letters as "shareholder"; and in its "List of Equity Security Holders" filed with the Bankruptcy Court on November 18, 2002, Emerald identified the Statutory Investors as holders of common shares. (Trustee's SOF ¶¶ 617, 620, 622-24.) Emerald, itself, appeared to acknowledge that the Statutory Investors held the status of shareholders. In a letter dated April 13, 2000 to shareholders, including the Statutory Investors, McQuaid wrote that the number of "shareholders" had increased from eighteen (original investors) to sixty, a number which included sales to the Statutory Investors. (Id. ¶ 621.) Additionally, McQuaid testified that the IRS, the Illinois
Defendants assert that the Statutory Investors did not become shareholders because the IGB never approved them. (C. Defs.' SOF ¶ 269; Pedersen's SOF ¶ 46.) They contend Emerald actually distinguished between existing shareholders, and those shareholders, including the Statutory Investors, who were awaiting IGB approval: Emerald's Stock Ledger did not list the Statutory Investors as shareholders, but instead indicated that their shares were "TO BE ISSUED" and the Statutory Investors were identified in Emerald shareholder records as "Pending Illinois Gaming Board Approval;" minutes from Emerald's shareholders' meetings in 2000 and 2001 indicated that the Statutory Investors were "subject to the approval of the Illinois Gaming Board;" and the Statutory Investors never received stock certificates for their shares. (C. Defs.' SOF ¶¶ 269-70; D. Flynn's SOF ¶ 85.) The IGB itself also identified the Statutory Investors as "proposed" or "contingent" shareholders. (C. Defs.' SOF ¶ 274) (citing IGB financial consultant Nicholas Wilke's testimony, Tr. 1605:10-22.)
The parties agree, and the IGB Final Board Order concluded, that Donald Flynn did not seek pre-approval from the IGB for these transfers. (PX162 at 22; PX401 ¶¶ 450-53; Trustee's SOF ¶¶ 559, 563, 595.) But, assuming that pre-approval was required for the Statutory Investor-transactions, Defendants assert that Emerald received it.
The Trustee denies that Emerald received any such approval at this meeting, and notes that McQuaid and Hanley only asserted that Casey approved such a sale "in this case." (Trustee's SOF ¶ 629.) Cusack testified that neither she nor Casey approved Emerald's immediate sale of shares to the Statutory Investors, and, the Trustee, observes, McQuaid's July 1 letter to Casey does not confirm that the Casey approved his proposal. (Id.) Acosta testified that he was never informed of the alleged approval. (Id.) Nor, the Trustee asserts, do Emerald's subsequent communications with the IGB demonstrate that Casey approved the sale to the Statutory Investors on July 1, 1999. (Id.) In a letter to McQuaid summarizing McQuaid's meeting with the IGB on August 10, 1999, Acosta wrote that McQuaid had asked for "advice regarding whether [Emerald] should make a presentation to the [Illinois Gaming] Board at the September 7, 1999 Board meeting to request `initial consideration'
Defendants may have reasonably believed that the IGB's behavior constituted pre-approval of the process for transferring shares to the Statutory Investors. The IGB's Final Board Order, however, assumed that Defendants were required to obtain IGB approval of each individual shareholder before transferring the shares or allowing a shareholder to vote. Defendants clearly did not obtain prior approval to sell shares to the individual Statutory Investors. McQuaid recruited those investors, sent them the applications, and received the applications and their checks for the purchase price. The parties agree that Emerald immediately began spending the money from the Statutory Investors. Neither party has directed the court to any evidence in the record that specifies who actually cashed the checks, and thereby accepted the Statutory Investors' subscription agreements to purchase stock. But the court infers that McQuaid, who sent and received the applications, interviewed the investors, and reported on the sale of stocks to the Emerald Board was responsible for completing the transfers of shares. (See PX25 at 1) (McQuaid "stated that the Company has sold 16.84% of its common stock ... He said he had planned to sell all 20% ... but certain potential investors unexpectedly withdrew their subscriptions at the last minute.")
The court finds that both Donald Flynn and McQuaid failed to obtain IGB pre-approval before transferring Emerald shares.
Defendants did regularly communicate with the IGB regarding these transfers. Before any transfers were made, Defendants met with IGB staff to discuss the procedure for transferring shares to the Statutory Investors.
Between September 1, 1999 and September 17, 1999, Donald Flynn agreed to sell shares to twenty-three individuals, including the Twelve Outsiders, Walter Hanley, Joseph McQuaid, and John McMahon. (PX324 at 2-3.) Defendants informed the IGB of these transfers soon after and continued to communicate about the Statutory Investors.
On September 28, 1999, Donald Flynn agreed to purchase shares from four Pedersen group shareholders. (PX75; Bankr. Tr. 2597:2-10.) Defendants continued communicating, albeit imperfectly, with the IGB about the transfers of shares.
On November 3, 1999 Donald Flynn agreed to purchase stock from another Pedersen group shareholder and from Pedersen. (D. Flynn's SOF ¶ 169.) Defendants continued to respond to the IGB's requests for more information.
The Trustee makes much of the fact that when Defendants provided the IGB with its updated lists of proposed shareholders in the September 21, 1999 letter and Renewal Application, it failed to distinguish between existing and proposed shareholders. (Trustee's SOF ¶¶ 564-65 (citing the 9/21/99 letter); id. ¶¶ 566-71, 630-31 (9/24/99 Renewal Application); id. ¶¶ 573-74 (10/4/99 letter); id. ¶ 574 (10/11/99 letter); id. ¶ 577 (10/29/99 letter).) The Trustee observes, specifically, that among the proposed shareholders on these lists, Defendants did not distinguish between the Statutory Investors who purchased from Emerald and the Twelve Outsiders who purchased from Donald Flynn. (Trustee's SOF ¶¶ 564-65 (9/21/99 letter); id. ¶¶ 573-74 (10/4/99 letter); id. ¶ 577 (10/29/99 letter).) While the Trustee points to the structure of these lists as evidence of Emerald's attempt to conceal these transfers from the IGB, Defendants
The court sides with Defendants on this dispute. Though the IGB took issue with the way the Defendants communicated the transfer of shares to the Statutory Investors (see PX162 at 36 (citing the shareholders' lists as a "shell game" that "provided little or no explanation")), Defendants did in fact disclose the transfers in letters and in meetings with the IGB. Administrator Acosta himself acknowledged receipt of the September 21, 1999 letter and verified that he had reconciled the list of proposed statutory shareholders with the PDF-1s he had received as of that date. (PX544 at 2.) The IGB made requests for increasingly detailed information (see PX318; PX379), but Defendants responded each time with the requested information. (See PX319; PX325.) The court concludes that the Trustee has failed to establish that Defendants withheld or failed to disclose the transfers of shares.
The IGB voted to deny Emerald's Renewal Application and to revoke Emerald's license on January 30, 2001. (PX135 at 37:16-19; Trustee's SOF ¶ 141; C. Defs.' SOF ¶ 706.) The public record of the meeting shows that Acosta presented the IGB staff's recommendation, based on its investigation of Emerald, not to renew Emerald's license. (PX135 at 32:23-33:1.) Acosta cited evidence that "the licensee and certain of its key persons have provided false and misleading information to the Board, and they have failed to establish a record of regulatory compliance required under the Board's rules," specifically naming Kevin Flynn and Donald Flynn. (Id. at 33:2-7, 33:12-34:3.) In addition, Acosta noted that there was evidence of "the insidious presence of organized crime elements associated with this proposed project." (Id. at 33:9-11.) Four of the five Board members voted to deny Emerald's Renewal Application, and to revoke Emerald's license. (Id. at 37:16-19.) Emerald's attorney, Michael Ficaro, reported on the IGB's vote the following day at Emerald's Board meeting. (PX35 at 1.)
The IGB issued a formal Notice of Denial of Emerald's Renewal Application, and a Disciplinary Complaint seeking to revoke Emerald's license on March 6, 2001. (PX151; PX161.) The Notice of Denial explained that "[t]he Board based its January 30, 2001 determination on three initial findings: (1) Emerald's continued failure to meet all of the requirements of the Act and the Rules; (2) Mr. Donald F. Flynn's unsuitability as a Key Person of Emerald; and (3) Mr. Kevin Flynn's unsuitability as a Key Person of Emerald." (PX161 at 4.) The Disciplinary Complaint alleged that "Emerald, by and through certain of its shareholders, directors, representatives and other Key Persons" violated IGB
Emerald answered the Disciplinary Complaint on March 26, 2001, largely denying any rule violations and challenging the IGB's interpretations of several of its rules. (PX41.) The hearing on the IGB's Disciplinary Complaint began on May 29, 2002 before Administrative Law Judge Herbert Holzman. (PX162 at 4; Trustee's SOF ¶ 148; C. Defs.' SOF ¶ 744.) On June 13, 2002, some of Emerald's creditors forced Emerald into involuntary Chapter 7 bankruptcy, and the disciplinary proceedings were suspended that same day. (PX162 at 4; Trustee's SOF ¶ 148.) The proceedings resumed on May 25, 2005 before Administrative Law Judge Abner Mikva.
As noted supra, Emerald's creditors filed an involuntary bankruptcy petition on June 13, 2002. (Involuntary Pet., In re Emerald Casino, Inc., No. 02-br-22977 (Bankr.N.D.Ill.2002)[1].) The Bankruptcy Court granted Emerald's motion to convert the case to a Chapter 11 proceeding on September 10, 2002. (Order, Sept. 10, 2002, In re Emerald Casino, Inc., No. 02-br-22977 (Bankr.N.D.Ill.) [113].)
Emerald, as debtor-in-possession, filed an application for leave to retain Kirkland & Ellis LLP ("K & E") as its counsel on September 27, 2002. The court approved that application on October 10, 2002. (Order, Oct. 10, 2002, In re Emerald Casino, Inc., No. 02-br-22977 (Bankr.N.D.Ill.) [156]; Appl. Pursuant to Fed. R. Bankr.P. 2014(a), In re Emerald Casino, Inc., No. 02-br-22977 (Bankr.N.D.Ill.2002)[144], hereinafter "Debtor's Counsel Appl.".) K & E, as Emerald's counsel, acknowledged that it was obligated to "[t]ake all necessary action to protect and preserve the Debtor's estate, including the prosecution of all actions on the Debtor's behalf" and "[a]dvise the Debtor regarding the maximization of value of the estate for its creditors and interest holders[.]" (Aff. in Supp. of Debtor's Counsel Appl., In re Emerald Casino, Inc., No. 02-br-22977 (Bankr. N.D.Ill.2002)[144], ¶¶ 12(c), (i).) On November 1, 2002, the United States Trustee appointed creditors
Time records submitted by Gardner Carton & Douglas for work performed on behalf of the Creditors' Committee show that the Creditors' Committee counsel was researching possible derivative claims against Emerald officers and directors as early as August 2003. For example, a time record for "J. Schwartz" notes, on August 4, 2003, a "[d]iscussion with H. Kaplan regarding strategy relating to IGB and Debtors [sic] insiders"; on August 11, 2003, a "[d]iscussion with R. Whitacre regarding potential derivative causes of action";
The Creditors' Committee did, eventually, take initial steps to pursuing a derivative cause of action against Emerald's officers and directors. On January 14, 2008, Creditors' Committee counsel at Drinker Biddle sent a memorandum to K & E discussing possible claims against Emerald's officers and directors such as "claims for breach of fiduciary duty, negligence, tortuous [sic] conduct and interference." (Mem. from Andrew Weissman on Regulatory Takings and Breach of Duty Claims Available to Emerald's Bankr.Estate (Jan. 14, 2008), Ex. Q to Defs.' 56.1[97]; C. Defs.' SOF ¶ 811.) The Creditors' Committee informed the Bankruptcy Court on February 13, 2008 that it intended to seek permission to bring a derivative action against Emerald's directors and officers. (Bankr.Tr., Feb. 13, 2008, 4:2-5:3.) On March 19, 2008, the Creditors' Committee proposed that Foley & Lardner serve as counsel for the Creditors' Committee in that litigation under a contingency agreement, if the Debtor's counsel decided not to pursue the action after receiving a formal demand letter. (Bankr.Tr., Mar. 19, 2008, 5:14-7:1.) Instead, however, the Bankruptcy Court decided to convert the case back to a Chapter 7 proceeding, and to appoint a trustee who could choose to pursue a derivative action. (Bankr.Tr., Mar. 19, 2008, 7:23-9:11, 12:7-31:1; see Order, Mar. 19, 2008, In re Emerald Casino, Inc., No. 02-br-22977 (Bankr.N.D.Ill.) [1985].) The Trustee, Frances Gecker, was appointed on March 21, 2008. (Letter of Appointment from Neary to Gecker of 3/21/08, In re Emerald Casino, Inc., No. 02-br-22977 (Bankr.N.D.Ill.2008) [1984].)
The Trustee filed this adversary proceeding on December 19, 2008, adding to her derivative claims on behalf of the estate, claims from a removed state court action, Payton v. Flynn, including claims for breach of contract and breach of fiduciary duty. (Pl.'s First Am. Compl. in Gecker v. Flynn, No. 08-ap-00972 [14],
Defendants argue that another action, filed in state court by certain Statutory Investors, bars the Trustee from bringing a breach of contract claim here. A majority of the Statutory Investors sued all of the present Defendants (with other named defendants) in a federal action on January 25, 2006, alleging RICO violations, and state law claims for fraud, breach of fiduciary duty, estoppel, and conspiracy arising from similar facts as those alleged here. (Compl. in Payton v. Flynn, No. 06-cv-0465 (N.D.Ill.2006)[1], hereinafter "Payton Fed. Compl;" see Trustee's SOF ¶ 612.) Reasoning that the RICO claims would be actionable as securities fraud, Judge Grady of this court dismissed the RICO claims as barred under 18 U.S.C. § 1964(c), and declined to exercise supplemental jurisdiction over the remaining state law claims. Payton v. Flynn, No. 06-cv-0465, 2006 WL 3087075 at *9 (N.D.Ill. Oct. 26, 2006).
One year later, in October 2007, most of the 06-cv-0465
On December 19, 2008, the Trustee filed her First Amended Complaint
Defendants moved for remand, arguing that because she was not a party to the Payton claims, the Trustee could not remove the action, and that she had attempted to do so in order to create federal jurisdiction in violation of 28 U.S.C. § 1359. (Defs.' Revised Mot. to Remand or, in the Alt., for Abstention in Gecker v. Flynn, No. 08-ap-00972 (Bankr.N.D.Ill. 2009)[22], hereinafter "Defs.' Remand Mot.," at 6-10.) Defendants also insisted that the Payton claims did not satisfy the "related to" jurisdictional requirement under 28 U.S.C. § 1334(b). (Id. at 10-12.) In the alternative, Defendants asked the
The Trustee opposed Defendants' motion, and as in her Notice of Removal, maintained that the Payton claims were core proceedings or at least "related to" the bankruptcy proceedings. (Trustee's Mem. in Opp. to Defs.' Remand Mot. in Gecker v. Flynn, No. 08-ap-00972 (Bankr. N.D.Ill.2009)[28], hereinafter "Pl.'s Opp. to Remand," at 2.) Because the Defendants filed proofs of claim against Emerald in the bankruptcy proceedings, the Trustee asserted, the estate's claims against Defendants were core proceedings as "counterclaims by the estate against persons filing claims against the estate." (Id. at 2) (quoting 28 U.S.C. § 157(b)(2)(C).) Alternatively, such claims (both the estate's and the Payton claims) were "related to" the core proceedings because the claims had been assigned to the Trustee, and recovery would affect Emerald's estate or the allocation of its assets. (Pl.'s Opp. to Remand at 3; see also Notice of Removal of Civil Action in Gecker v. Flynn, No. 08-ap-00972 (Bankr.N.D.Ill.2008)[3], ¶ 10 (quoting Baxter Healthcare Corp. v. Hemex Liquidation Trust, 132 B.R. 863, 866 (N.D.Ill.1991) ("the outcome of [the Payton action] `could conceivably have any effect on the estate being administered in bankruptcy' or `could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.").)
On January 27, 2009, Judge Eugene Wedoff orally ruled that the Bankruptcy Court would, in its discretion, abstain from adjudicating Counts II through VII of the First Amended Complaint, which included the Payton Plaintiffs' breach of fiduciary duty claim (Count II) and the breach of contract claim (Count III). (Bankr.Tr., Jan. 27, 2009, Ex. O to Defs.' 56.1 [107], hereinafter "1/27/09 Bankr.Tr.," 6:12-17, 14:3-7.) Judge Wedoff identified several reasons for exercising discretionary abstention, including that the Payton action "exclusively involved nondebtors suing other nondebtors" (id. 11:16-12:3), and that severance of the Payton claims from the Emerald estate's new claims was "feasible." (Id. 13:20-14:2.) The abstention order did not, however, address Emerald's own breach of fiduciary duty claim (Count I).
Before rendering his oral ruling, Judge Wedoff observed that "Counts II through VII of the amended complaint repeat Counts I through VI of the state court complaint," including Count III, the breach of contract claim. (1/27/09 Bankr. Tr. 5:5-10.) Yet, as noted above, Count I of the Payton Complaint and Count III of the First Amended Complaint, each alleging breach of contract, are worded slightly differently — only the breach of contract claim in the Trustee's First Amended Complaint mentions the Emerald estate. (See Payton Compl. ¶¶ 39-43; First Am. Compl. ¶¶ 132-36.) Recognizing this discrepancy, the Trustee moved to amend her complaint on February 2, 2009 (Mot. for Leave to Am. Compl. in Gecker v. Flynn, No. 08-ap-00972 (Bankr.N.D.Ill.2009)[40], hereinafter "Pl.'s Mot. Am. Compl.," ¶ 6), explaining that in the First Amended Complaint she "added to [the Payton breach of contract claim] the estate's separate
Back in Circuit Court, on February 20, 2009, the Trustee filed an amended complaint, which included a breach of fiduciary duty claim (Count I) and a breach of contract claim (Count II), each on behalf of the Payton Plaintiffs. (Am. Compl. in Gecker v. Flynn, No. 07-L-11989 (Ill. Cir. Ct. Cook Cnty.2009), Ex. B to Defs.' 56.1[107], hereinafter "Payton Am. Compl.") Count II alleged that "[t]he Defendants and Emerald tendered the Shareholder Agreement to the Statutory Investors, who each executed it and returned it to the Defendants and Emerald. The Defendants also each executed the Shareholder Agreement," and that the Defendants breached Paragraph Ten of the Shareholders' Agreement causing Emerald to lose its gaming license and thus injure the Payton Plaintiffs. (Id. ¶¶ 57-61.)
Defendants again moved to dismiss the state court action in April 2009. All of the Trustee's claims, including Count II for breach of contract, Defendants now argued, seek relief for "losses suffered by Emerald and, only derivatively, by its shareholders and investors. They are not losses that can be asserted by any individuals in their own right." (Defs.' Mem. in Supp. of their Mot. to Dismiss Pl.'s Am. Compl. in Gecker v. Flynn, No. 07-L-11989 (Ill. Cir. Ct. Cook Cnty.2009), Ex. R to Defs.' 56.1[107], hereinafter "Defs.' Mot. to Dismiss Payton," at 13) (emphasis added.) Because "the Statutory Investors do not even claim to be shareholders"
Later in 2009, however, the Trustee evidently lost enthusiasm for litigating in more than one forum. In August, she moved to stay the state court proceedings until the bankruptcy proceedings were resolved, recognizing that a win in the Bankruptcy Court would moot the state court action, because the bankruptcy award would constitute "a full recovery on behalf of the Debtor and all its creditors, including the Statutory Investors." (Mot. to Stay Proceedings in Gecker v. Flynn, No. 07-L-11989 (Ill. Cir. Ct. Cook Cnty.2009), Ex. T to Defs.' 56.1[107], hereinafter "Pl.'s Mot. to Stay 1," at 3-4.) The Trustee noted further that "a significant risk of conflicting judgments exists in the simultaneous litigation of this action and the Bankruptcy proceeding." (Id. at 4.) The Trustee renewed her motion in November 2009, pending the outcome of the Bankruptcy Court's summary judgment ruling then scheduled for December 16, 2009, and alternatively, moved for voluntary dismissal of the state court litigation. (Renewed Mot. to Stay Proceedings or, Alt., for Voluntary Dismissal in Gecker v. Flynn, No. 07-L-11989 (Ill. Cir. Ct. Cook Cnty.2009), Ex. U to Defs.' 56.1[107], hereinafter "Pl.'s Mot. to Stay 2.")
In an oral ruling on November 12, 2009
Though they had argued that the two actions were wholly independent of one another, once Judge Bartkowicz ruled, Defendants promptly reversed course. Just one month after the Circuit Court dismissal order became final, on April 30, 2010, Defendants moved for summary judgment on Plaintiffs claims for breach of contract (Count II) and breach of fiduciary duty (Count I), pending in Bankruptcy Court, arguing that they were barred by res judicata. (Defs.' Mot. for Summ. J. in Gecker v. Flynn, No. 08-ap-00972 (Bankr.N.D.Ill. 2010)[321].) In their supporting motion, Defendants argued that the breach of contract claim (as well as the breach of fiduciary duty claim) "were brought against the same director and/or officer defendants and were based upon the same factual allegations — Defendants' alleged misconduct that is alleged to have caused the loss of Emerald's gaming license." (Defs.' Mem. in Supp. of their Mot. for Summ. J. in Gecker v. Flynn, No. 08-ap-00972 (Bankr.N.D.Ill.2010)[322], hereinafter "Defs.' RJ Mot.," at 2-3.) The Bankruptcy Court denied Defendants' motion, reasoning that Defendants could not assert that res judicata barred the Trustee's breach of contract claim because Defendants were judicially estopped from claiming res judicata applied after they had argued, in seeking remand, that the claims were different, and because Defendants had acquiesced in the claim splitting.
This court withdrew the reference to the Bankruptcy Court on January 31, 2012. The parties presented additional evidence at a further bench trial before this court between December 17, 2012 and March 22, 2013.
The court reviews the Bankruptcy Court record de novo. The United States Bankruptcy Code authorizes bankruptcy judges to hear and enter final judgments in "all core proceedings arising under title 11, or arising in a case under title 11." 28 U.S.C. § 157(b)(1). Generally, a bankruptcy court's final judgment in a core proceeding is subject to appellate review by the district court. But in Stern v. Marshall, the Supreme Court held that some proceedings, specifically state law counterclaims, although "core" under the statute, may not constitutionally be adjudicated by a bankruptcy court. ___ U.S. ___, 131 S.Ct. 2594, 2620, 180 L.Ed.2d 475 (2011). The Supreme Court recently explained in Executive Benefits Insurance Agency v. Arkison, that when faced with a "core" claim that falls within the scope of Stern, the bankruptcy court should simply "treat[] the claim[] as non-core: The bankruptcy court should hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment." ___ U.S. ___, 134 S.Ct. 2165, 2173, 189 L.Ed.2d 83 (2014).
