SJC Rules Regulatory Taking Claim in Casino Dispute May Proceed to Discovery and Trial (but Not Impairment of Contract Claim) – Update from McGregor Legere & Stevens, PC

Written by Gregor I. McGregor, Esq.

An interesting, important and relatively rare decision from the Massachusetts Supreme Judicial Court is about regulatory taking (yes, Virginia, there is a valid claim for taking) and impairment of contract (no, sorry, there is no valid claim). 

The case arose from financial disputes about the former Wynn casino, now operating as Encore Boston Harbor in Everett, MA. The case is FBT Everett Realty, LLC v. Massachusetts Gaming Commission, 489 Mass. 702 (May 23, 2022). 

The SJC handed a win to the former owners of the casino site, ruling that the Superior Court erroneously had dismissed a lawsuit the former landowners filed against the Massachusetts Gaming Commission in a bid to collect an additional $40 million for the Everett land. The case was heard on an agreed statement of facts and a summary judgment record.

We commend the decision for its comprehensive discussion and citations of the leading cases on regulatory taking, both federal and Massachusetts. 

Plaintiff brought this suit against the Commission alleging various claims including tortious interference with contract and a regulatory taking after the Commission refused to allow Plaintiff to receive a “casino-use premium” on the sale of a parcel of land in Everett. 

The amended complaint alleged constitutional claims of a per se taking, a regulatory taking, and a violation of the contracts clause of Article I, Section 10, of the United States Constitution.

The Superior Court granted summary judgment, observing that because FBT bought the Everett parcel before the passage of the Gaming Act legalizing casino gambling in Massachusetts, it could not reasonably have expected to later sell the property for purposes of casino development.  

Because FBT could not establish that the Gaming Commission had interfered with its reasonable investment-backed expectations, which the judge characterized as an essential element of a regulatory taking claim, he concluded that the Gaming Commission was entitled to summary judgment.

Trials on the merits of regulatory takings are relatively few and far between. More common are rulings on whether complaints filed state a claim or summary judgment is appropriate. Plaintiffs have an uphill fight. 

Appellate decisions after trials are even more rare. More common are reviews of whether rulings of trial judges on motions to dismiss or summary judgment were correct. Plaintiff appellants usually lose.  

Overall, it is hard to properly allege and prove a regulatory taking has occurred with the remedy sought being invalidation of the restriction or award of money damages. Hardest to establish is a per se taking. 

Almost all taking cases center on whether the landowner or other plaintiff can establish that the governmental action fails the so-called three-factor balancing test enunciated in the seminal case of Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978).

The FBT decision was noted in the popular press for its impact on the economics of the original casino developers, and for leaving the path open to litigate the regulatory taking claim on the merits. 

In truth, the decision amounts to a fine law review article on how the SJC sees the regulatory taking doctrine, how the taking test under Penn Central is applied, and what is the relevant evidence for the three Penn Central factors, with particular attention to federal and Massachusetts jurisprudence. 

Specifically, the SJC affirmed in part and reversed in part the Superior Court judgment dismissing FBT’s claim against the Massachusetts Gaming Commission alleging intentional interference with a contract and granting summary judgment on the remaining regulatory taking claim, holding that summary judgment on the regulatory takings claim was improper.

Most important, the SJC reversed the grant of summary judgment on the regulatory takings claim, holding that there were material disputed facts at issue precluding summary judgment.

The SJC found that the Gaming Commission took “highly unusual” action in 2013 after discovering that a businessman with a criminal record and organized crime ties was suspected of having a hidden interest in FBT Everett Realty LLC, which had negotiated a deal to sell the Everett property to Wynn for $75 million.

At the time, the Gaming Commission was considering Wynn’s application for one of three highly coveted casino licenses being offered by the Commonwealth. When the Commission’s investigators questioned FTB about a person’s suspected interest, the ownership group said he previously had a stake in the property but had sold it.

The Gaming Commission didn’t resolve the ownership question, but decided that FBT shouldn’t be allowed to collect the multi-million-dollar premium price allowed for the proposed casino site. According to the SJC, the Gaming Commission warned Wynn that its license application was in jeopardy unless Wynn took responsive action.  

