Opinion
Civ. No. 98-2058 (JNE/JGL).
June 13, 2003
Kyle E. Hart, Esq., and Richard G. Jensen, Esq., Fabyanske, Westra Hart, P.A., Appeared for Plaintiff.
Stanley E. Siegel, Jr., Esq., and Denied Q. Poretti, Esq., Rider, Bennett, Egan Arundel, LLP, Appeared for Defendants.
ORDER
This case arises from the parties' efforts to develop a casino for an Indian tribe. It involves claims for breach of contract and breach of fiduciary duty under Michigan law, as well as allegations that a subsidiary corporation was the alter ego of its parent corporation. Before the Court are cross-motions for partial summary judgment. For the reasons given below, both motions are denied.
The defendants' motion is entitled "Motion for Summary Judgment," but it does not address all of the plaintiff's claims.
I. BACKGROUND
A more thorough recitation of the facts underlying this case can be found in Casino Resource Corp. v. Harrah's Entertainment, Inc., 243 F.3d 435 (8th Cir. 2001), and Casino Resource Corp. v. Harrah's Entertainment, Inc., Civ. No. 98-2058, 2002 WL 480968 (D. Minn. Mar. 22, 2002).
In 1994, Casino Resource Corporation (CRC) acquired a right of first refusal to develop a casino for the Pokagon Band of Potawatomi Indians (Band), a federally recognized Indian tribe based in Michigan. In January 1995, CRC and Harrah's Entertainment, Inc. (Harrah's Entertainment) entered into a Memorandum of Understanding whereby they agreed to work together to pursue gaming opportunities with the Band. CRC and Harrah's Entertainment submitted a joint response to a request for proposals that had been issued by the Band. The Band eventually accepted their proposal.
CRC has since changed its name to BounceBack Technologies.com, Inc.
Following the Band's acceptance, a subsidiary of Harrah's Entertainment, Harrah's Operating Company, Inc. (Harrah's Operating), incorporated a subsidiary, Harrah's Southwest Michigan Casino Corporation (Harrah's Southwest). In September 1995, Harrah's Operating and Harrah's Southwest entered into a Development Agreement with the Band, and Harrah's Southwest entered into a Management Agreement with the Band. The Development Agreement contained a non-compete provision generally prohibiting the parties from engaging in gaming development within 125 miles of "any casino facility developed pursuant to agreement(s) between the parties."
In June 1996, CRC and Harrah's Southwest executed a Technical Assistance and Consulting Agreement (TACA), which incorporated by reference the Development Agreement's non-compete provision. The earlier Memorandum of Understanding between CRC and Harrah's Entertainment expired, at the latest, when the TACA was executed.
In December 1997, HEI Acquisition Corp. (HEI Acquisition), another subsidiary of Harrah's Operating, merged with Showboat, Inc. (Showboat). Showboat owned a majority interest in a riverboat casino moored within 125 miles of the Band's proposed casino. In September 1998, Harrah's Operating, Harrah's Southwest, and the Band agreed to terminate the Development Agreement and the Management Agreement.
CRC then brought this case against Harrah's Entertainment, Harrah's Operating, and Harrah's Southwest, as well as two executives of Harrah's Southwest, Philip Satre and Colin Reed (collectively, Defendants). The complaint states several claims under Michigan law, including claims for breach of the TACA and breach of fiduciary duty. It also alleges that Harrah's Southwest was the agent or alter ego of its parent corporation, Harrah's Operating, and its grandparent corporation, Harrah's Entertainment.
