Semb's, Inc. v. Gaming & Entertainment Management-Illinois, LLC

2014 IL App (3d) 130111Opinion filed June 23, 2014
_____________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
THIRD DISTRICT
A.D., 2014
SEMB'S, INC., an Illinois corporation, d/b/a
) Appeal from the Circuit Court
DA LEE'S FINE DINING, ) of the 13th Judicial Circuit,
) La Salle County, Illinois.
Plaintiff-Appellant, )
)
v. )
)
GAMING & ENTERTAINMENT ) Appeal No. 3-13-0111
MANAGEMENT-ILLINOIS, LLC, an Illinois ) Circuit No. 12-MR-223
limited liability company, METRO )
AMUSEMENTS, INC., an Illinois corporation, )
and BEST GAMING, LLC, an Illinois limited )
liability company, ) The Honorable
) Joseph P. Hettel,
Defendants-Appellees. ) Judge, presiding.
_____________________________________________________________________________
JUSTICE CARTER delivered the judgment of the court, with opinion.
Justice O'Brien concurred in the judgment and opinion.
Justice Schmidt dissented, with opinion.
_____________________________________________________________________________
OPINION
¶1 The plaintiff, Semb's, Inc., d/b/a Da Lee's Fine Dining (Da Lee's), filed a complaint
against the defendants, Gaming & Entertainment Management-Illinois, LLC (GEM), Metro
Amusements, Inc. (Metro), and Best Gaming, LLC (Best), regarding a contract for the placement
of video gaming terminals (VGTs). The contract was originally between Da Lee's and Metro,
who assigned the contract to Best, who then assigned it to GEM. The complaint alleged that the
contract was invalid. The circuit court dismissed the complaint and Da Lee's appealed. On
appeal, Da Lee's argues that the court's decision was erroneous because the contract was invalid
and unenforceable in that it: (1) was an illegal contract for gambling; (2) was not between a
licensed VGT operator and a licensed establishment, as required by regulations on "use
agreements;" (3) was assigned both to and from unlicensed VGT operators, in violation of the
regulations on "use agreements;" and (4) was immediately invalidated by the Illinois Gaming
Board (IGB) denying Best's licensure application. We affirm.
¶2 FACTS
¶3 On June 14, 2010, Lee Sember, the owner of Da Lee's, entered into a contract with Metro
(the Metro Agreement), which gave Metro the exclusive right to place VGTs in Da Lee's. Metro
was a VGT-operating business, but it was not licensed in Illinois under the Video Gaming Act
(Act) (230 ILCS 40/1 et seq.). Da Lee's was not a licensed video gaming location under the Act.
¶4 On September 2, 2010, Best acquired Metro and most of its assets, including the Metro
Agreement. Best was also an unlicensed VGT-operating business. Best had previously applied
for a license with the IGB and was awaiting a decision on its application at the time of this
acquisition.
¶5 On July 2, 2012, the IGB issued a notice to Best that it intended to deny Best's licensure
application. Best requested a hearing at which it intended to contest that denial. On July 17,
2012, Best assigned the Metro Agreement to GEM, which was a licensed VGT-operating
business. Two days later, the IGB denied Best's hearing request.
¶6 On July 26, 2012, Sember entered into another exclusive-VGT-placement contract with
Triple 7 Illinois, LLC, which was a licensed VGT-operating business. Da Lee's was still not a
2
licensed establishment at the time it entered into this second agreement (the Triple 7 Agreement).
Allegations were made that Sember signed the Triple 7 Agreement because Triple 7 told him that
Best's licensure application had been denied and that the Metro Agreement was therefore invalid.
¶7 On August 9, 2012, Triple 7 filed a complaint for declaratory relief against GEM, in
which it requested, inter alia, a ruling that the Metro Agreement was invalid. GEM filed a
motion to dismiss, which the circuit court granted after a hearing. In its ruling, the court ruled
that the Metro Agreement was not a "use agreement" under the Act and therefore did not violate
the Act or any video gaming regulations. Triple 7 appealed that ruling.
