Operating with a Non-Renewed LicenseMay 28, 2008 Casino Lawyer
This article originally appeared in the Spring Issue 2008 issue of Casino Lawyer, Volume 4 Number 2.
In December 2007, the New Jersey Casino Control Commission (NJCCC) denied the casino license renewal of Adamar of New Jersey Inc., the owner and operator of the Tropicana Casino and Resort in Atlantic City. It is only the second time in the 29-year history of legalized casino gaming in New Jersey that renewal of a casino license was denied. In 1989, the NJCCC denied the bankrupt former Atlantis Casino Hotel’s license renewal because of a failure to meet the New Jersey Casino Control Act’s (NJCCA) 1 mandated "financial stability, integrity and responsibility" criteria. 2 This time, the NJCCC’s non-renewal decision was primarily based on Tropicana’s failure to meet the NJCCA’s "business ability" 3 and "good character, honesty and integrity" 4 requirements. 5
Remarkably, it’s business as usual at Tropicana’s casino hotel facility, despite non-renewal of the casino license. It is not, however, by mere chance or happenstance that the facility remains open. The NJCCA includes two complementary, yet separate and distinct, mechanisms to assure the continuous operation of a casino hotel facility where a casino license is revoked, suspended or not renewed, or where there is a significant change in the ownership of a casino licensee. Each works as a prophylactic to sever unsuitable persons and entities from the ownership, management and operation of an existing casino hotel facility, while permitting business to continue without interruption.
Where there is a revocation, suspension or non-renewal of a casino license, the NJCCC is authorized to appoint a conservator. 6 The conservator, who must meet all the standards of a casino key employee except residency, has full authority to own, manage and operate the casino hotel facility. 7 Upon appointment, the conservator is "vested with the title of all the property of the former or suspended licensee relating to the casino and the approved hotel" and has a "duty to conserve and preserve the assets." 8 Generally speaking, the conservator owns, manages and operates the facility until it is sold to a third party. 9 During the period of conservatorship, the former licensee may receive a fair rate of return out of net earnings, if any. 10 Once the facility is sold, the former licensee is also entitled to the net proceeds from the sale, less the conservator’s fees and other costs. 11
Interim Casino Authorization
A separate but complementary mechanism in the NJCCA — interim casino authorization (ICA) 12 — applies when a person acquires a significant ownership interest in an ongoing casino hotel operation and thereby triggers the NJCCA’s casino licensure or qualification requirements. ICA permits a person to acquire an ownership interest in an existing casino hotel operation without first being licensed or found qualified. Prior approval of the NJCCC is not necessary to acquire publicly traded securities of a holding company of a casino licensee on the open market. 13 All other acquisitions require the prior approval of the NJCCC. 14 Whenever prior approval is required, the purchaser must place all future right, title and interest in the to-be-acquired property in trust. In cases where the NJCCC determines that a person who has acquired publicly traded securities is required to qualify, the purchaser must likewise place the acquired property in trust. 15 In either case, once the trust is created, the purchaser then applies to the NJCCC for ICA.
The NJCCC is required to act on an application for ICA within 120 days after the filing of a complete ICA application. 16 In determining whether to grant ICA, the NJCCC considers whether granting ICA would serve the public interest, and the initial investigative findings and recommendations of the New Jersey Division of Gaming Enforcement. 17 In addition, a prerequisite to granting ICA is a requirement that the ICA trustee be qualified to the standards of a casino key employee, except residency. 18
If granted, ICA is valid for a nine-month period, subject to extension for an additional three-month period. 19 In cases where the transaction requires prior approval from the NJCCC, once ICA is granted, the transaction may close and all acquired property is placed in the trust. 20 During the ICA period, the trust, while legally effective, is not operative unless a disqualifying event occurs. 21
Before the expiration of ICA, the NJCCC acts on the plenary licensure or qualification of the purchaser. 22 If the NJCCC denies licensure or qualification, the trust becomes operative and the trustee is required to "exercise all rights incident to ownership of the property subject to the trust." 23 The trustee is then obligated to sell the trust property to either a person who is already appropriately licensed or qualified under the NJCCA, or a person who agrees to obtain ICA prior to the closing of the sale. 24
While the trust is operative pending a sale of the trust property, the unqualified applicant has "no right to participate in the earnings of the casino hotel or receive any return on its investment." 25 Upon the sale of the trust property, the unqualified applicant may only receive from the sale proceeds up to the lesser of the actual amount paid by the unqualified applicant, or the market value as of the date the trust became operative. Any excess funds are paid to the state. 26 In other words, an unqualified applicant is neither permitted to share in any earnings of the casino hotel facility once the trust is operative, nor profit from the sale of the trust property. This is materially different from a conservatorship, where the former licensee is entitled to both a fair rate of return out of net earnings of the facility during the conservatorship period and the net proceeds from the sale of the facility.
