May 13, 2013

PokerStars v. Atlantic Club Casino—What to Watch for in Atlantic Club's Response

As most folks in the poker world are aware, the Rational Group—parent of online poker behemoth PokerStars—has filed suit against Resorts International and other defendants with respect to a dispute over an agreement for PokerStars to purchase the Atlantic Club Casino. The purchase of the Atlantic Club was—and maybe still is—the best vehicle for PokerStars' entry into the legal U.S. online poker market. The apparent failure of the deal has been covered by former corporate attorney turned poker journalist Dave "FTrain" Behr for Flushdraw.com (Part 1 and Part 2). Behr (at Flushdraw.com) along with poker journalists DiamondFlush (at DiamondFlush.com) and Chris Grove (at QuadJacks.com) have each provided excellent analyses of the initial Complaint and accompanying Motion for Temporary Restraining Order (TRO) and supporting Brief (thanks to Grove and QuadJacks for obtaining and sharing the original pleadings).

At this point, there's not much for me to add to the excellent work noted above, mostly because to this point we—and the Court—have seen only one side of the case. However, my 18-year career has been spent mostly as a litigator specializing in defending a variety of civil lawsuits, primarily insurance, financial, and commercial in nature. As a civil defense attorney, when looking at an initial Petition or Complaint, my first instinct is to ask, "What's missing? What didn't the Plaintiff or Petitioner tell the Court?" Often what's not mentioned in the Petition or Complaint are matters that go to the heart of the dispute. With respect to the PokersStars v. Atlantic Club Casino Complaint, there are several key factual issues that need to be fleshed out in the Atlantic Club's Response due later today. Three issues in particular deserve to be put on a "watch list" for when Atlantic Club files its Response.

I.  What does the Purchase Agreement state regarding the "Outside Date" and PokerStars' Obligation to Become Licensed?

The first, and most critical issue, is the exact contractual definition of "Outside Date", and the contractual significance of that date. Regrettably, the Purchase Agreement itself is not yet publicly available (though it was filed with and available to the Court). However, PokerStars makes repeated reference to various provisions of the Purchase Agreement throughout its Complaint and Brief, including quoting or even block-quoting several key provisions.

However, the Complaint and Brief cite to, paraphrase, but do not quote the relevant contractual provisions which apparently set an "Outside Date" for completion of certain aspects of the deal (referred to as Section 7.2), and also set forth the requirements for PokerStars to obtain a casino license (referred to as Section 5.5.). The failure to quote contractual terms is always a red flag to a litigator, because the precise contractual language is nearly always critical to the proper construction and interpretation of a contract.

In this particular case, the exact terms of the Purchase Agreement related to licensing and the "Outside Date" are critical because PokerStars is arguing those provisions run afoul of the following provision of the New Jersey gaming statutes:

[W]henever any person contracts to transfer any property relating to an ongoing casino operation … under circumstances which require that the transferee obtain casino licensure … the contract shall not specify a closing or settlement date which is earlier than the 121st day after the submission of a completed application for licensure or qualification… Any contract provision which specifies an earlier closing or settlement date shall be void for all purposes.

PokerStars argues that its application was not "completed" until April 11, 2013, and thus any contractual provision for an "Outside Date" less than 120 days later (before August 9, 2013) would be void pursuant to law.

The problem with PokerStars' argument is that it is not clear whether the Purchase Agreement actually violates the statute. First, the term "Outside Date" is not defined. To violate the statute, the "Outside Date" must be a "closing or settlement date". A "closing date" is generally understood to be the date when control and ownership is transferred to the purchaser, and payment is made to the seller. A "settlement date" is generally understood to be the date payment is made for a previous transfer of goods or property. In the context of gaming control regulations connected to licensing of a previously unlicensed owner, "closing or settlement date" would appear to be the date when the purchaser takes control of the casino after receiving its license; the 120 day statutory requirement is to ensure there is sufficient time for gaming officials to consider, investigate, and make a determination as to the purchaser's suitability for licensing.

However, for those of us who have been involved in large business sales, it seems unlikely that the "closing date" is the same as a licensing date. Closing on a large business sale like this requires significant "due diligence", including transferring deeds, clearing liens, assigning contracts and accounts, and reviewing employment and labor contracts (the PokerStars Complaint and Brief take Atantic Club to task for failing to provide paperwork on several of these types of due diligence issues). The more common practice where regulatory approval is required for a transaction would be to designate a deadline for obtaining necessary approvals or licenses, and a later date for the actual closing of the transaction.

