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Board of County Commissioners of County of Cherokee v. Kansas Racing & Gaming Commission

Supreme Court of Kansas

May 5, 2017

Board of County Commissioners of the County of Cherokee, Kansas, Appellant,
Kansas Racing & Gaming Commission, et al., Appellees. Castle Rock Casino Resort LLC, Appellant,
Kansas Racing & Gaming Commission, et al., Appellees.


         Under the facts of this case, the district court did not abuse its discretion by denying appellants' discovery requests, motion to amend, or request for an evidentiary hearing. Further, the district court correctly held the agency action did not result from an error of law and was supported by substantial evidence.

         Appeal from Shawnee District Court; Larry D. Hendricks, judge. Affirmed.

          William R. Sampson, of Shook, Hardy & Bacon, L.L.P., of Kansas City, Missouri, argued the cause, and Stephen W. Cavanaugh, of Cavanaugh, Biggs & Lemon, P.A., of Topeka, and Barbara Wright, of Columbus, were with him on the briefs for appellant Board of County Commissioners of the County of Cherokee, Kansas.

          Russel S. Jones, Jr., of Polsinelli PC, of Kansas City, Missouri, argued the cause, and Brendan L. McPherson, of the same firm, was with him on the briefs for appellant Castle Rock Casino Resort LLC.

          Gregory P. Goheen, of McAnany, Van Cleave & Phillips, P.A., of Kansas City, argued the cause, and Robert L. Turner, IV, of the same firm, was with him on the brief for appellees Kansas Racing & Gaming Commission, et al.

          Kevin M. Fowler, of Frieden, Unrein & Forbes, LLP, of Topeka, argued the cause, and John C. Frieden, and Eric I. Unrein, of the same firm, were with him on the brief for appellee Kansas Crossing Casino, L.C.


          STEGALL, J.

         Castle Rock Casino Resort, LLC (Castle Rock) and the Board of County Commissioners of Cherokee County (Cherokee County) ask this court to review the State's selection of Kansas Crossing Casino, L.C. (Kansas Crossing) as the casino management firm authorized by the Kansas Expanded Lottery Act (KELA), K.S.A. 2016 Supp. 74-8733 et seq., to manage the state-owned and operated casino in Southeast Kansas. Castle Rock proposed a large-scale casino in Cherokee County just across the state line from the Downstream Casino, located in Oklahoma. Kansas Crossing proposed a smaller casino in Crawford County farther from Downstream and several other casinos in Northeast Oklahoma.

         Following an extensive process that produced an agency record containing thousands of pages, the Lottery Gaming Facility Review Board (Board) selected Kansas Crossing's proposed lottery gaming facility management contract. After the Board's decision was approved by the Kansas Racing and Gaming Commission (KRGC), both Castle Rock and Cherokee County filed actions pursuant to the Kansas Judicial Review Act (KJRA), K.S.A. 77-601 et seq., in Shawnee County District Court, seeking judicial review of the outcome. The lawsuits challenged: (1) the sufficiency of the evidence supporting the decision; (2) the legal interpretation given KELA by the state agencies; and (3) whether the decision was otherwise arbitrary or capricious. Importantly, while the lawsuits also made factual allegations suggesting improprieties occurred during the process, neither petition sought relief on the statutory grounds of either procedural improprieties or of disqualified persons participating in the Board's actions. The district court thus denied appellants' requests to investigate their allegations through traditional means of discovery and later denied their petitions on the merits.

         On these facts, we hold that the district court acted within its broad discretion when it denied appellants' multiple discovery requests. We further determine that the district court correctly held that the Board's decision to select Kansas Crossing was supported by sufficient evidence; was not error as a matter of law; and was not arbitrary or capricious. As such, we affirm.