The Tropicana’s License
In an interesting legal twist, the NJCCA’s conservatorship and ICA provisions are both implicated by the non-renewal of Tropicana’s casino license. William J. Yung III, along with family trusts for his children, had only recently acquired Tropicana through their wholly owned company, Tropicana Casinos and Resorts Inc. (TCR), on Jan. 3, 2007. Yung acquired Tropicana after winning a "bidding war" for Aztar Corp., a publicly traded company, which at the time indirectly owned Tropicana. The transaction was subject to ICA, and the NJCCC granted ICA to TCR on Nov. 2, 2006. When the transaction closed on Jan. 3, 2007, TCR became subject to qualification as a holding company of Tropicana, and Tropicana’s issued and outstanding equity securities became trust property.
In December 2007, TCR continued to be subject to ICA because the NJCCC had not, as yet, ruled on the plenary qualification of TCR as a holding company of Tropicana. In connection with denying the renewal of Tropicana’s casino license, however, the NJCCC also denied the plenary qualification of TCR. Consequently, the ICA trust became operative. In addition, non-renewal of Tropicana’s casino license required that a conservator be appointed. The NJCCC appointed former New Jersey Supreme Court Justice Gary Stein to serve as the conservator. He was already serving as the ICA trustee. Thus, Stein now wears two hats under the NJCCA.
The duality of this unique circumstance of having both an ongoing conservatorship and operative ICA trust presented, at least facially, a direct conflict between the NJCCA’s conservatorship and ICA provisions. On one hand, the act’s conservatorship provisions permit a former licensee to enjoy both a fair rate of return out of net earnings of the facility during the conservatorship period and the net proceeds realized from the sale of the facility. On the other hand, ICA prohibits an unqualified purchaser from neither participating in the earnings of the facility while the trust is operative nor realizing any profit from the sale of the facility.
In reconciling the apparent conflict, the NJCCC ruled that the ICA provisions control because the New Jersey Legislature was clearly cognizant of the pre-existing conservatorship provisions when it amended the NJCCA to include ICA, and TCR agreed to be subject to the ICA regime when TCR acquired Aztar. 27 Consequently, TCR is barred from participating in the earnings of Tropicana’s casino hotel facility while the trust is operative and from realizing any profit from the sale of facility.
It is a testament to the foresight of the NJCCA’s drafters that ownership of the Tropicana is in the process of being orderly transferred after non-renewal of its casino license. Almost everyone wins — Tropicana’s employees remain employed, the state continues to derive tax revenues, and the public’s trust in licensed casino gaming is maintained. The only losers (and justifiably so) are the unqualified persons and entities responsible for non-renewal of the casino license.
Of course, not all gaming jurisdictions have legislation that provide mechanisms to handle situations similar to those presented by Tropicana. For example, just recently the Pennsylvania Gaming Control Board addressed a situation where the sole owner of one of its slot facilities, Louis DeNaples, was criminally indicted. While no specific provisions of the Pennsylvania Race Horse Development and Gaming Act authorized the appointment of a trustee, the board relied on its inherent emergency powers and appointed a trustee to hold DeNaples’s ownership interest in the slot facility. 28
1) N.J.S.A. 5:12-1 et seq.
2) N.J.S.A. 5:12-84(a).
3) N.J.S.A. 5:12-84(d).
4) N.J.S.A. 5:12-84(c).
5) NJCCC, Order No. 07-12-12-27, p. 59 (Dec. 12, 2007).
6) N.J.S.A. 5:12-130.1 through -130.11.
7) N.J.S.A. 5:12-130.2.
9) N.J.S.A. 5:12-130.2 and -130.8.
10) N.J.S.A. 5:12-130.5.
11) N.J.S.A. 5:12-130.5.
12) N.J.S.A. 5:12-95.12 through -95.16.
13) N.J.S.A. 5:12-95.12(b).
14) N.J.S.A. 5:12-95.12(a).
15) N.J.S.A. 5:12-95.12 and -95.14.
16) N.J.S.A. 5:12-95.12.
17) N.J.S.A. 5:12-95.13.
18) N.J.S.A. 5:12-95.13(a).
19) N.J.S.A. 5:12-95.16.
20) N.J.S.A. 5:12-95.12(a).
21) N.J.S.A. 5:12-95.14.
22) N.J.S.A. 5:12-95.16.
23) N.J.S.A. 5:12-95.14(c).
24) N.J.S.A. 5:12-95.14(e).
25) N.J.S.A. 5:12-95.14(c).
27) NJCCC, Public Hearing of December 19, 2007, Chairperson’s published remarks.
28) In Re: The Principal License of Louis Anthony DeNaples et al., Opinion of the Pennsylvania Gaming Control Board (Feb. 5, 2008).
Nicholas Casiello Jr. is an attorney in the Atlantic City office of Fox Rothschild LLP. He is Chair of the Gaming Practice Group and began practicing gaming law in 1980.
Patrick Madamba is an attorney in the Atlantic City office of Fox Rothschild LLP. He has practiced in various areas of gaming law for more than a decade, handing casino regulatory matters in numerous jurisdictions, including New Jersey, Illinois, Indiana, Louisiana, Missouri, Nevada and Macau.