¶8 While Triple 7's appeal was pending with this court, on October 10, 2012, Da Lee's filed
a complaint against GEM, Best, and Metro. The complaint alleged that the Metro Agreement
was invalid and sought injunctive relief to prevent GEM from enforcing the Metro Agreement.
Further, the complaint contained several allegations of fraud. First, the complaint alleged that
GEM committed fraud in that it represented to Da Lee's that the Metro Agreement had been
validated by the IGB and in that it falsified aspects of its terminal operator license. Second, the
complaint alleged that Metro and Best committed fraud in that prior to entering into the Metro
Agreement, Metro had agreed to sell its business to Best and that as part of that agreement,
Metro was required to sign VGT-placement contracts with at least 35 establishments. Further,
the complaint alleged that when Metro approached Da Lee's, they told Da Lee's that they would
remain a family-owned business and that, upon Da Lee's signing the agreement, they would
immediately transmit the signed VGT-placement agreement "to preserve [Da Lee's] place in line
for licensure as a licensed Establishment." The complaint requested a declaratory judgment that
the Metro Agreement was invalid, as well as compensatory damages, punitive damages, and
injunctive relief.
3
¶9 Motions to dismiss the complaint pursuant to section 2-619.1 of the Civil Code of
Procedure (735 ILCS 5/2-619.1 (West 2012)) were filed and were heard by the circuit court.1
The court issued an order granting the motions to dismiss. The court dismissed the first three
counts with prejudice and the fourth count without prejudice. The court also found that there
was no just reason to delay the enforcement or appeal of the order dismissing the first three
counts with prejudice. Da Lee's did not replead count IV, but did file a motion to reconsider.
The circuit court denied Da Lee's motion to reconsider, dismissed count IV with prejudice, and
made its order nunc pro tunc to the date of the prior dismissal order. Da Lee's appealed.
¶ 10 ANALYSIS
¶ 11 Da Lee's argues in this appeal that the circuit court's decision was erroneous because the
Metro Agreement is invalid and unenforceable in that it: (1) is an illegal contract for gambling;
(2) was not between a licensed VGT operator and a licensed establishment, as required by
regulations on "use agreements;" (3) was assigned both to and from unlicensed VGT operators,
in violation of the regulations on "use agreements;" and (4) was immediately invalidated by the
IGB denying Best's licensure application.
¶ 12 We note that Da Lee's appellant's brief and GEM's response brief were filed in this case
while the Triple 7 appeal was still pending. On July 26, 2013, this court issued an opinion in the
Triple 7 appeal that affirmed the circuit court's decision. Triple 7 Illinois, LLC v. Gaming &
Entertainment Management-Illinois, LLC, 2013 IL App (3d) 120860. In so ruling, this court
rejected Triple 7's arguments that: (1) the Metro Agreement was invalid because the Act permits
the assignment of "use agreements" only by licensed VGT operators (id. ¶ 17); (2) the Act
prohibits prelicensure agreements (id. ¶ 20-23); (3) the Metro Agreement was invalid because it
1
The appellant did not file a report of proceedings with the record on appeal.
4
was a contract for the unlicensed performance of an act (id. ¶ 28); and (4) the Metro Agreement
was invalidated at the time that the IGB denied Best's licensure application (id. ¶ 31).
¶ 13 Da Lee's reply brief was filed in this case after this court issued its decision in Triple 7.
In that brief, Da Lee's claims that Triple 7 was wrongly decided because the IGB's website
indicates that prelicensure agreements are "use agreements;" and because public policy favors a
ruling that prohibits the assignments of the Metro Agreement. Da Lee's also claims in its reply
brief that modifications that the IGB made to its website's "Frequently Asked Questions (FAQs)"
section after the Triple 7 decision was issued indicate that the IGB disagrees with that decision,
and that this court should therefore defer to this construction of the Act.2
¶ 14 Under the doctrine of res judicata:
" 'a final judgment on the merits rendered by a court of competent jurisdiction
bars any subsequent actions between the same parties or their privies on the same
cause of action.' " [Rein v. David A. Noyes & Co., 172 Ill.2d 325, 334 (1996).]