In May 1999, the Court granted Defendants' motion to dismiss, reasoning that the Indian Gaming Regulatory Act, 25 U.S.C. § 2701-2712 (2000) (IGRA), preempted CRC's claims. Defendants appealed, and the Eighth Circuit Court of Appeals reversed and remanded. Casino Res. Corp. v. Harrah's Entm't, Inc., 243 F.3d 435, 440-41 (8th Cir. 2001). On remand, the Defendants filed a motion to dismiss or for summary judgment, arguing, inter alia, that CRC was not owed a fiduciary duty because the TACA did not create a partnership or joint venture. The Court rejected this argument, denied Defendants' motion in part, and granted it in part. Casino Res. Corp. v. Harrah's Entm't, Inc., Civ. No. 98-2058, 2002 WL 480968, at *6-9 (Minn. Mar. 22, 2002). CRC and Defendants now move for partial summary judgment.
II. DISCUSSION
Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party "bears the initial responsibility of informing the district court of the basis for its motion," and must identify "those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party satisfies its burden, Rule 56(e) requires the party opposing the motion to respond by submitting evidentiary materials that designate "specific facts showing that there is a genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In determining whether summary judgment is appropriate, a court must look at the record and any inferences to be drawn from it in the light most favorable to the party opposing the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
A. CRC's Motion
CRC seeks summary judgment on its claim that Harrah's Southwest is the alter ego of its parent corporation, Harrah's Operating, and it seeks summary judgment on the issue of liability with respect to its claims for breach of contract and breach of fiduciary duty.
1. Alter ego
CRC argues that Harrah's Southwest was the alter ego of Harrah's Operating, and it urges the Court to treat the two corporations as a single entity by piercing Harrah's Southwest's corporate veil. Under Michigan law, separate corporate identities are generally respected, and corporate veils are pierced only to prevent fraud or injustice. In re RCS Engineered Prods. Co., Inc., 102 F.3d 223, 226 (6th Cir. 1996) (applying Michigan law); Bodenhamer Bldg. Corp. v. Architectural Research Corp., 873 F.2d 109, 111 (6th Cir. 1989) (same). A court may find that a subsidiary was the alter ego of its parent and pierce the subsidiary's corporate veil upon proof that the subsidiary was a mere instrumentality of the parent, the subsidiary was used to commit a fraud or wrong, and there was an unjust loss or injury to the plaintiff. Foodland Distribs. v. Al-Naimi, 559 N.W.2d 379, 381 (Mich.Ct.App. 1997); Nogueras v. Maisel Assocs. of Mich., 369 N.W.2d 492, 498 (Mich.Ct.App. 1985); see Gledhill v. Fisher Co., 262 N.W. 371, 372 (Mich. 1935).
The TACA provides for the application of Michigan law, and the parties agree that Michigan law governs this case.
The evidence in this case tends to support CRC's position that Harrah's Southwest was a mere instrumentality of Harrah's Operating. Harrah's Southwest was initially capitalized with a loan of $1,000 from Harrah's Operating. When Harrah's Southwest had to pay CRC $250,000 pursuant to the TACA, Harrah's Operating issued the payment. Harrah's Southwest and Harrah's Operating had an interlocking board of directors, and Harrah's Southwest did not compensate its directors. Two of Harrah's Southwest's directors testified they did not even know what position they held with Harrah's Southwest, and they could not identify any of the company's other officers or directors. Harrah's Southwest never had its own employees, bank accounts, office space, telephone number, letterhead, or business cards. During discovery, CRC requested all stock certificates, meeting minutes, and corporate resolutions issued by Harrah's Southwest since its incorporation. Harrah's Southwest did not produce any such documents. The only evidence weighing against a finding that Harrah's Southwest was a mere instrumentality is the deposition testimony of Satre, which indicates that he signed corporate resolutions on behalf of Harrah's Southwest, and the fact that Harrah's Southwest filed its own income-tax returns.
