An expert on the American gaming scene, Maurice “Mac” VerStandig is well-versed in casino management from common issues of fraud and theft prevention to the Unlawful Internet Gambling Enforcement Act and Indian Gaming Regulatory Act. With a strong background in bankruptcy work, VerStandig is also skilled in the strategic valuation and monetizing of complex assets, and applies that knowledge to all areas of his practice, from fraud recoveries to traditional insolvency proceedings. Here, Verstandig offers his expert opinion on the recent lawsuit filed by PokerStars against the Atlantic Club requesting a temporary restraining order and alleging the defendants acted in bad faith.
Editor's Note: The case is being held in New Jersey Superior Court today (Friday, May, 17, 2013) where it will be determined whether the Atlantic Club Casino Hotel can walk away from its agreement with Rational Group or whether it must wait for a licensing decision to be made several months from now.
At the intersection of Pacific Avenue and Park Place, Monopoly’s Atlantic City roots still shine through. A block to the northeast quietly sits Indiana Avenue, as free parking abounds in the adjoining Bally’s garage for those gamblers toting certain ever-ubiquitous Total Rewards cards, and two blocks to the south may be discovered the once-coveted boardwalk. Yet the glowing towers of the Borgata and Harrah’s, softly radiating in the distance, coupled with the hard eyesores of nearby neighborhoods, dusting the foreground with a generous edge, furnish a melancholy reminder that the boardwalk – and its adjoining hotels – are no longer the most prized real estate in town.
Now, according to a freshly inked lawsuit in the Superior Court of New Jersey, it seems that the Atlantic Club – the southernmost legal gaming establishment adorning those wooden planks alongside the beach – may actually be the cheapest casino in town. And the allegations in this case have nothing to do with penny slots, dollar blackjack, or low-limit poker – rather, they have everything to do with a seemingly botched deal to acquire the property once known as the glistening Hilton for a mere $15 million.
The plaintiffs are Rational Group US Holdings Inc. and Oldford Group, Limited, though each is better known for their connections to PokerStars, the one Black Friday target that appears to have shown an entrepreneurial interest in transforming infamy into neon fame. The lead defendant is Resorts International Holdings, LLC, owner and operator of the Atlantic Club, with other defendants being related persons and entities. And at issue is the well-publicized effort of PokerStars to trade its once legally controversial place in the American bandwidth for a licensed brick and mortar establishment along the neon expanses of the New Jersey shore.
The core allegation of the complaint – that the defendants failed to honor a contractual obligation to complete a sale of the Atlantic Club to the plaintiffs – belies the intricate complexity of the suit’s contextual claims. Beneath the surface is a tangled web of cash advances, regulatory hurdles, and allegedly deceptive representations.
In essence, Rational Group claims to have entered into a binding agreement to acquire the boardwalk casino, and, pursuant to that agreement, assumed responsibility for covering operating shortfalls while its license was under review. Apparently those shortfalls are appreciable, as the plaintiff claims to have put forth some $11 million – more than two-thirds of the purchase price – between November 7, 2012, and the present. And the investments did not stop there, as the court filing takes care to repeatedly reference the more than $220,000 the Rational Group supposedly coughed up so that a new poker room could be built. Ultimately, the suit suggests that much – if not all – of these monies were to be credited against the purchase price, which would have been payable once licensure was secured and closing documents were signed.
Yet, as is common practice, the deal between Rational Group and Resorts contained an “outside date” – a mark on the calendar by which all of the regulatory hurdles would need to be cleared, and all of the final documents would need to be inked. Here, that date was April 26, 2013, and the defendants had the apparent right to keep the monies they already collected (and, possibly, even collect further funds), and walk away, should that date arrive before the plaintiff’s acquisition was complete.
In hindsight, the deal-breaking quirk was as predictable as a Chance Card sending players back three spaces: The plaintiffs allege gaming regulators to have taken far longer than expected, and red tape to have still been piled high when the “outside date” of April 26, 2013, arrived. The complaint basically asserts that Resorts seized upon this external sluggishness, notified Rational Group that it was keeping the $11.2 million fronted to date, called off the deal, and even attempted to collect a $4 million “termination fee” – suggesting Rational Group would end up paying every bit of the $15 million for which it bargained, while receiving not so much as a square foot of gaming space in return.
Shortly thereafter, the plaintiffs found their way to court where this suit began. In total, there are some six counts for relief, though they may be best described as varying approaches to accomplishing three discreet legal goals.
First, and most notably, Rational Group is seeking myriad of injunctions to get the deal back on track and to stop Resorts from engaging in any wheeling and dealing in the interim. The plaintiff is asking the court to punt the “outside date” far enough to allow regulators to finish their work, to otherwise reinstate the contract (including Resorts’ obligations to go through with the sale), and to prohibit Resorts from so much as attempting to market the property to any other investors in the interim. These are not entirely unusual requests in the situation of a large scale property deal gone awry, though counting on a court to grant any injunction is perennially a suspect bet.
