Hold ‘Em Or Fold ‘Em: What’s Next For The Massachusetts Gaming Industry If Voters Repeal …

Massachusetts Gaming

By  E. Abim Thomas and Joshua M. Daniels

The Supreme Judicial Court of Massachusetts recently cleared the way for gaming opponents to appeal directly to Massachusetts voters by ordering that the measure to repeal the Massachusetts gaming law be placed on the November 2014 ballot.[i]  The initiative, known as Question 3, seeks to repeal the expanded gaming law by (1) prohibiting the Massachusetts Gaming Commission from issuing any additional gaming or slots parlor licenses, and (2) prohibiting any casino or slots parlor that already has received a license from operating.[ii]

Both sides of the issue are committed to achieving victory with the voters on November 4, 2014.  Obviously, the companies that already have succeeded in securing casino or slots parlor licenses under the 2011 gaming law—Penn National Gaming, MGM Resorts and Wynn—are keen on protecting their investment, which already has cost them a great deal of money:  license fees alone cost tens of millions of dollars, not including application fees and other expenses incurred in contemplation of opening a casino or slots parlor (e.g. site permits, professional consulting services, etc.).

Media reports indicate that opponents of the initiative (i.e., pro-gaming forces), including Penn, MGM and Wynn, already have spent more than $10 million trying to defeat the measure, far more than what opponents have spent.  Television ads opposing the repeal effort have run nearly 3,000 times on local broadcast channels. And based on recent polling data, it looks as if such efforts might be paying off, with recent opinion polls indicating that most Massachusetts voters appear to be leaning against repeal.  But the repeal effort probably should not be counted out just yet:  there is still time for the electoral terrain to shift before the November 4, 2014 election, and some potentially powerful political voices, including Sen. Elizabeth Warren (D-MA) and Massachusetts’s Catholic bishops, have put their weight behind the repeal effort.

All of which prompts the question:  what happens if the repeal effort succeeds, however unlikely its chances may seem now?  In particular, what will that mean for the companies that planned to open casino and slot gaming establishments in Massachusetts and the various counterparties (including the Commonwealth and the local communities that were supposed to host them)?  What will happen to the money that the winning licensees have already paid or still are due to pay to these parties, with the expectation of operating facilities that the voters may very well decide to outlaw?  This article seeks to answer these questions and to explore what options may remain open to would-be casino operators and their owners in the (perhaps unlikely) event that the Massachusetts gaming repeal effort carries the day in November.

The Massachusetts Gaming Law and the Nascent Massachusetts Gaming Industry

Opening a gaming establishment in Massachusetts is an extremely expensive proposition, requiring hundreds of millions of dollars in capital at a minimum.  In addition to paying a nonrefundable minimum $400,000 application fee to the Massachusetts Gaming Commission (which is required just to be considered for a license),[iii] a successful applicant also must pay a substantial license fee:  $85 million for a casino license and $25 million for the slots-only license.[iv]  In addition, successful applicants must commit to minimum capital investments of at least $500 million for a casino and $125 million for a slots parlor.[v]  And of course, additional expenses are necessary to open and operate any planned casino or slots parlor as well:  in addition to construction costs, local zoning and other permits must be obtained—a process which requires significant amounts of money to be spent, years before ground-breaking, on expert consultants to address aesthetic, noise, traffic, environmental, and other issues relevant to such permits.

Additionally, applicants are required to obtain agreements with municipalities that would serve as host or surrounding communities—those municipalities in and around where the casino or slots parlor will be located, which are likely to experience adverse impacts from the development and operation of the planned casino or slots parlor.[vi]  These agreements are required to contain provisions providing for the payment of “community impact fees” by the casino owner to the host and surrounding communities, which are intended to compensate those communities for adverse impacts the development and operation of the casino may introduce (e.g., traffic, noise, etc.).[vii]  The amount of these fees may easily run into the tens of millions of dollars on an annual basis.

Thus far, the single slots-only and two out of three casino licenses have been awarded.  The Commission awarded the slots parlor license to Penn in February 2014, and the Western Massachusetts casino license to MGM Springfield in June, followed by the Greater Boston casino license to Wynn Everett in September.[viii]  The Southeastern Massachusetts commercial casino license is expected to be awarded in August 2015 (subject to the outcome of the election).[ix]

Remedies and Defenses Available to Gaming Companies

To date, only Penn has paid the statutorily required license fee of $25 million for its slots-only license. [x]  The Commission allowed MGM and Wynn to delay paying the $85 million casino license fee for their respective casino licenses.[xi]  But there is little doubt that all applicants, both those who have succeeded in winning their licenses and those still in the running, have already expended large sums of money hiring private counterparties, e.g., professional consultants to support their applications for local zoning and other site approvals.