Res judicata bars not only what was actually decided in the first action but also
whatever could have been decided. La Salle National Bank v. County Board of
School Trustees, 61 Ill.2d 524, 529 (1975). Three requirements must be satisfied
for res judicata to apply: (1) a final judgment on the merits has been rendered by
a court of competent jurisdiction; (2) an identity of cause of action exists; and (3)
the parties or their privies are identical in both actions. Downing v. Chicago
Transit Authority, 162 Ill.2d 70, 73–74 (1994)." Hudson v. City of Chicago, 228
Ill. 2d 462, 467 (2008).
2
GEM filed a motion to strike this portion of Da Lee's reply brief. We have reviewed that motion and hereby deny
it.
5
¶ 15 The three requirements for res judicata to apply in this case have been met. First, our
decision in Triple 7 was a final judgment on the merits in that it declared the Metro Agreement
was valid. See Style Builders, Inc. v. Fuernstahl, 32 Ill. App. 3d 272, 275 (1975) ("[a] judgment
is on the merits when it amounts to a decision as to the respective rights and liabilities of the
parties, based on the ultimate facts or state of facts disclosed by the pleadings or evidence, or
both, and on which the right of recovery depends"). Second, an identity of cause of action exists
between the Triple 7 action and this action, as both actions sought to invalidate the Metro
Agreement under the same set of operative facts. See Rein, 172 Ill. 2d at 339. Cartwright v.
Moore, 394 Ill. App. 3d 1, 7-8 (2009). Third, Da Lee's is in privity with the parties from the
Triple 7 action, as Da Lee's interests were affected by our decision in Triple 7. See Hayes v.
State Teacher Certification Board, 359 Ill. App. 3d 1153, 1164 (2005) (outlining the general
principles behind privity). Under these circumstances, we hold that res judicata applies.3
Accordingly, we hold that the circuit court did not err when it dismissed Da Lee's complaint.
¶ 16 CONCLUSION
¶ 17 For the foregoing reasons, we affirm the judgment of the circuit court of La Salle County.
¶ 18 Affirmed.
¶ 19 JUSTICE SCHMIDT, dissenting.
¶ 20 I agree with Da Lee's that the agreement in this matter is invalid and that Triple 7 was
wrongly decided by this court. As such, I respectfully dissent from the majority's opinion to the
3
We note that at oral argument, Da Lee's focused on its argument that the Metro Agreement was void because it was
an illegal contract for gaming. We decline to address this argument, as it was not raised for the first time until this
appeal. See Hudson, 228 Ill. 2d at 467 ("res judicata bars not only what was actually decided in the first action but
also whatever could have been decided").
6
contrary. Not only was the Triple 7 decision wrong, it was palpably erroneous, ergo it cannot
support the majority's res judicata theory. People v. McDonald, 366 Ill. App. 3d 243 (2006).
¶ 21 The Triple 7 court acknowledged that our task in cases of statutory construction is to
ascertain and give effect to the intent of the legislature. Supra ¶ 16. It is clear that the majority's
analysis jumped the tracks right out of the station. A reading of Triple 7 leads one to the
inescapable conclusion that the majority worked off the underlying premise that gaming
contracts are legal in this state unless prohibited by statute. Of course, the converse is true.
Gambling and gambling contracts are illegal unless authorized by statute. See Hall v.
Montaleone, 38 Ill. App. 3d 591, 592 (1976) (gambling contracts are absolutely void and
unenforceable, by reason of public policy); Brelsford v. Stoll, 304 Ill. App. 222, 226 (1940)
(“alleged contract was illegal and void from its inception as contravening the provisions of the
gaming statutes of Illinois and against public policy and was therefore unenforceable”);
Schneider v. Turner, 130 Ill. 28, 39 (1889) (“[n]othing is more clearly and firmly established by
the common law, than that all gambling contracts are void”); Mallett v. Butcher, 41 Ill. 382, 383
(1866) (all contracts having their origin in gaming are void, not voidable, and it is immaterial
when or how the fact is made patent to the court).
