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Kansas Penn Gaming, LLC v. Hv Properties of Kansas

December 13, 2011



The opinion of the court was delivered by: Briscoe, Chief Judge.

United States Court of Appeals Tenth Circuit


Elisabeth A. Shumaker Clerk of Court

Before BRISCOE, Chief Judge, BALDOCK and LUCERO, Circuit Judges.

Plaintiff Kansas Penn Gaming, LLC (KPG), a limited liability corporation formed by Penn National Gaming, Inc. (Penn National), entered into a real estate sale contract with HV Properties of Kansas, LLC (HV), pursuant to which KPG purchased from HV parcels of land in southeast Kansas for $2.5 million for the purpose of seeking to develop a lottery gaming facility on the land. KPG ultimately chose not to develop a lottery gaming facility on the land. HV thus did not receive $37.5 million of payments that it had hoped to receive from KPG under the contract.

KPG filed this diversity action seeking a declaratory judgment that it did not breach the terms of the contract. HV filed a counterclaim alleging that KPG breached the terms of the contract. HV also filed a separate action against Penn National alleging breach of Penn National's obligation as guarantor to make the payments due under the contract between KPG and HV. The district court consolidated the two cases and granted summary judgment in favor of KPG and Penn National. Following the entry of judgment, the district court awarded attorneys' fees and expenses to KPG and Penn National. HV now appeals from these rulings. Exercising jurisdiction pursuant to 28 U.S.C. § 1291, we affirm the judgment of the district court, as well as its post-judgment award of attorneys' fees and expenses.


A. Factual history

1) HV Properties

In 2003, Steve Vogel and Gary Hall, natives of the southeastern Kansas town of Galena, began efforts to bring casino gaming to Kansas. In June 2004, Vogel and Hall formed Kansans for Economic Growth for the purpose of promoting passage of gaming legislation in Kansas. In early 2005, Vogel and Hall located and obtained the rights to several parcels of real property in Cherokee County, Kansas, which had immediate access to Interstate 44 and were close to gaming markets in Oklahoma, Arkansas and Missouri (the Subject Property). The Subject Property specifically included a fee interest in approximately 112.4 acres of land, as well as options to purchase two separate tracts of land totaling approximately 294.07 acres.

On or about February 2, 2005, Vogel and Hall formed HV, a Kansas limited liability company with its principal place of business in Joplin, Missouri, and transferred their rights in the Subject Property to HV. Effective January 1, 2006, HV's membership expanded to include Tim Shallenburger and Ross Vogel, both of whom were also residents of southeast Kansas.

2) HV's contact with Penn National

In the summer of 2005, Shallenburger, who at the time was working for but was not yet a member of HV, first spoke to Richard Klemp, the Vice-President of Government Relations for Penn National, a Pennsylvania-based gaming company, about the prospect of gaming in Kansas and the possibility of Penn National developing a casino on the Subject Property. In September 2005, Klemp and Steven Snyder, Penn National's Senior Vice-President for Corporate Development, met with HV to discuss the prospects for the legalization of gaming in Kansas, visited the Subject Property, and drove through northeastern Oklahoma to look at the existing tribal casinos.

On January 11, 2006, Penn National and HV entered into a Letter of Intent that contemplated that Penn National would lease the Subject Property. Thereafter, Penn National and HV engaged in various efforts to secure the legalization of gaming in Kansas.

3) The Kansas Expanded Lottery Act

In April 2007, the Kansas legislature enacted the Kansas Expanded Lottery Act (KELA), Kan. Stat. Ann. § 74-8733 et seq. KELA, in pertinent part, authorized the establishment of one "lottery gaming facility" in each of four specified "gaming zones," including the "southeast gaming zone," which encompasses Cherokee and Crawford counties in the southeast corner of the State. Kan. Stat. Ann. §§ 74-8702(f), 74-8734(a) and (d). KELA anticipated that each lottery gaming facility would be owned and operated by the Kansas Lottery, an independent state agency, but managed by a "lottery gaming facility manager" whose management terms and conditions would be governed by a "lottery gaming facility management contract" (management contract). Id. §§ 74-8702(n) and (o), 74-8734(a) and (d).

KELA imposes certain requirements for management contracts in the southeast gaming zone, including that (a) the casino must consist of an investment in infrastructure of at least $225 million, (b) the applicant must pay a $25 million privilege fee, and (c) the compensation paid to the lottery gaming facility manager must not exceed 73% of gaming revenues (or, in other words, the "tax rate" on the casino must not be lower than 27%). Id. §§ 74-8734(g)(2), (h)(6), (h)(12), (h)(13) and (h)(16).

