In FTB Everett Realty, LLC v. Mass. Gaming Comm’n, No. SJC-13196 (May 23, 2022), the Massachusetts Supreme Judicial Court revived a property owner’s Penn Central takings claim, reversing the trial court grant of summary judgment to the Commission.

This one deals with the intricacies of gambling law and the process necessary to approve the operation of a casino — subjects that we can’t claim to fully understand — so bear with us if there are any inaccuracies.

FBT purchased vacant land which was contaminated and required extensive cleanup. It looked into a variety of possible uses, including a storage facility or big box retain. But two years later, Massachusetts legalized casino gambling and created the Commission. Its duties include issuing gambling licenses.

A branch of the Wynn casino operation wanted the property. It entered into an option agreement with FBT under which it would buy the land if Wynn were able to secure the necessary gambling license from the Commission. Wynn sought a license, and the Commission began the usual investigation of the applicant.

Difficulties ensued. Investigators “uncovered evidence leading them to suspect that Charles Lightbody, a convicted felon with apparent connections to organized crime, had a hidden ownership interest in FBT.” Slip op. at 5. Despite FBT’s entreaties that everything was cool, the Commission “continued to suspect, however, that Lightbody retained an ownership interest,” and FBT was concealing this fact.

The commission was troubled by what it believed to be a lack of candor by FBT’s principals and their failure to fully cooperate with the IEB’s investigation. It was also anxious that individuals with a criminal background and associations with organized crime should not profit from the award of a casino license to Wynn for the Everett parcel.

Slip op. at 6. If the allegations about Mr. Lightbody were true, then Wynn’s casino license application was in jeopardy: the Commission would not approve a license if FTB had connections to the Outfit and stood to financially gain from selling the land to Wynn for a casino.

That’s where the versions of the story branch off. FBT asserted the Commission wanted to punish FBT for its perceived lack of candor. The Commission for its part denied the allegation, but the SJC opinion noted that “[t]he record, which is based on limited discovery that has occurred so far, reveals some evidence supporting FBT’s allegation.” Slip op. at 6.

When the deal looked at risk, the players came up with plan. The property could still be sold — and Wynn might get its casino license from the Commission — if the deal could be structured so that any “taint” (our words, not the opinion’s) of FBT potentially gaining from a sale as a casino could be removed.

So Wynn appraised the property based on its highest and best non-casino use (big box retail) at $35 million. “Fearing that the commission would otherwise find Wynn unsuitable, dooming Wynn’s license application and FBT’s sale of the Everett parcel to Wynn, FBT agreed in November 2013 to amend the option agreement to reduce the price from $75 million to $35 million, thus eliminating FBT’s casino-use premium[.]” Slip op. at 8. Wynn bought the property for $35 million, and because the proceeds which FBT received were free of the casino-taint, the Commission granted Wynn its gambling license.

FBT wasn’t satisfied with $35 million, and brought a state-court lawsuit against the Commission, asserting tortious interference with contract and a regulatory takings claim under Penn Central for the $40 million before-and-after delta allegedly brought about by the Commission’s actions. After discovery, the trial court entered summary judgment in favor of the Commission on both claims, concluding that FBT purchased the property before gambling was legal, “it could not have reasonably expected to later sell the property for purposes of casino development.” Slip op. at 10. Inability to prove one factor was enough, and the whole claim fell.

The SJC reversed. The Penn Central requires “balancing” of the three factors, none of which alone is dispositive. Slip op. at 12 (“All three factors in the multifactor Penn Central test ‘should be taken into account’ when determining whether a challenged regulation amounts to a taking.”).

Rather than considering all three factors in the multifactor Penn Central test, however, the motion judge relied on just a single factor. The judge reasoned that because FBT could not demonstrate that the commission had interfered with FBT’s reasonable investment-backed expectations, FBT had “no reasonable expectation of proving an essential element” of its regulatory takings claim, Kourouvacilis v. General Motors Corp., 410 Mass. 706, 716 (1991), and summary judgment was proper. He thus granted summary judgment for the commission without considering the other two factors identified in Penn Central, namely the economic impact and the character of the government action. This was error, particularly given the significant diminution in value here — lowering the amount paid from $75 million to $35 million — and the unusual and disputed character of the government action, which we discuss in more detail infra.