Defendants urge the court to find that the Trustee's fiduciary duty claim is barred by Illinois's five-year statute of limitations for such claims. See 735 ILCS 5/13-206. Specifically, they argue that, because the Trustee's allegations are based on events leading up to the IGB's revocation of Emerald's license on January 30, 2001, any claims arising out of those events would have to be filed within five years of that date. Plaintiff filed this suit on December 19, 2008, almost eight years after the IGB revoked the license and three years beyond the limitations period. For her part, the Trustee acknowledges that her fiduciary duty claim arises from actions that took place more than five years before she filed suit. She argues, however, that, pursuant to Illinois's doctrine of "adverse domination," the five-year limitations period was actually tolled from January 30, 2001 through the Trustee's appointment on March 20, 2008. (Trustee's Post-Trial Br. at 368.) Under this theory, the Trustee filed this lawsuit with more than four years to spare.
Defendants point out that adverse domination merely establishes a rebuttable presumption. They argue that the facts here call for the presumption to be rebutted. As explained here, the court agrees. The Creditors' Committee had the knowledge, ability, and motivation to bring suit before December 19, 2003, and the Trustee's breach of fiduciary duty claim is time-barred.
Illinois's doctrine of adverse domination is "an equitable doctrine that tolls the statute of limitations for claims by a corporation against its officers and directors while the corporation is controlled by those wrongdoing officers or directors." Indep. Trust Corp. v. Stewart Info. Servs. Corp., 665 F.3d 930, 935 (7th Cir.2012) (quoting Lease Resolution Corp. v. Larney, 308 Ill.App.3d 80, 86, 241 Ill.Dec. 304, 719 N.E.2d 165, 170 (1st Dist.1999)). The doctrine "creates a rebuttable presumption that knowledge of the injury will not be available to the corporation as long as the corporation is controlled by wrongdoing officers and directors." Larney, 308 Ill. App.3d at 90, 241 Ill.Dec. 304, 719 N.E.2d at 173 (citing cases). The presumption is rebuttable, however, and can be overcome "by evidence that someone other than the
The adverse domination concept is an extension of the Illinois discovery rule, under which the statute of limitations is tolled until a plaintiff knows or should know that he has been injured and that his injury was wrongful. A plaintiff seeking to invoke tolling of the limitations period under this rule has the burden of proving the date of discovery. Resolution Trust Corp. v. Franz, 909 F.Supp. 1128, 1137 (N.D.Ill.1995) (quoting Hermitage Corp. v. Contractors Adjustment Co., 166 Ill.2d 72, 85, 209 Ill.Dec. 684, 651 N.E.2d 1132, 1138 (1995)). Because a plaintiff-corporation can learn that it has been injured only through the knowledge of its agents, if the agents' interests are adverse to the corporation, the agents' knowledge is not imputed to the corporation. See Stewart, 665 F.3d at 935. "The rationale behind this doctrine is `that control of the board by wrongdoers precludes the possibility for filing suit since these individuals cannot be expected to sue themselves or initiate action contrary to their own interests.'" Larney, 308 Ill.App.3d at 86, 241 Ill.Dec. 304, 719 N.E.2d at 170 (quoting FDIC v. Greenwood, 739 F.Supp. 450, 453 (C.D.Ill. 1989)).
The first and, to the court's knowledge, only Illinois decision applying adverse domination was issued in 1999 by the Illinois Appellate Court in Larney. In adopting this doctrine, the Larney court also addressed the question of how completely the "wrongdoers" must dominate their corporation in order to trigger tolling. The Appellate Court considered two options adopted by other jurisdictions: majority domination and complete domination. "Under the majority domination theory, a plaintiff must show only that a numerical majority of the board members were wrongdoers during the period the plaintiff seeks to toll the statute." Larney, 308 Ill.App.3d at 88, 241 Ill.Dec. 304, 719 N.E.2d at 171 (citing Franz, 909 F.Supp. at 1136). The complete domination theory, as its name suggests, requires "a plaintiff who seeks to toll the statute... [to] show full, complete, and exclusive control in the directors or officers charged." Franz, 909 F.Supp. at 1136 (quoting FDIC v. Dawson, 4 F.3d 1303, 1309 (5th Cir.1993)). In other words, "the plaintiff must negate the possibility that an informed shareholder or director could have induced the corporation to initiate suit." Resolution Trust Corp. v. Farmer, 865 F.Supp. 1143, 1156 (E.D.Pa.1994) (citing Farmers & Merchs. Nat'l Bank v. Bryan, 902 F.2d 1520, 1522 (10th Cir. 1990)).
Although the Illinois Supreme Court remains silent on the doctrine, the Seventh Circuit recently embraced Larney as well. In Stewart, the receiver-appellant argued against the application of Larney in that diversity action because Larney is an intermediate state court opinion. The Seventh Circuit found, however, that "the district court did exactly what it should have," because "[w]here a state's supreme court has not yet passed on an issue, [courts] examine decisions of the lower state courts to help formulate an answer." Id. (quoting Kaplan v. Shure Bros., Inc., 153 F.3d 413, 420 (7th Cir.1998)). As Larney is the only Illinois Appellate Court decision to discuss the adverse domination doctrine and its holding has not been undermined by intervening Illinois precedent, the Seventh Circuit held that it should be given "persuasive weight." Stewart, 665 F.3d at 936.
Defendant Pedersen argues that "the doctrine of adverse domination, properly understood, cannot save the Trustee's stale claim in this case." (Def. Pedersen's Post-Trial Br. [240] at 49.) Pedersen urges the court to reject the Larney court's adoption of the majority domination brand of the adverse domination doctrine. (Id. at 50.) Specifically, Pederson asks the court to spurn Larney in favor of Chapman, a 1995 opinion from the Central District of Illinois which chose the complete domination theory. (Id. at 51) (citing Resolution Trust Corp. v. Chapman, 895 F.Supp. 1072, 1079 (C.D.Ill.1995).) As Pedersen would have it, adverse domination would not apply to the Trustee's claim due to the presence of independent director Eugene Heytow on Emerald's Board. (Id. at 49-50.) These arguments are problematic for several reasons.
First, in asking the court to follow Chapman, Pedersen ignores the Seventh Circuit's decision in Stewart, as well as several cases that post-date Chapman and reject its conclusion. Chapman was decided in 1995 without the benefit of either the Illinois Appellate Court's 1999 opinion in Larney or the Seventh Circuit's 2012 opinion in Stewart, both of which found that majority domination is consistent with Illinois law. The Franz court itself considered and rejected the conclusion in Chapman. See Franz, 909 F.Supp. at 1136.
Even apart from that authority, this court would decline to adopt Chapman's conclusion. The Chapman court chose the complete control theory based on the fact that "[t]he complete domination version of the adverse domination doctrine puts a heavy burden on the [plaintiff]," which "is appropriate because it is the [plaintiff] who is attempting to toll the statute of limitations." Chapman, 895 F.Supp. at 1079. Thus, the Chapman court seems to suggest, the adverse domination doctrine should, like the Illinois discovery rule that inspired it, place the burden of proof on a plaintiff seeking to toll the limitations period. But copying the placement of the burden under the discovery rule and pasting it onto adverse domination is the wrong approach. A more reasoned tactic is to consider the principles behind the allocation of the burden in the discovery rule context, and then apply that rationale to adverse domination. Burdens of proof and production are ordinarily imposed on the party who is more likely to have access to the necessary information. See Hecht v. Resolution Trust Corp., 333 Md. 324,
Second, as Plaintiff points out, even assuming, as Pedersen does, that complete domination is the proper theory of adverse domination under Illinois law, Heytow's presence on the Board would not doom the Trustee's claims.
The remaining Defendants (i.e., Kevin Flynn, Joseph McQuaid, Kevin Larson, John McMahon, Walter Hanley, and Donald Flynn
As discussed supra, the doctrine of adverse domination is based on the discovery rule, which tolls the statute of limitations until the plaintiff knows or should know that she was injured and that the injury was wrongful. In Illinois, adverse domination presumes that the wrongdoing remains unknown; and because a corporation can only learn that it has been injured through the knowledge of its agents, where the corporation is dominated by the wrongdoers, the knowledge remains inaccessible to independent actors who have the ability and motivation to sue.
In this case, however, the revocation of Emerald's gaming license was public knowledge, and the Trustee's position is that it was apparent that Defendants' alleged misconduct was the cause for the revocation. Notably, the fact that their misconduct was so serious as to cause revocation of Emerald's license appears to have been unknown to Defendants themselves, who each had an obvious interest in Emerald's success. But that information, too, soon became a matter of public record: During the public session of the January
The Trustee makes several arguments about ability. First, because the Creditors' Committee could only bring a suit on behalf of Emerald against Defendants with the Bankruptcy Court's permission,
At the same time, Trustee argues that allowing the Creditors' Committee's ability to sue to rebut the presumption would eliminate the distinction between the majority and complete domination theories. (Trustee's Post-Trial Br. at 379-80.) But, as discussed supra (see note 101), the court finds that the primary distinction between these two theories really concerns which party bears the burden of proof, and that the Creditors' Committee (or another independent director) could rebut the presumption does not eliminate this distinction. Under both theories, the burden remains with the defendants to identify an independent plaintiff who could sue on behalf of the corporation.
The Trustee couches her final argument as a dispute over whether the Creditors' Committee had "knowledge" more than five years before the suit was filed. But this argument in fact questions whether "a responsible litigant would have filed suit during 2002 and 2003." (Id. at 407.) The Trustee contends that it would not have been possible for any entity appointed in 2002, to file suit by late 2003, because there would not be time to investigate and build a case.
Finally, Trustee argues, and the Bankruptcy Court found, that motivation is lacking in two ways. First, the Trustee claims, the Creditors' Committee and all other interested parties were not motivated to sue, because they were instead motivated to ensure that Emerald kept its license. (Trustee's Post-Trial Br. at 398-400, 403.) In addition, Trustee argues, any legal action against Defendants for loss of the license before January 30, 2006 would have directly conflicted with efforts
This court declines to adopt the Trustee's strict definition of "motivation" in this context. A fairer understanding is that the motivation prong is met simply when a person, who is not culpable in the wrongdoing, knows that she has been wronged by the alleged misconduct of the wrongdoing directors. The motivation itself arises from the fact that the person bringing a derivative action has herself been injured, and therefore, presumably would want to (that is, be motivated to) recover from the wrongdoing-defendants for her injury. Such an "independent" party has motivation to sue regardless of whether that same party may recognize a strategic advantage in waiting to file suit.
As the Trustee sees things, only an independent party with a fiduciary duty to file suit has the requisite "motivation" to overcome the presumption. She emphasizes the "discretion" retained by the Creditors' Committee "both to determine what is in creditors' best interests and to decide how to accomplish that objective" and contends that such a Committee, in a Chapter 11 proceeding, is "no different from a shareholder, who also has a right, but no mandatory duty to seek leave to bring a derivative claim." (Trustee's Post-Trial Br. at 386.) The fact that the Creditors' Committee has more than one option does not, however, defeat the conclusion that it has the necessary motivation to bring suit against wrongdoing directors. Requiring an independent party to have a fiduciary duty to sue in order to satisfy the motivation prong is too stringent a test.
Nor does the fact that litigation might have been expensive make a difference. (Cf. Trustee's Post-Trial Br. at 406.) The damages award in this case demonstrates that finding counsel on a contingency was likely. Indeed, in this case both the Creditors' Committee and, ultimately, the Trustee did succeed in retaining counsel on contingency. (See Bankr.Tr., Mar. 19, 2008, 5:14-7:1; Background V.B.)
The court concludes that the Creditors' Committee had the motivation to sue years before 2008. Emerald went into bankruptcy on June 13, 2002 (Involuntary Pet., In re Emerald Casino, Inc., No. 02-br-22977 (Bankr.N.D.Ill.2002)[1]), and the U.S. Trustee appointed a Creditors' Committee on November 1, 2002. (App't Creditors' Comm.) The Creditors' Committee retained Gardner Carton & Douglas to serve as its counsel, and the firm's time records indicate that as early as August 2003, the Creditors' Committee's Counsel researched possible derivative claims against Emerald officers. (See supra Background V.B.) The creditors represented by the Creditors' Committee obviously were injured by Emerald's loss of license; because of the loss, Emerald was unable to pay them for their services or to redeem their ownership interests. And, as discussed supra, that Defendants' conduct caused the revocation of Emerald's license
The three prongs of the test are met. The court concludes that because the Creditors' Committee had the knowledge, ability and motivation to sue, Defendants have rebutted the presumption of adverse domination, and the Trustee's breach of fiduciary duty claim is barred by Illinois' five-year statute of limitations.
Trustee alleges that Defendants breached Paragraph Ten of the Amended Shareholders' Agreement, which provides,
(PX1008 at 7.) Trustee argues that each Defendant violated IGB rules, and therefore breached the contract, resulting in the loss of Emerald's valuable license. Before turning to the merits of Trustee's claim, the court must consider Defendants' argument that the claim is barred by res judicata.
The full faith and credit clause of the United States Constitution requires courts "to give to a judgment at least the res judicata effect which the judgment would be accorded in the State which rendered it." Durfee v. Duke, 375 U.S. 106, 109, 84 S.Ct. 242, 11 L.Ed.2d 186 (1963). This principle extends to federal courts interpreting a state court judgment. 28 U.S.C. § 1738; Hayes v. City of Chi., 670 F.3d 810, 813 (7th Cir.2012). Under Illinois law, a judgment is given res judicata effect, barring the filing of the same claims in a subsequent suit, where: "(1) there was a final judgment on the merits rendered by a court of competent jurisdiction, (2) there is an identity of cause of action, and (3) there is an identity of parties or their privies." River Park, Inc. v. City of Highland Park, 184 Ill.2d 290, 302, 234 Ill.Dec. 783, 703 N.E.2d 883, 889 (1998). Illinois law prevents res judicata from barring a subsequent action, however, "where it would be fundamentally unfair to do so." Nowak v. St. Rita High Sch., 197 Ill.2d 381, 390, 258 Ill.Dec. 782, 757 N.E.2d 471, 477-78 (2001).
Much ink has been spilled during the years in which the Payton claims bounced between the Circuit and Bankruptcy Courts. As a result, addressing the parties' arguments with respect to the res judicata issue presents a unique challenge, for in many previous filings the parties asserted arguments opposite to those they now present: Defendants, in seeking remand of the Payton claims, and before the Circuit Court had ruled on their motion to dismiss, maintained that such claims were different from the Emerald estate claims, including breach of contract. (Defs.' Remand Mot. at 10-12; Defs.' Remand Reply at 4, 14; 11/12/09 State Tr. 7:15-18, 9:1-3.) The Trustee, in seeking removal of the
Under Illinois law, a dismissal with prejudice is a final adjudication on the merits. Rein v. David A. Noyes & Co., 172 Ill.2d 325, 335-36, 216 Ill.Dec. 642, 665 N.E.2d 1199, 1204-05 (1996). Here, the Circuit Court dismissed the Payton breach of contract claim with prejudice on November 12, 2009, holding that it was barred by the statutes of limitations and/or repose contained in the Illinois Securities Law. (11/12/09 State Tr. 10:12-17.) The Trustee did not appeal the decision. Thus, under Illinois law, the Circuit Court's dismissal of the breach of contract claim was a final judgment on the merits. The Trustee argues that there cannot be a final adjudication on the merits where claims have been split. (Trustee's Post-Trial Br. at 449) (citing Torres v. Rebarchak, 814 F.2d 1219, 1223, 1225-26 (7th Cir.1987) and Zimmerman v. Bankers Life & Cas. Co., 324 Ill.App. 370, 58 N.E.2d 267, 268-69 (1st Dist. 1944).) Both of the cases she cites however, appear to be more relevant to whether the claims are the same for the purposes of res judicata (making a final judgment on the merits between the same parties binding), and not whether the Circuit Court's decision itself is, under Illinois law, a final judgment on the merits.
In Torres, the Seventh Circuit reasoned that under Section 26 of the Restatement (Second) of Judgments, the Illinois prohibition of claim splitting would likely "not apply where the parties have agreed that a plaintiff may split his claim or the court in the first action has expressly reserved the plaintiff's right to maintain the second action," for example, by indicating that the judgment is "without prejudice" with respect to the second action. 814 F.2d at 1224-25. The use of the "term `with prejudice' clearly means that the judgment bars a later action." Id. at 1223. In this case, the Circuit Court dismissed Plaintiff's breach of contract "with prejudice" and used no words of limitation, nor did the Circuit Court express any concerns about the bankruptcy action other than possible preclusive effect of the Bankruptcy Court's judgment on the Circuit Court action. (11/12/09 State Tr. 10:12-17.) The Trustee also cites Zimmerman for the proposition that "there may be more than one judgment in the same cause" of action. 324 Ill.App. at 373, 58 N.E.2d at 268-69. That principle is fully consistent with the doctrine of res judicata, which prohibits only multiple judgments between the same parties concerning the same issue or claim.
Here, the court finds that under Illinois law, the Circuit Court's decision dismissing the breach of contract claim was a final judgment on the merits.
Under Illinois' transactional approach, claims are the same "if they arise from a single group of operative facts,
Both the Plaintiffs' and the Trustee's breach of contract claims arise from "a single group of operative facts" because both claims, which contain substantially similar language, allege that Defendants breached Paragraph Ten of the Amended Shareholders' Agreement by violating IGB rules causing revocation of Emerald's license. (Payton Am. Compl. ¶¶ 57-61; Third Am. Compl. ¶¶ 120-25.) Citing Iovinelli v. Pritchett, No. 06-cv-6404, 2008 WL 2705446 (N.D.Ill.2008), the Trustee asserts that the fact that the claims contain nearly identical language, alone, does not establish that the claims are the same. (Trustee's Post-Trial Br. at 444 n.106.) In Iovinelli, the plaintiff firefighter sued the Village of Franklin Park and its Department Chief under § 1983, alleging that the defendants retaliated against the plaintiff for bringing a suit against the Village of Franklin Park in state court. The district court concluded that these claims were different because they involved different operative facts (the § 1983 case would involve facts concerning the plaintiff's employment history, information that was relevant to the state court case only because it conferred the plaintiff standing to sue), and because they concerned different legal issues ("tax levy and collection issues" in the state court case, and "employment and constitutional claims" in the § 1983 case). No. 06-cv-6404, 2008 WL 2705446 at **1, 9. The case before this court differs from Iovinelli, because, here, the operative facts and legal issues are the same: the complaints in both Circuit Court and the Bankruptcy Court alleged that Plaintiffs and Defendants were parties to the Amended Shareholders' Agreement, and that Defendants breached Paragraph Ten of the Amended Shareholders' Agreement by violating IGB rules, causing revocation of Emerald's license. Although the Payton Plaintiffs also alleged misleading conduct in connection with the sale of the shares, the primary issue in each of the two cases is whether Defendants' conduct violated Paragraph Ten.
Next, the Trustee argues, and the Bankruptcy Court concluded, that these claims were different because "the central basis for the [Payton] claims was that the defendants had not accurately informed the Payton Plaintiffs of facts relating to their investments" while "the claims of the Emerald estate have nothing to do with communications between management and individual investors, but rather, with management's dealings with the Illinois Gaming Board." (Trustee's Post-Trial Br. at 443-44) (quoting 459 B.R. at 304 n. 3.) The Payton Complaint does contain allegations that Defendants "defrauded" each of the Payton Plaintiffs through "intentional concealment of ... facts, conduct and events" that "would have been material to each [Payton] Plaintiff" and would have caused each one of them not to entrust money to Emerald."
The Trustee insists the claims do indeed differ. She emphasizes that "the Trustee on behalf of the estate asserts rights under the contract that belonged to Emerald and are different from those she asserted as assignee of the Payton Plaintiff claims." (Trustee's Post-Trial Br. at 444-45) (citing Saxon Mortg., Inc. v. United Fin. Mortg. Corp., 312 Ill.App.3d 1098, 1107, 245 Ill.Dec. 455, 728 N.E.2d 537, 544-45 (1st Dist. 2000).)
As this court reads the Amended Shareholders' Agreement, only the estate (or the Payton Plaintiffs derivatively) had the right to sue under the contract. The Agreement states that it is between Emerald and current and/or future shareholders. (PX13 at 1) ("THIS AGREEMENT is made and entered into as of the 6th day of August, 1999 between [Emerald], an Illinois corporation ... and those parties set forth in Exhibit A attached hereto while such party holds Shares ... and any party who hereafter acquires Shares....") In Paragraph Ten of the Amended Shareholders' Agreement, titled "Additional Agreements of Shareholders," which both the Payton Plaintiffs and the Trustee allege Defendants violated, the shareholders promise to "cooperate with [Emerald] to provide any disclosure information to the IGB," to "take any actions necessary to secure the renewal of [Emerald's] gaming license," "to comply with the [Riverboat Gambling Act] and all rules and orders of the IGB," and finally to "not commit any acts which would jeopardize the license or a renewal thereof." (Id. at 4.) In allegedly violating this paragraph, Defendants caused harm to Emerald itself by allegedly causing revocation of Emerald's license. Though this, in turn, caused harm to the other shareholders through loss of their investment, the contractual obligation itself is owed only to Emerald, the corporation, and to the shareholders
This distinction (regarding who may sue for breach of contract under the Amended Shareholders' Agreement) is crucial for the purposes of understanding Defendants' positions throughout the Bankruptcy and Circuit Court proceedings, see supra note 96, and for understanding the effect of the Circuit Court action for the purposes of res judicata. As discussed above, in their motion to remand, Defendants emphasized that the Payton claims, brought by the Statutory Investors in their individual capacity, were different from any claims that the estate may have. (Defs.' Remand Mot. at 16-17; Defs.' Remand Reply at 5, 20.) After the Payton claims were remanded, Defendants moved to dismiss them on two alternative bases: first, that the Payton Plaintiffs did not have standing to bring the breach of contract claim in their individual capacity, and second, that if the Payton breach of contract claim is, in fact, a derivative claim, it is duplicative of the estate's breach of contract claim pending in Bankruptcy Court. (Defs.' Mot. to Dismiss Payton at 12-13.) The Circuit Court rejected both arguments, but dismissed the breach of contract claim with prejudice on alternative grounds. (11/12/09 State Tr. 10:12-17, 34:12-20.)
