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In Matter of Lawful Gambling License

Minnesota Court of Appeals
Dec 14, 2004
No. A04-510 (Minn. Ct. App. Dec. 14, 2004)


No. A04-510.

Filed: December 14, 2004.

Appeal from the Gambling Control Board, Agency No. 11-0800-15243-2.

Jack E. Pierce, Pierce Law Firm, P.A., (for relator American Legion Post 303).

Mike Hatch, Attorney General, E. Joseph Newton, Assistant Attorney General, (for respondent Minnesota Gambling Control Board).

Considered and decided by Schumacher, Presiding Judge; Minge, Judge; and Crippen, Judge.

This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2002).


This appeal arises from a decision of the Minnesota Gambling Control Board suspending relator's lawful gambling license for two years, with restoration dependent on relator reimbursing its lawful gambling account for $111,100 in stolen gambling receipts. The board based its decision on findings that faulted relator for not adequately supervising its employees during operation of relator's lawful gambling activities. Relator disputes the adequacy of the board findings or evidence in the record to justify a conclusion that relator is at fault for the employees' misconduct or that the quantity of relator's fault justifies the severity of the punishment imposed. Because the record and findings are sufficient to support the board's decision, including its attribution of fault to relator, we affirm.


Relator American Legion Post 303 is licensed by respondent Gambling Control Board to conduct lawful gambling. Relator conducts its licensed gambling business through a paddlewheel game. A paddlewheel "is a mechanical vertical wheel marked off into sections containing numbers and which, after being spun, uses a pointer to indicate the winning number." Minn. R. 7861.0010, subp. 43 (2001). Patrons place their bets on the paddlewheel table using paddletickets, which are purchased from the paddlewheel operator. Minn. R. 7861.0100, subp. 2A, 11C (2001). The operator must place all cash received for paddletickets into a drop box, and no one may access the drop box during the game. Id., subp. 12H.

In January 2002, a state gambling agent began an investigation of relator's paddlewheel game activity. According to the board's complaint, relator violated numerous gambling provisions, including (1) failing to keep the paddleticket cash receipts physically separate from the paddlewheel operators; (2) allowing paddlewheel operators access to the money in the drop box at the end of the operators' shifts; and (3) allowing patrons to use winning paddlewheel chips as currency to purchase drinks, pull tabs, and other items. Relator admitted that these violations occurred, and the violations are stated in the board's findings of fact.

Two of relator's paddlewheel operators were charged with theft of gambling receipts. The operators stole the money using a number of methods, such as (1) falsely marking winning paddlewheel tickets as more than their actual worth and pocketing the excess; (2) falsely marking losing paddlewheel tickets as winners and pocketing the money; and (3) taking money from patrons without putting it in the drop box. The nature and extent of thefts was detailed in findings by an administrative law judge, to whom the parties submitted relevant evidence.

Finally, on October 9, 2002, relator's gambling manager, Rodney Iverson, entered into a consent order admitting that he failed to sufficiently supervise the conduct of lawful gambling at the American Legion, pursuant to Minn. Stat. § 349.167, subd. 1 (2000), and Minn. R. 7861.0030, subp. 9, .0060, subp. 1(B) (2001). In its order suspending relator's lawful gambling license and requiring reimbursement of $111,100 to the gambling fund, the board based its punishment on the paddlewheel violations, the operators' theft, and the consent order.

The board brought an action against relator in December 2002. In November 2003, an administrative law judge (ALJ) recommended that the board find that $129,700 was stolen from relator's lawful gambling fund. On March 4, 2004, the board found that this sum had been stolen from the account and suspended relator's gambling license for two years, with license restoration contingent on relator depositing $111,100 into its gambling account. The board lowered relator's reimbursement amount because it had received $18,600 in restitution from the paddlewheel operators. Relator argues to this court that the board erred when it attributed conduct of paddlewheel operators, both violations and thefts, to the organization.


1. Relator's Liability

Whether relator may be held directly or vicariously liable by the board for the paddlewheel operators' thefts is a matter of law. "In considering such questions of law, reviewing courts are not bound by the decision of the agency and need not defer to agency expertise." St. Otto's Home v. Minn. Dep't of Human Servs., 437 N.W.2d 35, 39-40 (Minn. 1989). Even though we may independently evaluate questions of law, "an agency's interpretation of the statutes it administers is entitled to deference and should be upheld, absent a finding that it is in conflict with the express purpose of the . . . intention of the legislature." George A. Hormel Co. v. Asper, 428 N.W.2d 47, 50 (Minn. 1988). Therefore, when an agency makes a reasonable interpretation of a statutory provision, this court generally does not overrule that interpretation. In re Lawful Gambling License of Henry Youth Hockey Ass'n, License No. 02795, 511 N.W.2d 452, 455 (Minn.App. 1994), modified by 559 N.W.2d 410 (Minn. 1994).

Statutes and rules regulating lawful gambling are predicated on the purpose to ensure gambling's integrity and "to provide for the use of net profits only for lawful purposes." Minn. Stat. § 349.11 (2002). The board was established to regulate gambling pursuant to the public interest, and it is authorized to promulgate administrative rules regulating gambling and to revoke licenses in case of wrongdoing. Minn. Stat. § 349.151, subd. 4(a)(1), (a)(5), (a)(12) (2002).