KELA imposes a multi-step approval process for management contracts. The Lottery Commission first approves or disapproves proposed management contracts with the entities who have submitted timely applications to be lottery gaming facility managers for a particular gaming zone. Id. § 74-8734(d). If the Lottery Commission approves a proposed management contract, the executive director of the Kansas Lottery and the prospective lottery gaming facility manager are required to "execute the contract . . . ." Id. § 74-8736(a). "Upon execution of a . . . management contract . . . , the executive director [of the Lottery] . . . submit[s] such contract . . . to the [Review Board]," id. § 74-8736(b), which in turn must determine whether "the contract is the best possible such contract," id. § 74-8736(a). If the Review Board determines that the management contract "is the best possible such contract," id., it then "submit[s] the contract to the Kansas racing and gaming commission [KRGC] for approval," id. § 74-8736(e). The KRGC in turn must, after "conduct[ing] . . . background investigations of prospective lottery gaming facility managers," "vote to approve in whole or reject in whole the recommendation of the [Review Board]." Id. The executed management contract must also be "endorse[d] by resolution of the city governing body or county commission as required in [Kan. Stat. Ann. §] 74-8734 and amendments thereto." Id. § 74-8736(a). Thus, in sum, an executed management contract becomes "binding . . . only upon" approval by the Review Board and KRGC, and endorsement by the relevant city or county governing body. Id.

4) KPG

In May 2007, shortly after the passage of KELA, Penn National formed Kansas Penn Gaming, LLC (KPG), a Delaware limited liability corporation, for the purpose of applying for a license to manage a gaming facility in Cherokee County, Kansas, within the southeast gaming zone. Penn National is the sole member of KPG.

5) Cherokee County's approval of gaming and KPG

On June 5, 2007, Cherokee County held a referendum election in which county residents could determine whether they wished to have a casino located within the county. The referendum, which Penn National and HV promoted, passed with a large majority. Subsequently, on July 23, 2007, the Cherokee County Commission passed a resolution giving KPG an exclusive endorsement to be the operator of a lottery gaming facility in Cherokee County.

6) The competing Quapaw Tribe casino project

In May 2007, the Quapaw Indian Tribe (Quapaw) of Oklahoma announced plans to develop a large-scale casino in northeastern Oklahoma, directly across the state line from the Subject Property. At that time, and for several months thereafter, KPG was uncertain about the Quapaw's ability to obtain financing for and develop the proposed casino. KPG nevertheless viewed the Quapaw's proposed casino as a potential threat to the economic viability of a gaming facility located on the Subject Property, and consequently engaged in efforts to stop the development of the proposed Quapaw casino. Those efforts included investigating whether the proposed casino development was in violation of applicable environmental regulations, and participating in and financing a federal lawsuit against the United States Department of Interior, in which it was alleged that the federal government had improperly acquired and conveyed portions of the Quapaw's Oklahoma land, such that the land could not legally be used for gaming purposes.

7) KPG's application for the southeast gaming zone

On August 31, 2007, KPG applied with Kansas gaming authorities to be the lottery gaming facility manager for the southeast gaming zone. KPG's application was the only application submitted for the southeast gaming zone prior to the expiration of the initial September 6, 2007 application deadline.

8) The Sale Contract, Repurchase Agreement and Guaranty

On September 6, 2007, HV and KPG entered into a real estate sale contract (the Sale Contract), pursuant to which KPG agreed to pay a total of $2.5 million to acquire HV's interest in the Subject Property. The Sale Contract also provided for two contingent payments from KPG to HV: (1) a $17.5 million payment ten days after the "Lottery Gaming Facility Management Contract Award Date" (Section 3.3 of the Sale Contract), the definition of which is discussed below; and (2) a $20 million payment on the earlier of (a) ten days after the date KPG commenced gaming operations on the Subject Property or (b) 30 months after the Lottery Gaming Facility Management Contract Award Date unless delayed due to any force majeure event (Section 3.4 of the Sale Contract).

Section 1.11 of the Sale Contract defined the phrase "Lottery Gaming Facility Management Contract Award Date" in the following manner:

As used herein, the term "Lottery Gaming Facility Management Contract Award Date" shall mean the date upon which Buyer [KPG] has obtained all final, unappealed and unappealable licensing under the Act and Buyer has received a fully executed Lottery Gaming Facility Management Contract between Buyer and the Kansas Gaming Authority for the Subject Property to be utilized for Gaming Operations and all appeals periods with respect to the Grant and execution of such Lottery Gaming Facility Management Contract have lapsed without an appeal there from having been taken or any appeal thereof having been resolved in favor of Buyer. Aplt. App., Vol. I at 178-79.

Section 13 of the Sale Contract, entitled "Buyer's Representations and Covenants," provided, in pertinent part, as follows:

13.1 Buyer [KPG] shall use good faith commercially reasonable efforts to be designated the Lottery Gaming Facility Manager for and enter into a Lottery Gaming Facility Management Contract with respect to the Southeast Gaming Zone. Without limitation, Buyer shall make a complete and timely application for such designation and with respect to the Subject Property to the Kansas Gaming Authority by no later than the date set by the Kansas Gaming Authority as the due date for such application (subject to extensions of time that may be granted by the Kansas Gaming Authority), and shall thereafter provide such further information requested by the Kansas Gaming Authority and respond to such inquiries of the Kansas Gaming Authority regarding the application. Upon such designation, Buyer shall diligently proceed to negotiate and execute a Lottery Gaming Facility Management Contract with respect to the Subject Property. If, despite compliance with the covenants contained in this Section 13.1, Buyer is not designated the manager of the Gaming Operations in the Southeast Gaming Zone and does not receive from the Kansas Gaming Authority a fully executed final, unappealed and unappealable Lottery Gaming Facility Management Contract reasonably acceptable to Buyer, Buyer's obligation to pay the ...

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