The Circuit Court thus appeared to accept the notion that the Statutory Investors had standing to pursue their own claims for breach of contract. This court reads the Amended Shareholders' Agreement differently. In the end, however, it makes no difference for res judicata purposes. In support of their successful motion for remand, Defendants urged that the Payton claims were distinct from the claims that the estate might pursue. (See Defs.' Remand Mot. at 16-17; Defs.' Remand Reply at 5, 20.) Under the doctrine of judicial estoppel, they will not now be heard to argue otherwise.
The final element for enforcing res judicata is a showing that parties in the previous case are the same as the ones now before the court. It is undisputed here that the Defendants are the same, but the parties dispute whether the plaintiffs were the same in the Payton and estate causes of action for the purposes of res judicata. The Trustee filed the Payton breach of contract claim as assignee of the Payton claims, and the estate's breach of contract claim on behalf of the estate,
Illinois courts have yet to address this issue. But, in Perry v. Globe Auto Recycling, Inc., 227 F.3d 950 (7th Cir.2000), the Seventh Circuit held that, under federal law, res judicata did not bar the plaintiff-assignee from litigating a claim that he had purchased from the assignor, though the plaintiff, in his individual capacity, had litigated the same claim against the same defendant to a final judgment. 227 F.3d at 952-53. The court reasoned that the identity-of-parties requirement of res judicata was not satisfied because in litigating his individual claim "[the plaintiff-assignee] was not [the assignor's] representative in any sense of the term, and thus [the assignor] would have been fully entitled to bring the present litigation on his own." Id. at 953. Defendants attempt to limit Perry's holding only to situations in which the assignee litigated the potentially preclusive claim before he acquired the assigned claim. (See C. Defs.' Post-Trial Mem. at 135-36), but the language of the Perry decision does not suggest such a limitation. So long as the assignee has a right to bring an action in his own name, the court concluded he could transfer that right to an assignee.
Defendants also cite several Illinois law cases which hold that an entity that controls the litigation, even as a non-party, is in privity with the party controlled. (C. Defs.' Post-Trial Mem. at 137) (citing Cabrera v. First Nat'l Bank of Wheaton, 324 Ill.App.3d 85, 101-02, 257 Ill.Dec. 512, 753 N.E.2d 1138, 1152 (2d Dist.2001) and Fed. Sav. & Loan Ins. Corp. v. Dir. of Revenue of Ill. Dep't of Revenue, 650 F.Supp. 1217, 1223 (N.D.Ill.1986).) The Trustee notes only that these cases contradict the holding in Perry. (Trustee's Post-Trial Br. at 448.) Regardless how that issue is resolved, the court concludes that Defendants are estopped from asserting res judicata.
In seeking to bar Plaintiff's claim for breach of contract under res judicata, Defendants omit one of the most important facts concerning the state and bankruptcy proceedings — that these "dual proceedings" were of their own making. Defendants argue that the Trustee had an obligation "to amend or dismiss [her] complaints as necessary to get [her] entire cause of action in one suit." (C. Defs.' Post-Trial Mem. at 122) (quoting Chi. Title Land Trust Co. v. Potash Corp. of Sask. Sales Ltd., 664 F.3d 1075, 1081 (7th Cir.2011).) Yet, unlike the
The Bankruptcy Court so concluded, and the court agrees. 459 B.R. at 303-04. Under the doctrine of judicial estoppel, "a party who prevails on one ground in a prior proceeding cannot turn around and deny that ground in another one." Butler v. Vill. of Round Lake Police Dep't, 585 F.3d 1020, 1022 (7th Cir.2009). Judicial estoppel "is an equitable concept designed to protect the integrity of the judicial process and to prevent litigants from playing fast and loose with the courts." Butler, 585 F.3d at 1022 (internal quotations and citations omitted). There are three requirements to applying the doctrine: "(1) the later position must be clearly inconsistent with the earlier position; (2) the facts at issue should be the same in both cases; and (3) the party to be estopped must have convinced the first court to adopt its position." Ogden Martin Sys. of Indianapolis, Inc. v. Whiting Corp., 179 F.3d 523, 527 (7th Cir.1999).
Each of these three requirements has been satisfied. Defendants' initial argument, that the Payton and estate breach of contract claims were different and, therefore, severable, prevailed when the Bankruptcy Court agreed to remand these claims. In their motion for remand, Defendants maintained that "the causes of action in the [Payton Complaint] have no impact on Emerald's bankruptcy estate, and the proofs relative to establishing liability to the estate and the proofs necessary to establishing liability to the Payton Plaintiffs on their individual claims are different and would not overlap." (Defs.' Remand Mot. at 16.) Then in their subsequent
Moreover, as Judge Wedoff recognized, Defendants acquiesced to splitting the breach of contract claim. 459 B.R. at 305. Under Illinois law, "[r]es judicata will not be applied where it would be fundamentally unfair to do so." Nowak, 197 Ill.2d at 390, 258 Ill.Dec. 782, 757 N.E.2d at 477. Section 26 of the Restatement (Second) of Judgments, which the Illinois Supreme Court has cited with approval, see Nowak, 197 Ill.2d at 393, 258 Ill.Dec. 782, 757 N.E.2d at 479, outlines several exceptions for the application of res judicata when claims have been split, including where "[t]he parties have agreed in terms or in effect that the plaintiff may split his claim, or the defendant has acquiesced therein." RESTATEMENT (SECOND) OF JUDGMENTS § 26(1)(a). The Bankruptcy Court concluded that "[b]y moving for remand or abstention with respect to the Payton Plaintiff claims, while expressly declining to seek transfer of the Emerald estate claims to state court," Defendants both acquiesced and affirmatively sought to split the Payton and estate claims, including the breach of contract claim. 459 B.R. at 305. This court agrees.
Defendants attempt to evade application the doctrines of judicial estoppel and acquiescence here on the ground that "neither the bankruptcy court nor the Defendants nor the Trustee even suggested splitting the contract claim at the time of remand, and ... the bankruptcy court remanded the contract claim to state court as a single claim."
The court notes, further, that Judge Wedoff evidently intended to remand only those claims that had been removed from the Circuit Court, which did not include the estate's breach of contract claim. Judge Wedoff mistakenly observed that "Counts II through VII of the amended complaint repeat Counts I through VI of the state court complaint. Counts I, VIII, IX, X, and XI are new." (1/27/09 Bankr. Tr. 5:5-10) (emphasis added.) In fact, Count III (breach of contract) of the First Amended Complaint was different from Count I (breach of contract) of the Payton Complaint, as the First Amended Complaint added language to include the estate. (First Am. Compl. ¶¶ 132-36; Payton Compl. ¶¶ 39-43.) Defendants' remand motion itself was directed only at the Payton claims. (See Defs.' Remand Mot. at 1 (arguing that the Trustee "is not and never has been a party" to the Payton action, though 11 U.S.C. § 323 confers the Trustee with standing to represent the estate, and therefore, she is clearly party to the estate's breach of contract claim); Defs.' Remand Reply at 4-5 (distinguishing between the Payton claims and the estate claims).) Defendants admit as much by noting that "Defendants' remand motion was directed at the removed Payton claims because it had to be. Defendants could not seek remand of the claims that were not removed from state court." (C. Defs.' Post-Trial Mem. at 138.) Finally, as Judge Wedoff observed in rejecting Defendants' res judicata arguments, "[t]he court would hardly have allowed the claims to go forward in separate courts with the notion of creating a race to judgment between the two." 459 B.R. at 304.
Defendants argue that the issue of splitting the breach of contract claim was never raised, and in fact, that "once the issue was raised, Defendants objected both to the Trustee filing duplicate contract claims and to the claims proceeding simultaneously in two courts." (C. Defs.' Post-Trial Mem. at 121.) Defendants offer no evidence of this, however, and it appears from the record that Defendants argued the claims were duplicative only after the Payton claims had been remanded, and after the Trustee had amended her complaint in Bankruptcy Court to include a breach of contract claim on behalf of the estate. In February 2009, after the Payton claims were remanded, Defendants did not object when the Trustee sought leave to amend her complaint in Bankruptcy Court "[t]o accurately reflect what the Court did in its abstention order" by "divid[ing]" the breach of contract claim "into the Estate's claim and the Payton Plaintiffs' claim." (Pl.'s Mot. Am. Compl. ¶ 6 (emphasis added); see 2/4/09 Bankr.Tr. 2:9-12.) Defendants nevertheless sought dismissal of the Payton breach of contract claim in Circuit Court, in April 2009, urging that the claim was duplicative of the bankruptcy action. (Defs.' Mot. to Dismiss Payton at 13.) Defendants changed their tune yet again in Circuit Court before Judge Bartkowicz ruled on the motion to dismiss, arguing that the Circuit Court
The Illinois Appellate Court in Piagentini v. Ford Motor Co., 387 Ill.App.3d 887, 897, 327 Ill.Dec. 253, 901 N.E.2d 986, 996 (1st Dist.2009) observed that "the key element in determining acquiescence is the failure of the defendant to object to the claim-splitting." 387 Ill.App.3d at 897, 327 Ill.Dec. 253, 901 N.E.2d at 996. Interpreting comment a of Section 26 of the Restatement (Second) of Judgments, the Illinois Appellate Court noted that a defendant acquiesces if he "does not make known his objection in either action." 387 Ill.App.3d at 897, 327 Ill.Dec. 253, 901 N.E.2d at 996. Defendants seize on this language, noting that they did object to the claim-splitting in Circuit Court after the claims had been remanded, when they argued that the Payton breach of contract claim duplicated the estate's breach of contract claim in Bankruptcy Court, and should be dismissed. (C. Defs.' Post-Trial Mem. at 140.) The scenario described in the Restatement,
Defendants also assert that their objection in Circuit Court under 735 ILCS 5/2-619(a)(3) "precludes a finding of acquiescence." (C. Defs.' Post-Trial Mem. at 139-40 (citing Treadway v. Nations Credit Fin. Servs. Corp., 383 Ill.App.3d 1124, 1133, 322 Ill.Dec. 897, 892 N.E.2d 534, 541-42 (5th Dist.2008)); see also Defs.' Mot. to Dismiss Payton at 13.) Again, the court disagrees. In Treadway, the defendant
The court finds that Defendants are judicially estopped from asserting that res judicata bars the Trustee's breach of contract claim.
To prevail on a breach of contract claim in Illinois, a plaintiff must prove (1) the existence of a valid and enforceable contract, (2) plaintiff's performance, (3) breach of the terms of the contract, and (4) damages resulting from the breach. Spitz v. Proven Winners N. Am., LLC, 759 F.3d 724, 730 (7th Cir.2014); Kelly v. Orrico, 380 Ill.Dec. 513, 520, 8 N.E.3d 1055, 1061 (Ill.App.Ct. 2d Dist.2014). For purposes of evaluating "plaintiff's performance," the question is whether Emerald performed, not whether the Trustee performed, because Emerald was the party to the contract and Trustee is only representing Emerald's interests. In their post-trial briefs, the parties do not dispute that Emerald performed its obligations under the Amended Shareholders' Agreement and there is no evidence that shows any defect in Emerald's performance. The Trustee, therefore, has satisfied this element of her breach of contract claim.
Defendants argue that there is no "valid and enforceable contract" between Defendants and Emerald for two reasons. First, the Officer Defendants, Kevin Flynn, Joseph McQuaid, John McMahon, Kevin Larson, and Walter Hanley, assert they are not parties to the Amended Shareholders' Agreement because the IGB never approved them as Emerald shareholders. Second, Defendants contend that terms in Paragraph Ten of the Amended Shareholders Agreement are too speculative to be enforceable. The court rejects both arguments.
For their part, Defendants Donald Flynn and Pedersen do not contest that they are shareholders and parties to the Amended Shareholders' Agreement. (See PX880 ¶ 406; D. Flynn's SOF ¶¶ 275-79.) Defendants Kevin Flynn, McQuaid, McMahon, Larson, and Hanley on the other hand, make the squirrely claim that, despite consistently exercising the powers of shareholders and representing themselves as shareholders, they are not in fact shareholders. The Officer Defendants do not dispute that they executed and signed the Amended Shareholders' Agreement. They argue instead that because the IGB never approved them as shareholders, they never became parties to the contract they signed. (C. Defs.' Post-Trial Mem. at 143.) This argument is without merit.
The Officer Defendants essentially read the Amended Shareholders' Agreement to contain an implicit condition that shareholders receive IGB approval before they are bound by it. This argument is problematic
First, the terms of the contract do not support the Officer Defendants' interpretation. The Amended Shareholders' Agreement states that it is an agreement between Emerald "and those parties set forth on Exhibit A attached hereto while such party holds Shares (as defined below) and any party who hereafter acquires Shares (the "Shareholders")."
The Officer Defendants' argument rests on the assumption that a "shareholder" for purposes of the agreement must be the same as a "shareholder" for purposes of Rule 235(a). The agreement itself does not mention Rule 235, however, nor does it state that it applies only to "IGB-approved shareholders." Instead, the agreement states that it applies to "any party who hereafter acquires shares (Shareholders)," without further defining that term. (PX1008 at 4.) Because the contract does not qualify the term "shareholder," or the phrase "any party who hereafter acquires shares," the court declines to read in an additional qualification or limitation and therefore interprets the contract as applying to all categories of shareholders.
This broad reading of the term shareholder is consistent with the remaining terms in the contract, as well. Specifically, Section 4 of the contract conditions certain sales of shares from shareholders to "Outsiders" upon IGB approval. (See PX1008 ¶¶ 4, 4.07) ("[T]he transfer of any Shares pursuant to this Paragraph 4 shall only be effective upon the approval of the IGB and when made in compliance with the Act.") There is no similar language requiring IGB approval before an individual becomes a shareholder, implying that the parties did not intend to impose a similar requirement on such an individual.
Paragraph 5.01 of the Amended Shareholders' Agreement also supports a broad reading of the term "shareholder." (PX1008 ¶ 5.01.) Paragraph 5.01 contemplates what would happen if the IGB disapproved a shareholder after the shareholder had already acquired Emerald shares: "If the IGB determines ... that... any Shareholder is not an acceptable owner of the Corporation ... the Shareholder shall promptly sell his Shares to the Corporation or another Shareholder thereof."
This court's reading of Paragraph 5.01 is consistent with Defendants' own understanding of the IGB's historical use of "economic disassociation" of casino investors. Elsewhere in their briefs, Defendants argue that, despite IGB Rule 235(a), the IGB did not require pre-approval of shareholders and historically had not penalized licensees for voting to sell shares of stock without first obtaining IGB approval. (C. Defs.' SOF ¶¶ 59-62.) Instead, when the IGB found that an individual applicant for ownership in a casino was unsuitable, the IGB required that the individual divest herself of her interest in the casino and that any money the individual had invested be returned. (See Tr. 2545:22-2546:13, 2546:22-2547:13, 2548:16-2549:6.) This process was codified in IGB rules in 1998, before the Amended Shareholders' Agreement was executed in August 1999. See 86 ILL. ADMIN. CODE § 3000.224 ("Each owner and supplier licensee shall provide a means for the economic disassociation of a Key Person in the event such economic disassociation is required by an order of the Board."). Therefore, despite the Officer Defendant's assertions, the IGB, Emerald, and Defendants themselves contemplated that individuals would own shares while awaiting approval by the IGB. The court concludes that under the terms of the Agreement, the Officer Defendants need not be IGB-approved in order to be shareholders bound by the Agreement.
Even if the Officer Defendants were right that Rule 235(a) makes it a legal impossibility to transfer shares without IGB approval, the Rule would not make such a transfer a factual impossibility. The fact that the Officer Defendants were, in practice, shareholders of Emerald is sufficient for purposes of the Agreement. At the June 23, 1999 Board meeting, the Board of Directors approved a Restricted Stock Award Plan (PX1316 at 130) and several agreements to sell restricted stock under the Plan. (PX521; PX1316 at 113.) The Restricted Stock Award Plan was intended to provide "grants of awards of Restricted stock" to "key officers and employees" as part of their compensation. (PX521 at 2.) By its terms, the Plan would "become effective on June 23, 1999 (subject to approval, to the extent required, by the Illinois Gaming Board or its Administrator)." (Id. at 2.) The Officer Defendants each signed a Restricted Stock Agreement on June 23, 1999 under which each was awarded Emerald stock subject to the terms of that Restricted Stock Award Plan. (Id. at 14, 22, 26, 30, 34; Trustee's SOF ¶ 76; C. Defs.' SOF ¶ 155.) Defendants were issued stock certificates, which contained, on the back, the clause "[b]y accepting the shares of the stock evidenced by this certificate, the holder agrees to execute and be bound by the Shareholders' Agreement." (PX1282 at 82, 85, 88, 91, 94.)
After issuing the stock certificates, Defendants and Emerald behaved as though the Officer Defendants had accepted the shares. Emerald treated John McMahon, Kevin Larson, Joseph McQuaid, Kevin Flynn, and Walter Hanley as all other existing shareholders. The Officer Defendants were allowed to attend shareholder meetings and to vote their shares. (PX1127 at 3-5 (completed proxy voting forms for Hanley, McMahon, and Larson); Trustee's SOF ¶ 81; C. Defs.' SOF ¶ 160 (acknowledging that Restricted Stock Plan participants would be allowed to vote their
Defendants also represented that they were shareholders for tax purposes.
The Officer Defendants agree that they executed the stock purchase agreements and signed the stock certificates, but maintain that they never actually accepted the shares. The Officer Defendants assert instead that the shares were held in escrow. From what appears in the record, however, the "escrow" did not exist, or was, at best, a mere formality. Defendants admit that the stock certificates were not held by a neutral third party, but rather were held in Defendant Walter Hanley's own office. (C. Defs.' SOF ¶ 251; see also Bankr.Tr. 2745:5-2747:2 (Hanley testifying that the "corporation held the shares").) This is plainly inconsistent with the common understanding of "escrow." See Albrecht v. Brais, 324 Ill.App.3d 188, 191, 257 Ill.Dec. 738, 754 N.E.2d 396, 399 (3d Dist.2001) (escrow must be held with a third party); Midwest Decks, Inc. v. Butler & Baretz Acquisitions, Inc., 272 Ill.App.3d 370, 379, 208 Ill.Dec. 455, 649 N.E.2d 511, 517 (1st Dist.1995) (escrow must be held with "stranger or third party"). The court concludes that the Officer Defendants accepted their shares and became shareholders of Emerald, bound by the Amended Shareholders' Agreement.
Second, the Officer Defendants' treatment of other "prospective" shareholders as though they were bound by the Amended Shareholders' Agreement reveals that the Officer Defendants interpreted the Amended Shareholders' Agreement to apply to prospective shareholders. The Statutory Investors and the Twelve Outsiders were in the same position as the Officer Defendants — they had signed the Amended Shareholders' Agreement (PX1008 at
The Officer Defendants try to rebut the weight of this evidence by arguing that Emerald represented that the Officer Defendants were "prospective" shareholders on various occasions. (C. Defs.' Post-Trial Mem. at 150.) Yet, the Officer Defendants cite only two instances when they made such a representation: the Renewal Application, in which Defendants told the IGB the stocks were in "escrow," and a 2002 Settlement Agreement with the IGB (which was signed but never consummated). (C. Defs.' Post-Trial Mem. at 150.) But simply saying that the Defendants were "prospective" shareholders does not make them so. Ultimately the representations on paper were meaningless in practice. Defendants cite no instances in which Emerald or the Officer Defendants acted differently based on the Officer Defendants' status as "prospective" shareholders. The Officer Defendants, therefore, were shareholders within the meaning of the Amended Shareholders' Agreement and were bound by its terms.
Finally, with the exception of this very adversary proceeding, the Officer Defendants have consistently presented themselves as shareholders in every context, including in the claims process of the bankruptcy proceedings. The Officer Defendants have filed Proofs of Interests with the Bankruptcy Court, each claiming that they owned "common stock" of Emerald. (PX395 (McMahon); PX518 (Larson); PX1192 (Hanley); PX1194 (McQuaid); PX1196 (Kevin Flynn).) Even in this adversary proceeding the Officer Defendants have been inconsistent. For example, in their Post-Trial Memorandum, the Officer Defendants argue that this court should reduce the damages award because the award will simply be "cycled from the shareholder Defendants," through Trustee's lawyers and bankruptcy estate, "and back to the Defendant shareholders." (C. Defs.' Post-Trial Mem. at 286) (emphasis added.) The Officer Defendants' brief cites Donald Flynn as the lone example, but their Proofs of Interest in the bankruptcy proceedings demonstrate that each of the five Officer Defendants who deny their shareholder status here expect to be
For all of these reasons, the court concludes that the Officer Defendants are shareholders of Emerald and bound by the Amended Shareholders' Agreement.
Defendants argue that two of the three clauses in Paragraph Ten of the Amended Shareholders' Agreement are unenforceable. As Defendants read that paragraph, it imposes requirements in three separate clauses, as follows:
Each Emerald Shareholder shall:
(See C. Defs.' Post-Trial Mem. at 155-56) (quoting PX1108 at 7.) Defendants argue that the Cooperate and Jeopardize Provisions are "too uncertain to establish an obligation and are therefore, unenforceable." (C. Defs.' Post-Trial Mem. at 156.) Trustee forcefully disputes this reading of Illinois law (see Trustee's Post-Trial Br. at 213-18), but her breach of contract claim nevertheless relies primarily on the Comply Provision. Thus, the Trustee urges that Defendants violated (i.e. did not comply) with IGB rules and, as a result, Emerald lost its license. Defendants do not argue that the Comply Provision is unenforceable. (C. Defs.' Post-Trial Mem. at 156.) Because the court can decide the Trustee's breach of contract claim by reference to the Comply Provision, the court need not address whether the remaining provisions are enforceable, as well.
To establish a breach of the Comply Provision, Defendants assert, the Trustee
The court concludes that the Trustee has no obligation to prove Defendants' state of mind. First, although Defendants are correct that Trustee's breach of contract claim relies on proving an underlying violation of IGB rules, none of the five IGB rules cited in the Final Board Order contains an intent requirement. See 86 ILL. ADMIN. CODE § 3000.110(a)(5) (a holder of a license may face disciplinary action for "for any act or failure to act that is injurious to the public health"); § 3000.140(a) (licensees "shall have a continuing duty to disclose"); §§ 3000.140(b)(3), (b)(7) ("licensees ... shall periodically disclose"); § 3000.235(a) ("an ownership interest ... may only be transferred with leave of the Board"). In Costello v. Grundon, 651 F.3d 614 (7th Cir.2011), the case Defendants cite, the Seventh Circuit was evaluating whether the parties had breached their contract by violating a federal regulation. The regulation at issue in that case, however, itself specifically included an intent requirement. 651 F.3d at 641; see 12 C.F.R. § 224.1(b)(1) (exempting a borrower from certain requirements "unless the borrower willfully causes the credit to be extended in contravention" of federal regulations).
