Thursday, August 03, 2006

Update on "Iowa's Casinos Breaking Law?"

NOTE: Be sure to read RexusNexus' comment to this blog entry; it rather persuasively rebuts my superficial analysis and raises additional issues that require additional research and thought that RexusNexus has done -- and I have not. [Note added 20060803 1610.] Now, I have today (August 4) added some material to this entry based on RexusNexus' comment.

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In "Iowa's Casinos Breaking Law?" I referred to a comment posted to "Leno, Losses and Rain Forests" (August 1, this blog) by RexusNexus that raised the possibility that out-of-state interests in "Iowa" casinos, of a variety of kinds, might constitute a violation of Iowa law.

I have since done a little reading in the Iowa Code, vol. I, ch. 99, et seq. (2005). Note that what follows is not a "legal opinion" -- for a couple of reasons. (a) Because I am not practicing law, I save on bar dues by assuming "inactive" status, which precludes my practicing law (such as offering "legal opinions"). (b) This is not a legal specialty of mine, and I have not done enough research on all of the issues that, even if I were practicing law, and it was an area of my expertise, I would feel confident in offering any solid conclusions.

I would just note the following.

The initial attitude of the Iowa Legislature toward gambling in general is revealed in the Chapter heading for Chapter 99: "Houses Used for Prostitution or Gambling." Sec. 99.1A provides that "Whoever shall . . . maintain . . . any . . . place used for the purpose of prostitution or gambling . . . shall be enjoined . . .." This doesn't mean that gambling casinos -- provided for elsewhere -- are illegal. But it is, at a minimum, an interesting historical footnote to how far we've come.

Chapter 99A ("Possession of Gambling Devices") is consistent. Section 99A.2 provides, "The intentional possession . . . of a gambling device upon any licensed premises . . . is cause for the revocation of any license upon the premises where the gambling device is found." I haven't done enough research to know, but I'm guessing this is designed to apply to something like a bar that possesses a liquor license.

Chapter 99B ("Games of Skill or Chance, and Raffles") lays out the conditions under which bingo, "amusement concessions," raffles at fairs, games where liquor or beer is sold, and "electrical and mechanical amusement devices" are legal. Section 99B.6 (8) specifically provides, with regard to "casinos," that "Gambling games authorized under chapter 99F may be conducted on an excursion gambling boat which is licensed as an establishment that serves . . . alcoholic beverages . . .." (Chapter 99F, addressed below, is the legislation most directly applicable to casinos.)

Chapter 99C ("Professional Boxing and Wrestling") is inapplicable, and has been transferred to Chapter 90A.

Chapter 99D ("Pari-Mutual Wagering") provides for the creation of the state Racing and Gaming Commission (Section 99D.5), and legalizes pari-mutual "wagering on the results of horse or dog races" (Section 99D.4).

Chapter 99E ("Iowa Lottery") has been repealed, and the subject is now dealt with in Chapter 99G ("Iowa Lottery Authority").

Chapter 99F ("Gambling -- Excursion Gambling Boats and Racetracks") contains the legislation dealing with casinos.

When the boys used to say, "Mom, make me a sandwich," my wife would wave her arm, as if with a magic wand, and delare, "You're a sandwich."

A stand-up comic had a similar line. He'd parrot the flight attendant's announcement that, "In the event of a water landing your seat cushion becomes a flotation device" and then ask in an irritated tone, "If my seat cushion can become a flotation device why can't the plane just become a boat?"

That's the approach the legislature has taken to one of the interesting issues regarding "gambling boats." The legislature hasn't figured out a way to turn an airplane into a boat, but they have come up with a way to turn a building into a boat: just sprinkle a little water under its front porch.

Section 99F.1 (9) defines an "excursion gambling boat" as "an excursion boat or moored barge on which lawful gambling is authorized . . .." And Section 99F.1 (17) defines a "moored barge" as "a barge or vessel that is not self-propelled." And sure enough, very few of Iowa's enormous, land-based structures are "self-propelled." So I guess they qualify as barges.

The Chapter goes on to provide that "wagering on a gambling game . . . is legal, when conducted on an excursion gambling boat" -- i.e., one of Iowa's "moored barges." (Section 99F.7(1) says "An excursion gambling boat may also be located on a man-made basin or other body of water adjacent to a river, provided it is located no more than one thousand feet from the high water mark . . ..")

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The Racing and Gaming Commission is to select as a casino owner ("applicant" for a license) the one "which best serves the interests of the citizens of Iowa," Section 99F.4 (1). Certainly one might argue a resident of Iowa (who would keep the money in-state) "best serves the interests of the citizens of Iowa."

