Philly Foxwoods Might be Years Away

This article first appeared in The Legal Intelligencer.

PHILADELPHIA-In about three weeks, SugarHouse Casino will open in Philadelphia. This opening, 45 months after initial selection of Pennsylvania casinos, reinforces the unfortunate fact that the second Philadelphia casino, Foxwoods, remains years away.

The Foxwoods project has been stalled by a number of factors, including insufficient traffic plans, neighborhood opposition, extensive litigation, defaults by the Mashantucket Pequot tribe on debt issued in connection with their Connecticut Foxwoods properties, a relocation effort that the Pennsylvania Gaming Control Board chairman called a "fool's errand," the inability to reach a deal with hoped-for savior Steve Wynn and delays resulting in fines of $2,000 per day for failure to open the casino.

On July 29, frustrated with the continuing delays, the gaming board indicated its plans to revoke the license it granted in December 2006. A discovery proceeding is on-going and, unless the project is rescued, a revocation hearing will follow.

The current Foxwoods ownership team, PEDP, is attempting to fight back with two strategies.

The first is a hoped-for partial acquisition by Harrah's Entertainment and the second is a procedural defense against the revocation of the license. In both cases, however, PEDP will have to contend with ramifications of the broad board discretion arising from the statute and a swath of prior litigation.

It has been reported that PEDP's current hope is a white-knight bid from Harrah's, one of the giants of the gaming industry.

Harrah's owns or operates 39 casinos in the United States, including Harrah's Chester and five in Atlantic City.

Thus far, though, no deal has been announced and it is unclear if the gaming board would agree to the transaction.

The ownership of Harrah's Chester is an initial complication insofar as the state's Gaming Act restricts ownership of more than a third of more than one casino. In fact, were it not for that provision, Harrah's likely would have been the bidder at the Foxwoods site. Caesars Entertainment had long owned the Foxwoods site, but was acquired by Harrah's shortly after the Pennsylvania legislature authorized gaming.

Because Harrah's already owned the racetrack site in Chester that was guaranteed a license, it was willing to sell this property, which PEDP bought in a transaction on which it still owes Harrah's millions of dollars.

That said, the double ownership bar can likely be addressed through structuring the transaction as a combination of minority ownership and debt financing, an approach used when the largest owner in the SugarHouse project came to the rescue of Pittsburgh's The Rivers Casino.

The ownership of the Atlantic City casinos is also likely to be a concern for the Gaming Control Board. In the board's 2006 decision awarding the Philadelphia licenses to Foxwoods and SugarHouse, the board focused on the casino locations and proposed designs, which has, for Foxwoods, changed dramatically, and that four factors made Foxwoods stand out above its competition. The fact that neither Foxwoods nor SugarHouse's ownership groups controlled an Atlantic City site was one of those four factors.

It later came to light that the Mashantucket Pequot were in an Atlantic City development deal with MGM, and when a losing bidder challenged the award on this issue, the license award to PEDP was upheld.

In the 2007 case Riverwalk Casino v. Pennsylvania Gaming Control Board, the state Supreme Court declined to reverse the board's licensing decision, stating that, were the board to determine that PEDP misled the board, "the board has specific authority to take appropriate action." The MGM deal never came to fruition and the gaming board did not, at that time, make a move towards revocation.

Atlantic City ties are not the only factor that would not apply to a Harrah's license application to acquire Foxwoods Philadelphia.

The board's other three factors that differentiated PEDP's application were:

(i) A strong, investment-grade partner in the Mashantucket Pequot;

(ii) Diversity in ownership (the Mashantucket Pequot are a Native American tribe whose members are almost all also African-American); and

(iii) That 42% of Foxwoods' ownership interests would benefit charities in the Philadelphia area.

A Harrah's buyout would eliminate the latter two supposed advantages, although one could theoretically structure the buyout to nominally protect these interests.

Combined with the location-specific problems that have come to the fore in pre-development traffic planning, a significant change in the PEDP ownership group would largely vitiate the board's rationale for the license award.

If the gaming board decided to resist the transfer of the license, for whatever reason, both express statutory language and a PEDP victory in the state Supreme Court would likely halt any efforts to reverse the board in court.

Under 4 Pa. C.S.