Defendants argue that this evidence is sufficient to create a genuine issue of fact as to whether Harrah's Southwest was a mere instrumentality. The Court need not reach this question. Assuming without deciding that Harrah's Southwest was a mere instrumentality, CRC is still not entitled to summary judgment because it has failed to carry its burden with respect to the second and third elements. Under the second element, CRC must show that Harrah's Operating used Harrah's Southwest to commit a fraud or wrong. The argument presented by CRC on this point is essentially identical to its argument on the mere-instrumentality element. As discussed, under Michigan law, CRC must do more than show that Harrah's Southwest was a mere instrumentality of its parent. See Gledhill, 262 N.W. at 372; Nogueras, 369 N.W.2d at 498; Maki v. Copper Range Co., 328 N.W.2d 430, 433 (Mich.Ct.App. 1982) (per curiam). As for the third element, CRC contends that it will suffer an unjust loss if the Court does not pierce Harrah's Southwest's corporate veil because Harrah's Southwest does not have any assets. Thus, the argument continues, if CRC prevails on its claims against Harrah's Southwest, it will be unable to collect on its judgment. CRC has failed to submit evidence substantiating its claim that Harrah's Southwest would be unable to satisfy a judgment. Furthermore, the Court is unwilling to assume at this stage of the litigation that CRC will ultimately prevail on its claims. For these reasons, the Court concludes that CRC is not entitled to summary judgment on its veilpiercing theory.
2. Breach of contract
CRC's breach-of-contract claim is based on section 9.8.1 of the TACA, which provides:
With the exception of, and subject to, any restrictions contained in the Casino Agreements, either party [CRC or Harrah's Southwest] may engage and possess an interest in any other business venture of any nature, kind or description, including, without limitation, any business venture engaged in the same type of business as that contemplated under this [TACA], even if such other business is competitive with the business venture contemplated under this [TACA].
(Emphasis added.) According to CRC, the italicized language incorporates by reference the non-compete provision in the Development Agreement between the Band, Harrah's Operating, and Harrah's Southwest. With exceptions not relevant here, the non-compete provision required the parties "to refrain from commercial or Indian gaming development within [125 miles of] any casino facility developed pursuant to agreement(s) between the parties." CRC claims that this provision was breached when HEI Acquisition merged with Showboat.
The Development Agreement is one of the Casino Agreements. According to Defendants, CRC's position is that the TACA is also one of the Casino Agreements. The Court disagrees. Although CRC maintains that the TACA incorporates by reference the Distribution Agreement's non-compete provision, it has never argued that the term "Casino Agreements" includes the TACA.
The first issued raised by the parties is whether the TACA is legally enforceable under the IGRA. The IGRA provides that management contracts related to certain classes of gaming activity must be approved by the Chairman of the Department of the Interior's National Indian Gaming Commission (NIGC). See 25 U.S.C. § 2710(d)(9), 2711; Casino Resource, 243 F.3d at 438 n. 3. Management contracts become effective upon approval by the NIGC, 25 C.F.R. § 533.1 (2002); United States ex rel. Bernard v. Casino Magic Corp., 293 F.3d 419, 421 (8th Cir. 2002), and contracts that are not approved are void, 25 C.F.R. § 533.7 (2002). It is undisputed that the TACA was not approved by the NIGC. Thus, the question presented is whether the TACA is a management contract.
The NIGC's regulations define the term "management contract" to mean "any contract, subcontract, or collateral agreement between an Indian tribe and a contractor or between a contractor and a subcontractor if such contract or agreement provides for the management of all or part of a gaming operation." 25 C.F.R. § 502.15 (2002). The TACA does not fall within this definition. In this case, the contract that "provide[d] for the management of all or part of [the Band's proposed] gaming operation" was the Management Agreement between Harrah's Southwest and the Band. Under the Management Agreement, the Band agreed to retain Harrah's Southwest as the "exclusive manager" of the proposed casino, and Harrah's Southwest agreed to "conduct and direct all business and affairs in connection with the day-to-day operation, management and maintenance" of the casino. The TACA does not alter the Management Agreement's allotment of management authority, nor does it grant any management authority to CRC. Indeed, section 3.1.1 of the TACA states that CRC "shall have no right to affect the management decisions made by Harrah's [Southwest] in its . . . performance of" the Management Agreement. The Court therefore concludes that the TACA is not a "management contract" requiring NIGC approval.
