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AAA Gaming LLC v. Midwest Electronics Gaming, LLC

United States District Court, N.D. Illinois, Eastern Division

November 2, 2016

AAA Gaming LLC and Illinois Gaming Investments, LLC, Plaintiffs,
Midwest Electronics Gaming, LLC, Defendant.



         Plaintiffs sold to defendant Midwest Electronics Gaming, LLC, the rights to install gaming equipment in certain restaurants and other businesses. The parties almost immediately found themselves in a dispute when Midwest withheld payments due under the contracts because some of those rights appeared to be invalid. The parties resolved the dispute later that year by entering into a settlement agreement, which provided for an ongoing relationship and payment scheme. But Midwest has again stopped paying plaintiffs, raising some of the same issues that the parties had previous settled. Plaintiffs bring claims of breach of the settlement agreement (Count I) and breach of the duty of good faith and fair dealing implied in that agreement (Count II). They also seek to enforce the agreement's accelerated payment provision (Count III).

         Midwest seeks dismissal of all of plaintiffs' claims. It argues that Illinois law and public policy mandates dismissal, because plaintiffs seek to enforce unlawful gambling contracts. It also says that plaintiffs' cause of action for breach of implied duty of good faith and fair dealing is not recognized in Illinois, and that the accelerated payments provision that plaintiffs seek to enforce in Count III of the complaint is an unenforceable penalty clause. For the following reasons, Midwest's motion is granted.

         I. Legal Standards

         “A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) challenges the viability of a complaint by arguing that it fails to state a claim upon which relief may be granted.” Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732, 736 (7th Cir. 2014). To survive a motion to dismiss, a plaintiff's “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Put differently, a “complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). A document that is attached to a pleading “is a part of the pleading for all purposes.” Fed.R.Civ.P. 10(c). Thus, when ruling on a Rule 12(b)(6) motion to dismiss, a court must “consider documents attached to the complaint as part of the complaint itself.” Reger Dev., LLC v. Nat'l City Bank, 592 F.3d 759, 764 (7th Cir. 2010) (citing Int'l Mktg., Ltd. v. Archer-Daniels-Midland Co., 192 F.3d 724, 729 (7th Cir. 1999)).

         II. Facts

         Plaintiff AAA Gaming LLC consists of members Nicky L. Nichols, Bennie F. Relan, John J. Koehler, Jess P. Koehler, and the Koehler 2009 Irrevocable Trust F/B/O/ James P. Koehler and Family, whose trustee is James P. Koehler. [1] ¶¶ 7, 12.[1] Nichols and the trust also comprise the membership of plaintiff Illinois Gaming Investments, LLC. [1] ¶ 8. Together, plaintiffs held a collection of exclusive location agreements purporting to give them exclusive rights to operate video gaming terminals at 316 bars, restaurants, and other establishments, once those establishments become licensed and approved by the Illinois Gaming Board. [1] ¶¶ 20-21.

         On July 18, 2012, plaintiffs entered into two asset purchase agreements-one for AAA and one for Illinois Gaming-with defendant Midwest Electronics Gaming, LLC, whose sole member is Timothy Scott Jones. [1] ¶¶ 14, 20, 21. Midwest is a “licensed terminal operator, ” approved by the Illinois Gaming Board to operate video gaming terminals at licensed establishments. [1] ¶ 19. Under the purchase agreements, plaintiffs assigned to Midwest its rights under the exclusive location agreements with the bars and restaurants. [1] ¶¶ 20-21. In return, Midwest agreed to pay plaintiffs sums of money at and shortly after closing, and to make a series of payments in the future, the amount and timing of which would depend on the occurrence of certain events. [1] ¶¶ 43-50, 52-53, 56-67. Those events include the licensing of an establishment and municipal approval of the use of video gaming terminals. [1] ¶ 56. The agreements also provided that in an Event of Default, which occurs if Midwest misses a payment and fails to make that payment within ten days of written notice, Midwest would have to pay plaintiffs an amount equal to all of the future payments that would be owed on the contract if every establishment became licensed. [1] ¶¶ 68-69, 133.