         Factual and Procedural Background

         In 2007, the Kansas Legislature enacted the KELA, establishing four "gaming zones" in the state-northeast, southwest, south central, and southeast-and empowered the Kansas Lottery to operate one "lottery gaming facility" (i.e., casino) owned by the state in each zone. K.S.A. 2007 Supp. 74-8702(f); K.S.A 2007 Supp. 74-8734(a); see State ex rel. Six v. Kansas Lottery, 286 Kan. 557, 570-73, 186 P.3d 183 (2008) (explaining Kansas' unique ownership of casinos under the KELA). The southeast gaming zone encompasses Crawford and Cherokee Counties. K.S.A. 2016 Supp. 74-8702(f)(2). Cherokee County is situated in the far southeast corner of the state, sharing a southern border with Oklahoma and an eastern border with Missouri. Crawford County is directly north of Cherokee County; it also borders Missouri.

         In order to receive authorization to manage a casino in a gaming zone, applicants must submit proposed lottery gaming facility management contracts to the Kansas Lottery Commission for initial approval. K.S.A. 2016 Supp. 74-8734(b); see K.S.A. 74-8709 (establishing the Kansas Lottery Commission). Once the Lottery Commission approves one or more proposed management contracts with statutorily prescribed terms, it forwards the management contracts to the Lottery Gaming Facility Review Board (Board), which was established by KELA to select one of the proposals through a competitive bidding process. See K.S.A. 2016 Supp. 74-8734; K.S.A. 2016 Supp. 74-8735; K.S.A. 2016 Supp. 74-8736(b). Once the Board selects the contract that "best maximizes revenue, encourages tourism and otherwise serves the interests of the people of Kansas[, ]" it then "submit[s] the contract to the Kansas racing and gaming commission for approval." K.S.A. 2016 Supp. 74-8736(b), (e). The voters of the county in which the casino would be located must approve by a majority vote the operation of a casino in their county. K.S.A. 2016 Supp. 74-8737.

         Following the passage of KELA, contracts were awarded and casinos established in each gaming zone except the southeast. In 2007 and 2008, Kansas Penn Gaming, LLC, attempted but ultimately failed to open a casino in Cherokee County. After submitting a proposed facility management contract and entering into a number of land contracts, the company's efforts were thwarted by the successful development of the Downstream Casino, a large-scale casino built in Oklahoma directly across the state line from Penn Gaming's proposed site. See generally Kansas Penn Gaming, LLC v. HV Properties of Kansas, LLC, 662 F.3d 1275 (10th Cir. 2011).

         With no other entities seeking to develop a casino in the southeast zone, the Kansas Legislature amended the KELA in 2014, lowering the zone's minimum infrastructure investment threshold requirement from $225 million to $50 million and reducing the privilege fee for being selected as a lottery gaming facility manager from $25 million to $5.5 million. K.S.A. 2016 Supp. 74-8734(g)(2), (h)(6); L. 2014, ch. 92, sec. 1.

         In January 2015, the Lottery Commission received four proposed facility management contracts for the zone. Shortly thereafter, one of the applicants withdrew, leaving Kansas Crossing, Castle Rock, and Emerald City Casino & Resort (referred to throughout the agency proceedings as "Camptown"). Kansas Crossing and Camptown each proposed to construct casinos at different locations in Crawford County, while Castle Rock proposed to build a casino in Cherokee County across from Downstream Casino. On April 24, 2015, the Lottery Commission approved and forwarded the three proposed facility management contracts to the Board.

         Proceedings before the Board

         The Board was made up of three members appointed by the governor, two members appointed by the president of the Senate, and two members appointed by the speaker of the House of Representatives. K.S.A. 2016 Supp. 74-8735(a). The governor selected Lisa Pleasure, Georgianna Mullin, and Jack Bower to serve on the Board. The senate president appointed Jeff Oakes and Don Alexander, while the speaker chose Kevin Cook and Gail Radke. Chaired by Jack Bower, the Board was charged with "determin[ing] which contract best maximizes revenue, encourages tourism and otherwise serves the interests of the people of Kansas." K.S.A. 2016 Supp. 74-8736(b).