And as already discussed, they also have negotiated contracts with other private parties, including host and surrounding communities, which contemplate future payments, all in anticipation that the planned gaming establishments will soon open for business and that the rising tide of these establishments’ profits will lift all boats.  If that assumption is in jeopardy, what is to become of these agreements?  And who will potentially be left holding the bag?  The answers to these questions are to be found in Massachusetts’s law of contracts and unjust enrichment, construed against the reasonable expectations created by the gaming law’s statutory scheme, and they depend on the type of payment at issue, and the identity of the person to whom it is owed.

Against the Commonwealth.  It is quite clear that, no matter what happens, applicants will not be able to recover any application fees they have paid, which the statute expressly makes nonrefundable.[xii]  The Supreme Judicial Court’s decision in Abdow expressly holds that the statute’s clear language precludes the existence of any “implied contractual right [against the Commonwealth] to a final determination” of one’s application.[xiii]  The reason is simple:  the statute makes clear that the application fee is nonrefundable, even if the application ultimately is denied.  So the applicant cannot have any reasonable expectation of ever getting its application fee back, no matter what happens.  The same logic would appear equally to preclude an unjust enrichment claim as well as a contract claim.[xiv]

Whether the license fee that Penn has paid could be recovered is a much closer question.  The Supreme Judicial Court left that issue open in Abdow, noting that while the Commission’s regulations had initially declared that such fees are nonrefundable, a later amendment eliminated the key language, rendering the regulations now silent on the issue.[xv]

Thus, there may be a plausible argument that the license fee should be recoverable via an unjust enrichment claim (if not on a contract theory), because the applicant’s reasonable expectation was that the fee would be paid in exchange for being allowed to operate a slots parlor; should the voters frustrate that expectation in November.  The argument is that the applicant should be allowed to recover the benefit it conferred on the Commonwealth, now that the reason for paying the money has been destroyed.[xvi]  Denying recovery would allow the Commonwealth an improper windfall of tens of millions of dollars.[xvii]

On the other hand, the Commonwealth has a response:  that the applicant reasonably should have anticipated the possibility that the gaming law would be repealed, destroying the value of the applicant’s investment, so the applicant should have reasonably expected that even if it succeeded in obtaining a license, it might ultimately wind up with less than it hoped (or nothing at all) in exchange for the license fee.

Indeed, the Abdow Court expressly noted that “the possibility of abolition is one of the many foreseeable risks that casinos, slots parlors, and their investors take when they choose to apply for a license and invest in a casino or slots parlor.”[xviii]  And the equities arguably do not weigh that strongly in Penn National’s favor here:  although the Commission’s regulations now are silent as to whether the license fee is refundable because of an emergency amendment that became effective only days before Penn was awarded its license,[xix] the prior version of the regulations, which were in effect during much of the time that Penn National’s application was pending, made the license fee nonrefundable.[xx]

How these arguments might actually play out in court is unclear.  What is clear is that a substantial case could be made on each side in support of their respective positions.  And what is even more clear, in light of the substantial uncertainty concerning the refundability of the license fee, is that licensees who have not yet paid it, like MGM and Wynn, should try to delay doing so, for as long as the Commission will allow, while the fate of the gaming law hangs in the balance.

Against Private Counterparties.  With respect to private counterparties, who either have already been paid or expect to be paid substantial amounts of money in exchange for professional services, mostly in connection with site-specific studies needed to support various zoning and other regulatory approvals, the analysis proceeds along similar lines:  in the event the repeal effort succeeds, whether would-be casino operators can recover money they have already paid, or can unwind deals with various counterparties to avoid paying more money, depends on the contents of the contracts and what the parties’ reasonable expectations are vis-à-vis the risk of repeal.  Would-be casino operators have a plausible argument that, having paid these sums to others in contemplation of building, and eventually of operating, its casino, they have grounds to unwind these deals and to recover at least some (though probably not all) of what they have paid, as well as avoid paying future amounts that still may be due.  The first step is to set aside the bargain it made with the private third parties in question.

