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In re Emerald Casino Inc.

United States Court of Appeals, Seventh Circuit

August 11, 2017

In Re: Emerald Casino, Inc. Plaintiff-Debtor,
v.
Estate of Kevin Flynn, John McMahon, Kevin Larson, Joseph McQuaid, Defendants-Appellants/Cross-Appellees, Frances Gecker, as Trustee of Emerald Casino, Inc. Plain tiff-Appellee/Cross-Appellant, Plaintiff-Appellant/Cross-Appellee, and Estate of Peer Pedersen, Defendant-Appellee/Cross-Appellant.

          Argued May 31, 2017

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 11 C 4714 - Rebecca R. Pallmeyer, Judge.

          Before Kanne, Sykes, and Hamilton, Circuit Judges.

          Kanne, Circuit Judge.

         This case arises out of the Illinois Gaming Board's decision to revoke Emerald Casino, Inc.'s[1]gaming license. In an attempt to recover the value of the license, the bankruptcy trustee sued the defendants-former Emerald officers, directors, and shareholders-for breach of contract and breach of their fiduciary duties.

         This set of consolidated appeals concerns the district court's decision on those claims.

         Defendants Kevin Flynn, John McMahon, Kevin Larson, and Joseph McQuaid contest the court's decision that their conduct caused the Board to revoke Emerald's license. The defendants thus argue that the court could not have held them severally liable for the value of Emerald's license.

         The trustee contests the court's decision that (1) defendant Peer Pedersen's conduct did not cause the Board to revoke Emerald's license, (2) the statute of limitations barred her breach-of-fiduciary-duty claim, and (3) the defendants were severally liable instead of jointly and severally liable.

         We reverse and remand the court's decision to hold the defendants severally liable instead of jointly and severally liable. But otherwise, we affirm.

         I. Background[2]

         Emerald had an Illinois gaming license to operate in East Dubuque, Illinois. Emerald operated profitably in 1993 but then began to struggle to compete with a new Dubuque, Iowa casino. Iowa's more lenient gaming laws made continued success for Emerald in East Dubuque unlikely, so Emerald applied to the Illinois Gaming Board for permission to relocate. The Board denied the application, claiming that it lacked the statutory authority to allow a licensee to relocate.

         By early 1996, Emerald had stopped operating a casino and began devoting its time to lobbying the Illinois legislature to pass an act that would allow it to relocate. In the meantime, it had to renew its gaming license. The Board voted unanimously to deny Emerald's renewal application, citing Emerald's "non-responsive application, " "inadequate gaming operation, " financial inviability "significant compliance shortcomings, " failure to "provide for positive economic development and impact, " and general noncompliance with the Riverboat Gambling Act. In re Emerald Casino, Inc., 530 B.R. 44, 64 (N.D. 111. 2014) (quoting the Board's denial of Emerald's application to renew its license). Emerald appealed that decision to an Illinois administrative law judge, who agreed with the Board and recommended denying Emerald's renewal application.

         But before the Board could officially adopt the administrative law judge's recommendation, Emerald's lobbying efforts succeeded. On May 25, 1999, the Illinois legislature passed 230 ILCS 10/11.2, which provides that a "licensee that was not conducting riverboat gambling on January 1, 1998 may apply to the Board for renewal and approval of relocation ... and the Board shall grant the application and approval upon receipt by the licensee of approval from the new municipality or county ... in which the licensee wishes to relocate." A month later, the Governor signed § 11.2 into law.

         Emerald had its win: the Board interpreted the word "shall" in the statute to mean that it was required to renew Emerald's license and grant Emerald's request to relocate. The Board thus withdrew its decision to deny Emerald's renewal application.

         Anticipating its political victory, Emerald began considering new relocation sites well before the legislature passed § 11.2. Specifically, Emerald considered Rosemont, Illinois. Several times during 1998-a year before § 11.2 passed- Kevin Flynn[3] and McQuaid met with Rosemont's mayor and representatives of two Rosemont corporations about moving Emerald to Rosemont. Evidence at trial suggested that, at those meetings, Kevin Flynn at least discussed selling significant ownership interests in Emerald to Rosemont's mayor and the two Rosemont corporations.

