AAA Gaming LLC et al v. Midwest Electronics Gaming, LLC
Filing
55
MEMORANDUM Opinion and Order. Signed by the Honorable Manish S. Shah on 1/26/2018: Midwest's motion to dismiss, 41 , is granted. The complaint is dismissed for failure to state a claim. The parties shall appear for a status hearing on February 2, 2018, at 9:30 a.m. [For further detail see attached order.] Notices mailed. (psm, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
AAA GAMING LLC and
ILLINOIS GAMING INVESTMENTS, LLC,
Plaintiffs,
No. 16 CV 4997
v.
Judge Manish S. Shah
MIDWEST ELECTRONICS GAMING, LLC,
Defendant.
MEMORANDUM OPINION AND ORDER
Defendant Midwest Electronics Gaming, LLC, bought from plaintiffs the
rights to install video gaming terminals in certain venues, but withheld payments
when some of those rights appeared to be invalid. The parties resolved their dispute
by entering into a settlement agreement, but Midwest soon stopped its payments
due under that contract, too. Plaintiffs filed a complaint seeking to enforce the
contract between the parties. That complaint was dismissed for failure to state a
claim, [21],1 and plaintiffs’ motion to vacate and alter judgment was denied. [38].
Plaintiffs filed an amended complaint, again alleging that Midwest breached the
contract, and Midwest again moves to dismiss. For the following reasons, the
motion is granted.
I.
Legal Standard
To survive a motion to dismiss under Rule 12(b)(6), a complaint must contain
factual allegations that plausibly suggest a right to relief. Ashcroft v. Iqbal, 556 U.S.
1
Bracketed numbers refer to entries on the district court docket.
662, 678 (2009). The court must accept all factual allegations as true and draw all
reasonable inferences in the plaintiff’s favor, but need not accept legal conclusions
or conclusory allegations. Id. at 678–79. With a 12(b)(6) motion, a court may
consider only allegations in the complaint, documents attached to the complaint,
and documents that are both referred to in the complaint and central to its claims.
Levenstein v. Salafsky, 164 F.3d 345, 347 (7th Cir. 1998).
II.
Background
The Video Gaming Act, 230 ILCS 40/1, et seq., legalized the use of video
gaming terminals in certain licensed establishments in Illinois. [40] ¶ 20. Defendant
Midwest Electronics Gaming, LLC, is a licensed terminal operator—it was approved
by the Illinois Gaming Board, an administrative agency, to operate video gaming
terminals at licensed establishments. [40] ¶ 21.
On July 18, 2012, plaintiffs AAA Gaming LLC and Illinois Gaming
Investments, LLC, sold to Midwest their rights under exclusive location agreements
to operate video gaming terminals at 316 bars, restaurants and other
establishments, once those establishments became licensed and approved by the
Board. [40] ¶¶ 22–23. Plaintiffs assigned those rights under two asset purchase
agreements, which established a complicated payment scheme that included
payments up front, as well as future payments contingent upon the occurrence of
certain events. [40] ¶¶ 43–52, 54–55, 58–69. For example, the asset purchase
agreements entitled plaintiffs to certain payments when Midwest became “live” and
operated video gaming terminals at a licensed establishment, or if the municipality
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in which an establishment was located voted to approve the use of video gaming
terminals. [40] ¶¶ 43, 58. The agreements also provided that an Event of Default
would occur if Midwest missed a payment and failed to pay all amounts due within
ten days of written notice. [40] ¶¶ 135, 157. In that scenario, Midwest would have to
pay plaintiffs an amount equal to the sum of all of the future payments that would
be owed under the agreements if every establishment became licensed. [40] ¶¶ 70–
71.
Midwest disclosed to the Board the asset purchase agreements after they
were signed, as well as the compensation paid under those agreements. [40] ¶¶ 107,
111. The Board took no action in response to those disclosures. [40] ¶ 108. But the
Board did affirmatively approve Midwest’s rights to operate video gaming terminals
at certain establishments that were party to the exclusive location agreements
assigned under the asset purchase agreements. [40] ¶¶ 109–10.
Within months of entering into the asset purchase agreements, however, the
parties quarreled over payment. [40] ¶¶ 72–75. Midwest questioned the validity and
completeness of the exclusive location agreements it had been assigned, and it
withheld its payments. [40] ¶¶ 74–75. On December 7, 2012, the parties entered
into a mutual release agreement to resolve their dispute. Under that contract,
Midwest agreed to pay a fixed sum to settle the debt it had accumulated under the
scheme set out in the asset purchase agreements, and it agreed to make future
payments in accordance with a modified version of that scheme. [40] ¶¶ 127, 131.