Even in the absence of a statutory intent requirement, Defendants contend, because the Trustee's claim is based on fraud and misrepresentations, she must show that Defendants intended to commit those wrongful acts. (C. Defs.' Post-Trial Mem. at 157-58.) Yet the Trustee's claims are not actually premised on fraud and misrepresentations. True, as Defendants note, the Trustee has alleged (perhaps hyperbolically) that Defendants engaged in a "concerted scheme" to "actively mislead" the IGB, and that their Renewal Application was "fraudulent." (C. Defs.' Post-Trial Mem. at 157-58.) But the use of this language does not transform the nature of Trustee's claim. Peeling back the overstated rhetoric, the Trustee's claim, at base, is that Defendants did not comply with IGB rules and that this failure resulted in the loss of Emerald's valuable license. All that matters is whether Defendants engaged in conduct that violated the IGB rules, and whether that conduct in fact caused the IGB to revoke the license. The subjective reasons for Defendants' failure to comply are, therefore, not relevant to the court's analysis.
This comports with Illinois contract law. Under Illinois law, "[w]hether one intentionally, carelessly, or innocently breaches a contract, he is still considered in breach of that contract, and will be liable to the extent that the other party must be placed in the position he would have been in absent the breach." Wait v. First Midwest Bank/Danville, 142 Ill.App.3d 703, 710, 96 Ill.Dec. 516, 491 N.E.2d 795, 802 (4th Dist.1986); see also
To show breach, the Trustee must establish that each Defendant engaged in conduct that did not comply with (i.e.violated) IGB rules. The IGB Final Board Order listed five rules that Emerald violated and listed the conduct Emerald engaged in, which violated each rule. (PX162 at 32-36; see Appendix C). The IGB Final Board Order speaks in terms of Emerald's conduct, but to prove breach, the Trustee must show which of the individual Defendants were responsible for each act or failure to act that the IGB cited. After a careful review of the record, the court concludes that the Trustee has established violations of Rues 140(a), 140(b)(3), 235(a) and 110(a). (See Appendix C.) The Trustee did not establish that individual Defendants violated Rule 140(b)(7).
The court finds that Defendants Kevin Flynn, Donald Flynn, Joseph McQuaid, and Kevin Larson each told the IGB that Kevin Flynn had no official role managing Emerald before June 1999. (See supra Background III.C.) The Trustee has established that Kevin Flynn did actively manage Emerald prior to 1999, however. (See supra Background III.C.1.) Therefore, the court concludes that when each of these Defendants stated otherwise to the IGB, each violated Rule 140(a) and breached the contract.
The Trustee has not established that Peer Pedersen violated Rule 140(a), however. The Trustee presented evidence that on October 31, 2000, Pedersen (1) testified that he did not know what Kevin Flynn's role at Emerald was during this time, and (2) recanted an earlier statement to the IGB that Kevin Flynn was active in Emerald's lobbying efforts, testifying instead that he "overstated" Kevin Flynn's role "because it was Joe McQuaid who was involved in that." (PX1100 at 19-20.) Pedersen's testimony about Kevin Flynn's lobbying efforts is not relevant because the IGB Final Board Order was concerned with Kevin Flynn's role managing Emerald, rather than his lobbying efforts. Pedersen's remaining testimony is wavering and uncertain; it is not a misrepresentation of Kevin Flynn's role.
The court also concludes that John McMahon did not deny Kevin Flynn's role to the IGB prior to January 30, 2001, which is the date that the IGB concluded its investigations and decided to revoke Emerald's license. Although the Trustee presented evidence that McMahon, through Emerald, may have made statements denying Kevin Flynn's involvement (Trustee's SOF ¶ 183), these statements took place during the disciplinary proceedings to appeal the revocation, and could not have been the basis of the revocation itself.
The court finds that Defendants McQuaid, McMahon, and Hanley breached the contract by failing to provide the Rosemont Letter of Intent, Site Access Agreement, and the three Extension Agreements, in violation of Rule 140(a). (See supra Background II.B.2.)
The Trustee contends it was Kevin Flynn who supervised the drafting of a February 14, 2000 letter, which was one of several instances in which Emerald failed to disclose the agreements. As this court reads Kevin Flynn's testimony, however, Kevin Flynn equivocates about whether he was directly involved in collecting the documents. (See Bankr.Tr. 990:4-993:19.) The court concludes there is insufficient evidence to establish that Kevin Flynn failed to disclose the agreements. (See supra Background II.B.2.)
The Trustee presented no evidence that Defendants Donald Flynn, Larson, or Pedersen had knowledge of the agreements and opportunities to disclose the agreements, and failed to make the required disclosures. (Id.)
The court concludes that McQuaid and Hanley failed to disclose various construction agreements to the IGB. (See supra Background III.B.4.)
Although Kevin Flynn and John McMahon were also involved in meeting with construction professionals and entering into the contracts, the Trustee has failed to show that Kevin Flynn and McMahon had an opportunity to disclose the agreements and failed to make the required disclosures. (Id.)
The Trustee also alleges that other Defendants helped to prepare the Renewal Application which was silent concerning several then-existing construction agreements. (Trustee's SOF ¶¶ 633-37.) Because the Trustee has not established which Defendants completed which portions of the Renewal Application, however, she has not proven which of the Defendants are responsible for the inadequacies of the Renewal Application.
The IGB found that Emerald violated Rule 140(a) in several other ways. The court concludes that Trustee has failed to establish that individual Defendants engaged in the conduct cited by the IGB.
First, the IGB found that Emerald failed to disclose various transfers of shares of Emerald. (PX162 at 33, Count I(a).) Yet, as the court finds above, although Defendants sometimes delayed their disclosures, they did not fail to disclose the transfers. (See supra Background IV.E.2.)
Next, the IGB found that Emerald failed to disclose agreements or understandings to sell ownership interests in Emerald. (PX162 at 33, Count I(b).) This conclusion, however, rested on the IGB's determination that an agreement existed between
Finally, the IGB also cited the failure to disclose the status of construction in Rosemont. (PX162 at 33 Count I(d).) As explained earlier, however, there is ample evidence that the IGB was aware of the construction activities at the Rosemont site, and insufficient evidence that any Defendants made efforts to conceal the construction activities themselves. (See supra Background II.B.1.c.ii.)
The court finds that Defendants McQuaid, McMahon, and Hanley breached the contract by failing to provide the Rosemont Letter of Intent, Site Access Agreement, and the three Extension Agreements, in violation of Rule 140(a). (See supra Background II.B.2.)
The court concludes that McQuaid and Hanley failed to disclose various construction agreements to the IGB. (See supra Background III.B.4.)
The IGB once again cited the failure to disclose the status of construction in Rosemont, but as explained above, the IGB was aware of the construction activities. (See supra Background II.B.1.c.ii.)
The court concludes that the Trustee has failed to establish that the individual Defendants engaged in any of the conduct the IGB cited in Count III.
First, the IGB again cited Emerald's failure to disclose transfers of shares of Emerald. (PX162 at 33 Count III(a).) As explained earlier, the court has concluded there was no failure to disclose these transfers. (See supra Background IV. E.2.)
Next, the IGB once again cites the failure to disclose "agreements or understandings" to sell Emerald ownership interests, referencing the alleged Davis and Duchossois deal. That claim fails, again, because there is insufficient evidence to establish that any such deal existed. (See supra Background II.A.2.)
Finally, the IGB cites specifically the agreement or understanding to transfer an ownership interest to Mayor Stephens. Yet, since this was purportedly part of the
The IGB Final Board Order found that three transfers of shares violated Rule 235(a) because Emerald had not obtained pre-approval for the transfers of shares. Both parties agree that the IGB did not approve the transactions between Donald Flynn and the Twelve Outsiders and Five Insiders prior to the transfers. As the court concludes above, Defendants did not obtain official IGB pre-approval for the transfer of shares to the Statutory Investors. (See supra Background IV.E.1.) The only question remaining on this issue is which Defendants were involved in these transactions.
The Trustee has established only that Donald Flynn was involved in this transfer of shares because the sale was from Donald Flynn to the Twelve Outsiders. The Trustee asserts that McQuaid was involved in the sales, in that he maintained a list of interested investors. McQuaid's record-keeping activities are insufficient, in this court's view, to show that he participated in the sales themselves. (See supra Background IV.0.)
The court concludes that Donald Flynn and Pedersen arranged a sale of shares from Five Insiders, including Pedersen, to Donald Flynn. The parties do not dispute that Pedersen and Donald Flynn failed to obtain IGB pre-approval, which the IGB concluded was a violation of Rule 235(a). (See supra Background IV.0.)
The court concludes that Joseph McQuaid is responsible for the violation of Rule 235(a) with respect to the sales of shares to the Statutory Investors because he identified and interviewed prospective shareholders. He also sent them each a blank subscription agreement, the Amended Shareholders' Agreement, a questionnaire, and a PDF 1. He instructed prospective shareholders to send their PDF 1s directly to the IGB, but to return a completed application with a check to him. McQuaid also reported to Emerald's Board about the sale of shares. Therefore, McQuaid was the officer at Emerald responsible for completing the transfers of shares to the Statutory Investors. (See supra Background IV.D.) The IGB found that the transfer of shares without IGB pre-approval violated Rule 235(a), which states that shares "may only be transferred with leave of the Board." 86 ILL. ADMIN. CODE § 3000.235(a).
With respect to John McMahon, the Trustee has established only that he provided information to Paul Donnelly to conduct
The court finds that Kevin Flynn failed to disclose the Field Street Agreement until June 29, 2000 in violation of Rule 110(a). Although the Trustee presented some evidence that Kevin Larson also knew about the Field Street Agreement, the court concludes that Larson was not obligated to disclose it, and therefore his failure to disclose the agreement did not violate any IGB Rule or breach the contract. (See supra Background III.C.2.)
It was Joseph McQuaid who was responsible for the incomplete Renewal Application. As the court concluded above, the Renewal Application failed to disclose several pieces of information, including the agreements between Emerald and Rosemont, as well as various construction agreements. (See supra Background III. A.) McQuaid was in charge of preparing the application and was the Emerald official who signed and submitted the document. (Id.) Therefore, the court finds that McQuaid is responsible for Emerald's failure to include the relevant information in the Renewal Application in violation of Rule 110(a).
The court finds that Hanley was also responsible for failing to disclose the Rosemont agreements in the Renewal Application. (See supra Background III.A.2; III. A.4.)
The court finds that Defendants Kevin Flynn, Donald Flynn, Joseph McQuaid, and Kevin Larson each told the IGB that Kevin Flynn had no official role managing Emerald before June 1999. (See supra Background III.C.)
Once again, in Count IV, the IGB cited Emerald's failure to disclose the status of construction in Rosemont, the transfer of shares between Donald Flynn and other investors, and the alleged agreement to allow Mayor Stephens to receive or sell shares. (PX162 at 36.) The court has previously concluded there is insufficient evidence to show Defendants engaged in this conduct. (See supra Discussion III. B.2.b.i(d) (Count I: Rule 140(a).)
The IGB cited several other violations, as well. Three related to organized crime (See PX162 at 36, Count V(c), (d) and (j)), but the Illinois Appellate Court overturned those findings as against the manifest weight of the evidence (PX1233 at 105), and this court need not address them further.
The IGB also pointed to two problems with the Lease and Development Agreement.
Second, the IGB found that the Agreement violated Rule 110(a) because it included a term that permitted Rosemont to "waive" the requirement that the IGB pre-approve construction activities. Putting to one side the question whether it is reasonable to conclude any contract provision could enable Rosemont to "waive" an IGB requirement, the court is unable to find a breach of Defendants' obligations on this basis. The Trustee has not established which, if any, Defendants included this term in the Agreement, which was a product of negotiation between Rosemont and several of Defendants as well as attorneys for both parties. (See supra Background II.B.3.)
Finally, the IGB cited Emerald for "failing to cooperate fully with the IGB's investigation of Emerald and its Key Persons." (PX162 at 35 (Count V(a).) The IGB's Final Board Order does not offer specifics concerning which conduct supported this broad and general conclusion. And in the case before this court, the Trustee likewise failed to identify and prove incidents of specific conduct that caused the IGB to find that individual Defendants failed to cooperate fully with the IGB.
In sum, the court concludes that the Defendants breached the following rules:
The final element of Trustee's breach of contract claim is to show "damages resulting from the breach." Spitz v. Proven Winners N. Am., LLC, 759 F.3d 724, 730 (7th Cir.2014); Kelly v. Orrico, 380 Ill.Dec. 513, 520, 8 N.E.3d 1055, 1061 (Ill.App.Ct. 2d Dist.2014). Illinois law requires proof of causation for breach of contract claims as in tort claims. Martin v. Heinold Commodities, Inc., 163 Ill.2d 33, 58, 205 Ill.Dec. 443, 643 N.E.2d 734, 746 (1994) (quoting Town of Thornton v. Winterhoff, 406 Ill. 113, 119, 92 N.E.2d 163, 166 (1950)) ("It is a fundamental principle applicable alike to breaches of contract and to torts," that "the injury suffered by the plaintiff must be the natural and not merely a remote consequence of the defendant's act."). Proof of causation in Illinois requires proof of both "cause in fact" and "legal cause." Thacker v. UNR Indus. Inc., 151 Ill.2d 343, 354, 177 Ill.Dec. 379, 603 N.E.2d 449, 455 (1992).
Illinois courts use two tests to determine if there is cause in fact: (1) the "but for" test; and (2) the "substantial factor" test. City of Chi. v. Beretta U.S.A. Corp., 213 Ill.2d 351, 395, 290 Ill.Dec. 525, 821 N.E.2d 1099, 1127 (2004). First, under the "but for" test, courts ask whether the injury would have occurred absent the defendant's conduct. 213 Ill.2d at 395, 290 Ill.Dec. 525, 821 N.E.2d at 1127. That test
For the purposes of causation, then, the court must determine which rule violations were material elements or substantial factors in the IGB's decision to revoke the license. The IGB stated that it had the authority to revoke the license on the basis of any single rule violation. Yet, the IGB also made clear that the totality of Emerald's conduct was an important factor in its decision to revoke the license rather than impose a smaller penalty, such as a fine:
(PX162 at 30) (emphasis added.) The court also notes that the IGB's primary concern appears to have been the connections to organized crime. Defendants' less-than-forthcoming behavior throughout their interactions with the IGB seems to have exacerbated those concerns by creating the misimpression that Defendants were colluding to hide mischievous conduct. The court concludes that Defendants' failures to disclose information in violation of Rules 140(a), 140(b)(3), and 110(a) were substantial factors in the IGB's decision to revoke the license. These failures to disclose were repeatedly cited in the IGB Final Board Order because the conduct violated multiple IGB rules. The court concludes that the IGB attached significant weight to these violations in making its determination to revoke the license.
The court is unable to conclude, however, that the violation of Rule 235(a) caused the loss of the license. The IGB Final Board Order concludes that certain transfers of shares, without IGB pre-approval, were in violation of Rule 235(a). As noted above, the parties do not dispute that Defendants failed to obtain pre-approval for these transfers. Yet, the court takes note that the IGB had a long history of overlooking, and even condoning the practice of obtaining IGB approval only after transferring shares. In fact, the IGB had a specific policy, referred to as "economic disassociation," to address the problem that arose when a proposed shareholder was later disapproved by the IGB. (Tr. 734:9-13.)
Historically, the IGB did not require pre-approval of shareholders and had not disciplined licensees for voting to sell shares of stock. (See Tr. 2545:22-2546:13, 2546:22-2547:13, 2548:16-2549:6.) Instead, when the IGB found that an individual applicant for ownership in a casino was unsuitable, the IGB required that the individual divest him/herself from the casino and any money invested would be returned to the investor. (Tr. 734:9-13, 2533:5-20.) This process was codified in IGB rules in 1998 and remains the law today. See 86 ILL. ADMIN. CODE § 3000.224 ("Each owner and supplier licensee shall provide a means for the economic disassociation of a Key Person in the event such economic disassociation
Notably, on January 30, 2001 at the same meeting where the IGB revoked Emerald's license, the IGB approved a Settlement Agreement with Empress Joliet Casino that involved economic dissociation of an investor that the IGB had disapproved. (PX858 at 870-73.) In that instance, the investor was a significant shareholder — Attorney Michael Ficaro testified that the investor had a ninety-eight percent interest in the casino — and the IGB allowed him to divest through the economic disassociation process. (Tr.1965:24-1966:10, 2536:20-25.) That this was the IGB's longstanding practice is confirmed by the fact that the IGB approved the transaction between Donald Flynn and the Five Insiders after the transfer had been completed. (C. Defs.' SOF ¶¶ 335, 339; D. Flynn's SOF ¶ 174.) In the IGB Staff's supplemental report to the IGB Board, the Staff noted that the "failure to disclose the purchase of shares by Donald Flynn from Peer Pedersen," was one of the issues that had "either been resolved" or "determined to be irrelevant." (DX678 at 5, n.1.) The IGB Staff concluded that the issue had been resolved because "staff were notified of this fact on December 2, 1999, approximately one month after the sale took place." (Id.) That conclusion confirms the understanding that notification after-the-fact is sufficient to comply with IGB requirements. Although the IGB Final Board Order referenced this failure to disclose, the Staff report, which recommended revocation without reference to this violation, shows that the transaction between Donald Flynn and Pedersen was not a substantial factor in the IGB's decision. Furthermore, given the IGB's long history of economic dissociation, the court concludes that none of the violations of Rule 235(a) were substantial factors in the IGB's decision to revoke the loss of the license. Therefore, the court does not assign liability to Defendants based on the transfers of shares without pre-approval.
It follows from this finding that Peer Pedersen is not liable for the loss of the license. With respect to Pedersen, Trustee has established only that he violated Rule 235(a). Because the court concludes the violation of Rule 235(a) was not a substantial factor in the IGB's decision, the Trustee has failed to prove that Peer Pedersen's conduct was a "cause in fact" of the loss of the license. The Trustee has established that the remaining Defendants, Kevin Flynn, Donald Flynn, McQuaid, McMahon, Larson, and Hanley, violated other rules that were a substantial factor in the IGB's decision.
"The second requirement, legal cause, is established only if the defendant's conduct is so closely tied to the plaintiff's injury that he should be held legally responsible for it." Beretta U.S.A. Corp., 213 Ill.2d at 395, 290 Ill.Dec. 525, 821 N.E.2d at 1127. As the Illinois Supreme Court explained, "[t]he proper inquiry regarding legal cause involves an assessment of foreseeability, in which [courts] ask whether the injury is of a type that a reasonable person would see as a likely result of his conduct." 213 Ill.2d at 395, 290 Ill.Dec. 525, 821 N.E.2d at 1127.
Defendants argue that the harm for which the Trustee holds them responsible was unforeseeable because the IGB had never before enforced their rules so stringently. (See C. Defs.' Post-Trial
The Riverboat Gambling Act gives the Board the wide discretion and authority to "suspend, revoke or restrict licenses, to require the removal of a licensee or an employee of a licensee for a violation of this Act or a Board rule." 230 ILCS 10/5(15). The IGB also reiterated its authority to revoke a license when it promulgated Rule 140: "The failure to meet the requirements of subsection (a), (b) or (c) may result in discipline up to and including revocation of a license." 86 ILL. ADMIN. CODE § 3000.140(d). Furthermore, agencies with broad discretion are generally entitled to change their pattern of enforcement or interpretation of rules. See Hawthorne Race Course, Inc. v. Ill. Racing Bd., 366 Ill.App.3d 435, 443, 303 Ill.Dec. 316, 851 N.E.2d 214, 221 (1st Dist.2006) (quoting Hazelton v. Zoning Bd. of Appeals, 48 Ill.App.3d 348, 351-52, 6 Ill.Dec. 515, 363 N.E.2d 44, 47 (1st Dist.1977) ("An administrative body has the power to deal freely with each situation as it comes before it, regardless of how it may have dealt with a similar or even the same situation in a previous proceeding"); see also Kozminski v. Ret. Bd. of Firemen's Annuity & Benefit Fund of Chicago, 2012 IL App (1st) 111808-U, 2012 WL 6962561 (1st Dist. 2012) ("[A]dministrative agencies, which govern our public regulation, must be free to change their standards (as long as these changes are not arbitrary and capricious) so they can adjust our public policies in light of our ever-changing experiences. To hold otherwise absolutely binds our administrative agencies to their prior determinations, foreclosing any chance at necessary change."). This is one of the risks of operating a business in a regulated industry. In light of the clear language in the IGB rules, a reasonable person would understand that the revocation of a license is a likely or at least a possible result of violating an IGB rule.
This conclusion is bolstered by the Illinois Supreme Court's explanation that the question of proximate cause "is one of policy — How far should a defendant's legal responsibility extend for conduct that did, in fact, cause the harm?" Beretta U.S.A. Corp., 213 Ill.2d at 395, 290 Ill.Dec. 525, 821 N.E.2d at 1127. As relevant here, the Illinois General Assembly and the Illinois Gaming Board have made their policy choice explicit: a gaming licensee's responsibility for violating any IGB rule extends to the revocation of the license. The Illinois Appellate Court agreed, finding that "Emerald had fair and ample warning" of the possibility its license would be revoked. (PX1233 at 107.)
In sum, the court concludes that the violations of Rules 140(a), 140(b)(3), and 110(a) were the cause in fact and legal cause of Emerald's loss of its license. Therefore, the following Defendants are liable for the loss of the license based on the following violations:
Defendants Donald Flynn, Kevin Larson, and Joseph McQuaid urge this court to reconsider their Motion for Leave to File Third-Party Complaint against Eugene Heytow. (C. Defs.' Post-Trial Mem. at 285 n.52.) This court denied the motion without prejudice on April 23, 2012 but reserved the possibility of reconsideration in the event of a judgment against Defendants. (Minute Entry, Apr. 23, 2012[126].) Because the court has concluded that Defendants Donald Flynn, Kevin Flynn, Joseph McQuaid, John McMahon, Kevin Larson and Walter Hanley are liable for the loss of the license, the court addresses their argument that Heytow must be part of the mix, as well.