Having concluded that the TACA is legally enforceable, the Court will now consider CRC's contention that HEI Acquisition's merger with Showboat breached the non-compete provision. As a result of the merger, Harrah's Operating became the sole owner of a corporation that held a majority interest in a riverboat casino located within 125 miles of the Band's proposed casino. Harrah's Operating, however, was not a party to the TACA. The only defendant that was a party to the TACA, Harrah's Southwest, was not involved in the merger. Thus, CRC's breach-of-contract claim depends on the premise that Harrah's Operating and Harrah's Southwest were the same entity. Because the Court has already denied CRC's motion to treat the two corporations as one, its motion on this point must also be denied.
3. Breach of fiduciary duty
CRC claims that Harrah's Southwest and its alleged alter ego, Harrah's Operating, owed CRC a fiduciary duty, and that they breached their duty by acquiring a majority interest in Showboat's riverboat casino, operating the riverboat casino, and terminating their agreements with the Band. CRC advances two theories in support of its position that it was owed a fiduciary duty. The first is based on section 9.10 of the TACA, which required Harrah's Southwest to "comply fully with . . . [its] Compliance Policies" in performing its obligations under the TACA. The Compliance Policies state in pertinent part that "[o]ur policy at [Harrah's Entertainment and its subsidiaries] is to conduct business with honesty and integrity, always practicing the highest moral, legal and ethical standards." Similarly, the Compliance Policies state that "[i]t is the strict policy of [Harrah's Entertainment and its subsidiaries] to conduct [their] business with honesty and integrity, and in accordance with high moral, legal, [and] ethical standards," and that "Harrah's [Entertainment and its subsidiaries are] committed to conduct[ing] all [their] activities in accordance with the highest standards of integrity, ethics, and objectivity." According to CRC, Harrah's Southwest's promise to abide by its Compliance Policies created a fiduciary relationship.
Under Michigan law, the term "fiduciary relationship" is a "very broad one" that includes relationships founded on trust or confidence placed by one person in the integrity and fidelity of another. LaForest v. Black, 128 N.W.2d 535, 538 (Mich. 1964); Van't Hof v. Jemison, 289 N.W. 186, 189 (Mich. 1939). A fiduciary relationship arises "`when there is a reposing of faith, confidence and trust and the placing of reliance by one person upon the judgment and advice of another.'" Mannausa v. Mannausa, 121 N.W.2d 423, 425 (Mich. 1963) (quoting In re Jennings' Estate, 55 N.W.2d 812, 813 (Mich. 1952)). The existence of a fiduciary relationship is a question of fact. Kar v. Hogan, 221 N.W.2d 417, 421 (Mich.Ct.App. 1974); In re Kanable's Estate, 209 N.W.2d 452, 455 (Mich.Ct.App. 1973).
Nearly all of the cases cited by CRC involved relationships that have traditionally been considered fiduciary in nature. See Hall v. Nat'l Recovery Sys., Inc., No. 96-132-CIV-T-17(C), 1996 WL 467512, at *5 (M.D. Fla. Aug. 9, 1996) (fiduciary relationship between class representative in putative class action and other members of class); GLM Corp. v. Klein, 665 F. Supp. 283, 286 (S.D.N.Y. 1987) (agent and principal); Black v. Dahl, 625 P.2d 876, 879-80 (Alaska 1981) (real-estate agent and client); H.J. Tucker Assocs., Inc. v. Allied Chucker Eng'g Co., 595 N.W.2d 176, 188 (Mich.Ct.App. 1999) (agent and principal); Band v. Livonia Assocs., 439 N.W.2d 285, 294 (Mich.Ct.App. 1989) (partners). The one exception, LaForest, is easily distinguished. In that case, the Michigan Supreme Court held that a stepdaughter was a fiduciary of her mentally incompetent stepmother. 128 N.W.2d at 538. The evidence indicated that the stepdaughter "was a close business and personal confidante of [her stepmother]; she advised her, served her, and procured services for her." Id. CRC is far less vulnerable than the stepmother in LaForest. In addition, the TACA's mere reference to the Compliance Policies does not demonstrate that CRC actually reposed its faith, confidence, and trust in Harrah's Southwest's judgment and advice. Based on these considerations, the Court concludes that a ration trier of fact could find that the TACA's reference to the Compliance Policies did not create a fiduciary relationship.
