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

2014 IL App (3d) 130111, 12 N.E.3d 223

• Court: Appellate Court of Illinois
• Decided: June 23, 2014
• Docket: 3-13-0111
• Status: Unpublished

Opinion

2014 IL App (3d) 130111

Opinion 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.

7 Adm. 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

9 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

10 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.