CHICAGO — The U.S. Court of Appeals for the Seventh Circuit has sided with an Illinois federal court, noting that a federal judge was correct in ruling that six Illinois casino executives are responsible for paying $272 million after they allegedly caused their company to lose its gambling license and fall into bankruptcy.

The Seventh Circuit panel included judges Michael S. Kanne, Diane S. Sykes and David F. Hamilton.

The ruling was the culmination of a legal path stretching back more than 20 years for Emerald Casino, which had an Illinois gaming license to operate in East Dubuque in the state's far northwest corner.

Emerald, a riverboat gaming operation, operated profitably in 1993, but then began to struggle to compete with a new casino across the Mississippi River in Dubuque, Iowa.

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.

The company had sought to move into a brick-and-mortar site, according to the panel.

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 short‐ comings,” failure to “provide for positive economic development and impact” and general noncompliance with the Riverboat Gambling Act.

The defendants also were forced to defend allegations that Emerald was tied to organized crime - a primary concern when the board decided to revoke Emerald’s license.

“The board’s concern about Emerald’s alleged ties to organized crime is apparent from the record," Kanne said in the decision. "The defendants may not have been able to foresee that the board would suspect Emerald had ties to organized crime. But they knew that the board would review Emerald’s renewal application.”

A district court ruling had found the casino executives were on the hook for breach-of-contract claims after the casino tanked. That decision had found each defendant severally liable.

In valuing damages, the district court apportioned the $272 million equally among six defendants: John McMahon, Kevin Flynn, Donald Flynn, Kevin Larson, Joseph McQuaid and Walter Hanley.

According to the decision, Donald Flynn and Hanley settled their portions of the judgement. Donald Flynn, who has since passed away, settled his portion of the judgment for $45.3 million, while Hanley settled for $7 million, leaving the remaining defendants responsible for $219.6 million.

After the trustee had argued the $272 million settlement figure was too low and the executives countered that it was too high, the Seventh Circuit affirmed the figure, which was determined from the price that Emerald’s license eventually brought at auction in 2008.

“As best we can tell from the record, the defendants never argued to the district court that the court needed to adjust the $272‐million award to account for inflation,” Kanne wrote in the decision.

Citing Nicolet Instrument Corp. v. Lindquist & Vennum, the panel noted that contracts allocate risk to the party best able to bear it. In this case, that risk fell to the executives.

“It was only natural to impose that obligation on those people," Kanne wrote. “Of course, the defendants never intended to pay for the cost of a revoked license. But the way to avoid liability was to abide by IGB [Illinois Gaming Board] rules.”

Moreover, the panel pointed out that the court considered 10 bids for Emerald or its license. The bids ranged from $216 million to $615 million and spanned from 2001 to 2008. After a thorough analysis, the court concluded that a $272‐million bid from 2008 best reflected the value of Emerald’s license.

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Illinois Gaming Board U.S. Court of Appeals for the Seventh Circuit

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