Eugene Heytow was one of the original founders of Emerald, along with Peer Pedersen, and served as a Director from 1991 to April 19, 2002. (Certain Defs.' Mem. In Supp. of their Mot. for Leave to File Third-Party Complaint [76], hereinafter "C. Defs.' Mot. in Supp. of TPC," at 4.) Specifically, he was on Emerald's Board during the important August 12, 1999 and December 22, 1999 meetings, at which the Board voted to (1) authorize sales of Emerald stock without IGB pre-approval, (2) authorize construction plans and start of construction without IGB approval, and (3) authorize financing of construction with funds from the Statutory Investors. (C. Defs.' Mot. in Supp. of TPC at 23.) The court has not, however, found violations of IGB rules based on these decisions. Defendants assert they are "entitled to equitable contribution from Heytow for his proportionate share of any amount for which [Defendants] may be held liable as a result of actions by the Emerald Board to which Heytow assented." (C. Defs.' Mot. in Supp. of TPC at 1.)
To emphasize their point, Defendants note that "Pedersen and Heytow are indistinguishable for purposes of the Trustee's allegations." (C. Defs.' Mot. in Supp. of TPC at 13.) The court agrees. But it has declined to find Pedersen liable for the loss of the license based on his votes at Board meetings. Instead, the court has found other Defendants liable based on other individual conduct. Therefore, the court denies the motion for leave to file a third-party complaint against Eugene Heytow.
The Trustee urges the court to subordinate Defendants' claims on the bankruptcy estate. The Bankruptcy Code allows the court to "reprioritize a claim if it determines that the claimant is guilty of misconduct that injures other creditors or confers an unfair advantage on the claimant." In re Kreisler, 546 F.3d 863, 866 (7th Cir.2008) (discussing 11 U.S.C. § 510(c)). Equitable subordination generally requires the Trustee to satisfy three conditions "(1) the claimant must have engaged in some type of inequitable conduct; (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) subordination must not be inconsistent with the provisions of the Bankruptcy Act." In re Kreisler, 546 F.3d at 866 (internal quotations omitted). The first step of the inquiry is to identify inequitable conduct. "If there is none, then a bankruptcy court cannot subordinate a claim." In re Lifschultz Fast Freight, 132 F.3d 339, 344 (7th Cir.1997).
The Trustee urges this court to find inequitable conduct on the basis that Defendants violated IGB rules. To support this argument, she cites In re Lifschultz Fast Freight, 132 F.3d 339 (7th
Trustee's reading is much too broad. To find inequitable conduct, "[t]he creditor must have done something inequitable — a wrong or an unfairness or, at the very least, a masquerade of something for what it is not." Id. at 344. The Trustee contends here that conduct that violates a state regulation is sufficient to show inequitable conduct, but in the cases she cites, in which bankruptcy courts subordinated claims, the unlawful conduct at issue was a crime. First, in In re Mid-American Waste Systems, Inc., the creditor was a former officer of the debtor corporation who bribed a public official. 284 B.R. 53, 74 (Bankr.D.Del.2002). In Roberts v. Geremia (In re Roberts, Inc.), the creditor was the president and sole shareholder of a corporation who was indicted on fourteen counts of conspiracy, concealing corporate assets, removing evidence, offering a bribe, and obstructing justice. 15 B.R. 584, 585 (Bankr.D.R.I.1981). He pleaded guilty to several charges and was sentenced to prison. The court found that "there could hardly be a stronger argument for subordination." Roberts, 15 B.R. at 586.
Defendants' failure to disclose certain agreements between Emerald and Rosemont, and between Emerald and various construction professionals, and failure to inform the IGB of Kevin Flynn's role managing Emerald, are civil regulatory violations and plainly are not comparable to the egregious and criminal acts in these cases. The Trustee has presented no support for her claim that civil regulatory violations are sufficient to support equitable subordination. Furthermore, inequitable conduct, alone, does not necessitate the application of equitable subordination. "[E]quitable subordination is applied only to the extent necessary to undo the effect of the misconduct on other creditors." In re Kreisler, 546 F.3d 863, 866 (7th Cir. 2008) (quoting Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 701 (5th Cir.1977)).
In this case, the court is not satisfied that IGB rules violations constitute inequitable conduct for purposes of the Bankruptcy Code. The Trustee has established that Defendants breached the contract, but as explained above, such a breach is a strict liability violation; it is not dependent on Defendants' state of mind. (See supra Discussion III.B.2.a.) A showing that Defendants breached a strict liability obligation, without more, is insufficient to establish a "wrong," an "unfairness," or a "masquerade." Defendants may well have "played fast and loose" with the IGB rules in an attempt to move quickly and avoid the delay of regulatory scrutiny. (Trustee's SOF ¶ 826) (quoting PX162 at 37.) Their conduct is disappointing, but not startling: the IGB appears to have decided, under Administrator Acosta's watch, to beef up enforcement, and perhaps to make an example out of Emerald. Defendants' conduct appears to have been careless or sloppy, and their disclosures were incomplete; but there is no credible basis to conclude that they were being dishonest or deliberately deceptive. Indeed, the Trustee has presented no explanation of what would motivate Defendants to undertake an elaborate and concerted effort to deceive the IGB, the regulatory body that Defendants obviously knew controlled the
The court has found that the individual Defendants breached the Amended Shareholders' Agreement by engaging in conduct that caused the IGB to revoke Emerald's license; the remaining questions are what damages flow from this breach and whether Defendants are jointly or severally liable. The court turns to the second issue first.
In a breach of contract claim, defendants who are parties to a joint contractual obligation are ordinarily jointly and severally liable for breach. See Codest Eng'g v. Hyatt Int'l Corp., No. 94-c-7335, 1995 WL 683505, at *6 n. 5 (N.D.Ill. Nov. 15, 1995) ("Under Illinois law, all joint contractual obligations are joint and several obligations."); Pritchett v. Asbestos Claims Mgmt. Corp., 332 Ill.App.3d 890, 898, 266 Ill.Dec. 207, 773 N.E.2d 1277, 1283 (5th Dist.2002) ("If two or more parties to a contract owe a joint and several duty of performance to another party to the contract and the duty is not performed, each may be liable for the entire damages resulting from the failure to perform."). In some circumstances, however, liability for breach is several. "Whether a contractual obligation is joint and several, or only several, depends upon the intentions of the parties, as revealed by the language of the contract and the subject matter to which it relates." Brokerage Res., Inc. v. Jordan, 80 Ill.App.3d 605, 608, 35 Ill.Dec. 940, 400 N.E.2d 77, 80 (1st Dist.1980).
Determining whether Defendants' liability is joint or several begins with the language of the Amended Shareholders' Agreement. The question has been presented in one case already: In Flynn v. Levy, 832 F.Supp.2d 951 (N.D.Ill. 2011) (Castillo, J.), all Defendants in this case, except for Pedersen, filed an action seeking equitable contribution from Eugene Heytow. Id. at 952. Heytow was one of the original founders, shareholders, and directors of Emerald. Heytow served on Emerald's Board through April 19, 2002 and participated in several votes that the Trustee has alleged were violations of the Amended Shareholders' Agreement. Under Illinois law, the right to equitable contribution arises when a statute or agreement creates a joint financial obligation to a third party. Id. at 955. Defendants here — Plaintiffs in the action before Judge Castillo — argued that "each of Emerald's directors owed common and joint obligations to the corporation under the Shareholders' Agreement both individually, and when acting as directors, jointly as a Board." Id. at 956. Therefore, they argued, any liability for breach of contract in this case should entitle them to contribution from Heytow.
Judge Castillo analyzed the terms of the Agreement and ultimately concluded it did not create any joint obligation. Specifically, he observed that "[u]nlike [the situation of] co-signors on a promissory note, or parties to mortgage agreements or apartment leases, where the parties agree to be jointly liable for a financial obligation, nothing in the Shareholders' Agreement supports [the] position that it created anything other than an individual obligation between each shareholder and Emerald."
The court agrees with Judge Castillo's reading of the contract and finds that the Shareholders' Agreement does not create the necessary joint obligation. A joint obligation for the purposes of joint and several liability is created by a promise of a joint performance or by providing joint consideration. See Pritchett, 332 Ill. App.3d at 898, 266 Ill.Dec. 207, 773 N.E.2d at 1283 ("Here the defendants acted collectively, through their agent, in promising a single performance (the payment of one undivided sum to the plaintiff)."). "Parties to a contract are more likely to have a joint and several contractual obligation if they have a joint or identical interest in the contract or its subject matter, instead of diverse interests." Brokerage Res., 80 Ill.App.3d at 608, 35 Ill.Dec. 940, 400 N.E.2d at 80. The terms of the Agreement that each Defendant (as well as Heytow) signed in this case are the same, and shareholders have similar interests in the contract. Yet there was fundamentally no collective action or joint promise here. The promised performance was unique to each shareholder that signed the contract. That is, each shareholder promised to conform his or her own behavior to IGB rules. As Judge Castillo noted, the contract speaks only in terms of individual obligations. Id. at 956 (noting the contract speaks in terms of "each shareholder"). The "intention[] of the parties, as revealed by the language of the contract," therefore, was to create individual commitments and consequently several liability. Brokerage Res., Inc., 80 Ill.App.3d at 608, 35 Ill.Dec. 940, 400 N.E.2d at 80.
The Trustee's motivations for not naming Mr. Heytow as an additional Defendant may reasonably be questioned. Heytow was as involved (or uninvolved) as several of the named Defendants were in reviewing Emerald's submissions to the IGB and in taking action as a member of Emerald's Board. Defendants contend the real reason he is not a named Defendant here is that an attorney who acted as Heytow's proxy at several Emerald Board meetings is a partner at the law firm which represents the Trustee. (C. Defs.' SOF ¶¶ 827-30.) Whatever her motivations may be, the Trustee has not argued that the Amended Shareholders' Agreement creates a joint obligation among these Defendants, nor has she otherwise explained why the breach of contract claim (as distinct from the breach of fiduciary duty claim) should support joint and several liability.
The court recognizes that one Illinois case has adopted the theory of "concurrent breach of contract." See InsureOne Indep. Ins. Agency, LLC v. Hallberg, 364 Ill.Dec. 451, 467, 976 N.E.2d 1014, 1030 (Ill App.Ct. 1st Dist.2012) reh'g denied (Oct. 10, 2012), appeal denied, 367 Ill.Dec. 619, 982 N.E.2d 769 (Ill.2013). As the Illinois Appellate Court explained,
InsureOne Indep., 364 Ill.Dec. at 467, 976 N.E.2d at 1030. At first blush, this doctrine appears to fit the facts of this case well. The InsureOne court acknowledged, however, that its holding was the exception
The court therefore apportions damages among the six Defendants who breached the contract: Kevin Flynn, Donald Flynn, Joseph McQuaid, John McMahon, Kevin Larson, and Walter Hanley. The degree of liability for each Defendant might be said to differ; but the court concludes that each Defendant is equally liable for the loss of the license. Gaming Board rules, the Riverboat Gambling Act, and the language of the Amended Shareholders' Agreement, all appear to permit revocation for a single rule violation. As discussed earlier, while "organized crime" appeared to be the IGB's primary concern, Defendants' repeated violations of Rules 140(a), 140(b)(3), and 110(a) were also significant reasons for the revocation of Emerald's license. (See supra Discussion II. B.2.b.) Though it appears from this record that it was the totality of Defendants' conduct that was deemed so egregious that revocation, rather than a smaller disciplinary action, was appropriate (see PX162 at 31), the court cannot ignore language in the IGB's Final Board Order announcing that each rule violation "alone supports revocation of Emerald's license." (PX162 at 33-35, 37.) The Illinois Appellate Court affirmed the revocation. (PX1233 at 107.) Accordingly, for the purposes of apportioning damages, the court takes the IGB at its word and weighs each violation equally. As described above, the court has identified conduct of each of the six Defendants that violated an IGB rule and caused the loss of the license:
Each Defendant is liable for an equal proportion of the value of the lost license.
The Trustee is seeking damages equal to the value of the license (Trustee's SOF ¶ 849), which she calculates in three different ways, relying on expert testimony, on market evidence, and on Defendants' own statements. Before addressing these categories of evidence, the court considers Defendants' objection that the Trustee's theory of damages has been a "moving target." (C. Defs.' Post-Trial Mem. at 269.) Specifically, Defendants argue that the Trustee shifted from a lost-profits theory to a theory based on the loss of an income-producing asset. (Id.) In other words, Defendants claim the Trustee initially sought to recover the revenue Emerald would have earned from operating a casino in Rosemont but now seeks to recover the price Emerald could have obtained by selling the license to another company. Defendants' only support for this claim is that the Trustee presented expert evidence that projected "future cash flows of a casino in Rosemont over ten years," and then discounted the cash flow to present value. (Id.) Defendants urge that such expert testimony is essentially a lost-profits calculation that the Trustee is attempting to re-characterize as evidence of the market price of the license.
Defendants' objection ignores substantial additional evidence that the Trustee has offered. That evidence falls into three categories: First, she did present the expert testimony of Mr. Steven Rittvo, who opined in his report (PX445), that the value of the license as of November 30, 2010 was $519,573,342. As explained below, the court has concerns about that determination; but to the extent Mr. Rittvo's analysis depended on projecting future cash flows and discounting them to present value, the court concludes he did so in an effort to calculate the value of the license rather than to calculate damages. That analysis, in short, is consistent with the Trustee's market-price theory of damages, not an impermissible departure from the Trustee's theory. In addition to Rittvo's projection testimony, the Trustee presented market evidence of the value of the license, specifically offers from sophisticated companies seeking to purchase Emerald's license in a series of structured sales and auctions between 2001 and 2008. The offers ranged from $272 million to $615 million. Third, the Trustee presented evidence of Defendants' own statements about the value of the license. Adopting the estimate of Mr. Rittvo, Trustee requests damages equal to $519,573,342.
Defendants did not present their own evidence regarding the value of the license. They do object to the Trustee's request on several grounds. First, they raised a Daubert objection to the admissibility of Mr. Rittvo's testimony during the bankruptcy proceedings which must now be addressed by this court. (Defs.' Mot. to Strike the "Expert" Aff. of Steven M. Rittvo, in Gecker v. Flynn, No. 08-ap-00972 (Bankr.N.D.Ill.2009)[197]; Certain Defs.' Mot. to Preclude the Trial Test. of Consultant Steven M. Rittvo Designated by the Trustee as a Bus. Valuation Expert, in Gecker v. Flynn, No. 08-ap-00972 (Bankr. N.D.Ill.2010)[480]; C. Defs.' Post-Trial Mem. at 270-73.) Second, Defendants claim that Mr. Rittvo's testimony should also be excluded because Mr. Rittvo improperly included prejudgment interest in his valuation. (Certain Defs.' Proposed Findings of Fact & Conclusions of Law at 282[252], hereinafter "C. Defs.' PCOL," ¶¶ 120-23; C. Defs.' Post-Trial Mem. at 273.) Third, Defendants argue that Trustee has not proven damages to a reasonable
The Trustee's expert witness, Steven Rittvo, estimates that the loss of Emerald's license resulted in damages equal to $519,573,342. Defendants challenged the admissibility of that estimate under Daubert.
The Trustee asserts that the Bankruptcy Court resolved the Daubert challenge and that decision should be binding on this court. (Trustee's Post-Trial Brief at 307-08.) The Trustee points to the Bankruptcy Court's oral ruling on October 27, 2010:
(Bankr.Tr., Oct, 27, 2010, 7:13-8:1.) Without further elaboration, the Bankruptcy Court permitted Mr. Rittvo to testify on the strength of his qualifications, but recognized that the Daubert objection remained an "open issue" that would be "addressed at trial." (10/27/10 Bankr.Tr. 8:21-24.) As this court reads that language, though Judge Wedoff did specifically address Mr. Rittvo's qualifications, he did not fully resolve the issue of reliability. Under Daubert, a court must determine not only that the witness is qualified but also that the testimony also is reliable and relevant. FED. R. EVID. 702. Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 592-93, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993).
In fact, immediately after Mr. Rittvo's testimony regarding his qualifications, Defendants renewed their pre-trial objection (Bankr.Tr. 2990:6-10), and the Bankruptcy Court made clear that the objection was preserved. (Bankr.Tr. 2990:11-13) ("[B]y no means does your failure to raise that objection again constitute any kind of waiver of the objection you've already made.") The Bankruptcy Court also acknowledged that the Defendants had not "waived any argument [Defendants] have against the reliability of the opinions." (Bankr.Tr. 2990:8-14.) At the close of Mr. Rittvo's testimony the Bankruptcy Court concluded, "I'll accept [Mr. Rittvo's testimony] for what value it has consistent with what I've seen before." (Bankr.Tr. 3253:12-14.) In explaining its inclination to admit the testimony without further analysis, the court invoked judicial efficiency and the unique nature of a bench trial:
(Bankr.Tr. 2990:20-2991:7.) The Seventh Circuit has acknowledged this approach to Daubert hearings during a bench trial. See In re Salem, 465 F.3d 767, 777 (7th Cir.2006) (noting that if "the gatekeeper and the factfinder are one and the same — that is, the judge — the need to make such decisions prior to hearing the testimony is lessened.") (citation omitted). Therefore, the fact that the Bankruptcy Court heard the testimony does not reflect a final ruling. In any event, this court's review of the bankruptcy proceeding is de novo. See Executive Benefits, 134 S.Ct. at 2173 (2014).
In Daubert, the Supreme Court explained that district courts serve as gatekeepers with respect to expert testimony. 509 U.S. at 592-93, 113 S.Ct. 2786. Although Daubert concerned the admissibility of scientific evidence, its standards and description of the district courts' gatekeeping function apply equally to all expert testimony. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 148, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999). To determine the admissibility of expert testimony, courts engage in a three-part analysis: (1) a witness must demonstrate his/her expertise "by knowledge, skill, experience, training or education," FED. R. EVID. 702; (2) the reasoning or methodology employed by the expert must be reliable, Daubert, 509 U.S. at 592, 113 S.Ct. 2786; and (3) the testimony must "assist the trier of fact to understand the evidence or to determine a fact in issue," FED. R. EVID. 702. In other words, the witness must be qualified and the testimony must be reliable and relevant.
Judge Wedoff found Mr. Rittvo qualified, and this court agrees. Mr. Rittvo is President and Founder of the Innovation Group, an international financial forecasting, feasibility analysis, and market research firm specializing in the gaming, hospitality, and leisure industry. (PX445 at 16; Bankr.Tr. 2956:24-2957:10.) He has been a consultant to the gaming industry since 1993, specializing in the areas of financial analysis, market feasibility, project development, and marketing. (Bankr.Tr. 2957:14-2958:1). In that role, he has conducted or supervised more than 550 financial analyses, market assessments, and feasibility studies for commercial gaming establishments, investment banks, and local, state, or national governments. (PX445 at 17; see also PX1266 at 18, 21-49; Bankr.Tr. 2977:16-2980:19.) He has also either conducted or been responsible for more than 275 financial analyses, market assessments, and feasibility studies for Native American gaming facilities, including both new and existing facilities. (PX445 at 17.) His clients include more than a dozen of the most well-recognized casino companies and state and local gaming associations in the nation. (Bankr. Tr. 2959:24-2960:12, 2961:16-19.) Defendants contend that the market assessments Mr. Rittvo performed for these clients are distinct from the type of valuation involved in this case (C. Defs.' SOF ¶ 914), and Mr. Rittvo admitted that a market assessment is only "an input or an element to a valuation." (Bankr.Tr. 3162:4-7.)
Significantly, however, Mr. Rittvo had personal experience with valuing the very license at issue in this case years ago. In 2004, he consulted with Midwest Gaming
Mr. Rittvo's educational background is as an engineer (PX445 at 17; Bankr.Tr. 2963:17-21), and his early employment history involved municipal transportation planning, first in New York and later in New Orleans. (Bankr.Tr. 2964:8-2965:5.) In New Orleans, his consulting firm was hired by the Port Authority to conduct a traffic study to determine how to accommodate six new riverboat casinos. (Bankr. Tr. 2965:13-18, 2966:11-18.) To complete that project Mr. Rittvo, developed a model to project the number of vehicles that would come to the casino. (Bankr.Tr. 2967:7-12.) Based on his own projections of the number of visitors and revenues, Mr. Rittvo decided to personally invest in a riverboat casino in Louisiana, but later sold that interest. (Bankr.Tr. 2968:12-17; 2968:18-2969:24.)
Mr. Rittvo then pioneered the use, in the casino industry, of the "gravity model" that he had used as a transportation engineer and urban planner. (Bankr.Tr. 2971:14-17.) "Gravity models utilize the gravitational force concept as an analogy," to explain human behavior through a mathematical formula that determines the "gravitational force" between two objects. 1 THE PRINCETON ENCYCLOPEDIA OF THE WORLD ECONOMY 567 (Kenneth A. Reinert, Ramkishen S. Rajan eds., 2009). In the transportation context, gravity models are used to predict trips to a particular destination, for example trips to a new supermarket or a new ATM. U.S. DEP'T. OF TRANSP., CALIBRATING & TESTING A GRAVITY MODEL FOR ANY SIZE URBAN AREA III-9 (1983) available at http://ntl.bts.gov/DOCS/CAT.html (last visited Sept. 22, 2014), hereinafter "DOT GRAVITY MODEL". To adapt Newton's gravity equation, the model replaces mass with an attraction factor that indicates how likely individuals are to travel to a destination. Id. at I-2. The gravity model is therefore a "distribution model," which begins with a population of people who will take a trip and assigns the trips to possible destinations to determine how many people will go to each specific destination. (Bankr.Tr. 2971:20-23.) Mr. Rittvo was the first to apply the gravity model, which has been used in other commercial settings and specifically in the transportation settings, to casinos. (Bankr.Tr. 2971:11-13, 2971:4-11.)
For four years ending in 2002 or 2003, Mr. Rittvo was the author of the Global Gaming Almanac, an inventory of all the gaming markets in the United States, their specific revenues and operations from the past year, and a forecast of each of those markets' revenues. (PX445 at 17; Bankr. Tr. 2981:2-13.) Kevin Flynn's company, EVI, relied on the 1998 Global Gaming Almanac in making a projection about the Chicagoland market. (PX317 at 20.) Mr. Rittvo has made presentations at more than 30 gaming conferences on topics including casino market assessments, financial feasibility, financial marketing, Native American casino development, and gaming patron consumer research. (PX445 at 17.) Mr. Rittvo has also served on committees in academia that concern the gaming industry, specifically for Tulane University and the University of Denver. (Bankr.Tr. 2983:1-6.)