Requests for injunctions come in various shapes and sizes. Here, the plaintiff is petitioning for a preliminary injunction to maintain the status quo while the suit is pending, and a permanent injunction to tie things together once the suit is over. Reliably, the court will look to a number of factors in making its decision concerning the preliminary injunction, but the so-called “balance of inconveniences” is likely to be the one that carries the day. In short, judges will consider whether it will be more detrimental to Rational Group to lose its opportunity to acquire the property, or to Resorts to lose its opportunity to court other suitors while litigation is pending. And while Rational Group may appear to have a clear upper hand, it is worth noting that courts will often consider the reality that even if Resorts quickly found a new buyer, Rational Group could always try to recoup its investment through a strictly monetary lawsuit.
In fact, recouping that investment gives rise to the second variety of relief sought: the plaintiff is asking the court to impose a “resulting trust” on the Atlantic Club. One of the law’s more deceptive terms, a “resulting trust,” can be most closely analogized to a classic mortgage. Basically, Rational Group is quietly acknowledging that its hopes for an injunction may falter somewhere along the way, and arguing that it should at least be permitted to claim an $11.2 million encumbrance on the boardwalk property if Resorts tries to orchestrate a cash sale. While this court-imposed lien may seem an entirely poetic compromise, do not count on it gaining much traction unless the plaintiffs can find a way to also prevail on their third set of theories.
That final consortium of counts comes in the form of a request that the court actually order the contract changed, by directing a new “outside date.” The two counts most intimately making this pitch are for reformation and impracticability. The former is a classic theory (and one notoriously ground into the minds of first year law students) whereby a court recognizes that an otherwise-valid contract does not actually provide for what both parties intended, so some modicum of strategic redlining is in order. The latter is an equally core doctrine whereby a court recognizes that though a contract provides for one thing, realities beyond the control of the respective parties dictate the occurrence of another thing. In short, this is what happens when a contract is literally “impractical” because of intervening or superseding events.
With all of these theories, however, there exists a notable dilemma. The law has long allowed people and companies to enter into contracts of their own making, and generally refuses to interfere with those contracts unless a truly extraordinary cataclysm comes to pass. Contracts often produce winners and losers, and signing one’s name to the dotted line beneath a fool’s deal is rarely reason enough to beg the courts for a way out. So while it is surely tempting to surmise that the payment of $11.2 million in exchange for a bill of goods must be so shocking to the conscience as to warrant a victorious lawsuit, the reality is that people regularly pay steep sums of money to enter into options contracts for which they ultimately are either unable – or uninterested – in exercising the pricey rights they have acquired.
The complaint makes much ado about the fact that the “outside date” only allowed for a 120-day licensure review period, when New Jersey law expressly mandates that at least 121 days be present in an agreement such as this. If true (and, as discussed below, a complaint should never be taken as gospel), however, this seems little more than a compelling suggestion that Rational Group negotiated a sloppy set of papers. Pragmatically, do not count on a court otherwise fussing over this issue – since the difference is but a single day, and the deal fell short by well more than a single day, the distinction is likely of little equitable value.
As always, the facts of this case are likely to be cloaked in fog once Resorts presents its side of the story. Complaints are, by definition, one-sided recitations of events. And here there are numerous aspects to the initial pleading that suggest a multitude of different facts may be hidden in plain sight. By way of anecdote only, the plaintiff alleges that it was hurried into making the deal by threats that the Atlantic Club would file for bankruptcy and cause some 1,800 employees to lose their jobs. Yet, as well-evidenced by the recent wave of bankruptcy and receivership filings to embroil Atlantic City casinos, large gaming operators are usually afforded an opportunity to go into bankruptcy with their payroll still being honored, because debts are reorganized in the background and shades of red and white continue to fill tip jars in the foreground.
The plaintiffs have already obtained a temporary restraining order, but such should not be interpreted as much more than an indication from the court that it is interested in a super-short term maintenance of the status quo while everyone finds their way to town for a series of hearings. Such orders are normally signed before the opposing party has occasion to appear and proffer any objection, and – as here – almost always bear expiration dates measured in days or weeks. It will be when the preliminary injunction is heard (currently scheduled for May 17, 2013), and all sides have an occasion to appear and state their cases, that the issues discussed herein will genuinely gain a third dimension, and those thick shades of gray will take hold.
I am not a New Jersey lawyer – though many of my Offit Kurman colleagues do regularly practice in the Garden State – and I do not profess to have any familiarity with this particular court or of the robed men and women who walk its hallways. But the concepts advanced in this case are all of a relentlessly generic nature, claiming proud and well-trodden roots throughout American jurisprudential history. And as shocking as it may seem that a PokerStars affiliate could drop some $11.2 million on a deal that never closed, myriad of legal principles suggest such an outcome could well be in the cards.
Whether that outcome is more likely than not is hard to tell. But in a town where Park Place and Pacific Avenue literally intersect, and where craps tables have long drawn well-heeled crowds, this would not be the first time a sure thing turned out to be a mere roll of the dice.
Maurice “Mac” VerStandig is an attorney with Offit Kurman, P.A., where his practice focuses on the litigation of various commercial and private disputes, including claims of fraud and financial insolvency cases. He has considerable knowledge of the numerous legal issues encompassing the American gaming scene, and is licensed to practice law in Maryland, Virginia and Florida.
*Lead photo courtesy of The Huffington Post.