Frances Gecker, Not Individually But Solely for the Bankr. Eemerald Casino, Inc. v. Flynn (In re, Emerald Casino, Inc.)
| Decision Date | 21 April 2015 |
| Docket Number | No. 11 C 4714,02 B 22977,Bankr. Adv. No. 08 A 00972,11 C 4714 |
| Parties | IN RE, EMERALD CASINO, INC., Plaintiff, Debtor FRANCES GECKER, not individually but solely as chapter 7 trustee for the bankruptcy estate of Emerald Casino, Inc., Plaintiff, v. DONALD F. FLYNN, KEVIN F. FLYNN, KEVIN LARSON, JOHN P. McMAHON, JOSEPH F. McQUAID, WALTER HANLEY, and PEER PEDERSEN, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
Emerald Casino, Inc. ("Emerald") was building a casino in Rosemont, Illinois when the Illinois Gaming Board revoked its gaming license. The loss of the license forced Emerald into bankruptcy. Plaintiff Frances Gecker is the Trustee appointed by the Bankruptcy Court on behalf of Emerald. She brought this adversary proceeding against seven former directors and officers of Emerald, alleging that they breached their fiduciary duty to Emerald (Count I) and violated Emerald's Amended Shareholders' Agreement (Count II), causing the loss of the license. She also challenged the proofs of claim filed by each of the Defendants in the underlying bankruptcy proceeding. Specifically, the Trustee urged the court to disallow the claims under 11 U.S.C. § 502(d) until Defendants satisfy any judgment (Count III); to equitably subordinate Defendants' claims against the estate (Count IV); to recharacterize as equity certain loans made by Donald Flynn and Peer Pedersen in 1996 and 1997 (Count V); and to disallow claims submitted by Donald Flynn, Kevin Flynn, and Walter Hanley for amounts Emerald owesthem under a 2002 settlement agreement because that agreement never became effective (Count VI).
On September 30, 2014, this court set forth its findings of fact and conclusions of law on Counts I, II, and IV. As set forth in its opinion, In re Emerald Casino, Inc., ___B.R.___, 2014 WL 4954453 (N.D. Ill. Sept. 30, 2014), the court found that six Defendants—Donald Flynn, Kevin Flynn, Walter Hanley, Kevin Larson, John McMahon, and Joseph McQuaid—are liable under Count II for breach of the Amended Shareholders' Agreement. The court entered judgment against those six Defendants in the amount of $45,333,333.33 each. The court dismissed claims against the seventh Defendant, Peer Pedersen. The court concluded that Count I was time-barred and that Defendants' conduct did not warrant equitable subordination of their claims (Count IV). The court reserved ruling on Counts III, V, and VI. After the September 30 opinion, the court accepted additional briefing on the remaining counts, and the Trustee moved the court, pursuant to Rule 54(b), to enter final judgment on Counts I, II, and IV. The court is now prepared to resolve the remaining counts. For the reasons explained below, the court grants judgment to the Trustee on Counts III and VI. Because the Trustee has not met her burden of establishing that the loans from Donald Flynn and Peer Pedersen should be recharacterized as equity, however, she is not entitled to judgment on Count V. As the court has decided all of Trustee's claims and will enter final judgment, the Trustee's motion for a Rule 54(b) final judgment [316] is denied as moot.
In addition to their roles as managers of Emerald and Defendants in the Trustee's claims of mismanagement, each of the seven Defendants is also a creditor in Emerald's underlyingbankruptcy proceedings. The Officer Defendants2 submitted claims based on unpaid salaries (see Claims Register in In re Emerald Casino, Inc., No. 02-br-22977 (Bankr. N.D. Ill.), hereinafter "Claims Register") (Kevin Larson (claim 58); Walter Hanley (claim 80); Jospeh McQuaid (claim 81); Kevin Flynn (claim 91); John McMahon (claim 100)). Peer Pedersen and Donald Flynn submitted claims based on money they loaned to Emerald. (PX529; PX1208.) Finally, all seven Defendants submitted proofs of interest based on the number of Emerald shares they own. In re Emerald Casino, Inc., — B.R.—, 2014 WL 4954453, at *105 (N.D. Ill. Sept. 30, 2014); (Claims Register, Peer Pedersen (claim 35); Donald Flynn (claim 71).)
In addition to these claims, Donald Flynn, Kevin Flynn, and Walter Hanley each submitted a notice that he might have another claim if the Bankruptcy Court's approved an August 2002 settlement agreement. Donald Flynn's proof of claim states:
In the event that the Bankruptcy Court approves the Settlement Agreement among the Debtor, the Illinois Gaming Board, and certain shareholders of the Debtor dated as of August 8, 2002 . . . or approves a Plan of Reorganization that incorporates the terms of the Settlement Agreement, the Creditor may have a claim against the Debtor in the amount of $4,309,872 subject to the terms and conditions of the Settlement Agreement.