The court concludes, further, that Mr. Rittvo's testimony regarding the valuation of Emerald's license at the time of revocation is indeed relevant. Under Daubert, testimony is relevant where it "assist[s] the trier of fact to understand the evidence or to determine a fact in issue." Daubert, 509 U.S. at 591, 113 S.Ct. 2786 (citing FED. R. EVID. 702). Testimony regarding the value of an Illinois gaming license would greatly assist the court here in determining a material fact — specifically the value of the license. Business valuation generally, and of gaming licenses specifically, is not within common knowledge, and expert testimony could elucidate how much the license was worth when the IGB revoked it.
The crux of Defendants' Daubert objection is that Mr. Rittvo's testimony is unreliable. Daubert and Federal Rule of Evidence 702 outline four, flexible and non-exhaustive "guideposts" to consider in evaluating expert testimony: "(1) whether the scientific theory on which the expert's testimony is based can be or has been tested; (2) whether the theory has been subjected to peer review and publication; (3) the known and potential rate for error; and (4) whether the theory has been generally accepted in the relevant scientific, technical, or professional community." United States v. Mire, 725 F.3d 665, 674-75 (7th Cir.2013). "The purpose of the Daubert inquiry is to scrutinize proposed expert witness testimony to determine if it has `the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.'" Lapsley v. Xtek, Inc., 689 F.3d 802, 805 (7th Cir.2012) (quoting Kumho Tire, 526 U.S. at 152, 119 S.Ct. 1167). A court may exclude the testimony of an expert who does not satisfy the standards for relevance and reliability.
Mr. Rittvo utilized a discounted cash flow analysis ("DCF") to estimate the value of the Emerald license as of January 31, 2001. (PX445 at 2, 6, 23, 96.) DCF is a method of predicting future revenue streams of a company and then discounting the value of the future revenue to determine present value. The DCF analysis theoretically represents what a willing buyer would have paid to a willing seller to purchase Emerald's license on February 1, 2001. (Bankr.Tr. 2985:22-2992:17; Trustee's SOF ¶ 782.) There are essentially four steps to a discounted cash flow analysis. The analysis starts with a base-year or baseline revenue. (See PX445 at 82) ("[T]he first step ... is to establish the
Second, after computing the base-year revenue, projections for future years are calculated for a limited "forecast period." (See PX445 at 90 (applying general Illinois casino market trends to Emerald's base-year revenue to derive the 2003 through 2005 revenue estimates."); id. at 92 (applying Elgin's casino historical trends to base-year revenue to derive 2006-07 revenues); id. at 93 (applying Elgin trends for years 2008-09); id. at 94-95 (applying general market trends for Emerald's 2010 revenue estimate).) The future revenue streams are discounted to reflect their present value. (Id. at 97.) This produces the "present value of cash flows." (Id. at 99.)
Third, in addition to calculating revenues for the forecast period, DCF analysis assesses the "terminal" or "residual" value of a company. (PX445 at 99.) This value accounts for the fact that businesses will continue to produce income streams beyond the forecast period. (Id. at 99.) The sum of "present value cash flow" and "terminal value" is enterprise value; from that figure, the company's existing debts are subtracted to determine a net present value of the company. (Id. at 99.)
The key building block for the Discounted Cash Flow analysis, therefore, is the base-year revenue, from which all the future revenue streams are derived. (See Bankr.Tr. 3210:9-21.) If the base-year revenue is wrong, it will influence all the subsequent calculations including the final conclusion. (Bankr.Tr. 3210:17-21.) Mr. Rittvo used his own methods to calculate the base-year revenue (Bankr.Tr. 3210:9-16), and Defendants object to those methods. (C. Defs.' SOF ¶¶ 894-902.) They also allege that Mr. Rittvo deviated from traditional DCF analysis, impermissibly using hindsight to project cash flows for years 3-10 (2003-2010). (C. Defs.' SOF ¶ 906.)
To calculate the base-year revenues, Mr. Rittvo used his gravity model to predict the number of gaming visitors a casino located in Rosemont would likely draw in one year, and multiplied that number of visitors by a "win per visit" amount, to generate an estimate of gross revenues. (Bankr.Tr. 3033:21-23) (testifying that he "applied that win per visit per patron to the attendance forecast and developed the revenue for Rosemont.") Then, he used a proprietary model to calculate the casino's estimated operating costs, and deducted those costs from the gross revenues in order to arrive at the base-year revenue. (PX445 at 95-96.)
This methodology is flawed, Defendants contend, in several ways. First, they argue that the use of the "gravity model" to project first-year visits is unreliable because the gravity model has not been and cannot be empirically tested. (C. Defs.' SOF ¶¶ 925-32.) Second, they argue that there is no basis for Mr. Rittvo's "win per visit" rate. (Id. at ¶¶ 903-05.) Third, they argue that Mr. Rittvo's calculation of operating expenses is unreliable because it is proprietary and therefore, has not been empirically tested or peer reviewed. (Id. at ¶¶ 939-40.)
First, the gravity model: The Trustee relies heavily on the assertion that Mr.
Were this the end of the inquiry, the court would be satisfied that the gravity model is reliable because it satisfies two Daubert criteria.
Defendants also point to flaws in Mr. Rittvo's calculations specific to the Rosemont casino. The Trustee brushes past those concerns, noting that Mr. Rittvo used the same base-year gravity modeling technique to make projections as part of his work for Midwest Gaming at the time Midwest Gaming bid on the license in 2004. (Bankr.Tr. 3010:3-16; Trustee's SOF ¶ 215.) Again, Mr. Rittvo's successful use of his methodology in a related "real world" context is helpful, but it does not eliminate the need for scrutiny. Although the goal of the inquiry is to ensure that the expert employs "in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field," a trial court "exercising its gatekeeping function, must examine (among other things) the expert's qualifications, the methodologies ... and the relevance of the final results." Adams v. Ameritech Servs., Inc., 231 F.3d 414, 423 (7th Cir.2000) (quoting Kumho Tire, 526 U.S. at 152, 119 S.Ct. 1167).
In meeting its obligation to analyze Mr. Rittvo's methodologies, the court first examines the key building block of Mr. Rittvo's analysis: the base-year revenues. To calculate those revenues, Mr. Rittvo first determined the estimated number of visitors to the proposed Rosemont casino, using zip code data to identify a base population. (PX445 at 25; Bankr.Tr. 3011:22-3012:8.) From that base population, he determined what percentage of the population would likely visit a casino (the "propensity"), and how often they would do so (the "frequency"). (PX445 at 25; Bankr Tr. 3012:14-20.) Mr. Rittvo then scaled the estimated number of casino visits per zip code based on the Simmons Market Penetration Index. (Bankr.Tr. 3014:8-3015:9.) Simmons, a national market research company, uses consumer survey data to quantify consumption differences between consumers based on such attributes as education, ethnicity, and family composition. (Bankr.Tr. 3014:9-17.) The market penetration index for gaming indicates how much gaming the population in a given zip code utilizes, relative to the national average. (Bankr.Tr. 3014:21-3015:12.) Mr. Rittvo utilizes the Simmons data to scale the estimated number of casino visits in his model based on the relevant zip codes and generate an estimated number of casino visits per zip code per year. Defendants assert that (1) the propensity and frequency factors are entirely subjective, (2) various additional factors that serve as inputs in the model were subjectively increased or decreased based solely on Mr. Rittvo's professional judgment and (3) Mr. Rittvo artificially increased the number of visits that the Rosemont casino could realistically handle. The court addresses each in turn.
Defendants critique the propensity factor and the frequency factors because, although Mr. Rittvo testified that they are based on "national surveys" (Bankr.Tr. 3012:24-3013:7), his initial valuation report did not cite to those surveys and the surveys were not produced in discovery. (C. Defs.' SOF ¶ 894.) Mr. Rittvo's valuation report lists only "Innovation Group," his company, as the source for these figures, without any explanation of how they were calculated. (PX445 at 82, 85.) Furthermore, as he testified that these factors were based, in part on his "professional judgment" (Bankr.Tr. 3152:21-3153:1), the court does not know precisely what methodology was used to calculate these two factors. Without more information, the court cannot conclude that these factors
The next step in Mr. Rittvo's analysis was to take the number of estimated casino visits per zip code and assign them to the available casinos in the market. (Bankr.Tr. 3016:6-7.) This process involves inputting a distance factor and an "attraction factor" for each casino in the Chicagoland market — the logic being that people will generally go to the closest casino, but may also prefer one casino over another based on the availability of certain amenities, for example, convenient parking. (Bankr.Tr. 3016:7-3017:16.)
With these inputs, the gravity model generates an estimate of the expected number of visits per casino. (Bankr.Tr. 3018:23-3019:1.) Mr. Rittvo then checks that estimate against the actual attendance data reported by the IGB. (Bankr.Tr. 3019:7-11.) If the numbers do not match, he makes several adjustments. First, to adjust the attendance data, he adjusts the attraction factor so that the model accurately predicts the reported data. (Bankr. Tr. 3019:7-1.) He also sets the model to account for just 96-97% of the attendance and revenues that the IGB reports, in order to account for some 3% of the visitors who, Mr. Rittvo estimates, come from out of town. (Bankr.Tr. 3024:7-22, 3025:3-7.)
Defendants criticize these calibrations as nothing more than Mr. Rittvo's "subjectively increasing or decreasing factors to create a result which he believed was realistic." (C. Defs.' SOF ¶ 895.) This characterization is unfair. Mr. Rittvo's model relies on an estimated "attraction factor" to account for a variety of amenities at each casino. Because even a sophisticated estimate is unlikely to perfectly predict consumer behavior, Mr. Rittvo appropriately relied on historical data about casino attendance to inform his model and create a better model of consumer preferences. Finally, calibrating to 96-97% is not simply a "subjective" adjustment. Rather, it is derived from data based on other casino attendance. (Bankr.Tr. 3024:19-22, see also PX445 at 83 (comparing the model visits and revenues to actual visits and revenues in 2002).) If this court were satisfied by Mr. Rittvo's propensity and frequency inputs, it would approve these methods for calibrating the model as well.
Defendants take issue with one other aspect of Mr. Rittvo's calculation of projected visitors: what he calls a "baseline equalizer," or, more colloquially, the "Rittvo Effect." (Bankr.Tr. 3214:9-12, 3215:8-18.) In Illinois, each casino is limited to roughly 1,320 seats for customers (each seat is called a "gaming position"). (Bankr.Tr. 3215:19-22.) The baseline equalizer "artificially increase[s]" the number of gaming positions in the model to roughly 1,920. (Bankr.Tr. 3021:23-24, 3216:3-14.) Defendants argue this is an unreliable way to project visitors because it ignores the fact that casino seats are limited. (C. Defs.' SOF ¶¶ 899-902.)
But Mr. Rittvo uses the extra seats as a proxy for additional, non-gaming revenue, rather than as an attempt to accurately predict attendance. (Bankr.Tr. 3012:3-8.) The initial revenue calculation (number of visits multiplied by the casino's win-per-visit) is too low, he explained, because it captures only the revenues derived from gaming, without including non-gaming sources of revenue (for example, from food sales or other retail sales). (Bankr.Tr. 3012:3-8.) Furthermore, Mr. Rittvo noted, demand for gaming in Chicago greatly exceeds the available supply, and each seat is therefore likely to be more productive
Defendants note that the "Rittvo Effect" has not been published, is not used by anybody else in the casino industry, and has never been empirically tested for reliability. (C. Defs.' SOF ¶ 902) (citing Bankr. Tr. 3216:21-3217:5.) The Trustee points out that Mr. Rittvo has consistently used the 600-seat addition to capture the additional revenues generated by casinos in other projects when evaluating the Chicagoland market. (Bankr.Tr. 3022:19-3023:7.) Mr. Rittvo conceded that "nobody else uses the Rittvo Effect," though he believes "that they have their own proprietary elements that make modifications to allow for" the additional revenue sources. (Bankr.Tr. 3217:1-7.) He admitted, as well, that the Rittvo effect has not been tested empirically by anyone outside of his company. (Bankr.Tr. 3217:6-9.) Mr. Rittvo's rationale is sound; the model needs to capture additional revenues derived from a casino's other amenities beyond the gaming positions. Mr. Rittvo has not explained why or how he selected the 600-seat increase, however; nor has he explained why this approach is more reliable or accurate than other methods of calculating additional revenues (for example, extrapolating from historical data, as he has done in other parts of the model). The court concludes, therefore, that the use of the Mr. Rittvo's baseline equalizer is not sufficiently reliable under Daubert.
Defendants also contend that errors in Mr. Rittvo's methods for calculating revenues exacerbate the flaws in his calculations of the number of visits to the proposed Rosemont casino. (C. Defs.' SOF ¶¶ 903-05.) Once Mr. Rittvo calculated the number of visits through the use of the gravity model, he multiplied that number by a "win-per-visit" rate. (Bankr.Tr. 3033:21-23) (testifying that he "applied that win-per-visit per patron to the attendance forecast and developed the revenue for Rosemont.") The win-per-visit is the amount of money the casino wins for every patron who comes to the casino (or, alternatively, the amount that each visitor to a casino loses on average). (Bankr.Tr. 2968:2-6.) Defendants allege that Mr. Rittvo's win-per-visit amount rate is a subjective number that is based only on his "professional judgment." (C. Defs.' SOF ¶ 904.) The valuation report he prepared does present the win-pervisit rate without any explanation of how it was calculated, and the charts simply identify only "the Innovation Group" as the source for the data. (PX445 at 82, 85.)
Mr. Rittvo's testimony provided a bit more insight. He testified he obtained attendance and revenue data from the Illinois and Indiana Gaming Commissions. (Bankr.Tr. 3032:19-22.). Though his testimony was less than explicit, it appears that he simply divided annual revenues by number of visits to determine the win-pervisit rate for each casino.
One of the final steps in Mr. Rittvo's calculations of a base-year revenue amount was to subtract from gross revenues the operating expenses for the year, using a proprietary expense model to predict those operating expenses. (PX445 at 24, 95.) The model "accounts for all departmental payroll, cost of goods, and other operating expenses" as well as "land lease costs of $4 million, property taxes, insurance, and utilities." (PX445 at 95, 96.) Mr. Rittvo's report simply identified "operating expenses" in a generic way, and Mr. Rittvo did not explain how he determined the payroll, the costs of goods, utilities, or insurance. Mr. Rittvo admitted at the bankruptcy proceedings that the expense model had not been tested or replicated anywhere. (Bankr.Tr. 3221:11-3222:9). Without more information on the specifics of the expense model, the court cannot conclude that the use of Mr. Rittvo's proprietary model is a sufficiently reliable methodology.
In addition to the flaws in calculating the base-year rate, Defendants argue that Mr. Rittvo's projections of future revenues are flawed. They argue that Mr. Rittvo improperly used hindsight to predict revenue streams and did not take account of (a) the then-existing risk of the casino not being licensed in Rosemont and (b) pending litigation against Emerald.
The Discounted Cash Flow analysis is intended to produce a value at which a willing seller would sell to a willing buyer. (Bankr.Tr. 2992:14-17; Trustee's SOF ¶ 210.) Therefore, DCF analysis should account for the fact that that a willing buyer would discount the purchase price for risks that existed at the time of the valuation. Mr. Rittvo's valuation was based on a presumed opening date of February 1, 2001, and he asserts that although he used hindsight, he "did not consider any positive post-February 2001 events; only negative events." (PX1266 at 9, ¶ 24.) Specifically, he considered (1) a gaming tax increase that occurred in June 2002; (2) a ban on smoking in Illinois implemented in January 2008; and (3) the economic recession. (Id. at 9, ¶ 23.) As a result, Mr. Rittvo contends, that the only effect of his hindsight "has been to substantially lower the valuation and, hence, the Trustee's loss." (Id. at 9, ¶ 24.)
Mr. Rittvo admitted, however, that his analysis did not take into account certain risks that existed on January 30, 2001. (Bankr.Tr. 3191:8-16). As Defendants point out, there was a significant risk that the IGB would not approve a move of Emerald's casino to Rosemont. At the time the license was revoked, there was also considerable uncertainty as to whether
The Trustee argues that Mr. Rittvo's approach was nevertheless fair because the "point of Rittvo's analysis was to value what Emerald would have had if Defendants had obeyed the law." (Trustee's Post-Trial Br. at 316.) That argument assumes that Defendants' misconduct was the only reason the IGB was skeptical of Rosemont and interpreted Section 11.2 to give it discretion to deny the Renewal Application. The court is far less certain. It is not at all clear that the IGB would have interpreted the legislation differently in the absence of Defendants' conduct. The IGB had also rejected offers to relocate the license to Rosemont, even with a different company at the helm. (See, e.g., DX697 at 3-4.) At a minimum, the court believes that a willing buyer in 2001 would have taken into account the risk that the pending litigation over the meaning of Section 11.2 would be resolved in favor of the IGB, when determining the price she would be willing to pay.
The use of selective hindsight in DCF analysis undermines the reliability of that analysis. Indeed, the Seventh Circuit has recognized the malleability of DCF analysis, observing that it is "highly sensitive to assumptions about the firm's costs and rate of growth, and about the discount rate. It is a simple matter to increase or reduce the outcome of a cash flow analysis by 200% by making changes in assumptions that appear by themselves to be insignificant." Metlyn Realty Corp. v. Esmark, Inc., 763 F.2d 826, 835 (7th Cir. 1985). The Seventh Circuit has also cautioned that "hindsight bias is to be fought rather than embraced" when valuing a company. Paloian v. LaSalle Bank, N.A., 619 F.3d 688, 693 (7th Cir.2010). In more colorful language, the Seventh Circuit recently described the process of discounted cash flow analysis as "something of a black art" and "almost impossible for private companies, for which uncertainties abound." Olsen v. Floit, 219 F.3d 655, 658 (7th Cir.2000).
Given the malleability and sensitivity of DCF analysis, the court concludes that the combination of undisclosed and flawed inputs in Mr. Rittvo's analysis renders his report unreliable.
Defendants have identified other flaws in Mr. Rittvo's report. The court need not consider their concerns in depth, but will address them briefly.
Defendants assert that Mr. Rittvo improperly assumed that Rosemont would be the location of the casino, and that this assumption inflated his final projections due to his belief that Rosemont was the most profitable location in the Chicagoland area. Defendants also challenge Mr. Rittvo's assumed start date of February 1, 2001 (Bankr.Tr. 3207:23-3208:4), noting that on that date they were still appealing the denial of the Renewal Application, and
The court concludes these concerns go to the weight of the evidence, not its admissibility. The Rosemont location and the February 2001 start date are factual assumptions underlying Mr. Rittvo's analysis, which were provided to him by the attorneys litigating this case. (Bankr. Tr. 3206:23-3207:4, 3207:12-18 (start date); Bankr.Tr. 3187:11-14 (Rosemont location).) But, "the soundness of the factual underpinnings of the expert's analysis and the correctness of the expert's conclusions based on that analysis are factual matters to be determined by the trier of fact, or, where appropriate, on summary judgment." Smith v. Ford Motor Co., 215 F.3d at 718 (citing Daubert, 509 U.S. at 595, 113 S.Ct. 2786); Walker v. Soo Line R. Co., 208 F.3d 581, 586-87 (7th Cir.2000) (when addressing whether expert testimony is reliable the district court should not consider the "`factual underpinnings' of the testimony but should determine whether the expert employed a proper methodology.").
Defendants also urge the court to reject Mr. Rittvo's testimony because Mr. Rittvo's valuation improperly included prejudgment interest. Mr. Rittvo determined that Emerald's license was worth roughly $342.8 million as of January 31, 2001. Mr. Rittvo then calculated what that sum would be worth as of November 2010, when the bankruptcy trial began. Specifically, he calculated "what I believe is the current value had somebody received that money [the $342 million] on ... February 1, 2001, and invested it in risk-free interest rate. That's what I believe the value of that would be now." (Bankr.Tr. 3146:11-15). The final result was a valuation equal to $519,573,342 as of November, 2010.
Trustee asserts that this amount is not prejudgment interest but rather is a necessary adjustment to place Emerald "in the same position it would have occupied at the time of judgment had Defendants not breached their contract." (Trustee's Post-Trial Br. at 318.) The Trustee argues a license valued at $342 million in 2001 would now be worth much more. (Id.) Although the Trustee argues that the $519 million figure is merely the present-value of Emerald's loss, Mr. Rittvo's report and testimony belie the notion that interest had nothing to do with this; in fact Mr. Rittvo's report explained that the figure was calculated based on a "risk-free interest rate." (PX445 at 11.) The court concludes that the additional amount is prejudgment interest. See Sys. Dev. Integration, LLC v. Computer Scis. Corp., 886 F.Supp.2d 873, 886 (N.D.Ill.2012) ("Although labeled a `present value calculation,' this is, in effect, merely a different way of accounting for prejudgment interest, which is not recoverable in this case."); Euroholdings Capital & Inv. Corp. v. Harris Trust & Sav. Bank, 602 F.Supp.2d 928, 940 (N.D.Ill.2009) (finding that plaintiff's computations "present-valuing its losses" constituted prejudgment interest which were not allowed).
"In Illinois, the general rule is that prejudgment interest cannot be awarded unless provided by statute or agreement of the parties." In re Air Crash Disaster Near Chi., Ill., on May 25, 1979, 644 F.2d 633, 638 (7th Cir.1981). The Illinois Supreme Court has confirmed that "[i]t is well settled that interest is not recoverable absent a statute or agreement providing for it." Tri-G, Inc. v. Burke, Bosselman & Weaver, 222 Ill.2d 218, 257, 305 Ill.Dec. 584, 856 N.E.2d 389, 412 (2006) (quoting City of Springfield v. Allphin, 82 Ill.2d 571,
Instead, the Trustee argues that Mr. Rittvo's calculation is appropriate because under Illinois law, the proper measure of damages is the time of judgment, not the time of breach. That argument is at odds with the longstanding principle in Illinois that "the proper date for determining damages in a breach of contract action is the date of the breach, not the date of trial." Sys. Dev. Integration, LLC, 886 F.Supp.2d at 886. "The requirement of establishing fair market value on the date of the breach relates to the proposition that a damage award should place the nonbreaching party into the position he would have been in had the contract been performed but not in a better position." 1472 N. Milwaukee, Ltd. v. Feinerman, 374 Ill.Dec. 957, 964, 996 N.E.2d 652, 658-59 (Ill.App.Ct. 1st Dist.2013) (internal citations omitted).