¶ 22 The agreement at issue in this matter is undoubtedly a contract for gambling as it calls for
the terminal operator and Da Lee's to evenly split gambling proceeds, termed "Net Terminal
Income." The "50/50 split" of gambling revenues between a terminal operator and an
establishment is mandated by the Video Gaming Act (230 ILCS 40/25(c) (West 2012)). As a
contract for gambling, the agreement is only valid and enforceable if specifically allowed for by
statute. Hall, 38 Ill. App. 3d at 592. Neither the Video Gaming Act (the Act) (230 ILCS 40/1 et
seq. (West 2010)) nor the administrative rules adopted by the Illinois Gaming Board (11 Ill.
7Adm. Code 1800.110 et seq. (2013)) specifically allow for a gaming contract between an
establishment and unlicensed terminal operator. Through its regulations, the Gaming Board has
made it clear that assignment of a use agreement can only take place between licensed terminal
operators. As neither Metro nor Best was ever a licensed terminal operator, I find the contract is
void and unenforceable.
¶ 23 As noted in Triple 7, in 2009 our legislature passed the Act, which legalizes the use of
video gambling terminals in Illinois subject to the regulations enacted by the Gaming Board.
230 ILCS 40/1 et seq. (West 2012); Triple 7, 2013 IL App (3d) 120860, ¶ 10. Restaurants such
as Da Lee's may become licensed establishments, which, in turn allows the placement and
operation of video gaming terminals. Id.; 230 ILCS 40/5 (West 2012). The entity that owns the
terminals is termed a "terminal operator," which the Act defines as an "individual, partnership,
corporation, or limited liability company that is licensed under this Act and that owns, services,
and maintains video gaming terminals for placement in licensed establishments, licensed truck
stop establishments, licensed fraternal establishments, or licensed veterans establishments." 230
ILCS 40/5 (West 2012).
¶ 24 The Act prohibits the placement of video gaming terminals in establishments unless the
establishment "has entered into a written use agreement with the terminal operator for placement
of the terminals." 230 ILCS 40/25(e) (West 2012). While the Act does not define the term "use
agreement" or define the proper parameters for such an agreement, the Act does direct the
Illinois Gaming Board to "adopt rules" and establish "criteria to preserve the integrity and
security of video gaming in this State." 230 ILCS 40/15 (West 2012). The Act also directs the
Gaming Board to "adopt rules for the purpose of administering the provisions of this Act and to
8
prescribe rules, regulations, and conditions under which all video gaming in the State shall be
conducted." 230 ILCS 40/78 (West 2012).
¶ 25 Pursuant to this directive, the Gaming Board adopted numerous administrative
regulations. See 11 Ill. Adm. Code 1800.110 et seq. (2013). These rules, in pertinent part, state:
"For purposes of this Part the following terms shall have the
following meanings:
***
'Use agreement': A contractual agreement between a
licensed terminal operator and a licensed video gaming location
establishing terms and conditions for placement and operation
of video gaming terminals by the licensed terminal operator
within the premises of the licensed video gaming location."
11 Ill. Adm. Code 1800.110 (2013).
The regulations continue:
"In addition to the requirements set forth in the Act, a Use
Agreement must satisfy the following:
a) Only be between a licensed terminal operator and
a licensed establishment, licensed truck stop establishment,
licensed veterans establishment or licensed fraternal
establishment;
b) Contain an affirmative statement that no inducement
was offered or accepted regarding the placement or operation
of video gaming terminals in a licensed establishment, licensed
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truck stop establishment, licensed veterans establishment or
licensed fraternal establishment;
c) Contain an indemnity and hold harmless provision
on behalf of the State, the Board, and its agents relative to any
cause of action arising from a use agreement;
d) Prohibit any assignment other than from a licensed
terminal operator to another licensed terminal operator.
e) Contain a provision that releases the video gaming
location from any continuing contractual obligation to the
terminal operator in the event that the terminal operator has
its license revoked or surrenders its license." 11 Ill. Adm.
Code 1800.320 (2013).
¶ 26 The Triple 7 court acknowledged that the contract could not be a "use agreement" since
neither Da Lee's nor Best was licensed at the time of signing. Triple 7, 2013 IL App (3d)
120860, ¶ 17 ("Here, neither Metro nor Da Lee's was licensed under the Act when it signed the
placement agreement. Thus, the Da Lee's Agreement is not a use agreement. Therefore, the
rules and regulations prohibiting the assignment of a use agreement do not apply to the
agreement assigned to GEM."). However, the Triple 7 court missed the obvious import of those
facts: since they were not "use agreements," they were illegal gaming contracts and, therefore,
void.