(PX529 at 2.) Kevin Flynn and Walter Hanley submitted Proofs of Claim with the same language, but for lesser amounts—$2,778,721 and $69,727, respectively. (PX1198 (Kevin Flynn); PX1197 (Walter Hanley).) The parties agree that the Settlement Agreement was not approved by the Bankruptcy Court and never became effective: Hanley testified that the August 8, 2002 Settlement Agreement "was not consummated." (Bankr. Tr. 1434:10-11; see also Trustee's Proposed Findings of Fact & Conclusions of Law, Gecker v. Flynn, 08-ap-00972 [765], hereinafter "Trustee's SOF," ¶ 902; Estate of Donald Flynn's Mem. on Counts III, V, and VI of the Third Am. Compl. [324], hereinafter "Flynn Mem.," 15.)
The Trustee also challenges several claims that arise from loans made by Donald Flynn and Pedersen. In his proof of claim, Donald Flynn asserts that he loaned Emerald a total of $20,155,538.33, before interest, and that with accrued interest, he has a claim for $31,278,901.33. (PX529 at 2.) With the exception of a Shareholder Credit Facility from August 2002, Donald Flynn's claims are based on loans he made to Emerald in 1996 and 1997:
Date Principal Amount Name 7/96 $407,569 Shareholders Promissory Note 8/96 $880,000 Vessel Loan Agreement 8/96 $2,622,305 1996 License Renewal Credit Facility 9/96 $633,822 Original Note 9/96 $11,806,270 Bank of America 5/97 $805,572.33 Convertible Note 8/02 $3,000,000 Shareholder Credit Facility
(PX529 at 2.)
Pedersen's claims, similarly, all stem from loans, totaling $4,822,100, that he made to Emerald between 1996 and 1997.
| Date |
| Principal Amount |
| Name |
| 8/96 |
| $183,000 |
| 1996 License Renewal Credit Facility |
| 9/96 |
| $633,822 |
| Original Note |
| 9/96 |
| $3,883,565 |
| Bank of America |
| 5/97 |
| $121,713 |
| Convertible Note |
(PX1208 at 5.) With interest, his claims now total $7,623,785. (PX1208 at 5.)
The Trustee maintains that each of these transactions was actually an equity contribution disguised as a loan. Though the record in this case is voluminous, the parties' Statements of Facts present relatively little detail concerning these transactions. The parties agree that Donald Flynn and Peer Pedersen provided significant financing to Emerald between 1996 and 1997, but disagree about the nature of those transactions. The court has gleaned the following from the record:
Emerald was struggling financially due to competition from casinos in Iowa, and was forced to shut down its East Dubuque, Illinois gaming operations by December of 1995. In re Emerald Casino, 2014 WL 4954453, at *5. In early 1996, Donald Flynn made a series of loanswhich enabled Emerald to resume operations in May or June of that year. In re Emerald Casino, 2014 WL 4954453, at *6; (PX125 at 2 ().) After Emerald re-opened, Flynn continued to support the company's operations: First, in July 1996, Emerald executed two promissory notes to Donald Flynn totaling $450,000. (PX511; PX512; Trustee's SOF ¶ 107 ().) In a July 3 Note, Emerald agreed to pay Donald Flynn the principal amount of $200,000 plus interest accruing at 10% annually. (PX511.) Emerald agreed to repay Flynn an additional $250,000 in a July 17 Note, again with interest accruing at 10% annually. (PX512.) Each Note also established that payments would be made quarterly, but that the entire unpaid balance would become due upon the earlier of (i) Emerald's bankruptcy, (ii) approval to relocate the license, or (iii) the issuance of any Emerald "equity interests." (PX511; PX512.)
The following month, Donald Flynn made two additional loans. The first of these was in response to a condition for continued licensure imposed on Emerald by the Illinois Gaming Board ("IGB"). Specifically, the IGB required that Emerald obtain a "Credit Facility . . . in the form of a line of credit from a financial institution or in the form of a loan from [Emerald]'s shareholders," based on the IGB's "concerns regarding [Emerald]'s ability to remain adequately capitalized, and remain financially viable throughout the period of licensure." (PX527 at 1; Trustee's SOF ¶ 108.) The IGB outlined the requirements for this line of credit in the Financial Obligation and Licensure Agreement executed by Emerald and the IGB on July 29, 1996. (PX527 at 1.) That Agreement required Emerald to borrow funds from its shareholders to pay its long-term, third-party debts. (PX527 at 1-2.) In furtherance of the goal of paying long-term debt, the IGB prohibited Emerald from making any "payments to stockholders for principal or interest on stockholder loans without the express written approval of the Administrator, except to convert such loans to equity in [Emerald]." (PX527 ¶ 2(h).)
Pursuant to this Financial Obligation and Licensure Agreement, Donald Flynn, Pedersen, and Eugene Heytow3 signed a "Credit Agreement" on August 15, 1996, providing Emerald with $3,000,000 in credit. (PX531 at 1.) Heytow agreed to provide up to $1,354,348, Flynn agreed to provide $1,462,652, and Pedersen committed to provide $183,000. (PX531 at 1, ¶ 1.) The Credit Agreement set August 1, 1997,...
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