The Trustee's challenge to this principle rests on three Illinois appellate decisions: Nilsson v. NBD Bank of Ill., 313 Ill.App.3d 751, 247 Ill.Dec. 1, 731 N.E.2d 774 (1st Dist.2000), Mercantile Holdings, Inc. v. Keeshin, 261 Ill.App.3d 546, 199 Ill.Dec. 9, 633 N.E.2d 805 (1st Dist.1993), and Am. Nat'l Bank & Trust Co. v. Erickson, 115 Ill.App.3d 1026, 72 Ill.Dec. 71, 452 N.E.2d 3 (1st Dist.1983). Each of those cases deals with the situation in which a plaintiff loses an opportunity to sell stock at a higher price when forced to sell stock as a consequence of a breach of contract. These cases rest on specific contractual language and reflect the exception, not the rule. See Santorini Cab Corp. v. Banco Popular N. Am., 376 Ill.Dec. 403, 409-412, 999 N.E.2d 46, 52-55 (Ill.App.Ct. 1st Dist. 2013) (distinguishing Erickson, Mercantile Holdings, and Nilsson from the general rule that damages are determined at the time of breach).
The cases Trustee cites cannot overcome the "well-settled" principle that the proper date for determining damages is the date of breach, and that prejudgment interest is not allowed. The Illinois Supreme Court has been explicit that, in an action at law, a plaintiff is not entitled to prejudgment interest "notwithstanding that an injured party who is eventually compensated may suffer detriment from the inability to use the money from the date of loss to the date of compensation." Tri-G, 222 Ill.2d at 258, 305 Ill.Dec. 584, 856 N.E.2d at 412. Therefore, the Trustee is only entitled to recover the value of the license as of February 1, 2001, the date of breach.
The court has declined to adopt Mr. Rittvo's valuation, but if it had done so, it would nevertheless decline to adopt the prejudgment interest calculation. See Euroholdings Capital & Inv. Corp., 602 F.Supp.2d at 942-43 (allowing the expert valuation in, but disregarding the prejudgment interest calculation).
As noted earlier, some of Mr. Rittvo's analysis may be understood as running afoul of the rule that bars recovery of lost profits for a new business. Defendants urge the court to reject Mr. Rittvo's testimony altogether on this basis. (C. Defs.' PCOL ¶ 114.) Indeed, at least some of Mr. Rittvo's calculations rely on his projections of a future income stream — a stream which assumes that the new casino in Rosemont would be profitable. Defendants urge that the court must disregard any evidence that incorporates a projection of lost profits, including evidence of bids and offers to purchase Emerald's
The Trustee urges that this court may not even address the "new business" issue because the Bankruptcy Court decided it. (Trustee's Post-Trial Br. at 362-63.) Again, this court disagrees. When first confronted with the issue, the Bankruptcy Court determined the challenge was "premature." (12/23/2009 Bankr.Tr. 10:11.) The Bankruptcy Court later characterized the new business rule as one of the "open issues" that it "expect[ed] to be addressed at trial." (10/27/2010 Bankr.Tr. 8:21-22). The Bankruptcy Court did suggest that the "context of a casino license ... has certain unique qualities," including "the somewhat monopolistic nature of the license," which "may have an impact on the new value rule," suggesting that a profits-based evaluation of the casino might be admissible in spite of the new business rule problem. (10/27/2010 Bankr.Tr. 8:8-20.) In any event, although the reasoning of the Bankruptcy Court is useful, this court is under an obligation to conduct a de novo review of the record. The Bankruptcy Court concluded that the new business rule is inapplicable here; though this court is less certain with respect to Mr. Rittvo's testimony, the court concludes that the Trustee's other evidence of the value of the license is a proper basis for an award of damages.
Under Illinois law, "as a general rule, expected profits of a new commercial business are considered too uncertain, specific and remote to permit recovery." TAS Distrib. Co. v. Cummins Engine Co., 491 F.3d 625, 633 (7th Cir.2007). The rule recognizes that calculating the profits that a new business might earn often requires speculation, and thus violates the principle that damages must be proven to a reasonable degree of certainty. Cement-Lock v. Gas Tech. Inst., 618 F.Supp.2d 856, 868 (N.D.Ill.2009) (quoting TAS Distrib Co., 491 F.3d at 634-35.) The new business rule would ordinarily preclude an award of lost profits for a new business, which is, Defendants insist, precisely what the Trustee is seeking. (See C. Defs.' Post-Trial Mem. at 269.) The Trustee maintains that she is advancing a theory based on the loss of the license itself and is seeking to recover the value of that license. (Trustee's SOF ¶ 854; Trustee's Post-Trial Br. at 320-21.) What she has offered, she asserts, is market evidence, not lost-profit evidence, and is not barred by the new business rule.
The Trustee is correct that market evidence, such as past sales or offers to purchase an asset, is distinct from evidence of lost profits. The Illinois Supreme Court specifically distinguished fair market value of property from the projections of lost profits in People v. Stevens, 358 Ill. 391, 193 N.E. 154 (1934). In that early case, the defendant was charged with embezzling funds from a life insurance company and using those funds to keep his business, the Stevens Hotel, afloat. 358 Ill. at 398-99, 193 N.E. at. 157. As part of its case, the prosecution offered expert testimony about the value of the Hotel in an effort to prove that the defendant knew the enterprise was insolvent. The expert calculated income from the projected occupancy of the hotel over a thirty-five year period, and added that income to the projected value of the hotel, reduced to its present day value. In rejecting this evidence, the court stated:
358 Ill. at 406, 193 N.E. at 160. Although not originally a new business rule case, Illinois appellate courts have relied on the reasoning of People v. Stevens to support the application of the new business rule. See SK Hand Tool Corp. v. Dresser Indus., Inc., 284 Ill.App.3d 417, 426, 219 Ill.Dec. 833, 672 N.E.2d 341, 347 (1st Dist. 1996) (citing Stevens for the proposition that "Illinois courts have long rejected the use of speculative, inaccurate or false projections of income in the valuation of a business."); Reynolds v. Coleman, 173 Ill.App.3d 585, 595-96, 123 Ill.Dec. 259, 527 N.E.2d 897, 904-05 (1st Dist.1988) (quoting People v. Stevens in support of application of the new business rule).
The case law recognizes a distinction between projections of lost profits and evidence of market value. In the cases cited by Defendants to support the application of the new business rule, the rule is consistently applied to evaluate whether projections and estimates of future profits are too speculative, rather than to evaluate historical offers to purchase a lost asset. In this case, similar considerations rendered Mr. Rittvo's own calculations of the propensity and frequency factors, and the operating expenses, unsatisfying, at least in part because they could not be anchored in the experience of a functioning casino. See TAS Distrib. Co., 491 F.3d at 635-636 (rejecting evidence of sales projections used during contract negotiations and evidence of a competitor's sales); M.S. Distrib. Co. v. Web Records, Inc., No. 00-cv-1436, 2003 WL 21087961, at *10 (N.D.Ill. May 13, 2003) (rejecting testimony by the defendant calculating lost profits based on estimates of lost sales of new recording artists' albums); Midland Hotel Corp. v. Reuben H. Donnelley Corp., 118 Ill.2d 306, 315-18, 113 Ill.Dec. 252, 515 N.E.2d 61, 66-67 (1987) (rejecting testimony of plaintiff's accountant and expert witness that hotel lost revenues due to exclusion from hotel guide based on projected occupancy rates); SK Hand Tool Corp., 284 Ill. App.3d at 428, 219 Ill.Dec. 833, 672 N.E.2d at 349 (rejecting expert testimony valuing a division of a business because it was based on an hypothetical assumption "not supported by the evidence"); Nordhem v. Harry's Cafe, Inc., 175 Ill.App.3d 392, 396-98, 124 Ill.Dec. 871, 529 N.E.2d 988, 991-92 (1st Dist.1988) (rejecting testimony by plaintiff's accountant estimating lost profits from missed business opportunity); Reynolds v. Coleman, 173 Ill.App.3d 585, 595-96, 123 Ill.Dec. 259, 527 N.E.2d 897, 904-05 (1st Dist.1988) (rejecting valuation based on projected income); F.L. Walz, Inc. v. Hobart Corp., 157 Ill.App.3d 334, 339-41, 110 Ill.Dec. 217, 510 N.E.2d 1248, 1252-53 (3d Dist.1987) (rejecting testimony and study of a certified public accountant comparing "actual sales with expected sales."). But see Milex Prods. v. Alra Labs., Inc., 237 Ill.App.3d 177, 191-93, 177 Ill.Dec. 852, 603 N.E.2d 1226, 1236-37 (2d Dist.1992) (allowing recovery of lost profits based on expert testimony projecting sales of new drug). The logic of the new business rule operates to bar consideration of speculative projections of profits.
Evidence that, in the past, third-parties were willing to purchase Emerald's license at a particular price at a particular time does not suffer from these uncertainties, however. Notably, too, no case cited by the parties, or identified by the court, applies the new business rule to a situation where a plaintiff lost a previously-owned asset which had the potential to produce
Finally, other courts that have considered the topic have drawn clear distinctions between damages based on lost profits and damages based on an asset's market value. The Second Circuit addressed the issue in a breach of contract case where plaintiffs alleged that the breach caused a corporation to lose an exclusive television programming license. Schonfeld v. Hilliard, 218 F.3d 164 (2d Cir.2000). The parallels to this case make the Second Circuit's decision particularly instructive. In Schonfeld, the court concluded that under New York's new business rule, the plaintiffs were not entitled to recover lost profits because the profits were "purely hypothetical." Id. at 173. The court did not bar the plaintiffs from recovering damages altogether, however, instead distinguishing between "damages for the market value of a lost income-producing asset and lost profits." Id. at 175. As the Second Circuit explained:
Id. at 176 (emphasis in original). Although the market value may be based in part on projections about future income, the two categories "remain analytically distinct." Id. at 177. This is because market value "represents what a buyer is willing to pay for the chance to earn the speculative
The court pauses for one final caveat before evaluating Trustee's market value evidence. In Illinois, where an expert's purported market valuation was based on lost-profit projections, Illinois courts have extended the new business rule to exclude such expert testimony. See SK Hand Tool Corp., 284 Ill.App.3d at 426, 219 Ill.Dec. 833, 672 N.E.2d at 347 (excluding evidence of a business's resale value because it was premised on the theory that plaintiff "would have made a larger gain on the resale of the business if SK had not lost incremental sales and profits.") (emphasis in original.) This is exactly what this court did in Cement-Lock v. Gas Technology Institute, 618 F.Supp.2d 856 (N.D.Ill. 2009). In Cement-Lock, this court held that despite plaintiff's efforts to characterize her expert's testimony as describing the lost value of an asset, "the logic of the new business rule was nevertheless triggered once [plaintiff's expert] admitted that his current-day valuation of the [asset] is an approximation of the profits [plaintiff] might earn from that [asset]." 618 F.Supp.2d at 868. Yet, even in that case, this court recognized a distinction between an "income approach" based on lost profits and a "market approach" to valuation based on prior sales of an asset. Id. at 864. As this court recognized, the market approach "values an intangible asset by ascertaining and comparing what others have paid for comparable assets in a free and competitive market place." Id. at 865 (emphasis added). The court did not apply the new business rule to evidence of actual offers or sales of the asset. See id. at 865 (describing evidence of purchase agreements used in market-approach valuation). What the Cement-Lock court took issue with was the expert's current-day valuation of the technology which "relie[d] exclusively on" an analysis of projected incomes, "as opposed to a market-based measure." Id. at 867. Illinois's new business rule prohibits plaintiffs from proving market value through expert projections of lost profits, but does not prevent the Trustee from presenting other evidence of market value, which is exactly what Trustee has done here.
The court turns to evaluate the Trustee's evidence of the fair market value
Furthermore, between 1999 and 2008, several different companies performed valuations of Emerald and made offers to purchase Emerald and to acquire its license based on those valuations. This evidence is useful. Again, as the Second Circuit explained:
Schonfeld, 218 F.3d at 178; see also Suitum v. Tahoe Reg'l Planning Agency, 520 U.S. 725, 741-42, 117 S.Ct. 1659, 137 L.Ed.2d 980 (1997) ("[T]he very best evidence of the value of [plaintiff's intangible assets] might be their actual selling price (assuming, of course, that the sales were made in good faith and at arm's length).").
Defendants next contend that even if the court considers the market evidence, the series of offers and bids is not a reliable basis for valuation. They make two general arguments. First, they urge that the offers and bids must be understood as measuring the value of Emerald as a whole, rather than the value of Emerald's license specifically. Second, they argue that several of the valuations assume a casino based in Rosemont, a location the IGB never approved, and which would have been more valuable than a license located elsewhere. (C. Defs.' SOF ¶¶ 953, 956, 959-60, 962.)
Defendants' first argument is not persuasive. As the Trustee points out, when Emerald stopped operating the Silver Eagle in 1997 it began disposing of its tangible operating assets. The license was Emerald's only significant asset during the valuations. (Trustee's SOF ¶ 708.) Defendants do not contest this claim, and the evidence supports it: Emerald's December 31, 1999 financial statement lists no tangible assets. (PX406 at 3.) McMahon also testified at the bankruptcy trial that during the 2004 bidding process, the license was Emerald's only significant asset. (PX393 at 5 (85:17-19); Bankr.Tr. 1416:8-16.) Defendants have not identified any other components of Emerald that would give it value, beyond the license.
Instead, Defendants attempt to distinguish between a bid on Emerald's "equity interests" and the license itself, urging that while an equity interest can be sold, with IGB approval, the license cannot be sold under any circumstances. (C. Defs.' Post-Trial Mem. at 280) (citing ILL. ADMIN. CODE §§ 3000.235(a), 3000.250.) As explained above, the license can be sold through a merger. Furthermore, the distinction breaks down in this case when the license was Emerald's only asset. Valuation of its equity therefore primarily reflects the value of the license. The fact that the IGB would have to approve the transfer of equity or any merger does not alter that conclusion.
Defendants' second argument, however, is more compelling. The IGB expressed clear hostility towards a casino in Rosemont throughout Emerald's efforts to sell the license. (PX858 at 1977, 1979, 1982-83, 1985-86.) The IGB also prevented a sale of Emerald that was contingent on a Rosemont location. (See, e.g., DX697 at 3-4.) The Trustee cannot show that Emerald lost the opportunity to operate a casino in Rosemont because the Trustee has not shown that but for Defendants' conduct, the IGB would have approved a Rosemont location. Defendants have presented compelling evidence that the IGB had other concerns about licensing a casino in Rosemont that would have existed absent Defendants' conduct — specifically, concerns (however vague) about connections to organized crime and the integrity of Rosemont's leaders. (PX858 at 1977, 1979, 1982-83, 1985-86.) The IGB did select a Rosemont casino as the winner of one round of bidding in 2004, but the Attorney General publicly opposed the transaction and prevented the sale, for those same reasons. (DX467 at 2-5.) In light of the IGB and Attorney General's hostility to a casino in Rosemont, the court cannot place great weight on Rosemont valuations.
Defendants urge the court to go further and disregard all evidence that assumes a location other than East Dubuque. (C. Defs.' PCOL ¶ 125.) They argue that because the IGB never approved the relocation of Emerald's license to any other location, the Trustee's evidence rests on a false
Although the valuations based on a non-Rosemont location are more persuasive evidence of the value of Emerald's license, the court nevertheless begins with the Rosemont valuations.
In August 1999, Emerald's Board approved a valuation of Emerald that was commissioned in order to determine how much to charge when selling twenty-percent of Emerald stock to the Statutory Investors. (PX20 at 2-3; Bankr Tr. 1327:11-21, 1330:4-8.) That valuation was done by Kevin Flynn's company, EVI (PX20 at 2-3; Trustee's SOF ¶ 714) and was unanimously approved at the August 12, 1999 Emerald Board meeting. (Trustee's SOF ¶ 714.) Donald Flynn, Kevin Larson, Peer Pedersen, and Joseph McQuaid all served on the Board at the time. (PX20 at 2.) Defendants Kevin Flynn, John McMahon and Walter Hanley also were present at the August 12, 1999 meeting in their capacities as officers of Emerald. (Id. at 1.)
Using a Discounted Cash Flow Analysis, EVI calculated Emerald's aggregate fair market value at $307.5 million as of July 31, 1999. (PX317 at 2, 25-26, 33.) The EVI appraisal complied with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation. (Id. at 5.)
Despite their past reliance on the valuation, Defendants now argue that the EVI report is not reliable evidence. They contend the EVI valuation was based on a non-controlling portion of stock of the enterprise, rather than the value of the owner's license. (C. Defs.' SOF ¶ 954.) As explained above, this is not a meaningful distinction. Furthermore, the valuation appears expressly to constitute a valuation of Emerald as a whole: the report first calculates the fair market value of the controlling, marketable equity of Emerald — i.e., a 100% interest. (PX317 at 33.) To the overall value of Emerald, the report then applies a series of "discounts" to account for the unique nature of the stock that was being sold. Specifically, the report included a 50% discount based on the "non-controlling" nature of the stock. Absent a discount, 20% of the stock would equal $61,500,000 (or 20% of the enterprise value). But with the 50% discount, as the report concluded, 20% of Emerald stock was valued at $30,750,000 (or 10% of the total value of the company). (Id. at 34.) While Defendants are correct that the ultimate valuation is based on a portion of the stock, the report bases that calculation on a valuation of Emerald as a whole. Given that the only significant asset Emerald had at the time was its owner's license, the court finds that this is a reasonably reliable valuation of the license.
Furthermore, the evidence shows that Defendants were successful at selling stock based on this valuation. By December 22, 1999, Emerald had sold approximately $26.7 million in common stock to the Statutory Investors based on the EVI valuation. (PX25 at 1.) Recognizing that the assumption
In 2000, attorneys representing Donald Flynn, Kevin Flynn, Joseph McQuaid, and Emerald as defendants in the Davis litigation commissioned the firm Jay Alix & Associates to prepare a valuation of Emerald on three different dates: July 1, 1999; October 18, 1999; and June 1, 2000. (PX653 at 3, 24-25, 27-28, 30-31.) The report was submitted on behalf of Defendants Donald Flynn, Kevin Flynn, Joseph McQuaid and Emerald. (Id. at 2; Trustee's SOF ¶¶ 723-24.) Using a DCF income analysis approach and a market approach based on a casino located in Rosemont (PX653 at 3, 5-6; C. Defs.' SOF ¶ 956), the report found that Emerald was worth $268-$272 million as of July 1, 1999 (PX653 at 24-25); $286-$295 million as of October 18, 1999 (id. at 27-28); and $308-$310 million as of June 1, 2000 (id. at 30-31).
This report has minimal credibility. To the extent it is useful at all, that is only because it was prepared on behalf of certain Defendants in a situation where Defendants had an incentive to present a modest valuation in order to reduce their potential liability in the Davis litigation. Like the EVI valuation, this one makes the potentially unwarranted assumption of a casino based in Rosemont. Furthermore, because this valuation was not used to support an offer or bid to purchase Emerald, it is not market evidence.
In 2001, the Flynn family retained Jefferies & Company, Inc. to serve as exclusive financial advisor in connection with a potential sale of Emerald. (PX1137 at 1.) The Emerald Board authorized officers to work with Jefferies. (Id. at 1-2.) Jefferies solicited bids by sending a confidential memo to potential buyers. (PX1302.) In response, Jefferies received four bids from (1) MGM Mirage, (2) Harrah's, (3) Isle of Capri/Bluhm and (4) Park Place. (PX1288 at 8-9). The initial bids ranged from $455 million to $550 million. (Id. at 8-9.)
The Jefferies process ultimately resulted in a final offer from MGM Mirage of $615 million, plus other consideration, including the assumption of all of Emerald's debt, in exchange for 100% of the stock in Emerald, resulting in estimated total value of the MGM offer to the selling shareholders of approximately $716 million. (PX443 at 3; PX632 at 5.) MGM's offer was contingent on the Rosemont location. (PX442 at 2; PX1150 at 28, 45.) Emerald agreed to consider the MGM offer, and the parties proceeded to draft an "Agreement and Plan of Merger Agreement." (PX1316 at 190; PX1150.) Following this presentation, the Board, including Defendants Donald Flynn, Kevin Larson, and Joseph McQuaid, voted to proceed with the MGM-Mirage agreement. (PX1316 at 192-93.) The IGB was opposed to the transaction, however, and issued a press release criticizing the negotiation process. (PX697 at 4.) The sale was never completed. (C. Defs.' SOF ¶ 961.)
This offer is somewhat useful to the court because it represents an offer from a willing buyer that was accepted by the Emerald Board. The report also reflects Emerald's value from the time period immediately surrounding the revocation of the license. Yet, the transaction was never completed, in large part because of IGB resistance. The evidence also indicates that the purchase price was elevated in order to address concerns about that resistance. (See PX443 at 1-2) (discussing that
On October 29, 2002, the Emerald Board passed a resolution to retain Rothschild, Inc. as Emerald's investment banker and financial advisor in connection with the sale, merger, or other disposition of Emerald. (PX1316 at 227.) The Rothschild bidding process produced bids from seven bidders: (1) Caesars Entertainment, to build a casino in Rosemont; (2) Harrah's Entertainment, to build a casino in Waukegan; (3) Isle of Capri Casinos Inc., to build a casino in Rosemont; (4) Mandalay Hyatt LLC, to build a casino in Summit; (5) Midwest Gaming Entertainment LLC, to build a casino in Des Plaines; (6) Penn National Gaming to build a casino in Rosemont; and (7) Southland Development Group, to build a casino south of Chicago. (PX1214.) From those initial bidders, three final bidders, Harrah's (Waukegan), Isle of Capri (Rosemont), and Midwest Gaming (Des Plaines) were chosen to participate in the auction process to purchase Emerald. (PX1215 at 2-3.)
On March 10, 2004, Rothschild conducted an auction. (PX578 at 1.) The procedures required, among other things, that prospective bidders submit "Binding Proposals" which had to be "definitive non-contingent offer[s]" with at a minimum thirty days to close. (PX578 at 123-25, 132 ¶ 4). At the conclusion of the multiple rounds of bidding, Rothschild requested that each bidder submit a "sealed, highest, best, and final bid." (Id. at 107.) The three final bidders submitted final sealed bids: Midwest Gaming bid $476 million; Isle of Capri bid $518 million; and Harrah's bid $520 million. (Id. at 111-12.)
On March 15, 2004, the IGB selected Isle of Capri as the winning bidder. (PX628 at 3.) Isle of Capri apportioned $488 million of the $518 million purchase price to the License. (PX1217 at 7.) The Isle of Capri bid was to construct a casino in Rosemont. (PX 858 at 1313.) Although the IGB selected Isle of Capri as the winner, the Illinois Attorney General publicly opposed this bid and filed a lawsuit to enjoin the IGB from approving the transaction. (DX 467, 485.) Under pressure from the Attorney General, the IGB withdrew its approval. (C. Defs.' SOF ¶ 967; see Bankr.Tr. 3186:7-9.)