¶ 27 Again, the agreement at issue in this matter and in Triple 7 calls for Da Lee's to split
gambling revenues with the terminal operator, rending it invalid unless specifically permitted by
statute. Hall, 38 Ill. App. 3d at 592. The Act directs the Gaming Board to enact regulations
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defining the steps necessary to enter into and assign these gambling contracts, which the Gaming
Board did. Those regulations have the full force and effect of law. Hartney Fuel Oil Co. v.
Hamer, 2013 IL 115130, ¶ 38.
¶ 28 Clearly, section 1800.320(d) (Ill. Adm. Code 1800.320(d) (2013)), which prohibits the
assignment of any use agreement "other than from a licensed terminal operator to another
licensed terminal operator," renders Metro's assignment to Best and Best's assignment to GEM
ineffective as neither Metro nor Best was ever a licensed terminal operator. While the Triple 7
court disagreed, a review of the court's reasoning reveals its error. Triple 7, 2013 IL App (3d)
120860, ¶ 17.
¶ 29 The authority cited by the Triple 7 court to support its contention that the agreement is
enforceable is found neither in the Act itself nor the Illinois Administrative Code. Instead, the
Triple 7 court referenced language contained in an application for licensure to support its theory
that the legislature and the Gaming Board intended to allow unlicensed entities to enter into
gaming contracts. Characterizing it as "regulatory language," the Triple 7 court noted that in
"section 8 of the application, the Gaming Board asks the applicant to list all businesses with
which the applicant has entered into an agreement for the placement of terminals." Id. ¶ 20.
Noticeably absent from the Triple 7 opinion is citation to any authority supporting the contention
that wording on an application for a license evinces an administrative agency's interpretation of
its enabling legislation or the legislature's intent in enacting a statute.
¶ 30 I find the actual administrative rules enacted by the Gaming Board much more indicative
of intent and authoritative than the wording of a potential licensee's application. Those rules,
again, "[p]rohibit any assignment other than from a licensed terminal operator to another
11
licensed terminal operator." 11 Ill. Adm. Code 1800.320 (2013). More importantly, nowhere do
these rules allow for unlicensed entities to enter into gaming contracts.
¶ 31 The Triple 7 court confused the issue when stating that "[n]othing in the Act or the
regulations prohibits the prelicensure placement agreement entered into by Da Lee's and Metro."
Triple 7, 2013 IL App (3d) 120860, ¶ 21. Well, nothing in the Act or regulations authorized it
either. Again, it seems clear that the Triple 7 court was working off of the premise that gaming
contracts are legal unless specifically prohibited.
¶ 32 The Triple 7 court acknowledged that the Administrative Code defines a use agreement
as an agreement between a licensed operator and a licensed location, and further acknowledges
that the initial contract between Metro and Da Lee's was not a use agreement under the Act and,
therefore, "the rules and regulations prohibiting the assignment of a use agreement do not apply
to the agreement assigned to GEM." Triple 7, 2013 IL App (3d) 120860, ¶ 17.
¶ 33 If, as the court correctly acknowledged, the contract between Metro and Da Lee's was not
a use agreement under the Act, then it was an illegal gaming contract. So ultimately, the court
concludes that contracts that are illegal at their inception and, therefore, void could be
resurrected by assigning them to someone who later becomes licensed to enter into gaming
contracts. How any reasonable person could believe that that was the intent of the legislature is a
mystery to me.
¶ 34 I feel it necessary to discuss the Triple 7 "analysis" because if the decision is not palpably
erroneous, it would have res judicata effect on the case before us. As should be obvious by a
reading of Triple 7 and as discussed below, to call the Triple 7 decision palpably erroneous is to
be quite charitable.