Massachusetts courts have long recognized that contractual arrangements are subject to avoidance where “an event neither anticipated nor caused by either party, the risk of which was not allocated by the contract, destroys the object or purposes of the contract, thus destroying the value of performance.”[xxi]  In such cases, both parties are excused from further performance of the contract, and are free to go their separate ways, released from their respective contractual obligations.

In avoiding the contract, the key threshold issue is whether the parties to the contract may be said to have allocated the risk of the supervening event—here the risk that Massachusetts voters might repeal the gaming law that made these casino projects possible in the first place.  A risk allocation may be explicit in the contract itself, or it could be implicit from the circumstances as a whole.  As to the latter possibility, “[t]he question is, given the commercial circumstances in which the parties dealt:  Was the contingency which developed one which the parties could reasonably be thought to have foreseen as a real possibility which could affect performance?  Was it one of that variety of risks which the parties were tacitly assigning to the promisor by their failure to provide for it explicitly?  If it was, performance will be required.  If it could not be so considered, performance is excused.”[xxii]  If the casino operators’ contracts with third parties did not explicitly allocate the risk to the operators, there is an argument that they also did not implicitly assume that risk in the circumstances.

On the other hand, again as the Abdow Court’s decision notes, “the possibility of abolition is one of the many foreseeable risks that casinos, slots parlors, and their investors take when they choose to apply for a license and invest in a casino or slots parlor.”[xxiii]  Even so, the question here is somewhat different:  while foreseeability is relevant to the issue of risk allocation,[xxiv] foreseeability of the risk alone is not sufficient.[xxv]  And in any event, the question here is whether the risk of repeal was allocated to the casino operators, as between it and its private counterparties—a question which was not before the Abdow Court, but which is an issue of fact for another case.[xxvi]

If the casino operators win on the risk allocation point, the third-party contracts should be easily avoided under the other elements needed for frustration of purpose:  if successful, the repeal effort will have destroyed the purpose of both the third-party contracts and the value of those contracts to operators, through no fault of theirs.  This will mean that the counterparties will not have to do anything beyond what they already have done, and the would-be casino operators likewise will not have to pay anything more than they already have.

The question that then arises is whether the parties are to be left where these supervening circumstances have placed them, or whether the operators may demand rescission of the arrangement altogether and seek a return to the pre-contract status quo, and if so, to what extent.  To the extent that the operators have already paid money to their private counterparties under the frustrated third-party contracts, they may recover that money back, via the remedy of rescission, to the extent that the counterparty has not already earned the money through its performance.[xxvii]

The object of rescission is to restore both parties to the position they occupied before they entered into the contract, each returning to the other what the other gave them.  But that is not always feasible, particularly where (as here) the performance of one of the parties consists of professional services rendered, which cannot be given back and which may be harder to value than money or property.[xxviii]  While rescission is not per se unavailable in such cases, courts do retain significant discretion to deny relief.[xxix]

Against Host and Surrounding Communities.  If the gaming repeal effort succeeds, it is possible that host and surrounding communities may demand that the licensees nonetheless continue to pay the “community impact fees” provided for in their agreements with the licensees, as the Town of Middleborough demanded of the Mashpee Wampanoag Tribe in 2012 and 2013 after the Tribe failed in its efforts to open a tribal gaming facility in that town.

Applying the same principles discussed above to these “community impact fees” provisions, it seems unlikely that the casino operators would still be on the hook for those fees if the repeal effort succeeds.  The whole purpose behind those fees is to compensate the host and surrounding communities for adverse impacts caused by development and operation of the proposed gaming establishment.  But if the voters repeal the gaming law and those casino projects fall through as a result, there would be no adverse impacts to compensate.

The fees in that event would serve no purpose at all that the parties to the host and surrounding community agreements had in mind, but would instead represent only a windfall to the host and surrounding communities, which principles of equity disfavor.[xxx]  Accordingly, should the would-be host or surrounding communities seek to enforce the community impact fee provisions even after the casino projects fall through as a result of the repeal, the would-be casino operators have a fairly strong argument that the agreements should be avoided, and both sides released from the agreements’ obligations, based on frustration of purpose.[xxxi]

Conclusion

As Massachusetts voters consider whether to ratify or veto the Legislature’s decision to allow casino gambling, the companies who would own or operate planned casino projects (and those companies’ backers) should keep in mind what recourse they may have in the event the cards turn out not to be in their favor on Election Day.  While these companies obviously have every intention of winning the electoral battle, they would also be wise to plan for other contingencies.  As discussed above, a number of arguments may be available to these companies which might mitigate these companies’ potential downside risk in the event that the worst-case scenario—repeal of the Massachusetts gaming law—comes to pass.