Relator argues that the action of the board, particularly in imposing a two-year license suspension, was tied to its concern for the loss of lawful gambling funds, and that the loss of funds is mostly or entirely attributable to the criminal conduct of the paddlewheel operators, such that relator had no prior knowledge of the theft. As relator asserts, there are indications that the board was prompted to act as it did mostly because of the substantial loss of money that should have been available for charitable purposes. The board noted in its memorandum of law that "[t]he public has a right to trust that lawful gambling proceeds will go to charitable organizations intended to receive the proceeds. Here, however, substantial amounts of money did not go to charitable purposes due to employee theft."

There is also merit in some of relator's arguments as to the board's explanation for relator's responsibility for the thefts. Relator argues, for example, that there was insufficient evidence tying the thefts to the rule violations cited by the board — failing to keep paddlewheel funds separate from the operators, allowing operators to have access to the drop box, and allowing patrons to use paddlewheel chips as currency. The board has not identified a direct tie-in between the rule violations and the loss of gambling funds. But this lack of a connection is not determinative of the appeal.

The board's action is premised singularly on its determination that relator itself was guilty of a failure to supervise its gambling operations so that paddlewheel violations and thefts would not occur. This board finding follows the board's recitation of the gambling manager's consent order, "in which he admitted that he failed to sufficiently supervise lawful gambling operations at Licensee's facility." Earlier, in proceedings before the ALJ, this consent order was the basis for the ALJ's summary determination that relator violated gambling regulations demanding adequate supervision. As relator asserts, the board made scant mention of the underlying facts that led to its finding on supervision lapses, but it does not follow that the finding is inadequate or that it is unsupported by the evidence in the record.

Relator is directly liable for its failure to supervise lawful gambling conducted on the premises. See Kasner v. Gage, 281 Minn. 149, 151, 161 N.W.2d 40, 42 (1968) (declaring principal's responsibility for acts of agent within scope of agent's authority). As the ALJ noted in her order for partial summary disposition: "The relevant issue in this matter is whether [relator] failed to supervise its lawful gambling activity. Whether the gambling proceeds were lost due to criminal conduct or a negligent act is not decisive." The board, in its order, agreed with the ALJ, noting that relator failed "to provide a system of internal controls over its lawful gambling operation and receipts."

Relator further argues that the board's imposition of liability was wrongly based on the criminal theft and not on the "minor" paddlewheel violations. But the board's holding was not based on the notion that relator had vicarious responsibility for the crimes of its employees. It is critical, evidenced by the rationale of the board and the ALJ, that Iverson, as relator's gambling manager, admitted that he failed to supervise the gambling operations pursuant to Minn. Stat. § 349.167, subd. 1 (2000) and Minn. R. 7861.0030, subp. 9, .0060, subp. 1(B) (2001). Minn. Stat. § 349.167, subd. 1, provides that a gambling manager "is responsible for the gross receipts of the organization and for its conduct in compliance with all laws and rules." Minn. R. 7861.0030, subp. 9, notes that a gambling manager must review and monitor the conduct of games, verify all receipts, and assure that the organization is in compliance with lawful gambling laws and rules. Finally, Minn. R. 7861.0060, subp. 1(B), provides that all playing of lawful gambling must be done on a cash basis. These legal standards invite the application of law that occurred here; because Iverson is relator's gambling manager, whose supervisory activities were wholly within the scope of his employment, his conduct is properly attributed to relator. See Kasner, 281 Minn. at 151, 161 N.W.2d at 42.

Examining the record that supports the board's recitation of relator's supervisory fault, we are especially mindful of the evidence regarding the extent of losses that occurred. When compared with all other reporting organizations in the state, relator consistently posted the lowest "hold," or profit margin, from its paddlewheel games. The ALJ accepted expert testimony showing that the hold from paddlewheel games should be 12.5%. Evidence was presented showing that relator posted a 5.28% hold from 1999 to 2002. Relator is correct in noting that a 12.5% hold is not mandated by law. But because of the low level of relator's profits, relator should have been suspicious that lawful gambling receipts were not being deposited in the gambling account. This evidence, along with the failure to avoid statutory paddlewheel violations, buttress the board's determination that relator is directly liable for failing to deposit gambling receipts into its account. Given our standard of review of deference to the board's interpretation of its statutes, we decline to disturb the board's determination.

2. Arbitrary or Capricious

Relator next argues that the board's punishment was arbitrary or capricious. In administrative proceedings, we may reverse an agency's decision if, inter alia, it is arbitrary or capricious. Minn. Stat. § 14.69(f) (2002). "An agency decision is arbitrary and capricious if it is an exercise of the agency's will, rather than its judgment, or if the decision is based on whim or is devoid of articulated reasons." CUP Foods, Inc., v. City of Minneapolis, 633 N.W.2d 557, 565 (Minn.App. 2001), review denied (Minn. Nov. 13, 2001). If there is room for two opinions on the issue, an agency's choice of one opinion is not arbitrary and capricious. Id. (quotation omitted). Also, if a "rational connection between the facts found and the choice made" has been elucidated, an agency's conclusions are not arbitrary and capricious. In re Excess Surplus Status of Blue Cross Blue Shield of Minn., 624 N.W.2d 264, 277 (Minn. 2001) (quotation omitted).

