Gecker v. Flynn (In re Emerald Casino, Inc.)

• Decision Date: 30 September 2014
• Docket Number: 02 B 22977,Bankr. Adv. No. 08 A 00972,No. 11 C 4714,11 C 4714
• Citation: 530 B.R. 44
• 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

530 B.R. 44

In re, Emerald Casino, Inc., Plaintiff, DebtorFrances 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.

02 B 22977

Bankr. Adv. No. 08 A 00972

No. 11 C 4714

United States District Court, N.D. Illinois, Eastern Division.

Signed September 30, 2014

Catherine L. Steege, Keri L. Holleb Hotaling, Robert L. Graham, Jenner & Block LLP, Matthew J. Piers, Joshua Karsh, Hughes Socol Piers Resnick & Dym Ltd., Chicago, IL, for Plaintiff.

Francis J. Higgins, John Steven Delnero, Kenneth E. Rechtoris, K & L Gates LLP, John C. Kocoras, Nathan F. Coco, Steven Samuel Scholes, William Pfeiffer Smith, McDermott, Will & Emery LLP, Kevin Michael Forde, Kevin R. Malloy, Forde Law Offices LLP, Constantine L. Trela, John Nicholas Gallo, Michael Christian Andolina, Sidley Austin LLP, C. Barry Montgomery, Jordan Douglas Shea, Theodore John Low, Williams Montgomery

& John Ltd., Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

REBECCA R. PALLMEYER, United States District Judge.