CRC's second fiduciary-duty theory is that the TACA created a partnership or joint venture. When this question was presented to the Court in the context of Defendants' motion to dismiss or for summary judgment, it ruled that a rational trier of fact could find in CRC's favor. See Casino Res., 2002 WL 480968 at *6-9. Because only a limited amount of discovery had been conducted at the time Defendants made their earlier motion, the Court's decision was based almost exclusively on the four comers of the TACA. The issue raised by CRC's motion, in contrast, is whether, based on all of the evidence in the record at this time, a rational trier of fact could find in favor of Defendants. In making this determination, the Court must view the evidence in the light most favorable to Defendants. See Liberty Lobby, 477 U.S. at 255.
The Order states, "The relationship between CRC and Harrah's constitutes a partnership or joint venture." Id. at *8. In a Supplemental Order, the Court stated, "The Order does not purport to decide as a matter of law whether or not a partnership or joint venture existed."
The Court's Order of March 2002, contains an extensive discussion of Michigan law as it relates to the creation of partnerships and joint ventures, as well as the factors weighing in favor of and against the existence of a partnership or joint venture in this case. See Casino Res., 2002 WL 480968, at 9. That discussion need not be repeated here. Instead, the Court will focus on the new evidence submitted by Defendants in connection with the instant round of motions.
Defendants have submitted several documents filed by CRC with the Securities and Exchange Commission which represent that CRC served as a consultant or an advisor under the TACA. CRC made similar representations in annual reports issued to shareholders in 1995 and 1996. Although these documents contain references to joint ventures between CRC and other entities, they never characterize CRC's relationship with Defendants as a partnership or joint venture. Defendants have also come forward with deposition testimony from several of Harrah's Southwest's executives and individuals involved in the negotiation of the TACA, all of whom testified that they did not intend the TACA to create a partnership or joint venture. Based on this evidence, as well as the provisions of the TACA that expressly disavow the existence of a partnership or joint venture, a rational trier of fact could find that the TACA did not create a partnership or joint venture. Accordingly, the Court denies CRC's motion for summary judgment on its claim for breach of fiduciary duty.
B. Defendants' Motion
Defendants identify three main bases for its motion for partial summary judgment: first, the acquisition of Showboat did not violate the non-compete provision referenced in the TACA; second, the TACA did not create a partnership or joint venture; and third, CRC cannot show that the acquisition of Showboat was the "but for" cause of any damages it sustained.
1. Breach of the non-compete provision
Defendants claim that the Development Agreement's non-compete provision is void under the IGRA because the Development Agreement is a "management contract" that was not approved by the NIGC. Defendants rely on Casino Magic in support of their position. In Casino Magic, the Eighth Circuit held that a series of agreements involving an Indian tribe, a contractor, and a bank constituted a "management contract." 293 F.3d at 426. The first agreement was a consulting agreement between the tribe and the contractor, under which the contractor did not have any management authority over the tribe's casino. Id. at 421. The second was a loan agreement between the tribe and the bank. The loan agreement required the tribe to comply with all "recommendations" made by the contractor under the consulting agreement, unless the recommendations conflicted with gaming practices or industry standards. Id. at 422. The third was a participation agreement between the bank and the contractor that granted the contractor an ownership interest in the tribe's debt. Id.
