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In re Petition of Adamar of New Jersey

SUPREME COURT OF NEW JERSEY


November 25, 2008

IN THE MATTER OF THE PETITION OF ADAMAR OF NEW JERSEY, INC. FOR RENEWAL OF ITS CASINO AND CASINO HOTEL ALCOHOLIC BEVERAGE LICENSES AND IN THE MATTER OF THE PLENARY QUALIFICATION OF TROPICANA CASINO AND RESORTS, INC., TROPICANA ENTERTAINMENT HOLDINGS, LLC, TROPICANA ENTERTAINMENT INTERMEDIATE HOLDINGS, LLC AND TROPICANA ENTERTAINMENT, LLC AS HOLDING COMPANIES OF ADAMAR OF NEW JERSEY, INC.

On certification to the Superior Court, Appellate Division, whose opinion is reported at 401 N.J. Super. 247 (2008).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

(NOTE: This Court wrote no full opinion in this case. Rather, the Court's affirmance of the judgment of the Appellate Division is based substantially on the reasons expressed in Judge Cuff's opinion below.)

Adamar of New Jersey, Inc. (Adamar), the owner and operator of the Tropicana Casino and Resort Atlantic City (Tropicana AC), appeals from the Appellate Division's affirmance of a final order of the Casino Control Commission (Commission) denying its application for renewal of Tropicana AC's casino and casino hotel alcoholic beverage licenses (collectively casino licenses) and for plenary qualification of Tropicana Casino and Resorts, Inc. (TCR), as the parent company of Tropicana AC. Unless otherwise specified, all further references to Tropicana AC encompass Adamar and references to TCR encompass Tropicana Casino and Resorts, Inc., its subsidiaries and predecessors.

The effect of the Commission's order was to activate the Interim Casino Authorization (ICA) trust and to institute a conservatorship for the casino to remain in continuous operation, to ensure that all prerogatives attendant to the former casino licenses remained in place, and to ensure an orderly disposition of the property. In addition, the Commission imposed penalties of $750,000 against TCR and Tropicana AC (collectively Tropicana) on a complaint filed by the Division of Gaming Enforcement (DGE) because of Tropicana's failure to constitute and utilize an independent audit committee. In this appeal, the Supreme Court must determine if the Commission's decision, which was upheld by the Appellate Division, is reasonably supported by substantial credible evidence in the record.

On November 12, 2003, the Commission renewed the casino licenses held by Tropicana AC for a four-year term ending on November 30, 2007. On May 19, 2006, Tropicana AC's original parent company, Aztar Company (Aztar), a publicly traded entity, agreed to a merger that would result in Aztar and Tropicana AC becoming subsidiaries of TCR, a private company wholly owned by William Yung, III. Prior to TCR's acquisition of Aztar, Yung operated numerous hotel properties. Yung is the country's largest holder of full service Marriott franchises. He also owned and operated casino properties, including a casino in Lake Tahoe and various riverboat gambling sites in the Midwest and South. Yung and his organization had no prior experience operating a casino resort on the scale of the Aztar Atlantic City and Las Vegas casino and hotel properties purchased in May 2006.

On June 6, 2006, TCR filed a petition with the Commission seeking ICA and plenary qualification as a holding company for Tropicana AC pursuant to the relevant provisions of the Casino Control Act (the Act). While ICA is not a substitute for licensure or qualification, it is a temporary measure that, if granted, enables an applicant to close or settle the transfer of property without interruption of the casino's operations. Tropicana submitted additional petitions seeking declaratory rulings on certain provisions and specific debt transactions, and for the temporary licensure of Fred Buro as a key casino employee. Tropicana also sought permission from the Commission to permit Buro to assume the duties and exercise the powers of President and Chief Operating Officer (COO) of Tropicana AC without first having been found qualified pursuant to regulation. Following a hearing, the Commission granted ICA to TCR and allowed Buro to assume his duties as COO. On January 3, 2007, TCR closed its purchase of Aztar.

On June 20, 2007, the Commission conditionally approved Tropicana's June 14, 2007 restated and amended petition concerning the composition of its independent audit committee. The Commission also granted the petitions for the approval of Jeffrey Silver as the sole member of the independent audit committee, and Karen Brugler as the Corporate Director of Internal Audit of Tropicana Entertainment, LLC (TEL). On June 26, 2007, TCR filed a petition with the Commission seeking an extension of its ICA approval through January 2, 2008, which was granted. On August 2, 2007, Tropicana filed a petition for a five-year renewal of its casino licenses. On September 26, 2007, Tropicana filed a petition to disband the TEL audit committee and to reconstitute it as the audit committee of its subsidiary, Ramada NJ Holding Corp. (Ramada NJ), because Tropicana felt an audit committee at that level would be "more effective" because Ramada NJ only has New Jersey subsidiaries.

By the end of October 2007, Tropicana AC was operating with only 80% of its former workforce and cleanliness issues previously had surfaced, which negatively affected the casino's convention trade. The Commission was troubled by the extent of the reduction in employees because the scope and manner of various reductions varied markedly from initial representations. Furthermore, terminations in certain mandatory departments, including security, triggered concerns about the ability of Tropicana AC to comply with New Jersey's casino regulatory scheme. The Commission was also concerned with the significant turnover in senior management and the substitution of employees with extensive Atlantic City casino experience with personnel with less casino experience or experience in much smaller casino markets.