In the present case, PokerStars' obtaining licensing by a particular date might be a condition precedent for closing the deal, not the closing date itself. In other words, the "Outside Date" might refer to a deadline by which PokerStars was to be licensed to keep the deal alive, with a later formal closing date (perhaps tied to the date of licensing; e.g., "Closing shall occur within 30 days of PokerStars receiving a valid gaming license."). Or, the "Outside Date" might be a deadline on the entire deal itself; if all requirements are not met by that date, then the Purchase Agreement terminates. In such a case, the "Outside Date" would operate not as a closing date, but as the expiration date on an option to buy the casino (and it is unquestioned that the Purchase Agreement provided more than sufficient time from the date of signing in which PokerStars could have submitted a "completed application" and still had 120 days before the "Outside Date"). Similarly, there might be other deadlines in the Purchase Agreement which are not tied to licensing which PokerStars missed because of the licensing delays.

Of course, without the Purchase Agreement, we are in the dark as to what was meant by the term "Outside Date", and whether that "Outside Date" was the equivalent of a "closing or settlement date" pursuant to the relevant statute. But the Atlantic Club will need a convincing argument that the closing date statute has not been violated to avoid being found in breach of the Purchase Agreement.

II.  What is the Atlantic Club's explanation for appearing to mislead PokerStars into thinking the "Outside Date" would not be enforced?

In its claims for unjust enrichment and promissory estoppel, PokerStars outlines a number of communications and actions by the Atlantic Club which PokerStars claims unfairly gave the impression that the Atlantic Club was not going to enforce the "Outside Date" and terminate the Purchase Agreement. Both of these claims are equitable in nature, based on principles of fairness where one party has misled another party to its detriment. Principles of equity generally will not operate to void valid contractual provisions; equity is not intended to save parties from bad deals, only to remedy unfair conduct.

Here, the Purchase Agreement will again be key. Often contracts have "non-waiver of default" provisions that state a party can choose not to invoke a remedy for one default without waiving the right to later pursue a remedy for a future default. Here, the Atlantic Club might argue it was cooperating with PokerStars to make the deal work until it became obvious that the closing time frame was too far removed from the original "Outside Date" and it needed to terminate the Purchase Agreement and pursue other options.

The Atlantic Club will also need to answer what I view as PokerStars' strongest argument—PokerStars has paid advances of $11 million, and is potentially on the hook for an additional $4 million penalty, which is roughly equivalent to the full purchase price of the deal. Thus, termination of the Purchase Agreement essentially works a forfeiture of the entire purchase price. Generally speaking, the law frowns on forfeitures. However, if forfeiture of advance payments is a remedy spelled out in the Purchase Agreement, it likely is enforceable as a bargained-for condition of the contract.

More troubling is the allegation that the Atlantic Club demanded certain advances on construction costs associated with refurbishing the casino for PokerStars, including building out a poker room. Some of these demands for advance payments were made after the time when it appears the Atlantic Club was already considering terminating the Purchase Agreement. How the Atlantic Club responds to these complaints is also important. However, even if some of these actions by the Atlantic Club are found to be improper, the Court may nonetheless determine that the appropriate remedy is only reimbursement of specific payments made after the date the Atlantic Club determined the deal would not meet the contractual deadline. PokerStars' preferred remedies of either specific performance of the contract or reimbursement of all payments may both be rejected even if PokerStars demonstrates detrimental reliance on some of the Atlantic Club's statements and demands.

III.  Spot the malpractice.

Assuming that the major issues are whether the "Outside Date" complies with New Jersey law, and whether the Purchase Agreement provides for forfeiture of advance payments if PokerStars did not obtain a gaming license, the obvious question will be "What lawyer dropped the ball?" These issues are so legally obvious, so critical to the business deal, and of such a major financial magnitude that the attorneys drafting the Purchase Agreement and giving the parties advice on how to proceed pursuant to that contract have to be sweating profusely about how to explain any potential loss in Court to their respective clients.

Get your popcorn. This lawsuit promises to be legal Bloodsport.

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