Instead of completing an investigation of FBT’s ownership, the SJC found the Gaming Commission “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.” 

Wynn’s casino license was approved after it slashed the purchase price for the 35 acres on the Mystic River to $35 million, the estimated value of the land if the buyer were not building a casino.

Therefore, the SJC reversed a Superior Court’s dismissal of FBT’s claim that the sharp price cut constituted an unjust “regulatory taking” by the Gaming Commission. That case will go forward on remand. 

Central to the ruling is language familiar to all of us following the evolution of regulatory takings jurisprudence at the U.S. Supreme Court and, for an even longer time, the Massachusetts Supreme Judicial Court: 

“The regulatory takings inquiry is a fact-intensive evaluation that should consider multiple factors, including not only reasonable investment-backed expectations but also the economic impact and character of the challenged regulatory action.”

“The motion judge here limited his analysis to the investment-backed expectations factor.  This was error, as he also should have considered the significant $40 million economic impact and the highly unusual character of the government action here –conditioning the award of a casino license to Wynn on FBT not receiving a casino-use premium on the sale of the Everett parcel, thus effectively compelling the transfer of this economic benefit to Wynn.”

That was the Superior Court error. Left open for discovery and maybe trial on remand, according to the SJC, are disputed facts about “exactly what the commission expected or required Wynn to do, and what Wynn did on its own initiative.”

“Whether the commission directed such a compelled transfer of property, or merely accepted it as a cure to its concerns about undisclosed criminal ownership interests at FBT, cannot be decided without further discovery,” the Court stated, allowing the suit to go forward on the regulatory claim. 

Noteworthy is the SJC’s compilation of the U.S. Supreme Court’s long line of decisions on proper formulation of the three-factor Penn Central balancing test: 

“We note that the Court has expressly cautioned that interference with investment-backed expectations is only “one of a number of factors that a court must examine” … “Penn Central inquiry does not turn “exclusively” on regulation’s economic impact and degree of interference with legitimate property interests”… “Investment-backed expectations … are not talismanic under Penn Central”…”all three Penn Central factors are important, or at least may be important in determining whether a regulatory taking occurred, and should be considered in the regulatory takings inquiry.”

Turning to the facts on the record before it, the SJC points out that “This is particularly true, as in the instant case, where the economic impact is significant and the challenged government action is not …a standard regulatory practice.”

On this score the SJC stated: “We conclude that there are material disputed facts precluding summary judgment on the limited existing record, particularly in regard to the nature of the commission’s actions.”

Amplifying its understanding of the “investment backed expectations” factor, the Court states:

 “We have recognized that an important determinant of the reasonableness of an owner’s investment-backed expectations is the regulatory environment at the time that the owner purchased or otherwise took title to the property at issue” … (citations omitted) … “a property owner’s investment-backed expectations must be reasonable and predicated on existing conditions.”

While allowing the suit to proceed on the regulatory taking claim, the SJC affirmed the Superior Court’s decision to dismiss a second claim by FBT alleging that the Gaming Commission intentionally interfered with its contract to sell the land. As a public employer, the Court ruled, the Gaming Commission is immune from suit for intentional torts under the Massachusetts Tort Claims Act, G.L. c. 258.

Some take-aways seem to be that:

  • the regulatory takings doctrine is alive and well in Massachusetts; 
  • proper pleading of it and documentation in agreed facts and summary judgment record can survive attack; 
  • the Penn Central three-factor test must be applied in a fact-intensive analysis;
  • reliance on the absence of reasonable investment-backed expectations alone will not win the day; 
  • reliance on the economic impact on governmental restriction alone likewise will fail;
  • reliance on attacking the nature of the governmental interest is a hard hill to climb;
  • rather, all three Penn Central factors are important with none weighted more than the others;
  • there are many federal and Massachusetts decisions explicating how they properly apply; and 
  • this FBT decision is a nice synopsis of this constitutional doctrine which limits governmental power. 

Real estate, land use, and environmental lawyers take heed.