         In order to evaluate the voluminous proposals, the Board retained the consulting services of Union Gaming Analytics, LLC (Union Gaming) and its five subcontractors: Cummings Associates (Cummings); Casinonomics Consulting, LLC (Casinonomics); Civic Economics; EKAY Economic Consultants; and Macomber International, Inc. (Macomber). See K.S.A. 2016 Supp. 74-8735(h) (authorizing the Board to employ "experts, consultants or other professionals . . . to provide assistance in evaluating a lottery gaming facility management contract submitted to the board"). The Union Gaming contract stated that it would provide the Board with a wide variety of consulting services, including: "Evaluation of each proposal's ability to attract local and regional visitation"; "[e]stimat[ion] of the local and state revenue to be generated by each proposal"; "[d]evelopment of independent revenue projections for each prospective lottery gaming facility manager proposal"; and "[r]eview of the financial suitability and stability of each lottery gaming facility manager's proposal."

         From January 2015 through June 2015, the Board conducted seven open meetings pursuant to the Kansas Open Meetings Act (KOMA), K.S.A. 2016 Supp. 75-4317 et seq. Two of the Board's meetings were held on April 22, 2015-one in Cherokee County and another in Crawford County. During these meetings, members of the community had the opportunity to provide the Board with comments regarding the proposed casinos.

         During the public meeting held on May 29, 2015, the Board heard extensive applicant presentations from Camptown, Castle Rock, and Kansas Crossing. Board members asked each applicant about its ability to finance the project, generate revenue, attract tourism, and compete in the market. Generally speaking, Castle Rock claimed it was "bigger and better than the other choices, " while Kansas Crossing pitched itself as "the right location and the right size." After the presentations concluded, the Board took public comments.

         Following the May 29 hearing, Union Gaming and its subcontractors submitted lengthy reports to the Board that provided estimates of gross gaming revenue (GGR), tourism attraction, and other economic concerns. These estimates generally placed Castle Rock as the proposal with the highest projections for revenue and tourism metrics. However, the written reports also expressed concerns about Castle Rock's financial viability in light of the competition it would face from nearby Oklahoma casinos. For example, Casinonomics noted:

"The Castle Rock site is within two miles of the Downstream Casino [in Oklahoma]. As a result of the Downstream's proximity and large size, Castle Rock revenues are estimated to be negatively affected by 37-48%, compared to the case if the Downstream did not exist.
"The Camptown and Kansas Crossing properties would be harmed less because of the longer distance between them and the Downstream. The harm to them is estimated at around 5-10% of revenues.
. . . .
". . . Results from this study suggest that the Downstream Casino is likely to have a large negative impact on any of the proposed Kansas casinos, but especially on the Castle Rock property."

         Macomber raised similar concerns:

"In competition for the pure locals' market, Castle Rock will be a new, big, 4-star, sparkling destination casino-resort that checks all the boxes in terms of expected activities to be offered in a better-than-locals'-only environment. Castle Rock is rather centrally located and easily accessible even if among the cluster of northeast Oklahoma competitor casinos. It is unclear whether the pricing will be off-putting to locals vis a vis pure locals' casino pricing.
"In uncontested locals' markets Castle Rock should do as well as the aforementioned price points will allow. In contested locals' markets where the competition ranges from a minimum of medium to high, the efficacy will also somewhat be a function of the Demand Stimulation Marketing effort and reinvestment rate Castle Rock is willing to make toward local players.
"In terms of appealing to the 90-mile middle and outer ring regional Marketplace, the Castle Rock facilities are on par with the minimum Phase 1 critical mass needed to have a chance of being a success. But, there is nothing overwhelming in the proposal. It is 'Bigger and Better' than the other two Applicant proposals but they are locals' centric. Castle Rock upon opening will compete with bigger and in some cases regional casinos closer to their target market segments. There is simply too much existing competition to declare Castle Rock 'enough' to generate the demand forecast." (Emphasis added.)