The question is, where in the Iowa Code are the prohibitions on out-of-state interests in Iowa gambling casinos? I have no basis for suggesting that RexusNexus is "wrong." My assumption is that he's right. But there is still confusion in my mind as to how we get there.

RexusNexus is absolutely right that in Chapter 99D ("Para-Mutual Wagering") "licensee" is defined in Section 99D.2(5) as "a non-profit corporation licensed under Section 99D.9." And Section 99D.9 ("Licenses -- terms and conditions -- revocation") consistently refers to "nonprofit corporation or association" (e.g., Section 99D.9(2) and (3)) and requires that the licensee be the "true owner" and "sole owner."

(However, while Section 99D.8 clearly includes a "nonprofit corporation organized under the laws of this state [Iowa]," that phrase is preceded by an "or" and seems to me to be in the disjunctive -- since the section begins with a description of Internal Revenue Code Section 501(c)(3) and comparable corporations exempt from federal taxation.)

It's absolutely true that in Chapter 99B ("Games of Skill or Chance, and Raffles") Section 99B.7(3)(b) requires that a nonprofit corporation must function as such, dedicating such moneys as are raised to appropriate charitable causes.

Although these provisions deal with bingo games and horse racing, it seems clear that throughout Iowa's gambling legislation there is provision for non-profits as licensees. The question is whether only nonprofits can be involved in Iowa's casinos -- for which we must look to Chapter 99F ("Gambling -- Excursion Gambling Boats and Racetracks").

Chapter 99F seems to draw a distinction between a person or entity that "operates" a casino, and one that "conducts gambling games" in a casino. Presumably this distinction is very significant -- I'm just not sure how. Section 99F.1 (2) defines "applicant" as "any person . . . applying for a license to operate [a casino] . . . or . . . [an] organization . . . applying for a license to conduct gambling games . . .." (emphasis supplied) (The "organization" is further described as "a qualified sponsoring organization located in Iowa.") However, "licensee" is defined as "any person licensed under Section 99F.7." Section 99F.1 (15). Similarly, Section 99F.5(1) distinguishes a "license to conduct gambling games" and "a license to operate an excursion gambling boat."

And RexusNexus is correct that Section 99F.7 is like Section 99D.9(3)(c) and (d), insofar as it also provides that "a license shall not be granted if . . . the aplicant is not the true owner of the enterprise . . . [or] the applicant is not the sole owner . . .." Section 99F.7(8)(c) and (d). However the latter is complicated by the addition of ". . . and other persons have ownership in the enterprise, which fact has not been disclosed." It's not clear what is meant by the distinction between the "true" owner and the "sole" owner. For example, can an applicant be the "true" owner of an enterprise of which he or she is not the "sole" owner? If not, why are both provisions included? And the "sole owner" requirement could be argued to contemplate the possibility of shared ownership -- just so long as it is disclosed; in other words, it is the misrepresentation about ownership, rather than the lack of "sole ownerhip," that is the problem.

There is another potential problem in Section 99F.7 (3)(a). It provides that "The applicant shall not . . . turn over to a person the operation of an excursion gambling boat licensed under this section . . .." So far, so good. But it continues, "This section does not prohibit a management contract approved by the commission." Depending on how lenient the Commission is prepared to be, "management contracts" could be an enormous loophole in a legislative intention to keep control, and revenues, in Iowa.

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At least there should be some transparency in all of this, as the Commission is also required to "require a licensee to file an annual balance sheet and profit and loss statement . . . together with a list of . . . persons having any beneficial interest in the gambling activities of each licensee." Section 99F.4 (9). "Beneficial interest" (not defined in the Chapter) would presumably include management contracts, share of profits contracts, or creditors. And see Section 99F.12.

Section 99F.4 also provides for the "voluntarily excluded" procedure, enabling gambling addicts and problem gamblers to stay out of gambling facilities, Section 99F.4 (22). It also requires the Commission "to conduct a socioeconomic study on the impact of gambling on Iowans every eight years beginning in . . . . 2008 . . .." Section 99F.4 (24).

Section 99F.5 (1) provides that a "sponsoring organization" may enter into an agreement with an "operator," but that the sponsoring organization must distribute to "educational, civic, public, charitable, patriotic, or religious uses" an amount "that averages at least three percent of the adjusted gross receipts for each license year." See also Section 99F.6 (4)(a).