TABLE OF CONTENTS

BACKGROUND

I. A “big to-do”...59

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

II. A casino in Rosemont...75

A. Emerald lays the groundwork to move to Rosemont...75

1. Kevin Flynn met with Mayor Donald Stephens in 1997...75

2. The alleged agreement between Emerald, the Davis Companies, and Duchossois Industries...77

B. Emerald attempts to relocate to Rosemont...83

1. Emerald's construction activities...84

a. Construction progress...84

b. Financing construction...87

c. Communication with the IGB...89

i. The pre-approval construction requirement...89

ii. The IGB was aware of construction...90

2. Emerald failed to disclose preliminary agreements between Emerald and Rosemont to the IGB...96

3. The IGB found that the final Lease and Development Agreement between Emerald and Rosemont violated IGB rules...101

III. Defendants' disclosures to the IGB...104

A. Emerald's September 24, 1999 Renewal Application...104

1. Question 16: public officials...105

2. Question 21: agreements...108

3. Question 31: threatened litigation...109

4. Questions 46 & 47: agreements with municipalities...112

B. Construction Agreements...113

1. Aria Architects...113

2. Degen & Rosato Construction Company/ Power Construction LLC, Joint Venture (“Joint Venture”)...114

3. Other agreements...115

4. Communication with the IGB...115

a. September 24, 1999 Renewal Application...116

b. September 30, 1999 meeting with the IGB...116

c. Communications with the IGB after September 30, 1999...117

C. Kevin Flynn...119

1. Pre–June 23, 1999 involvement in Emerald...119

a. Pre–1999 meetings & agreements with third parties...122

i. Lake County Riverboat...122ii. Meeting with Mayor Stephens...124

iii. Davis and Duchossois meetings and alleged agreement...124

iv. Meeting with Gary Armentrout...126

b. Lobbying...127

c. Emerald's management & Board meetings...129

2. Field Street Agreement...134

IV. Transfer of Emerald shares...137

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

1. Emerald's Restricted Stock Award Plan...140

2. Amended and Restated Purchase Agreement...140

3. The Officer Defendants executed the Amended Shareholders' Agreement and were issued Emerald shares...141

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

1. Defendants failed to obtain IGB pre-approval for the transfers of shares...151

2. Defendants disclosed the transfers of shares after the transfers were completed...157

V. Procedural History...161

A. IGB revocation proceedings...161

B. Bankruptcy proceeding...161

C. Payton Plaintiffs' litigation...165

D. District court...171

DISCUSSION

I. Standard of Review...171

II. Count I: Fiduciary Duty...172

A. The Trustee's fiduciary duty claim is barred by the statute of limitations...172

1. Adverse domination...172

2. Pedersen's arguments against tolling...174

3. Flynn Defendants' arguments against tolling: rebutting the presumption of adverse domination...175

i. Knowledge...176

ii. Ability...177

iii. Motivation...178

III. Count II: Breach of Contract...180

A. The Trustee's breach of contract claim is not barred by res judicata ...180

1. Final Judgment on the Merits...181

2. Same claims and same parties...181

a. The Payton and estate breach of contract claims are the same...181

b. The parties may be the same...184

3. Defendants are estopped from asserting res judicata ...185

B. Merits...190

1. The Amended Shareholders' Agreement is a valid and enforceable contract... 190

a. Defendants are parties to the Amended Shareholders' Agreement...195

b. The “comply provision” of Paragraph Ten of the Amended Shareholders' Agreement is enforceable...1952. Defendants breached their obligations under the Amended Shareholders' Agreement...195

a. The Amended Shareholders' Agreement imposes strict liability and does not require proof of Defendants' state of mind...195

b. Certain Defendants engaged in conduct that caused the IGB to revoke the license...197

i. IGB Count I: Rule 140(a)...197

(a) Failure to disclose Kevin Flynn's involvement in management and operation of Emerald...197

(b) Failure to disclose agreements between Emerald and Rosemont...198

(c) Failure to disclose agreements between Emerald and various construction professionals and subcontractors...198

(d) Rule 140(a) violations for which the Trustee has not established Defendants' conduct...198

ii. IGB Count II: Rule 140(b)(3)...199

(a) Failure to disclose agreements between Emerald and Rosemont...199

(b) Failure to disclose agreements between Emerald and various construction professionals and subcontractors...199

(c) Rule 140(b)(3) violations for which the Trustee has not established Defendants' conduct...199

iii. The Trustee has not established that any Defendants have violated IGB Count III, Rule 140(b)(7)...199

iv. IGB Count IV: Rule 235(a)...200

(a) Transfer of shares between Donald Flynn and the Twelve Outsiders without IGB prior approval...200

(b) Transfer of shares between Donald Flynn and the Five Insiders without IGB prior approval...200

(c) Transfer of shares between Emerald and the Statutory Investors without IGB prior approval...201

v. IGB Count V: Rule 110(a)...201

(a) Failure to fully, truthfully, timely, and accurately disclose information to the IGB...201

(b) Failure to disclose Kevin Flynn's involvement in management and operation of Emerald...201

(c) Rule 110(a) violations for which the Trustee has not established Defendants' conduct...201

3. Defendants' breach caused the loss of the license...202

a. Cause in fact...202

b. Legal cause...204

4. The court denies Defendants' motion for leave to file third-party complaint against Eugene Heytow...206

IV. Count IV: Equitable Subordination...206

V. Damages...206

A. Defendants are severally liable...208

B. The value of Emerald's license...211

1. Testimony of Steven M. Rittvo...212

a. Daubert challenge remains pending...212

b. Daubert standards...213

c. Mr. Rittvo is qualified...213

d. Mr. Rittvo's testimony is relevant...215

e. Mr. Rittvo's testimony is not sufficiently reliable...215i. Flaws in base-year revenue calculations...216

(a) Use of the gravity model to predict attendance data...216

(1) Mr. Rittvo did not specify his methods for calculating the propensity and frequency factors...218

(2) Mr. Rittvo's method for calibrating the model is sufficiently reliable... 219

(3) The “Rittvo Effect” is not sufficiently reliable...219

(b) The win-per-visit amount is not sufficiently reliable...220

(c) The proprietary model for operating expenses is not sufficiently reliable...221

ii. Mr. Rittvo did not account for specific risks that existed as of February 2001, which would have reduced the value of Emerald's license at that time... 221

iii. Other alleged flaws in Mr. Rittvo's calculations...222

(a) Improper factual underpinnings...222

(b) Improper inclusion of prejudgment interest...223

2. New business rule...224

3. Evidence showing the market value of Emerald's license...228

a. Rosemont valuations...231

i. August 1999 EVI valuation...231

ii. 2000 valuation for the Davis litigation...232

iii. 2001 MGM Mirage offer...232

iv. 2004 Rothschild auction and Isle of Capri bid...233

b. Non–Rosemont bid from Midwest Gaming in 2008...233

4. The Trustee proved damages with a reasonable degree of certainty...234

5. The principles of equity do not support a reduction of damages...235

CONCLUSION ...237

APPENDICES

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...