         And once the legislation passed, Emerald moved quickly. It sent a formal relocation request to Rosemont just five days after the Governor signed § 11.2; Rosemont agreed that day. Within months after § 11.2 passed, Emerald and Rosemont had executed a site access agreement and a letter of intent to memorialize the terms of Emerald's relocation to Rosemont. Yet later when the Board asked when Emerald first considered Rosemont as a relocation site, Kevin Flynn and McQuaid lied and said that Emerald had not considered Rosemont until after § 11.2 passed. Emerald did not disclose its agreements with Rosemont until well over a year after the contracts were signed, in violation of Illinois Gaming Board (IGB) rules. See, e.g., 111. Admin. Code tit. 86, § 3000.110(a)(5) ("A holder of any license shall be subject to imposition of fines, suspension or revocation [for] ... fail[ing] to cooperate with any officially constituted investigatory or administrative body.").

         Emerald's dealings in Rosemont extended beyond securing a new site for the casino. Around the time § 11.2 passed, Kevin Flynn, McMahon, and McQuaid met with several architects about a design for the Rosemont casino; within days, Emerald hired an architecture firm to design the casino. In subsequent weeks, Emerald hired a general contractor and voted to start construction without the Board's prior approval. By October 1999, Emerald had at least nine contracts with construction companies and architecture firms but had not disclosed any of them to the Board, in violation of IGB rules. See 111. Admin. Code tit. 86, § 3000.140(b)(3) ("[Licensees and applicants for licensure shall periodically disclose changes in or new agreements, whether oral or written, relating to ... [construction contracts.").

         Also around this time, Emerald altered its ownership structure by issuing, selling, and reallocating stock. Three separate sets of transactions are important here.

         First, after the legislature passed § 11.2 but before the Governor signed it into law, Donald Flynn-Kevin Flynn's father and an original investor in Emerald who controlled Emerald's board of directors at the time-increased his ownership interest in Emerald from 40 to 74 percent. Then, two days later, he sold some of that stock to twelve outside investors, at least several of whom had connections to Rosemont's mayor and Rosemont's state representative. Donald Flynn sold 294 shares to the twelve outside investors for $6, 345 million. He then bought 294 shares from Pedersen and five current shareholders (insiders) for about $10.57 million-resulting in a roughly $4, 225 million loss.

         Second, Donald Flynn and Pedersen caused Emerald to issue stock to Kevin Flynn, McMahon, Larson, and McQuaid.[4]Several months later, those same defendants each bought additional shares from Donald Flynn.

         And third, just after § 11.2 passed, Emerald started selling shares to fulfill a statutory requirement. Emerald's statutory lifeline had come with a hook: to take advantage of the relocation provision in § 11.2(a), Emerald had to have at least 20 percent minority and female ownership (16 percent and 4 percent, respectively) within twelve months of relocating. 230 ILCS 10/11.2(b). So Pedersen began drafting the necessary paperwork while McQuaid began working to find so-called statutory investors who would satisfy the diversity requirement. McQuaid then met with potential statutory investors and, with the approval of the board of directors, sold shares to twenty-three of them.

         Importantly, all of these stock transfers occurred without approval from the Board, even though IGB rules require prior approval from the Board before transferring an ownership interest in a licensee. See 111. Admin. Code tit. 86, § 3000.235(a).

         As a part of the ownership restructuring, Emerald amended its Shareholders' Agreement. All existing shareholders (including Pedersen) and all new shareholders (including the other defendants here) executed an Amended Shareholders' Agreement. Paragraph 10 of that agreement required

Each Shareholder [to] cooperate with the Corporation to provide any disclosure information to the IGB and take any actions necessary to secure the renewal of the Corporation's gaming license. Each Shareholder further agrees to comply with the Act and all rules and orders of the IGB and shall not commit any acts which would jeopardize the license or a renewal thereof.