There is also some reference to preference for Iowans that is wholly consistent with, and supportive of, RexusNexus' interpretations. Section 99F.7 (6)(a) requires applicants to "make every effort" to hire "a substantial number of . . . residents of Iowa."

Insofar as there is concern about college students from the UI or elsewhere gambling away their tuition money, Section 99F.9 (5) declares that "a person under the age of twenty-one years shall not make . . . a wager . . . and shall not be allowed on the gaming floor of an excursion gambling boat . . . " although 18-year-olds can work for a casino. (Note the contrast with the restrictions on sales of alcohol to young persons: no sales to those under 21, however those over 18 may be present where liquor is sold -- from an administrative perspective a nightmare of enforcement.)

But again, to remind, this has not been a legal opinion, and it may very well be wrong.


Rexusnexus said...

I am compelled to respond. Although Nick's analysis is generally accurrate, as far as it goes, it misses a key line of analysis. I respond only briefly (relatively speaking), because a blog comment doesn't seem the proper place for extensive legal analysis.

As a set up, there can be no casinos or horse/dog tracks absent an organization that is licensed to carry on those activities. Nick says as much. Section 99D.9 of the Iowa Code, which governs the operation of the greyhound racing, provides that “[a] license shall not be granted to an organization if there is substantial evidence that the applicant for a license” is neither “the true owner of the enterprise” nor “the sole owner” of the enterprise. I.C.A. §§ 99D.9(3)(c) and (d). Section 99F.7, which governs the operation of casinos, provides the same. I.C.A. §§ 99F.7(7)(c) and (d). Without going any further the problem begins to crystalize: Iowa law requires that the license holders are the same organizations that run the casinos (or however else you want to define "true or sole owner of the enterprise"). As I said in my earlier post, I'd wager that, almost across the board, this is not the case, that the out-of-state, corporate gambling interests have virtually every reliable indicia of ownership over the casinos.

Why is this a problem? Why doesn't the Iowa Racing and Gaming Commission just give licenses to Harrahs, et al.? Because, contrary to Nick's post, that would be illegal. Section 99D(2)(1) defines “licensee” as meaning “a nonprofit corporation licensed under section 99D.9.” Section 99D.7, which outlines the Commission’s powers, commands that the Commission is to select applicants based upon the extent to which they serve “the interests of the citizens of Iowa,” and that the Commission is to cooperate with the “gamblers assistance program administered by the department of human services.” Section 99D.8 limits qualified applicants to those who are “nonprofit corporations[s] organized under the laws of [Iowa] . . . to promote those purposes enumerated in section” 99B.7(3)(b). Section 99B.7(3)(b) provides that a licensee must certify that “the receipt of all games, less reasonable expenses, charges, fees, taxes, and deductions . . . either will be distributed as prizes to participants or will be dedicated and distributed to educational, civic, public, charitable, patriotic or religious uses in [Iowa] and that the amount dedicated and distributed will equal at least seventy-five percent of the net receipts.” Chapter 99F, which governs casino licenses, has identical provisions. See §§ 99F.5-99F.7. When analyzing gaming statutes quite similar to the present one, the Maine supreme court explained that “the [gaming] statutes are not meant to regulate a gaming industry, but instead to provide specified types of socially desirable nonprofit organizations with a fund-raising tool.” Munjoy Sporting & Athletic Club v. Dow, 755 A.2d 531, 539 (Me. 2000).

I don't think the analysis I've given above is controversial. The contentious issues are (1) the extent to which ownership of the "licenses" counts as ownership of the "enterprise," and (2) what the term "ownership" requires in general. Iowa law also contemplates "management agreements," making another question the extent to which a licensee can transfer power via a "management agreement" without divesting itself of "true ownership."

In the end, I think it comes down to that phrase "true owner of the enterprise." Are the current licensees the true owners of Iowa's casinos? I think not. Why don't we just license the out-of-state corporations then? Because we want to keep the $$$ in state. To bad the actual arrangement represents a river of dollars flowing straight out of Iowa.

Nick said...

My thanks to RexusNexus for this impressive analysis -- and apologies for not doing a closer job of reading in my superficial overview.

In my now (August 4) revised blog entry I (a) acknowledge the contribution, and (b) set off with "# # #" the changes I incorporated into my text.

I have already imposed far too much on RexusNexus, not to mention our readers, to ask for more on this topic -- but I am, of course, open to it.

I continue to think there are major questions here for journlists, legislators and possibly the Iowa Attorney General.

-- Nick

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