According to Minn. R. 7865.0025 (2001),

[t]he board may require an organization to deposit nongambling funds in the organization's gambling bank account to reimburse the account for unlawful expenditures or expenses, to otherwise bring the organization into compliance with Minnesota Statutes, section 349.15, or to reimburse the account for gambling receipts that the organization failed to deposit in the account.

(Emphasis added.) The rule lists the factors the board is to consider when deciding upon the extent of reimbursement, namely, (1) the severity of the conduct; (2) "the culpability of the violator"; (3) the frequency of the organization's failure to comply with the requirement to deposit gambling receipts; (4) "the actual harm caused to the integrity of lawful gambling"; (5) the probability that the violation will occur again; (6) the organization's cooperation with the investigation; and (7) any other factor related to the violation. Id.

Keeping in mind that this court defers to an agency's interpretation of statutes and rules, there is an adequate basis for the board's punishment. Minn. R. 7865.0025 allows the board to require reimbursement when an organization fails to deposit gambling receipts into its account. The rule contains no requirement that the organization's failure be willful, or that the rule is inapplicable when the underlying wrongdoing arises from a criminal activity.

Relator bases its challenge on the claim that the board did not adequately consider all of the factors necessary to determine the length of a license suspension pursuant to Minn. R. 7865.0020, subp. 2 (2001). Relator claims that this failure to consider all of the factors renders the board's decision arbitrary and capricious. Relator is correct in noting that the board mentioned only one specific factor in its order: the harm to the integrity of lawful gambling. Minn. R. 7865.0020, subp. 2D. But the board also commented on the fact that substantial amounts of money were stolen, that the theft occurred over a significant period of time, and that the violations reflected relator's disregard of administrative rules. These comments relate to the factors of (1) severity of the conduct; (2) frequency of the violator's failure to comply with the rules; and (3) culpability. See Minn. R. 7865.0020, subps. 2A, 2C, 2B.

Relator cites to CUP Foods and Reserve Mining Co. v. Minn. Pollution Control Agency, 364 N.W.2d 411, 414 (Minn.App. 1985), review dismissed (Minn. June 10, 1985), to support its point that the board must take all of the rule's factors into account when determining a penalty. The agency in CUP Foods, however, deviated from the ALJ's findings but did not explain why those findings were rejected. 633 N.W.2d at 565. The lack of agency findings — not the failure to evaluate an administrative rule's factors — made the decision arbitrary and capricious. Id. Similarly, the agency in Reserve Mining Co. did not provide any written findings with its decision. 364 N.W.2d at 414. This court concluded that a decision unsupported by written findings is arbitrary and capricious because it represented "the agency's will rather than its judgment." Id. (quotation omitted). In this case, the board did not deviate from the ALJ's recommendation nor did it fail to provide written findings for its decision; thus, relator's precedents do not apply.

Finally, relator contends that the board's punishment — suspending relator's lawful gambling license for two years and requiring it to reimburse its gambling account for $111,100 — was excessive. On this issue, we "may not interfere with the penalties or sanctions imposed by an agency decision unless a clear abuse of discretion is shown by the party opposing the decision." Henry Youth Hockey Ass'n, License No. 02795, 511 N.W.2d at 456. In Henry Youth Hockey, a hockey association was liable for $117,376 not deposited in its gambling account. Id. at 454. The board found that the shortage, along with an overall lack of documentation in the association's gambling account, merited a gambling license revocation, which this court affirmed. Id. at 457. Significantly, although there were losses in this matter that were comparable to those in Henry Youth Hockey, the penalty the board imposed on relator was less severe. The board did not abuse its discretion in determining relator's punishment, and we will not disturb the final penalty.

Ultimately, relator's contest of the punishment imposed is little different from its initial challenge of a conclusion that relator was directly at fault. Premised on its attack on the assessment of its fault, relator concludes that the penalty is inconsistent with the severity of the wrongdoing. Because the premise of this argument is flawed, reflected in our earlier decision on the merit of the board's assessment of fault, the argument of excessive severity also fails.

Based on the record, which contains evidence of paddlewheel violations, substantial amounts of theft, and an admission that a lack of supervision resulted in loss of funds, we conclude that the board did not exceed its authority by imposing direct liability and a two-year suspension on relator.


Summaries of

In Matter of Lawful Gambling License

Minnesota Court of Appeals
Dec 14, 2004
No. A04-510 (Minn. Ct. App. Dec. 14, 2004)
Case details for

In Matter of Lawful Gambling License

Case Details

Full title:In the Matter of the Lawful Gambling License of American Legion Post 303…

Court:Minnesota Court of Appeals

Date published: Dec 14, 2004


No. A04-510 (Minn. Ct. App. Dec. 14, 2004)