The parties agreed to release each other from all claims under the asset purchase
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agreements, with the exception that plaintiffs preserved their rights to enforce the
payment scheme. [40] ¶¶ 88–89.
Midwest continued to install and operate video gaming terminals at licensed
establishments under the mutual release agreement, but in October 2013, Midwest
again stopped making payments to plaintiffs, despite receiving multiple written
notices of its payment obligations. [40] ¶¶ 90, 132–39. Midwest raised as grounds
for nonpayment many of the same issues that it had raised before. [40] ¶¶ 90–91,
93, 95, 97. Plaintiffs allege that Midwest already released them from claims related
to those issues when it entered into the mutual release agreement, and that
Midwest breached that agreement by withholding payments. [40] ¶¶ 92, 94, 96, 98,
136–37. Plaintiffs also allege that Midwest breached the agreement by squandering
opportunities to install video gaming terminals at licensed establishments for which
it had exclusive location agreements. [40] ¶¶ 145–46. Midwest failed to maintain
relationships with establishments for which it had exclusive location agreements,
failed to monitor when those establishments became licensed, and failed to make
good faith efforts to install video gaming terminals at those locations. [40] ¶¶ 145–
46. By doing so, Midwest deprived plaintiffs of additional compensation it would
have paid under the mutual release agreement. [40] ¶ 148.
The complaint also describes a January 7, 2016 agreement between the
Administrator of the Board, Mark Ostrowski, and plaintiffs, Nicky Nichols (a
member of both plaintiff LLC’s), and several LLC’s of which Nichols is a manager.
[40] ¶¶ 104–05. In that agreement, which is also attached to the complaint as an
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exhibit, the Board acknowledged that the asset purchase agreements had been
disclosed to the Board, and that it was aware that plaintiffs had been receiving
compensation and enforcing their rights under the asset purchase agreements. [40]
¶¶ 104–05. The Board also agreed to refrain from taking certain disciplinary actions
that would interfere with plaintiffs’ efforts. [40] ¶¶ 105–06. The complaint also
alleges that the Board has a history of accepting exclusive location agreements that
were assigned by unlicensed parties. [40] ¶ 123.
Midwest moved to dismiss the original complaint under Rule 12(b)(6) for
failure to state a claim. [8]. In its motion, Midwest invoked J&J Ventures Gaming,
LLC v. Wild, Inc., 2015 IL App (5th) 140092, aff’d, 2016 IL 119870. Under that
decision and the decision by the Illinois Supreme Court affirming it, the validity
and enforceability of agreements and assignments that purport to control placement
and operation of video gaming terminals must be determined by the Illinois Gaming
Board. J&J Ventures Gaming, LLC v. Wild, Inc., 2016 IL 119870, ¶ 42, reh’g denied
(Nov. 21, 2016). The motion was granted because the mutual release agreement was
such an agreement and its validity and enforceability had not been determined by
the Board. [21]. Plaintiffs moved to vacate and alter judgment. [26]. That motion
was denied. [38].
Plaintiffs amended the complaint to include allegations of the parties’
communication with the Board, and the Board’s past conduct. The complaint alleges
a single count for breach of contract, incorporating into that claim allegations
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related to the duty of good faith and fair dealing and the contract’s accelerated
payment clause, which the original complaint had asserted as separate claims.
III.
Analysis
A.
Subject-Matter Jurisdiction
Midwest moves to dismiss the complaint for lack of subject-matter
jurisdiction, and the parties present their arguments in terms of the court’s subjectmatter jurisdiction over plaintiffs’ breach of contract claim. But that is a
mischaracterization of the issues under consideration. The parties dispute whether
a state agency, the Illinois Gaming Board, has sole authority under Illinois law to
determine the validity and enforceability of the contract at issue, and whether the
Board has made that determination. As noted in the order on the first motion to
dismiss, and in the oral ruling on the motion to vacate and alter judgment, that
issue does not call into question the court’s subject-matter jurisdiction. See Zahn v.