(Defendants-Appellants' Joint Appendix at 24, ¶ 10.)

         Emerald's once-bright future turned bleak, however, after it filed another license-renewal application with the Board in September 1999. The Illinois Riverboat Gambling Act requires the Board "to review applications for the renewal of licenses." 230 ILCS 10/5(c)(ll). Fulfilling its statutory obligation, the Board investigated Emerald's application for fifteen months. On January 30, 2001, citing numerous IGB rule violations, the Board voted to deny Emerald's renewal application and to revoke Emerald's license. About a month later, the Board sent Emerald a notice of denial, which informed Emerald that the Board was not renewing its license, and a disciplinary complaint, which served as the Board's formal basis for revoking Emerald's license.

         The district court would later describe the Board's investigation into Emerald's application as "unprecedented and aggressive." In re Emerald Casino, Inc., 530 B.R. at 58. The Board's interest in Emerald seems to have been a result of the Board's belief that Emerald had associated with organized crime in its attempt to relocate to Rosemont (through the outside investors, a construction company, and the mayor's office), a clear violation of IGB rules. See 111. Admin. Code tit. 86, § 3000.110(a)(5).

         But the notice of denial and disciplinary complaint included allegations that extended beyond Emerald's alleged ties to organized crime: the Board focused primarily on Emerald's inadequate disclosure of required information. As mentioned above, many IGB rules require licensees to disclose information to the Board. See 111. Admin. Code tit. 86, § 3000.140(a) (imposing general duty on licensees to disclose "material changes in information provided to the Board"); 111. Admin. Code tit. 86, § 3000.140(b)(3) (requiring disclosure of construction contracts); 111. Admin. Code tit. 86, § 3000.140(b)(7) (requiring disclosure of any agreement to transfer an ownership interest in a licensee); 111. Admin. Code tit. 86, § 3000.235(a) (requiring permission from the Board before transferring an ownership interest in a license).

         IGB rules put the burden to disclose all required information on the licensee, its agents, and its employees. 111. Admin. Code tit. 86, § 3000.110(a). To make the importance of disclosure clear, the renewal application warned that misrepresentations or omissions on the application were grounds for denial of the application and warned that Emerald had an ongoing duty to update its disclosures. And as discussed above, Emerald was far from forthcoming in disclosing its agreements with Rosemont, its construction contracts, and its stock transfers.

         The Board also took issue with Kevin Flynn's involvement with Emerald before June 1999. During the Board's investigation, Kevin Flynn, McQuaid, and Larson all claimed that Kevin Flynn had no role at Emerald before June 1999-which was false. Indeed, Kevin Flynn had an active role at Emerald well before June 1999: he helped lobby for the relocation legislation; he helped manage Emerald; he attended four of six Emerald board-of-directors meetings held between 1997 and 1999; and he helped negotiate Emerald's move to Rosemont.

         So beyond the alleged ties to organized crime, the Board's disciplinary complaint emphasized Emerald's nondisclosure of its early Rosemont agreements, its construction contracts, its stock transfers, and Kevin Flynn's pre-June 1999 involvement in managing Emerald.

         Emerald then exercised its statutory right to an administrative hearing on the charges. Three years after the administrative hearing-settlement talks between Emerald, the Board, and the Illinois Attorney General caused the delay- an administrative law judge recommended that the Board revoke Emerald's license. The Board adopted both the administrative law judge's factual findings and recommendation to revoke Emerald's license.

         In its final order revoking Emerald's license, the Board listed five official counts. Each count corresponded to a par- ticular IGB rule that the Board concluded Emerald had violated. Also listed under each count were the acts that violated the relevant IGB rule. But the Board did not list who was responsible for which IGB rule violation; instead, the Board prefaced each count by noting that Emerald violated the given rule "through its officers, employees, representatives, shareholders, Key Persons, and others." (Defendants-Appellants' Joint Appendix at 65, 66, 67, 69.) And after each count, the Board said that, "[b]y failing to comply with [the IGB rule], Emerald has failed to maintain its suitability for licensure. The Board proved Count [number] of the disciplinary complaint which alone supports revocation of Emerald's license pursuant to Section 5(c) of the Act and Subpart K of the Rules." (Defendants-Appellants' Joint Appendix at 66, 67, 68, 70.)