[i] See generally Abdow v. Attorney Gen., 468 Mass. 478 (2014); Mass. Gen. Laws. c. 23K.

[ii] Abdow, 468 Mass. at 483-84.  The ballot initiative also seeks to abolish pari-mutuel wagering on simulcast greyhound races in Massachusetts, but the focus of this article is on the initiative’s effort to ban casino-style gaming.

[iii] Mass. Gen. Laws c. 23K, § 15(11); 205 Code Mass. Regs. § 118.08.

[iv] Mass. Gen. Laws c. 23K, §§ 10(d), 11(b); 205 Code Mass. Regs. § 121.04.

[v] Mass. Gen. Laws c. 23K, §§ 10(a), 11(a); 205 Code Mass. Regs. § 121.02.

[vi] See Mass. Gen. Laws c. 23K, §§ 2, 15(8) & (9), 17(a).

[vii] Id. § 15(8) & (9).

[viii] See Mass. Gaming Commission, “Timeline,” available at http://massgaming.com/licensing-regulations/timeline/ (last visited Oct. 23, 2014); Abdow, 468 Mass. at 482.

[ix] See Mass. Gaming Commission, “Timeline,” supra.  The Mashpee Wampanoag Tribe entered into a compact with the State to operate a tribal gaming facility in Taunton, outside the Commission’s licensing process.  See Abdow, 468 Mass. at 482; see also Mass. Gen. Laws c. 23K, § 4, 67 and St. 2011, c. 194, § 2A.

[x] See Abdow, 468 Mass. at 482-83.

[xi] Id.

[xii] See Mass. Gen. Laws c. 23K, § 15(11).

[xiii] 468 Mass. at 496 n.15.

[xiv] See Cmty. Builders, Inc. v. Indian Motocycle Assocs., 44 Mass. App. Ct. 537, 560 (1998) (entitlement to restitution requires the conferral of an “unjust” benefit, “a quality that turns on the reasonable expectations of the parties”).

[xv] 468 Mass. at 492 n.14.

[xvi] Cmty. Builders, 44 Mass. App. Ct. at 560.

[xvii] See J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 794 (1986).

[xviii] 468 Mass. at 492.

[xix] Abdow, 468 Mass. at 492 n.14 (citing 205 Code Mass Regs. § 121.01(1), (2) (effective Feb. 24, 2014)).

[xx] Id. (citing 205 Code Mass. Regs. § 121.01(1), (2) (2013)); see also Mass. Gaming Commission, “Timeline,” supra.

[xxi] Chase Precast Corp. v. John J. Paonessa Co., Inc., 409 Mass. 371, 374 (1991); accord Massachusetts Mun. Wholesale Elec. Co. v. Danvers, 411 Mass. 39, 52 n.8 (1991), and cases cited.

[xxii] Mishara Constr. Co. v. Transit-Mixed Concrete Corp., 365 Mass. 122, 129 (1974).

[xxiii] Abdow, 468 Mass. at 492.

[xxiv] Chase Precast, 409 Mass. at 375 n.4

[xxv] Id. at 378 n.8 (citing W. L.A. Inst. for Cancer Research v. Mayer, 366 F.2d 220, 225 (9th Cir. 1966)).

[xxvi] Id. at 376.

[xxvii] See Restatement (Third) of Restitution and Unjust Enrichment §§ 34, 54 (2011).

[xxviii] The amount that could be recovered would likely be equal to the proportion of the contractual fee that has been paid for the work which corresponds to the portion of the defendant’s performance that remained undone at the time demand for rescission was made.  See id. § 34(2)(a).  In essence, the amount recoverable is the amount paid, offset by whatever the counterparty is entitled to recover on a quantum meruit theory.

[xxix] Id. § 54 comment b.  See also Bellefeuille v. Medeiros, 335 Mass. 262, 266 (1957) (allowing rescission even though plaintiff could not return exact property defendant had transferred, but could restore its monetary equivalent).

[xxx] See J.A. Sullivan, 397 Mass. at 794.

[xxxi] Chase Precast, 409 Mass. at 374.

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