Like the MGM offer, the Isle of Capri bid is useful because it represents an amount that a willing buyer would pay. The court also finds the separate pricing of the license and bid price instructive. Again, however, in light of the strong opposition by the Illinois Attorney General due to the Rosemont location, the Isle of Capri offer is entitled to less weight.
In 2008, the IGB contracted with Credit Suisse to put Emerald's license up for bid. (PX858 at 1973; PX1236 at 1.) The IGB received seven applications and selected three finalists. (PX1236 at 1.) The finalists were: (1) Trilliant Gaming, which bid $406 million to build a casino in Rosemont, (2) Midwest Gaming, which bid $272 million to build in Des Plaines, and (3) Waukegan Gaming, which bid $216 million to build in Waukegan. (PX1237 at 2.)
Ultimately, the IGB awarded the License to Midwest Gaming. (PX1237 at 1.) According to the IGB, the majority of factors favored the Midwest Gaming proposal. (Id. at 2.) The Midwest Gaming bid was contingent on a Des Plaines, Illinois location, and IGB members specifically
The court finds this bid to be the most reliable evidence of Emerald's value and accordingly awards damages equal to $272,000,000. This is the only sale that was ever completed. Defendants do not challenge this bid under the new business rule. (See C. Defs.' PCOL ¶¶ 127-30) (challenging only the 1999 EVI and 2000 Davis litigation valuations based on the new business rule.) Finally, this bid represents the actual sale price of the license, which is likely the best evidence of fair market value. Schonfeld, 218 F.3d at 178; see also Suitum, 520 U.S. at 741-42, 117 S.Ct. 1659.
As further support for relying on this bid as a measure of damages, the court notes that the 2008 Midwest Gaming bid falls just below the valuations of Emerald that were prepared closer to the date of breach. The EVI valuation prepared in 1999 was for $307.5 million and the valuations prepared by certain Defendants in the Davis litigation ranged from $268 to $310 million. These similar bids bolster the conclusion that the Midwest Gaming bid is an appropriate basis for determining the market value of the license.
The Trustee's evidence of the higher offers in 2001 and 2004 are not persuasive because they assume a Rosemont location and are based on offers for sales that were never completed. Although the Trustee asserts that the offers were final and binding, and therefore competent evidence of market value, the court finds the completed sale price more persuasive, due to the IGB's obstinate opposition to a Rosemont casino. The fact that Defendants themselves invoked these higher valuations does not alter the court's analysis.
Finally, the Trustee points out that John McMahon listed the value of Emerald's license at "$850,000,000 (enterprise value — MGM offer — subject to further investigation)" in the Schedule of Assets and Liabilities that was submitted in the bankruptcy proposal. (PX624 at 5; Trustee's SOF ¶ 711.) But there is no evidence or explanation as to how this value was calculated and the proposed value is well outside the range of bids offered in any other context. The Trustee implicitly acknowledges that this statement is not persuasive by her own request for a $519 million damage award. The court accords no weight to the $850 million figure in the bankruptcy schedules.
Dividing the total damages amount ($272,000,000) by six, the court determines that Kevin Flynn, Donald Flynn, John McMahon, and Kevin Larson are each liable for $45,333,333.33 and Joseph McQuaid and Walter Hanley are each liable for $45,333,333.34.
In Illinois, in order to recover for breach of contract, a plaintiff must establish both "that he sustained damages ... [and] he must also establish a reasonable basis for computation of those damages." Ellens v. Chi. Area Office Fed. Credit Union, 216 Ill.App.3d 101, 106, 159 Ill.Dec. 594, 576 N.E.2d 263, 267 (1st Dist.1991). Defendants here argue that the claim for damages is too speculative and that Trustee has failed to meet her burden to prove damages to a "reasonable degree of certainty." (C. Defs.' Post-Trial Mem. at 270) (quoting TAS Distrib. Co., 491 F.3d at 632.) This argument is largely an extension of Defendants' arguments against lost-profit damages and, as explained earlier, the court's award rests instead on evidence of market value.
The court concludes that the Trustee has proven damages in that amount to a reasonable degree of certainty. The history
Finally, none of Defendants' arguments cast doubt on the reliability of the 2008 Midwest Gaming sale. Defendants argue that Trustee's evidence is too speculative for three reasons: (1) the valuations based on projected income are unreliable because of the logic of the new business rule, (2) unconsummated bids or offers are unreliable precisely because they were never finalized, and (3) statements by Defendants are unreliable. (C. Defs.' PCOL ¶¶ 124-25.) As noted, however, Defendants did not challenge the Midwest Gaming sale as unreliable under the new business rule; the offer was consummated; and the Midwest Gaming bid does not rest on any statement made by Defendants. In fact, Defendants' only argument against the reliability of this evidence is the conclusory statement that "[t]he Midwest Gaming transaction is not evidence of the intrinsic value of Emerald's license to a reasonable degree of certainty." (C. Defs.' SOF ¶ 973.) The court disagrees with Defendants and determines that the Midwest Gaming bid is a reasonable basis on which to base the court's damage award.
Defendants request that even if this court finds that relief is appropriate, the court should "defer any award pending the administration of the claims process" in the bankruptcy proceeding to ensure that the damages amount in this case is limited to the amount owed to the creditors. (C. Defs.' Post-Trial Mem. at 285.) Defendants urge that reduction in the damages award is appropriate to avoid a massive windfall to the Trustee, and to avoid a process in which money would cycle through the estate and back to the Defendant shareholders. (Id. at 286-87.) Although the court is sympathetic to Defendants' request, the court declines to adopt their suggestion.
First, Defendants' argument that Trustee would receive a windfall is not compelling. As the Trustee notes, this argument conflates collecting estate assets with the process of distributing the estate assets. The Trustee's obligation is to "collect and reduce to money the property of the estate." 11 U.S.C. § 704(a)(1). The Seventh Circuit explained in In re FBN Food Services., Inc., that "[o]nce the whole transfer has been pulled into the estate, the money is distributed according to the priorities established by the Code and the debtor's own commitments." 82 F.3d 1387, 1396 (7th Cir.1996). Although defendants in that case tried to limit the award to the "amount of debt senior to the defendant in the preference-recovery action," the court concluded that the trustee's recovery "has nothing to do with identifying who gets how much when the estate distributes its assets." Id. This court, similarly, declines to anticipate the distribution phase of the bankruptcy proceeding when evaluating the recovery appropriate for Defendants' breach of contract.
The breach of contract claim arises under state law. Although federal law determines what claims are included
Defendants' only counter-argument is that the district court is authorized to exercise the equitable powers of the bankruptcy court under 11 U.S.C. § 105(a). (C. Defs.' PCOL ¶ 138-39, 144.) See, e.g., Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 444 (1st Cir.2000) ("[S]ection 105(a) empowers the bankruptcy court to exercise its equitable powers — where `necessary' or `appropriate' — to facilitate the implementation of other Bankruptcy Code provisions.... [A] court may invoke § 105(a) `if the equitable remedy utilized is demonstrably necessary to preserve a right elsewhere provided in the Code'....") (emphasis added).
None of the cases Defendants cite suggest that a bankruptcy court may use its equitable powers under § 105(a) when implementing the requirements of state law. In fact, most of Defendants' cases do not address circumstances where bankruptcy courts are evaluating state law claims. See In re Airadigm Comm., Inc., 519 F.3d 640, 657 (7th Cir.2008) (though the Bankruptcy Code is silent, § 105(a) grants bankruptcy courts the power to release third parties from a creditor's claims without the creditor's consent, in order to facilitate reorganization plans under § 1123(b)(6) of the Bankruptcy Code); Bessette, 230 F.3d at 446 (§ 105 of the Bankruptcy Code provides a bankruptcy court with statutory contempt powers and powers to administer sanctions in order to enforce violations of § 524 of the Bankruptcy Code).
The only case Defendants cite that speaks to the interplay of state-law claims and the exercise of equitable powers supports the conclusion that district courts should follow state law when evaluating state claims. In In re Memorial Estates, Inc., a bank with a secured loan sought, in state court, to have a receiver appointed to protect its collateral, a right it had under state law. 797 F.2d 516, 517 (7th Cir. 1986). The creditor subsequently went bankrupt and the case was removed to the bankruptcy court. Id. at 518. Upon the recommendation of the bankruptcy court, the district court appointed a receiver, an appointment that the Seventh Circuit upheld as an exercise of state equitable power, not a bankruptcy court's equitable power under § 105(a):
Id. at 519 (emphasis added) (internal citations omitted). In fact, In re Memorial Estates makes no mention of the equitable powers granted to under § 105(a); it refers only to 11 U.S.C. § 105(b), which is a limitation on a bankruptcy court's power that prohibits a bankruptcy court from appointing a receiver. Id. at 520.
If this court were exercising its power under the Bankruptcy Code to decide the distribution of claims, the court would indeed be authorized to invoke its equitable powers under 11 U.S.C. § 105(a). But, as the Defendants note, the court does not have the distribution proceedings before it. (See C. Defs.' PCOL ¶ 144) ("[T]he Bankruptcy Court has not administered the claims process, so at this point there is no way to know for certain the identity of the allowed claimants and the amounts of the respective allowed claims.") Instead, the court is evaluating Trustee's state-law claim in an adversary proceeding and therefore follows Illinois law.
Under Illinois law, "[t]he measure of damages for breach of contract is the amount that will compensate the aggrieved party for the loss `which either fulfillment of the contract would have prevented or which the breach of it has entailed.'" Santorini Cab Corp., 376 Ill.Dec. at 409, 999 N.E.2d at 52 (quoting LeFevour v. Howorka, 224 Ill.App.3d 428, 430-31, 166 Ill.Dec. 698, 586 N.E.2d 656, 658 (1st Dist.1991)). Put another way, "[t]he purpose of damages is to place the nonbreaching party in a position that he or she would have been in had the contract been performed." GK Dev., Inc. v. Iowa Malls Fin. Corp., 378 Ill.Dec. 239, 251, 3 N.E.3d 804, 816 (Ill.App.Ct. 1st Dist.2013.) The damage award of $272,000,000.00 is the amount that will compensate Emerald for the loss of the license. Defendants have not cited Illinois case law that supports their appeal to equity, and the court declines to use equity powers to deviate from what Illinois law requires.
Finally, Defendants' joint roles as officers, directors and shareholders of Emerald should not justify a reduction in the damage award. As explained above, Defendants individually made a promise — a rather unforgiving one — to Emerald to comply with IGB rules. The IGB found that Defendants had breached that contract, and the reviewing court affirmed that determination. Emerald lost its valuable license as a consequence. Defendants may have been acting reasonably and in good faith. They had no obvious motivation to jeopardize the casino license and may well not have foreseen the IGB's harsh reactions to their conduct. As the court has concluded they did in fact breach the contract, it finds them liable for the following losses:
For the reasons stated, Kevin Flynn, Donald Flynn, Joseph McQuaid, John McMahon, Kevin Larson, and Walter Hanley are liable for the claim of breach of contract (Count II). The court will therefore enter judgment on that claim in favor of the Trustee and against Kevin Flynn, Donald Flynn, John McMahon, and Kevin Larson in the amount of $45,333,333.33 and against Joseph McQuaid and Walter Hanley in the amount of $45,333,333.34 for a total judgment of $272,000,000.00. Claims against Defendant Peer Pedersen are dismissed. The court finds Count I,
Donald F. Flynn Estate's motion to dismiss the Trustee's claims for the imposition of joint liability and for punitive damages [64] is denied as moot. The court finds only several liability and the court dismissed the breach of fiduciary duty claim as barred by the statute of limitations, which was the only claim that could support punitive damages.
As the court has dismissed Count I, Defendants' motion to dismiss Count II of the Third Amended Complaint as duplicative [113] is denied.
Defendants' motion for judgment as a matter of law on Counts I & II[246] is granted with respect to Count I and denied with respect to Count II.
Defendants' motion [72] for leave to file a third-party complaint against Eugene Heytow is denied.
The court reserves judgment on Counts III, V, and VI and will set a status hearing to determine the appropriate method for resolving those claims.
Procedural History Section 11.2 Section 11.2 Flynn v. Levy Year ("shall means (Constitutional Davis Litigation IGB Revocation Bankruptcy Payton Plaintiffs (equitable shall") challenge) Proceedings Proceedings Litigation contribution) Payton v. Flynn, Emerald Casino, No. 06 C 465, 2006 Inc. v. Gaming Crusius v. Ill. Davis Cos. v. Emerald Casino, Bankruptcy Court: WL 3087075 (N.D. Bd., 346 Ill. App. Gaming Bd., 216 Emerald Casino, Inc. v. W. Gaming No. 08-ap-00972 Ill. Oct. 26, 2006) Flynn v. Levy, 832 3d 18, 803 N.E.2d Ill. 2d 315 837 Inc., 268 F.3d 477 Bd., No. 4-06-0051 F. Supp. 2d 951 914 (Ill. App. 1st N.E.2d 88 (2005) (7th Cir. 2001) (Ill. App. 4th Dist. District Court: Payton v. Flynn, (N.D. Ill. 2011) Dist. 2003) 2003.) (PX1233) No. 1:11-cv-04714 No. 074.-11989 (Ill. Cir. Ct. Cook Cnty. 2007) Apr.: IGB rejects1997 Emerald's Renewal App.; Emerald appeals1998 May: ALJ upholds IGB denial of Renewal App.June: § 11.2 passes in the LegislatureSept. 7: IGB finds § 11.21999 makes the May 1999 ALJ decision mootSept. 24: Emerald files Renewal App.Oct. 18: Davis files breach of contract compl.
Sept. 22: D. Ct. dismisses for2000 failure to join Duchossois, an indispensable partyJan. 30: IGB denies Renewal App. & revokes Emerald's licenseMar. 6: IGB issues formal Disciplinary Compl. revoking licenseMar. 26: Emerald answers2001 Disciplinary Compl.May 21: Emerald tiles compl. challenging IGB's § 11.2 interpretationSept. 28: 7th Cir. reverses: Duchossois was not necessary party
May: Crusius files compl.May 29: arguing § 11.2 Disciplinary violates Ill. proceedings Const.'s special begin legis. clauseJune 13: Disciplinary proceedings2002 halted due toJune 13: Bankr. bankr. filed (Ch. 7)Aug. 30: Cir. Ct. finds statute constitutionalSept. 6: Cir. Ct.Sept. 10: Bankr. rules in favor of converted IGB (Ch. 11)Sept. 10: D. Ct. grants defs.' Mot. for Summ. J. on Counts II & V. & denies Mot. oil Count IV2003 Dec. 30: App. Ct. reverses: IGB cannot deny Renewal App., but can revoke licenseMar. 31: App.Feb. 27: Case Ct. affirms; dismissed with2004 § 11.2 not prejudice upon special legis. parties' joint mot.
May 25: Disciplinary hearings resumeSept. 22: Ill.Sept. 27: Sup. Ct. affirms; Disciplinary upholds § 11.2 hearing end2005 under Ill. Const.Dec. 20: 1GB issues Final Board Order revoking Emerald's licenseJan. 25: Majority of Statutory Investors file federal suit against Defs. alleging RICO violations, and state law claims for fraud, breach of fiduciary duty, estoppel and conspiracy2006 Oct. 26: D. Ct. dismisses RICO claims and declines to exercise supplemental jurisdiction over state law claims
May 30: Ill. App. Ct. affirms IGB Final Board OrderOct.: Majority of Statutory Investors file state suit against2007 all Defs. (except Pedersen) for breaches of contract & of fiduciary dutyNov. 29: Ill. Sup. Ct. declines to hear the caseMar. 19: Bankr. converted (Ch. 7)Mar. 20: Trustee appointedNov.: Cir. Ct. grants Mot. to Stay because Payton Pls. assigned claims to TrusteeDec. 1: Trustee2008 removes Payton to Bankr. Ct.Dec. 19: Trustee files Am. Compl. with some Payton claims
Jan. 27: Bankr. Ct. abstains from Payton contract & fiduciary duty claimsFeb. 20: Trustee files Am. Compl. in Cir. Ct., with2009 Payton contract & fiduciary duty claimsApr.: Defs. move to dismissNov. 12: Cir. Ct. dismisses Payton contract claim as barred by statute of limitationsMar. 30: Deft. sue Heytow for equitable contribution, if Defs. are liable in. adversary proceeding2010 Apr. 30: Defs. file Mot. for Summ. J arguing Emerald's contract & fiduciary duty claims barred by res judicata
May 15: Levy as administrator of Heytow's estate, files Mot. to DismissAug. 26: Bankr. Ct. denies Defs.' Mot. because Defs. are judicially estopped from asseiling res judicataDec. 27: D. Ct.2011 denies in part and grants in part Levy's Mot. to Dismiss: equitable contribution possibly available under the Ill. Business Corp. Act, but not based on the Amended Shareholders' AgreementJan. 31: D. Ct.2012 withdraws reference to Bankr. Ct.
Breach of Contract Findings
other
IGB Rule Conduct Kevin Donald McQuaid McMahon Larson Hanley Pedersen casions
Flynn Flann violated?
(a) failure to disclose transfers of shares of Emerald No breach: Defendants disclosed transfers of shares Y1
(b) failure to disclose agreements or understandings
to sell ownership interests in Emerald No breach: Insufficient evidence to show Davis, Duchossois agreement Y1
(c) failure to disclose the nature of Kevin Flynn's
involvement in management and operation of X X X X
Count I 2
(e) failure to disclose agreements between Emerald X X X
and Rosemont
(f) failure to disclose agreements between Emerald X X
and various construction professionals, contractors,
subcontractors and vendors
(a) failure to disclose the status of construction in
Count II 2
3000.140(b) (b) failure to disclose agreements between Emerald X X X
(3) and Rosemont
(c) failure to disclose agreements between Emerald X X
and various construction professionals, contractors,
subcontractors and vendors
(a) failure to disclose transfers of shares of Emerald No breach: Defendants disclosed transfers of shares Y1
Count III 1
3000.140(b) (c) agreements or understandings to transfer
(5) ownership to associates of Mayor Stephens. No breach: Insufficient evidence to show Davis, Duchossois agreement
(a) transfers between Donald Flynn and twelve X Y1
outside. non-statutory minority investors without IGB
Count IV 1
3000.235(a) investors without IGB prior-approval
(c) transfers between Emerald and the statutory X Y1
minority investors without IGB prior-approval
(a) failing to cooperate fully with the IGB's investigation of Emerald and its Key Persons No breach Insufficient evidence of specific conduct (b) failing to fully truthfully, timely and accurately disclose information to the IGB, as required by the X X X Act and Rules, as specifically requested by the IGB (c) failing to conduct any reasonable inquiry into the background of its investors and other individuals that it chose to associate with No breach: Organized crime findings overturned by Illinois Appellate Court (d) selling shares to individuals of notorious or unsavory character, specifically individuals identified as known members of organized crime No breach: Organized crime findings overturned by Illinois Appellate Court (e) failing to disclose and actively misleading the IGB as to the status of construction in Rosemont No breach IGB had knowledge of construction Y (f) failing to disclose and actively misleading the IGB as to the transfer of shares to and from Donald No breach: Defendants disclosed transfers of shares Y Flynn (g) failing to disclose and actively misleading the 3000.110(a) IGB as to Kevin Flynn's involvement in the operation X X X X and management of Emerald (h) entering into an agreement or understanding that allowed Mayor Stephens to have control over and/or input into sales of Emerald shares No breach: Insufficient evidence to show Davis, Duchossois agreement (i) allowing the Village of Rosemont to waive the requirement that Emerald first obtain the necessary regulatory approval from the IGB prior to commencing construction of a casino No breach. Insufficient evidence to show which Defendant included terms (j) failing to supervise or manage the construction and by failing to do so, allowing work to be completed by a company that has been identified as having connections to known members or associates of organized crime No breach: Organized crime findings overturned by Illinois Appellate Court (k) entering into a Lease & Development Agreement with Rosemont that obligated Emerald to fund the construction of a parking garage, even though did not have sufficient financing to do so No breach: Insufficient evidence to support finding Count V
1 Historically, the IGB did not require pre-approval of shareholders and historically had not sanctioned licensees for voting to sell shares of stock without first obtaining IGB approval. (See Tr. 2545:22-46:13, 2546:22-47. 13, 2548;16-49. 6.) Instead, when the IGB found that an individual applicant for ownership in a casino was unsuitable, the IGB required that the individual divest him/herself from the casino and the investment would be returned. (Tr. 734:9-13, 2533:5-20.) This process was clearly codified in IGB rules in 1998 and remains the law today. See 86 ILL. ADMIN. CODE § 3000.224 ("Each owner and supplier licensee shall provide a means for the economic disassociation of a Key Person in the event such economic disassociation is required by an order of the Board"). For example, after the IGB did not approve two prospective investors in the Alton Riverboat Casino who had already contributed money, McQuaid testified, the casino, which had used the money for "general use," returned it to the prospective investors. (Bankr. Tr. 3383:20-3386:23.) Furthermore, the IGB approved a Settlement Agreement with Empress Joliet Casino that required a 98 percent shareholder who the IGB found unsuitable to divest (PX858 at 870-73; Tr. 1965:24-66:10; 2536:20-25.)2 William Kunkle, the IGB's first chairman, testified that between 1990 and 1999, the IGB did not require a casino licensee to obtain IGB pre-approval for construction. (Tr. 2511:13-24; 2527:16-19.) He further testified "I can't think of a single owner that didn't do some kind of, whether it was actually physical construction or whether it was contracting for construction, contracting for the building of a riverboat, the remodeling of a riverboat, the leasing of a riverboat, the same for the dock, the shore facilities, the security systems .... They needed to make a decision, a business decision .... knowing that if the board didn't like it, when the time came for a ruling on preliminary suitability, they might have to change it. But they could take that risk. And the board did not require advance notice about what they were doing." (Tr. 2527:21-2528:20.) Joe McQuaid, himself a former IGB staffer, said much the same thing. He testified that "[p]reapproval or approval in general [of construction] for the riverboats was not necessary' (Tr. 622:1-15), and that none of the original ten licensees had received pre-approval from the IGB before beginning construction. (Bankr. Tr. 3379:12-16.) McQuaid testified that this was his understanding of the IGB's position in June 1999. (Tr. 622:16-22.)
(PX1231 at 32-33.) ALJ Mikva also noted that he "denied three separate motions to disqualify" himself and that "two were taken to the Gaming Board for review," but were denied. (Id. at 33.)