         Furthermore, Union Gaming determined that 10 other casinos were located within a 30-minute drive of the proposed Castle Rock location, whereas no casinos were located within a 30-minute minute drive of the proposed Kansas Crossing location. Within a 2hour drive, however, both casinos faced competition from over 20 casinos.

         During the June 10, 2015, public meeting, the consultants presented their methodologies, projections, and conclusions to the Board and the applicants. At the outset of the meeting, Union Gaming provided the Board with a summary of its 2019 projections for each casino, which it believed would be the "first [full] year of stabilized operations." These projections are summarized in the following table:

Kansas Crossing

Castle Rock


Number of Slots


1, 400


Number of Table Games




Number of Hotel Rooms




Projected Gross Gaming Revenue (GGR)

$39 million

$47.8 million

$43.9 million

Percentage of GGR Coming from Kansas Residents




Percentage of GGR Coming from Out-of-State Residents




Visitors Each Year

540, 753

687, 501

608, 493

Taxes Paid to State of Kansas

$9.4 million

$11.5 million

$10.5 million

Taxes Paid to Local Government

$1.2 million

$1.4 million

$1.3 million

         When comparing Castle Rock's projections to its own projections, Union Gaming noted that Castle Rock projected its GGR at "just over 90 million, " while Union Gaming estimated only $47.8 million in GGR. Casinonomics later suggested that this disparity was due to Castle Rock either underestimating its competition in the area or perhaps overestimating its revenue. Kansas Crossing, on the other hand, estimated its annual GGR at $47.2 million, while Union Gaming believed it would be $39 million.

         Throughout the meeting, Board members questioned the consultants about the impact Downstream would have on Castle Rock's viability due to their close proximity to each other. Union Gaming provided the Board with an overview of the "very well-saturated" casino market in the northeast corner of Oklahoma and ultimately concluded: "[W]e don't believe [Castle Rock] is feasible because they'll not be able to have enough cash to pay off their debt on an annual basis."

         Casinonomics summarized the predicted impact of the Oklahoma casinos. It identified Downstream as the largest Oklahoma competitor and believed Downstream would adversely affect Castle Rock more than the other two casinos due to its close proximity to Castle Rock. Casinonomics concluded that, though Castle Rock had the "potential to do very well, " it was "certainly the riskiest when you consider the degree of competition." Macomber generally framed the distinction between the casinos as bigger risk, bigger gain for Castle Rock and lower risk, lower gain for Kansas Crossing and Camptown, though it concluded, "The risk associated . . . is about the same for all in their own way." Following the presentations, the Board informed the applicants that they would have 5 days to submit comments, objections, and corrections to the consultants' reports.

         The applicants submitted lengthy responses. Kansas Crossing generally agreed with the reports, while Castle Rock did not. Castle Rock emphasized the consultants' unanimity that it could generate the most revenue but took issue with Union Gaming's analysis, particularly regarding its ability to finance the project. Castle Rock tried to reassure the Board by informing it that Castle Rock's partners increased their financial commitments by an additional $60 million in project funds. The partners also stated that they would personally guarantee the remaining $35 million needed for development and operation, "if necessary to move the project forward." Furthermore, it asserted, "[I]n the event adequate senior lender construction financing cannot be secured to fund the casino, [the partners] will provide deeply subordinated debt on extremely favorable terms." Finally, Castle Rock detailed how the consultants "overstated the impact of Downstream on Kansas revenue projections" because they ignored, among other things, the "crushing debt load and high interest rate to which the Downstream facility is subject."

         The consultants provided rebuttal reports and testimony that continued to question Castle Rock's ability to compete with Downstream and secure adequate financing. Initially, a Cummings representative responded to Castle Rock's assertion that it had ignored Downstream's heavy debt load by stating: "I agree that these payments are of some import to Downstream's financial position, but not so much that they would seriously crimp Downstream's ability to spend far more than any casino in Kansas on competitive warfare."