N. Am. Power & Gas, LLC, 847 F.3d 875, 876–77 (7th Cir. 2017) (“[S]tates,
including Illinois, do not have the constitutional authority to limit a district court's
jurisdiction; that power lies exclusively with Congress.”). Subject-matter jurisdiction
exists under 28 U.S.C. § 1332(a)(1)—the parties are diverse, and the amount in
controversy exceeds $75,000. [40] ¶¶ 9–12, 14, 16, 18. And no ruling issued in this
action constitutes an abdication of the court’s authority or duty to exercise
jurisdiction and proceed to judgment.2
Plaintiffs’ invocation of the doctrine of abstention is similarly inapposite. The original
complaint was dismissed for failure to state a claim. The court did not, and does not,
abstain from exercising its jurisdiction.
2
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The motion is more appropriately considered as one that challenges whether
the complaint states a claim upon which relief may be granted. The Illinois
Supreme Court has held that Illinois state courts cannot determine the validity and
enforceability of certain contracts that purport to control the placement and
operation of video gaming terminals, because the state legislature vested the Illinois
Gaming Board with exclusive, original jurisdiction to make that determination.
J&J Ventures, 2016 IL 119870, ¶ 42. And under Illinois law, the first element of a
breach of contract claim is the existence of a valid and enforceable contract. Priebe
v. Autobarn, Ltd., 240 F.3d 584, 587 (7th Cir. 2001). Therefore, to state a breach of
contract claim, where the contract “falls within the purview of the comprehensive
statutory scheme granting the Board exclusive jurisdiction over video gaming in
Illinois,” J&J Ventures, 2016 IL 119870, ¶ 33, plaintiffs must allege that the Board
determined it to be valid and enforceable. A failure to do so is a failure to state a
claim upon which relief may be granted. Because the parties’ arguments are
directed at the merits of the claim rather than the court’s subject-matter
jurisdiction, the motion is more appropriately considered under Rule 12(b)(6). See
Miller v. Herman, 600 F.3d 726, 732–33 (7th Cir. 2010) (noting that a court may
treat a motion filed under Rule 12(b)(1) as a Rule 12(b)(6) motion if warranted, and
collecting cases).
B.
Failure to State a Claim
To state a claim for breach of contract “a plaintiff must show: (1) the
existence of a valid and enforceable contract; (2) the performance of the contract by
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plaintiff; (3) the breach of the contract by defendant; and (4) a resulting injury to
plaintiff.” Priebe, 240 F.3d at 587 (quoting Hickox v. Bell, 195 Ill.App.3d 976, 992
(5th Dist. 1990)). The parties dispute, albeit indirectly, whether the complaint
alleges the existence of a valid and enforceable contract.
Plaintiffs argue that they do not need to allege that the Board approved the
mutual release agreement to show that it is a valid and enforceable contract.
Relying on the same arguments raised in the motion to vacate and alter judgment,
plaintiffs contend that the contract is not a use agreement that purports to control
the location and operation of video gaming terminals, and is therefore outside the
scope of the holding in J&J Ventures, 2016 IL 119870. As explained in greater
detail in the order on the first motion to dismiss, see [21] at 7–9, and the oral ruling
on the motion to vacate and alter judgment, see [35] at 2–4, the exclusive location
agreements which plaintiffs assigned to Midwest under the asset purchase
agreements purport to control the placement and operation of video gaming
terminals. The mutual release agreement replaces the asset purchase agreements,
modifying and continuing the payment scheme established by the latter, and
governs the parties’ ongoing efforts to place and operate video gaming terminals.
The mutual release agreement is based on the placement of gaming terminals by
Midwest and entitles plaintiffs to compensation dependent on the extent to which
Midwest places video gaming terminals in certain licensed establishments. Under
J&J Ventures, only the Board can deem such a contract valid and enforceable.
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Plaintiffs argue that the mutual release agreement does not give them any
rights to locate or operate any video gaming terminals. They say the asset purchase
agreements assigned those rights to Midwest, and that the mutual release
agreement is an entirely separate contract that operates as a release and
termination of those agreements. While plaintiffs acknowledge that the mutual
release agreement incorporates certain payment terms from the asset purchase
agreements, they state that those terms are unrelated to the rights to control the
location or operation of any terminals.
Plaintiffs’ arguments are unpersuasive, especially in light of their theory of
relief. Plaintiffs’ own theory of breach is that the contract required Midwest to
install certain video gaming terminals and pay plaintiffs. Midwest’s failure to
perform was allegedly a breach. Plaintiffs’ reading of the contract, then, is that it
purports to control placement of and payments derived from video gaming
terminals. For the reasons listed above, and for the reasons stated in the order on
the motion to dismiss the original complaint and in the oral ruling on the motion to
vacate and alter judgment, the contract at issue is an agreement that purports to
control the placement and operation of video gaming terminals. As such a contract,
a determination of its validity and enforceability rests exclusively within the
Board’s jurisdiction. J&J Ventures, 2016 IL 119870, ¶ 38.