12
¶ 35 The Triple 7 court rejected the argument that the Administrative Code can only be read to
mean that only licensed terminal operators can enter into contracts for the placement and
operation of video gaming terminals. It found three problems with that argument. First, the
court held that to construe the statute and regulations that way would require it to ignore
language used by the Gaming Board in license applications, which asks the applicant to list all
businesses with which the applicant has an agreement for the placement of terminals. The court
concluded that the language in the application was "regulatory language," which "anticipates that
a terminal operator may have entered into placement agreements prior to its approval as a
licensed operator under the Act." Id. ¶ 20.
¶ 36 What is wrong with this analysis? First of all, the court cited no authority for the
proposition that it has to look to applications prepared by the Gaming Board in an effort to
construe the Video Gaming Act. In fact, the Triple 7 court created a new rule of statutory
construction: ignore statutory language and look to see what some bureaucrat drafted in a license
application. Second, by concentrating on the language in the application, the court ignored not
only the plain language of the Act and regulations, but also the purpose and spirit of the Act: that
was to try to keep unsavory types out of the licensed gaming business. Third, the analysis
ignored the fact that the applicant in this case did not enter into an agreement for placement of
terminals. Metro Amusements, Inc., entered into the contract with Da Lee's in June of 2010.
Metro was never licensed. The Gaming Board denied its application. Now, I suppose that had
Metro ultimately been licensed, there might be at least some merit to the court's reliance on the
application language. However, had Metro ultimately been licensed, we would have another
case than the one before us and the one before the Triple 7 court. I suspect that if that
13
application language could ever have any relevance, it would only be in the case of successful
applicants.
¶ 37 The Triple 7 court also states, "[t]his regulatory language anticipates that a terminal
operator may have entered into placement agreements prior to its approval as a licensed operator
under the Act." Id. Again, even if that were true, the party before the Triple 7 court was GEM.
GEM did not enter into a placement agreement prior to its approval as a licensed operator under
the Act. It purchased the contract from someone who could not get licensed. No reasonable
argument can be made that the regulatory language or the statute anticipated that scenario.
¶ 38 Next, the Triple 7 court reasoned that neither the Act nor the regulations imposed
limitations on prelicensure contracts. Id. ¶ 21. Again, I state the obvious: "Prelicensure
placement agreements" are simply gaming contracts, which are illegal. There is no need for the
Act or the regulations to limit that which was already illegal. The Triple 7 court seemed to have
concluded that by passing the Video Gaming Act, the legislature intended to make all gambling
contracts legal unless prohibited by the Act. In support of that proposition, the court said, "we
cannot rewrite a statue and depart from its plain language by reading into it limitations or
conditions not expressed by the legislature." Id. So, I ask, where in the plain language of the
statute does the court find intent to allow gaming contracts between unlicensed individuals or
corporations?
¶ 39 Saving the best for last, the Triple 7 court said, "[t]hird, interpreting the regulations to
apply to agreements between nonlicensed entities would violate the right of private parties to
freely contract. See U.S. Const., art. I, § 10; Ill. Const. 1970, art. I, § 16." Id. ¶ 22. So, the
Triple 7 court based its holding on the previously unheard of proposition that the contract clauses
14
of the United States and Illinois Constitutions protect the right to enter into gambling contracts.
That is, there is a constitutional right to gamble. I am thinking that is not exactly correct.
¶ 40 Aside from the obvious, neither the Act nor the regulations envision nonlicensed parties
entering into and transferring these gaming contracts. The Triple 7 decision permits exactly that
which the Act and regulations were designed to prohibit: racketeer influence in legalized
gambling. This decision allows mobsters to enter into gaming contracts and then sell those
contracts to others who can get licensed. This is not what the legislature envisioned (I hope).
¶ 41 Later, the Triple 7 court acknowledges that if a licensed terminal operator has its license
revoked or surrenders its license, the gaming location is released from any contractual
obligations. However, the court concluded that at the time Best sold the contract to GEM, the
denial of its application was not final, thus giving an operator who was never granted a license
rights superior to one who was licensed and then had the license revoked. This, again, strikes me
as counterintuitive and simply wrong. This would not make sense even if the underlying
contract was not void. It is also without support in the statutory language.
¶ 42 I would reverse the trial court and, therefore, respectfully dissent.
15