         In fact, the representative expressed a bullish outlook for Downstream:

"Downstream has proved an exceptional performer in a very competitive marketplace. In my analysis, it demonstrates one of the highest slot power ratings of any major casino in the U.S. I assume that Castle Rock will compete well, similar to what I assess to be the average of other attractive casinos in competitive markets, but I cannot responsibly assume that Castle Rock will match Downstream's demonstrated competitive abilities."

         Using Castle Rock's revised capital structure, Union Gaming recalculated the new loan-to-cost ratio and compared it to the loan-to-cost ratio under Castle Rock's initial proposal. It concluded:

"[E]ven with the new proposed capital structure, Union Gaming still has concerns regarding Castle Rock's ability to secure the necessary bank debt financing to complete the project.
". . . [O]btaining the total required bank debt financing would be very difficult and furthermore such debt would likely include onerous indicative terms (interest rate, required loan amortization, etc.) that would call into question the project's ability to operate as a going concern."

         Not to be deterred, Castle Rock responded by informing the Board that one of the partners had committed an additional $11 million of equity, leaving "only $24 million of required debt financing-the very amount which Union Gaming itself believes Castle Rock will be able to secure[.]" Castle Rock continued to disagree with Union Gaming's doubts concerning Castle Rock's viability. Castle Rock hoped that this additional commitment would serve as the "ultimate and final declaration of the Castle Rock partners' utmost confidence in the success of their proposal[.]"

          On June 23, 2015, the Board convened for the final time to select one of the proposed facilities management contracts. At the outset of the meeting, Cummings, Macomber, and Union Gaming gave presentations regarding their rebuttal reports, during which they answered questions from members of the Board. Macomber told the Board that Castle Rock, as the bigger casino, had "more upside potential, but more risk, " and the smaller casinos had "less upside potential" and "less risk, " but "[b]igger is better if it works. It's not better if it doesn't." Union Gaming again addressed whether Castle Rock's increased financial commitments would improve its chances of success:

"So while the leverage ratio under all those scenarios comes down for the new capital structure versus the old capital structure, it's still on the high end of the range. And we believe that the required additional bank financing would be very difficult and would likely be onerous with indicative terms, interest rate, required loan amortization, et cetera, and call into question, the project's ability to operate is a growing concern."

         Afterward, the Board permitted all three applicants to make a final presentation, followed by questions from individual Board members for applicants and consultants. Castle Rock presented a lengthy final pitch to the Board, which included detailed testimony regarding its financing options. It assured the Board, "Castle Rock and all its partners will take all the risks and Kansas will get the big reward."

         Next, the Board's counsel advised it of the voting process. In doing so, counsel explained that "[t]he review board shall determine which contract best maximizes revenue, encourages tourism and otherwise serves the interests of the people of Kansas. And that third category can encompass many things."

         After each Board member stated that he or she did not have any inappropriate contact with the applicants, ballots were circulated and collected. The Board decided by public vote-five for Kansas Crossing and two for Castle Rock-to recommend that Kansas Crossing be awarded the facility management contract. As the recording secretary announced the votes, each Board member explained his or her reasons:

"[Recording Secretary]: Don Alexander, Kansas Crossing Casino.
"Board Member Alexander: Again, I said this was going to be a very difficult decision, and it was. I obviously had Castle Rock scored higher on the first item of the revenue.
"I was a little bit more impressed with Kansas Crossing bringing tourism into the State and working with the partnerships. That was-you know, Castle Rock was the big one. Camptown was solid . . . financially and I didn't really just split the vote and go down the middle. It was based on partnerships and tourism.
"[Recording Secretary]: Thank you. Kevin Cook, Kansas Crossing Casino.
"Board Member Cook: For me I think the words that really jumped out and stuck with me throughout the entire process was ...

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