Plaintiffs also argue that the Board itself narrowly interpreted the Illinois
Supreme Court’s holding in J&J Ventures. The complaint alleges that the Board
amended its rules in response to that decision, creating a procedure for licensed
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establishments or terminal operators to petition the Board for a determination that
a use agreement is invalid. [40] ¶ 119. The procedure allows the Board to
determine: which use agreement is valid, if one establishment is party to use
agreements with multiple terminal operators that cover the same time period;
whether a use agreement complies with the Video Gaming Act; whether a use
agreement’s renewal provision constitutes an undue burden on an establishment;
and whether a terminal operator used improper means to persuade an
establishment to enter into or renew a use agreement. But plaintiffs cannot make
use of this procedure because they are neither terminal operators nor licensed
establishments. Plaintiffs argue that because the emergency amendment that the
Board enacted in response to J&J Ventures does not provide plaintiffs with a
mechanism to obtain Board approval, the Board has signaled that determining the
validity of the mutual release agreement is outside of its jurisdiction.3
Plaintiffs
overstate
the
significance
of
the
Board’s
interpretation—
representations by the Board and information relating to its procedures “do not
control the determination of the Board’s jurisdiction, which is a judicial function
and not a question for the agency itself.” J&J Ventures, 2016 IL 119870, ¶ 41.
Under J&J Ventures, the mutual release agreement falls within the category of
agreements whose validity and enforceability must be determined by the Board. If
Plaintiffs also note that the procedure established by the emergency amendment is
unhelpful because it does not provide the relief that plaintiffs seek—monetary damages.
However, as discussed above, plaintiffs need only obtain a determination of validity and
enforceability from the Board. Once the Board approves the contract, plaintiffs may enforce
it elsewhere. Plaintiffs can, for example, look to this court to adjudicate a breach of contract
action and recover monetary damages.
3
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the Illinois Supreme Court intended a narrower holding, then the Illinois Supreme
Court may provide clarification. Whether the Board provides plaintiffs with a
procedural path to implement the holding in its current form is a separate issue.
The additional facts alleged in the amended complaint do not cure the
deficiency identified in the earlier opinion. Plaintiffs do not allege that the Board
approved the mutual release agreement. The complaint includes allegations of the
Board’s past conduct—its approval of, or at least lack of objection to, other
agreements that have come before it. Plaintiffs suggest that that conduct either
constitutes approval of enough of the constituent parts of the mutual release
agreement sufficient to show that the mutual release agreement is a valid and
enforceable contract, or that it guarantees that the Board would approve of the
contract if given the opportunity. The allegations are insufficient to show that the
mutual release agreement was in fact approved by the Board, and even if plaintiffs
could establish a high probability of a favorable decision by the Board, that does not
obviate the need to submit the contract for Board approval.4
Plaintiffs object to the inconsistency in Midwest’s position that the mutual
release agreement’s validity has not been alleged. Midwest does not contest the
validity of the underlying exclusive location agreements or their assignments, and
in a different case, AAA and Midwest appeared together as defendants and argued
Midwest also argues that the complaint does not plausibly allege that the mutual release
agreement contains an implied duty of good faith and fair dealing. As discussed in the order
on the first motion to dismiss, Illinois courts read that duty into every contract as a matter
of contract interpretation. See Dayan v. McDonald's Corp., 125 Ill.App.3d 972, 989–90 (1st
Dist. 1984) (a covenant of good faith and fair dealing is implied into every contract unless
expressly disavowed). Because Midwest does not identify any provision in the agreement
expressly disavowing that duty, the complaint plausibly alleges that such a duty exists.
4
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in favor of the validity of a similar assignment of exclusive placement rights. But
the mutual release agreement is a different contract, as plaintiffs note elsewhere in
their brief, and one whose validity is not adequately alleged. Plaintiffs do not state a
claim for breach of that contract. Therefore, the motion to dismiss is granted.
IV.
Conclusion
Midwest’s motion to dismiss, [41], is granted. The complaint is dismissed for
failure to state a claim. The parties shall appear for a status hearing on February 2,
2018, at 9:30 a.m.
ENTER:
___________________________
Manish S. Shah
United States District Judge
Date: January 26, 2018
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