In Re: Emerald Casino, Inc. Plaintiff-Debtor,
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.
May 31, 2017
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. 11 C 4714 -
Rebecca R. Pallmeyer, Judge.
Kanne, Sykes, and Hamilton, Circuit Judges.
case arises out of the Illinois Gaming Board's decision
to revoke Emerald Casino, Inc.'sgaming 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
set of consolidated appeals concerns the district court's
decision on those claims.
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.
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
reverse and remand the court's decision to hold the
defendants severally liable instead of jointly and severally
liable. But otherwise, we affirm.
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.
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.
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.
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.
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 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.
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
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
around this time, Emerald altered its ownership structure by
issuing, selling, and reallocating stock. Three separate sets
of transactions are important here.
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.
Donald Flynn and Pedersen caused Emerald to issue stock to
Kevin Flynn, McMahon, Larson, and McQuaid.Several months
later, those same defendants each bought additional shares
from Donald Flynn.
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.
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, §
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.)
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
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).
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).
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.
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
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.
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
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,
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.
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.
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.
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.
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
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;
• 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 ...