         By December, Midwest had fallen behind in its payments, and the parties disagreed over the amounts owed. [1] ¶¶ 70-71. Midwest refused to pay, because plaintiffs had not provided to it complete copies of all of the exclusive location agreements purchased by Midwest, and because it questioned the validity of those agreements. [1] ¶¶ 72-73. Midwest believed that some of the exclusive location agreements did not comply with certain regulations and that some of the agreements had been forged. [1] ¶¶ 72, 78-83.

         On December 7, 2012, the parties entered into a mutual release agreement, under which Midwest paid a fixed amount to settle its outstanding debt, agreed to make future payments in accordance with the scheme set out in the purchase agreements (except payment would be triggered by the installation of a video gaming terminal at a licensed establishment rather than the licensure of that establishment), and released plaintiffs from all claims under the purchase agreements. [1] ¶¶ 84-86, 103. Plaintiffs in turn released Midwest from all claims, but preserved its right to enforce the payment scheme. [1] ¶ 87.

         The parties continued to operate under the release agreement for some time, but Midwest stopped making timely payments again after October 2013. [1] ¶ 104. And again, Midwest based its refusal to pay on the grounds that plaintiffs failed to deliver complete copies of all of the exclusive location agreements, that the agreements did not comply with regulations, and that the signatures on those agreements were forged. [1] ¶¶ 89, 91, 93. Midwest also claimed that plaintiffs knew that the signatures were forged and failed to inform Midwest. [1] ¶ 95. Plaintiffs allege that Midwest held those concerns before entering into the mutual release agreement, and as a result, that agreement prohibits Midwest from raising them as an excuse for nonpayment. [1] ¶¶ 88, 90, 92, 94, 96. Plaintiffs sent multiple written notices of Midwest's payment obligations, which now amount to $702, 676.77, to no avail. [1] ¶¶ 105-06, 110-11, 117.

         Plaintiffs further allege that a number of the establishments identified in the agreements received licenses from the Gaming Board, but that Midwest failed to contact them and take the steps necessary to install video gaming terminals at their locations. [1] ¶¶ 125-129. And because Midwest's obligation to pay plaintiffs under the mutual release agreement turns upon the installation of video gaming terminals at these establishments rather than the establishment's licensure, Midwest's failure to exploit these opportunities to install video gaming terminals resulted in plaintiffs missing out on an additional $1, 005, 000. [1] ¶¶ 119, 128-29.

         III. Analysis

         “Under Illinois law, ‘[t]o state a cause of action for breach of contract a plaintiff must show: (1) the existence of a valid and enforceable contract; (2) the performance of the contract by plaintiff; (3) the breach of the contract by defendant; and (4) a resulting injury to plaintiff.'” Priebe v. Autobarn, Ltd., 240 F.3d 584, 587 (7th Cir. 2001) (quoting Hickox v. Bell, 195 Ill.App.3d 976, 992 (5th Dist. 1990)).[2]Midwest believes that all of plaintiffs' claims must be dismissed, because the mutual release agreement (and the asset purchase agreements referenced therein) underlying those claims are illegal gambling contracts, and enforcing those contracts would be against Illinois law and public policy. Midwest argues that the gaming industry in Illinois is tightly regulated by the Illinois Gaming Board, and that individuals who have not been approved by the Gaming Board to profit from that industry should be prohibited from doing so. According to Midwest, plaintiffs have been denied a license by the Gaming Board. And because enforcing the asset purchase agreements and mutual release agreement would allow plaintiffs to profit from the gaming industry, Midwest says they should not be enforced. The premise of Midwest's argument-that the Gaming Board rejected plaintiffs' application for a license-is not alleged in the complaint. Plaintiffs object to the introduction of this fact and others that Midwest identifies in its briefs as matters of public record. Ultimately, the facts that Midwest seeks to introduce are irrelevant. Based on the allegations in the complaint alone, the validity and enforceability of the mutual release agreement is not properly alleged. The Illinois Gaming Board has exclusive, original jurisdiction to determine the ...

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