         Emerald appealed the Board's final decision to the Illinois appellate court. The court affirmed the Board's decision to revoke Emerald's license, but not in all respects. In particular, the appellate court held that the Board had not proved that Emerald had associated with organized crime.

         As the appellate court stressed, the IGB rule does not "hold a licensee 'strictly liable' ... for 'associating with members or associates of organized crime.'" (Trustee's Separate Appendix at 144.) Rather, the rule prohibits only "[associating with, either socially or in business affairs, or employing persons of notorious or unsavory reputation." 111. Admin. Code tit. 86, § 3000.110(a)(5) (emphasis added). The appellate court concluded that, because the Board had relied on confidential FBI documents to show that several people involved in the Emerald-to-Rosemont relocation were connected to organized crime, it had not proved that anyone involved with Emerald had a "notorious or unsavory reputation." Even so, the appellate court affirmed the Board's decision to revoke Emerald's license because the Board had proved Emerald's other IGB rule violations. The Illinois Supreme Court denied Emerald's petition for leave to appeal.

         The Board's decision to revoke Emerald's license is only a piece of this ongoing litigation. When the Board first issued notice of its decision to revoke Emerald's license in early 2001, Emerald's creditors forced it into bankruptcy. Initially filed as a Chapter 7 proceeding, Emerald converted the case into a Chapter 11 restructuring proceeding. The bankruptcy court then created a Creditors' Committee to represent Emerald's creditors' interests. But when Emerald officially lost its license in 2007 and restructuring became infeasible, the bankruptcy court converted the case back into a Chapter 7 liquidation proceeding and appointed Frances Gecker as trustee over Emerald's estate.

         The trustee then sued the defendants in bankruptcy court. What matters here are the trustee's breach-of-contract and breach-of-fiduciary-duty claims. In late 2010, the bankruptcy court held an eighteen-day bench trial. Two years later, before the bankruptcy court issued an opinion, the district court pulled the case. The district court then held an additional seventeen days of bench trial; about a year and a half later, the court issued its 281-page decision.

         The court dismissed the trustee's breach-of-fiduciary-duty claim, holding that Illinois's five-year statute of limitations barred it. The court also rejected the trustee's argument that, because the defendants controlled Emerald at the time, the statute of limitations had tolled.

         The trustee's breach-of-contract claim required significantly more attention. The Amended Shareholder's Agreement required all shareholders to comply with IGB rules. But the Board's final order never established which defendant violated which IGB rule; instead, the order spoke in general terms, noting that Emerald violated the rules "through its officers, employees, representatives, shareholders, Key Persons, and others." Thus, the court had to determine if each defendant had violated an IGB rule listed in the Board's final order. After an extensive 176-page recitation of facts, the court held that each defendant had violated at least one of the nondisclosure rules listed in the Board's disciplinary complaint:

• Kevin Flynn violated Rules 110(a) and 140(a) by failing to disclose his own involvement in managing Emerald before June 1999;[5]
• John McMahon violated Rules 140(a) and 140(b)(3) by failing to disclose Emerald's agreements with Rose-mont;
• Kevin Larson violated Rules 110(a) and 140(a) by failing to disclose Kevin Flynn's involvement in managing Emerald before June 1999;
• Joseph McQuaid violated Rules 110(a) and 140(a) by failing to disclose Kevin Flynn's involvement in managing Emerald before June 1999; Rules 110(a), 140(a), and 140(b)(3) by failing to disclose Emerald's agreements with Rosemont and by failing to disclose Emer-aid's construction contracts; and Rule 235(a) by transferring shares from Emerald to the statutory investors without first getting prior Board approval; and
• Peer Pedersen violated Rule 235(a) by arranging the transfer of shares from five insiders to Donald Flynn and by selling some of his own shares to Donald Flynn ...

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