The Act required Tropicana AC to have an independent audit committee in place on its first day of operation. However, Tropicana did not submit an acceptable independent audit committee proposal until approximately six months later. Moreover, surveillance department representatives did not attend meetings of the committee despite the regulatory requirement that they do so.

Following submission of the applications for renewal and plenary qualification, DGE filed four reports with the Commission in response to Tropicana's petitions. On October 11, 2007, DGE filed a complaint against Tropicana, alleging it had failed to implement a properly constituted and functioning independent audit committee and that it had failed to implement requisite lines of reporting and supervision for its internal control managers and surveillance departments. A hearing on the licensing renewal lasted eight days. After reviewing the statutory requirements for relicensure and plenary qualifications, including financial stability, integrity, and responsibility; integrity of all financial backers; good character, honesty, and integrity; business ability and casino experience to establish a likelihood of creation and maintenance of a successful, efficient casino operation; and suitability of the casino and related facilities, the Commission concluded that Tropicana did not satisfy the requirements for relicensure and plenary qualification. It found that Tropicana's regulatory performance was "abysmal." It described Tropicana's approach to the constitution and operation of the requisite independent audit committee as intransigent due to its desire to "retain management dominance."

The Commission determined that the massive layoffs were an alternative basis to deny relicensure and plenary qualification, concluding that Yung was determined to operate Tropicana AC in the same manner as his smaller markets with little regard for the regulatory requirements in New Jersey. The Commission also found Yung's lack of familiarity with certain regulatory requirements and his professed lack of understanding of Tropicana AC's management services agreement with TCR and Columbia Sussex (a company wholly owned by Yung) "strained credulity." In addition the Commission found that the turnover of key senior management and their replacement by personnel with limited casino experience raised questions about the ability of TCR and Tropicana AC to assemble and retain a competent team to operate in the highly regulated casino environment. The Commission also concluded that Tropicana had demonstrated a lack of financial integrity, noting that the massive personnel reductions had not improved the casino's financial performance and that the financing for the Aztar acquisition was structured to avoid subjecting Columbia Sussex to regulatory scrutiny as a holding company.

The Commission also addressed whether Tropicana AC was a first class facility, noting the significant cuts in housekeeping and maintenance staff caused cleanliness issues that led to many customer complaints. Ultimately, the Commission concluded that Tropicana's failure to appreciate the "workings of the Atlantic City marketplace," and its failure to retain or hire personnel who had the knowledge required to operate within the New Jersey regulatory and business environment, coupled with its failure to educate itself about that environment, demonstrated a lack of good character, honesty, and integrity, and constituted "contumacious defiance of the regulatory process."

The Appellate Division affirmed the decision of the Commission denying relicensure and plenary qualification. Initially, the Appellate Division addressed its role in reviewing the decision of the Commission, noting that the Commission's decision must be given deference unless it is determined to be arbitrary, capricious, unsupported by substantial credible evidence in the record, or is in violation of express or implicit legislative policy. The panel noted that great weight is to be given to the interpretation of legislation by the administrative agency to which its enforcement is entrusted. Further, the appellate panel addressed the broad regulatory powers the Legislature vested in the Commission to carry out the expansive regulation of casinos envisioned in the Act.

On the merits, the appellate panel addressed the issue of the need for an independent audit committee that is responsible for review and implementation of a system of internal controls. The Appellate Division noted that Tropicana did not dispute that it failed to adhere to the requirement that it have a proper independent audit committee in place when it began its operations on January 3, 2007, squarely in violation of the Act's requirements. The panel concluded that the record strongly supports a finding that Tropicana's conduct was purposeful and characterized by a philosophy or desire to do things its way rather than in the manner required by the New Jersey regulatory scheme. The panel also rejected Tropicana's argument that the standards governing its behavior were novel and imposed on it without notice. In addition, the appellate panel concluded that the Commission was not required to reduce prior adjudicatory decisions to rules promulgated in accordance with the Administrative Procedures Act.

The panel determined that the Commission's findings that Tropicana lacked financial integrity and responsibility, as well as business ability, are amply supported in the record. The massive staff layoffs, the turnover in senior management accompanied by their replacement with personnel with less extensive casino management experience, the cleanliness crisis experienced in the late winter-spring 2007, the regulatory violations directly related to inadequate staffing, and the failure to recognize the immediate need for a conforming independent audit committee and the intransigence in adopting a conforming committee, all attest to the ultimate conclusion that the Tropicana AC license should not have been renewed and that plenary qualification of TCR was properly denied.

HELD: Judgment of the Appellate Division is AFFIRMED substantially for the reasons expressed in Judge Cuff's written opinion below. The Casino Control Commission's determination to deny applications for renewal of Tropicana AC's casino and casino hotel alcoholic beverage licenses and for plenary qualification of Tropicana Casinos and Resorts, Inc., as the parent company of Tropicana AC, is amply supported by substantial credible evidence in the record.

CHIEF JUSTICE RABNER and JUSTICES LONG, LaVECCHIA, ALBIN, WALLACE, RIVERASOTO, and HOENS join in this opinion.

Per curiam.

Argued November 17, 2008

The judgment of the Appellate Division is affirmed, substantially for the reasons expressed in Judge Cuff's written opinion of the Appellate Division, reported at 401 N.J. Super. 247 (2008).

CHIEF JUSTICE RABNER and JUSTICES LONG, LaVECCHIA, ALBIN, WALLACE, RIVERA-SOTO, and HOENS join in this opinion.

Chief Justice Rabner PRESIDING

20081125

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