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Indiana Supreme Court: AG May Pursue Gambling Proceeds Under Charitable Trust Theory
Posted in Litigation

On Monday, in Zoeller v. East Chicago Second Century, Inc., the Indiana Supreme Court unanimously reversed the trial court’s dismissal of the Attorney General’s constructive trust and unjust enrichment claims against a for-profit corporation that received riverboat gambling funds intended to benefit the community. 

The Court found that when seeking a riverboat casino license from the City of East Chicago in 1993, Showboat Marina Partnership entered a local development agreement and agreed to contribute 3.75% of its adjusted gross receipts annually “to and for the benefit of economic development, education and community development in the city.”  A portion of the annual payment (0.75%) was to go to East Chicago Second Century, Inc. (“Second Century”), a for-profit corporation.  As part of the agreement, Second Century agreed to undertake development activities at sites within East Chicago.  Based in part on this agreement, Showboat received a gaming license on January 8, 1996. 

Between April 1997 and June 2006, Second Century received about $16 million from the casino operation.  But when the Gaming Commission asked the Attorney General to investigate the payments to Second Century, the Attorney General concluded that much of the $16 million could not be accounted for and could be traced to Second Century’s principals.

On April 15, 2005, Second Century sought a declaratory judgment against a subsequent holder of the Showboat license, seeking an order requiring continued payments to Second Century.  The Attorney General intervened in that lawsuit and filed a counterclaim and crossclaim seeking imposition of a constructive trust and an accounting of the money paid to Second Century under the local development agreement.  Second Century moved to dismiss the Attorney General’s claims, and the trial court granted that motion.

The Indiana Supreme Court, reversing the trial court’s dismissal of the Attorney General’s claims, held that the Attorney General is conferred with “broad common law and statutory authority . . . to protect the public interest in charitable and benevolent instrumentalities.”  Contrary to Second Century’s argument that it was a for-profit corporation and thus not a public charitable trust, the Court recognized that it had “long ago embraced the broad proposition that a ‘charitable trust is a gift to a general public use.’”  According to the Court, though whether Second Century constitutes a public charitable trust is “a respectable question,” “it is not grounds on which dismissal was warranted,” because the trust code covers entities other than public charitable trusts, including but not limited to “split-interest charitable trusts.”  Thus, the Court held that Second Century’s for-profit status did not bar the Attorney General’s claims. 

In addition, the Indiana Supreme Court held that the Attorney General’s claims were not barred by the presence of an express contract between Showboat and the City of East Chicago because neither the Attorney General nor the State was party to that agreement.  Further, the terms of the local development agreement “were not intended to control the rights of any non-parties.”

The Court further held that the Attorney General could request a constructive trust while also alleging unjust enrichment and restitution “where the contention is that one person has been unjustly enriched at the expense of another.”  The Court also clarified that fraud need not be alleged for a constructive trust to be imposed.  “Rather, the remedy is available where there is standard fraud (i.e., misrepresentation, reliance, etc.) or a breach of duty arising out of a confidential or fiduciary relationship.” (emphasis in original).  Thus, the Court found the Attorney General had stated a claim for constructive trust.



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