Whereas Casino Magic involved an initial agreement that called for the contractor to play a consulting role and two subsequent agreements that effectively converted the contractor into a manager, this case features a single agreement, the Management Agreement, that addresses the subject of management authority over the Band's proposed casino. Unlike the agreements at issue in Casino Magic, the Development Agreement does not modify the arrangement framed by the Management Agreement, and it does not "provide for the management of all or part of a gaming operation," 25 C.F.R. § 502.15. For these reasons, the Court concludes that the Development Agreement is not part of a "management contract" requiring NIGC approval under the IGRA.
Defendants next raise an issue of contract interpretation. Again, the non-compete provision prohibited the parties from engaging in "commercial or Indian gaming development within [125 miles of] any casino facility developed pursuant to agreement(s) between the parties." According to Defendants, the word "developed" means "operating." Under Defendants' interpretation, the acquisition of Showboat did not violate the non-compete provision because the Band's casino was not operating at that time. The Court disagrees with Defendants' reading. The scope of the Development Agreement is limited to the early phases of the project, such as acquisition of a site for the casino, feasibility studies, design and construction of the casino, and selection of furnishings and equipment. When read in light of the Development Agreement as a whole, it is evident that the non-compete provision was meant to prohibit competition during those phases. Thus, the fact that the Band's casino was not operating when Showboat was acquired is not a valid defense to CRC's claims.
Defendants' last argument regarding the non-compete provision is that Harrah's Entertainment could not have breached the provision because it was not a party to the Development Agreement. Given that CRC's claim is for breach of the TACA, and not the Development Agreement, this argument is off the mark. The more relevant point is that Harrah's Entertainment was not a party to the TACA. Nor, for that matter, was Harrah's Operating. A claim for breach of contract generally will not lie against a person who was not a party to the contract. Under this general principle, only Harrah's Southwest could be sued for breach of the TACA. However, CRC's theory of the case is that Harrah's Southwest, Harrah's Operating, and Harrah's Entertainment constitute a single entity. Thus, if CRC can convince the jury that the three corporations are really one, then it may be able to prevail on its claim that the acquisition of Showboat violated the non-compete provision, even though Harrah's Operating and Harrah's Entertainment are not parties to the TACA.
2. Creation of partnership or joint venture
Defendants urge the Court to hold that the TACA did not create a partnership or joint venture. As previously stated, the Court's Order of March 2002, held that a rational trier of fact could find that a partnership or joint venture did exist based on the terms of the TACA. See Casino Res., 2002 WL 480968, at *6-8. The additional evidence submitted by Defendants is not sufficient to alter this conclusion.
3. "But for" causation
Defendants' final contention is that CRC has failed to submit sufficient evidence on the element of causation. Specifically, Defendants maintain that CRC cannot demonstrate that, but for the acquisition of Showboat, CRC and Harrah's Southwest would still be pursuing their efforts to develop a casino for the Band. In fact, Defendants argue, the evidence in the record demonstrates that, even if Showboat had not been acquired, Harrah's Southwest and Harrah's Operating would have terminated their agreements with the Band on October 15, 1998, or, at the latest, October 15, 1999.
To satisfy the causation element, CRC must establish a link between Defendants' alleged wrongful conduct and the loss it suffered. CRC has submitted several damage calculations that do not depend on the assumption that CRC and Harrah's Southwest would have continued to pursue the casino project. See Casino Res., 2002 WL 480968, at *11 ("CRC's damage calculations take into account situations presuming the existence of the [Band's] proposed casino, as well as scenarios without this presumption."). Accordingly, CRC need not demonstrate that Defendants' alleged wrongful conduct caused the parties to stop working with the Band, and any failure of proof on this point is not fatal to CRC's claims.
III. CONCLUSION
In sum, neither CRC nor Defendants are entitled to partial summary judgment. Therefore, IT IS ORDERED THAT:
1. CRC's Motion for Partial Summary Judgment [Docket No. 137] is DENIED.
2. Defendants' motion for partial summary judgment [Docket No. 145] is DENIED.