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

867 F.3d 743

IN RE: EMERALD CASINO, INC., Plaintiff-Debtor,

Frances Gecker, as Trustee of Emerald Casino, Inc., Plaintiff-Appellee/Cross-Appellant, Plaintiff-Appellant/Cross-Appellee,

v.Estate of Kevin Flynn, John McMahon, Kevin Larson, Joseph McQuaid, Defendants-Appellants/Cross-Appellees,andEstate of Peer Pedersen, Defendant-Appellee/Cross-Appellant.

Nos. 16-1075

16-1132

16-1133

16-1143

16-1148

16-1160

16-1161

16-1164

16-1165

16-1235

United States Court of Appeals, Seventh Circuit.

Argued May 31, 2017

Decided August 11, 2017

Rehearing and Rehearing En Banc Denied October 2, 2017^*

Constantine L. Trela, Jr., Joseph Ryan Dosch, Tacy Fletcher Flint, John N. Gallo, Attorneys, SIDLEY AUSTIN LLP, Chicago, IL, for Defendant-Appellant/Cross-Appellee Estate of Kevin F. Flynn (Case Nos. 16-1075, 16-1133).

Michael Brett Kind, Jonathan William Young, Attorneys, LOCKE LORD LLP, Chicago, IL, for Defendant-Appellant/Cross-Appellee John McMahon (Case No. 16-1143).

Neil Lloyd, Daniel Schufreider, Attorneys, SCHIFF HARDIN LLP, Ronald S. Safer, Attorney, RILEY SAFER HOLMES & CANCILA LLP, Chicago, IL, for Defendant-Appellant/Cross-Appellee Kevin D. Larson (Case Nos. 16-1160, 16-1161).

William J. Factor, Attorney, LAW OFFICE OF WILLIAM J. FACTOR, Chicago, IL, for Defendant-Appellant/Cross-Appellee Joseph McQuaid (Case Nos. 16-1164, 16-1165)

Catherine L. Steege, Attorney, JENNER & BLOCK LLP, Chirag Gopal Badlani, Joshua Karsh, Matthew J. Piers, Attorneys, HUGHES SOCOL PIERS RESNICK & DYM, LTD., Chicago, IL, (Case Nos. 16-1075, 16-1132, 16-1143, 16-1148, 16-1160, 16-1161, 16-1164, 16-1165, 16-1235) Angela M. Allen, Robert L. Graham, Keri L. Hotaling, Barry Levenstam, Attorneys, JENNER & BLOCK LLP, Chicago, IL, (Case Nos. 16-1148, 16-1161, 16-1164, 16-1165), for Plaintiff-Appellee/Cross-Appellant, Plaintiff-Appellant/Cross-Appellee, Frances Gecker, as Trustee of Emerald Casino, Inc.

Theodore J. Low, Charles Barry Montgomery, Attorneys, WILLIAMS MONTGOMERY & JOHN LTD, Chicago, IL, (Case No. for 16-1132, 16-1235), Alyssa Mara Reiter, Attorney, WILLIAMS MONTGOMERY & JOHN LTD, Chicago, IL, (Case No. 16-1235), for Defendant-Appellee

/Cross-Appellant Estate of Peer Pedersen.

Before Kanne, Sykes, and Hamilton, Circuit Judges.

Kanne, Circuit Judge.

This case arises out of the Illinois Gaming Board's decision to revoke Emerald Casino, Inc.'s¹ gaming 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 fiduciary duties.

This set of consolidated appeals concerns the district court's decision on those claims.

Defendants 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.

The 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 liable.

We reverse and remand the court's decision to hold the defendants severally liable instead of jointly and severally liable. But otherwise, we affirm.

I. BACKGROUND ²

Emerald 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.

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. In re Emerald Casino, Inc. , 530 B.R. 44, 64 (N.D. Ill. 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.

But 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.

Emerald 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.

Anticipating 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 Flynn³ 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.

And 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. , Ill. 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 body.").

Emerald's 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 Ill. Admin. Code tit. 86, § 3000.140(b)(3) ("[L]icensees and applicants for licensure shall periodically disclose changes in or new agreements, whether oral or written, relating to ... [c]onstruction contracts.").

Also around this time, Emerald altered its ownership structure by issuing, selling, and reallocating stock. Three separate sets of transactions are important here.

First, 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.

Second, Donald Flynn and Pedersen caused Emerald to issue stock to Kevin Flynn, McMahon, Larson, and McQuaid.⁴ Several months later, those same defendants each bought additional shares from Donald Flynn.

And 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.

Importantly, 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 Ill. Admin. Code tit. 86, § 3000.235(a).

As a part of the ownership restructuring, Emerald amended its Shareholders' Agreement. All existing shareholders (including Pedersen) and all new...