Slip op. at 13-14.

And what of FBT’s investment-backed expectations? The SJC acknowledged that FBT had purchased the property when gambling was not legal in Massachusetts. Slip op. at 18 (“At the time it purchased the property, therefore, it could not reasonably have expected to sell the property as a site for the development of a casino.”). This “weighs heavily” against FBT having reasonable expectations of selling the property for casino use. But that wasn’t the end of the analysis, because while FBT owned the property, gambling did become legal. After it was legal, “FBT made net investments of about $900,000 in the property[.]” Slip op. at 19. In the end, the SJC agreed with the trial court that FBT’s investment-backed expectations were pretty weak, mainly because of the long-shot nature of Wynn obtaining a gambling license (the Commission has “full discretion” to decide whether to issue a license).

But as the court had already noted, weak-sauce expectations was not the end of the analysis. The economic impact here was pretty severe, and the before-government-action use and value of the highest-and-best-use of the property (casino, $75m) and the after-government-action use and value highest-and-best use (big box retail, $35m) was pretty massive. But add in the factual twist (was it Wynn’s actions in renegotiating the deal, or was it the Commission’s actions influencing Wynn to change the deal that caused the loss in value?), and the court was left with a bit of a knot to untie. But this was an appeal from summary judgment, so the court looked at the facts in the light most favorable to FBT, meaning that the actions of the Commission influencing Wynn means that “the government is responsible, for regulatory takings purposes, for the economic impact of the third party’s action if the economic harm to the plaintiff was ‘direct and intended’ and ‘the government’s influence over the third party was coercive rather than merely persuasive.” Slip op. at 21. On the economic impact factor, scales tip in favor of FBT.

On to the final factor, “character of the government action.” This one really tipped in favor of FBT: “[t]he character of the regulatory action here is highly unusual.” Slip op. at 23. The Commission didn’t keep on investigating to determine whether Mr. Lightbody had an interest in FBT, it “made favorable consideration of the application subject to lowering the amount of money the owners of FBT would receive for the property, thereby giving one private party, Wynn, a multimillion-dollar windfall at the expense of another private party, FBT.” Id.

Government-compelled transfers of economic benefits from one private party to another in this context raise significant regularly taking concerns. This is true even when done to punish one party for its lack of candor or to ensure such persons do not reap a financial windfall from the award of a gaming license or to address the public perception that this was even a possibility.

Conditioning the grant of a governmental license on the renegotiation of a transaction between private parties in this way, so as to effectively transfer $40 million dollars from one to another, is “extraordinary.”

Slip op. at 25.

And this wasn’t some general regulation or action, broadly applicable, but a singling-out of the owner, and thus looks more like eminent domain. See slip op. at 26-27. 

Adding all these factors to the judicial blender and hitting “frappe,” compelled the court to conclude that this one needs to be tried:

Viewing the evidence in the summary judgment record in the light most favorable to FBT, we conclude that while FBT did not have a reasonable investment-backed expectation in reaping a casino-use premium when selling the Everett parcel, the commission’s actions had a substantial, $40 million economic impact on FBT. The highly unusual character of the commission’s actions, effectively compelling the transfer of $40 million from one private party to another in order to secure a government license, weighs in favor of finding a taking. When all three Penn Central factors are considered and balanced, therefore, we cannot say that the commission is entitled to judgment as a matter of law on the available record. The entry of summary judgment for the commission on FBT’s regulatory taking claim was therefore error. Accordingly, we reverse the motion judge’s summary judgment order and remand FBT’s regulatory taking claim to the Superior Court to allow the completion of discovery and further proceedings consistent with this opinion. Only when the disputed facts surrounding the commission’s actions are fully developed and resolved will it be possible to properly decide FBT’s regulatory taking claim.

Slip op. at 27-28.

More on the decision:

On the whole, the SJC’s treatment of Penn Central (for all the faults of that test) seems about right.

FBT Everett Realty, LLC v. Mass. Gaming Comm’n, No. SJC-13196 (Mass. May 23, 2022)