Regulators, Legislators And Courts

#133 © Copyright 2007, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com

The U.S. Seventh Circuit Court of Appeals has just issued the latest, but undoubtedly not the last, decision in the fight over the Emerald Casino license. The Opinion offers some important lessons for anyone who wants to be involved in legal gaming.

First, a disclaimer: I was an expert witness for the Illinois Gaming Board in the hearing before Judge Abner Mikva, which resulted in the Board revoking Emerald’s gaming license on December 20, 2005. Emerald’s challenge to that revocation order is pending before the Illinois appellate court, so I will not discuss the merits of the case.

The Seventh Circuit’s 19-page-long Opinion also does not touch on whether Emerald is fit to be licensed. Instead, it focuses on procedure, and what even lawyers might consider minutia. Yet, hundreds of millions of dollars and the right to operate the closest casino to Chicago are at stake.

Because the stakes are so high, the fight has been going on for more than ten years, and has been fought in administrative hearings; Illinois trial, appellate and supreme courts; federal bankruptcy, district and appellate courts; and the state legislature. It has led to some bizarre situations, including the Illinois Attorney General suing the Illinois Gaming Board and its members; and, after the Board turned down Emerald’s application, the state legislature amending the Illinois Riverboat Gambling Act to require the Board to issue Emerald a license.

The most recent Opinion involves attempts by Emerald and the Village of Rosemont to get a federal court to prevent the Board from revoking Emerald’s license. Rosemont, near the Chicago Airport, has an interest because it spent millions of dollars building a parking garage “in the hopes that a casino would open soon within the Village.” It would like Emerald to pay for that, but Emerald’s only asset is its gaming license – which the Board wants to take away.

Most cases eventually settle. One of the main reasons there has been no settlement in the Emerald casino license fight is that state Attorney General Lisa Madigan, the one who sued the state’s own Board, said she would not approve any plan that resulted in a return of investment for the Emerald shareholders.

One of the questions raised by the dispute is whether a party who has been denied a gaming license should receive a share of the proceeds anyway. The question is not new. More than 25 years ago, the New Jersey Casino Control Commission ruled that Boardwalk Regency could get a license for the Caesars Palace casino in Atlantic City only if Caesars’ founders, Stuart Z. Perlman and Clifford S. Perlman were not in control. The New Jersey Supreme Court upheld the decision, allowing the founders to be bought out for $99 million. Not a small amount in 1982, especially given that the Perlmans were expressly denied licenses. Unhappy shareholders sued, and the buyout was eventually reduced by $7 million.

In most cases, investors, even those who are disqualified because they have ties to organized crime, do get a share of the value of the gaming license they helped create. This has always seemed strange to me, since these individuals were denied a license and are expressly not allowed to participate in the casino’s profits. Allowing them to be bought out means they are getting a share of the present value of those future profits.

Of course, if there is no license, then there is nothing to share. At one point, the Board had agreed to let Emerald sell its license to the Isle of Capri for $518 million. But, it appears Emerald no longer has a license to sell.

In 1997 the Board first turned down Emerald’s application to move its riverboat casino from the Mississippi River to Rosemont. The Illinois General Assembly got involved. It passed an amendment to the Riverboat Gaming Act that appears to undercut the entire purpose of having regulators. It stated that “the Board SHALL grant the application” [emphasis added] of a company (matching Emerald’s description) applying for a casino license.

It is possible that the legislature did not understand the important legal distinction between the words “shall” and “may.” By using “shall,” the lawmakers took away the Board’s discretion. The courts ruled that the Board was now legally required to issue the license, even if it found the applicant was unqualified.

But the new statute had another interesting use of words. It said the application had to be approved. But it never mentioned whether that license could then be immediately revoked.

The issue has come up a few times around the country. In California, the law governing licensing of cardclubs used to give applicants an automatic license, unless the Attorney General rejected the application within six months after it was complete. In one case, the A.G. was understaffed, and stalled for years by constantly asking an applicant for additional useless information. A court ruled that the A.G. had to issue the license. So the A.G. did, and then immediately revoked the license. The judge involved in the case angrily attacked the A.G. for trying to get around the court’s order.

The situation in Illinois was somewhat the same, but also radically different. In December 2003, the state appellate court ruled that Emerald had a legislatively mandated license. It remanded the case to the trial court, which then decided that the license was good for only four years, starting on September 23, 1999. The problem with that decision was that it meant the license had expired in September 2003, three months before the appellate court issued its ruling. Clearly angry, the appellate court declared that it “rejected the notion that this court is in the business of making empty and useless gestures.”

However, it went on to say, “Nothing in [the Act] prevents the Board from moving to revoke Emerald’s license.”

One issue that worries everyone with a gaming license is, “What happens if the regulators who have approved us are replaced by individuals who don’t like us?” Remember that at one point, Emerald had convinced the Board to let it sell its license for half-a-billion dollars. But those Board members were replaced by ones who wanted to simply revoke the license and issue it to someone else. Emerald actually got a majority of the former Board members to testify that they had approved the deal.

The federal Court of Appeals ruled that it does not matter. Just as one Congress cannot bind a later Congress, so a casino regulatory agency cannot bind future regulators. There actually are a few ways to make decisions like this binding, but they have to expressly state that they involve vested rights or contracts.

And I don’t know of any regulator who would knowingly give a license that they could never revoke.

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© Copyright 2007. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.