Court: District Court, D. New Jersey; March 13, 2015; Federal District Court
Marina District Development Co. LLC, operating as Borgata Hotel Casino Spa, filed claims against professional gamblers Phillip D. Ivey and Cheng Yin Sun, alongside playing card manufacturer Gemaco, Inc., alleging a deceptive scheme involving 'edge sorting' to gain an advantage in Baccarat. Ivey’s motion to dismiss these claims has been denied by the Court.
The complaint details Ivey's interactions with Borgata, beginning in April 2012 when he arranged to play high-stakes Baccarat under specific conditions, including a private playing area, a Mandarin-speaking dealer, a guest (Sun), and particular Gemaco cards and shuffling equipment. In return, Ivey deposited $1 million and agreed to a maximum bet of $50,000 per hand. Over several visits, he amassed total winnings of $9,626,000.
During these sessions, Ivey consistently requested that his winnings and front money be wired to a Mexican bank account. Borgata became aware of Ivey's similar actions at another casino, Crockfords, which withheld £7.3 million from him. Investigation revealed that Ivey and Sun utilized a card manipulation technique known as 'edge sorting,' where they exploited asymmetrical card designs to identify high-value cards during play. This involved turning cards in a particular way to signal their values to Sun, who would indicate favorable cards to the dealer.
Sun viewed the card's right edge before it was flipped, and after the dealer turned it side to side upon her calling 'Buhao' (meaning 'bad card'), that edge would become the left edge. This manipulation allowed Sun to distinguish strategically important cards, specifically those with values of 6, 7, 8, and 9, from others in the deck through a method known as 'edge sorting.' Ivey and Sun preferred using an automatic card shuffler to maintain the orientation of the cards, crucial for their strategy, as manual shuffling would disrupt their edge sorting efforts. They ensured the same cards were reused for each shoe to maximize their advantage. Once edge sorting was completed, they gained 'first card knowledge,' allowing Ivey to adjust his bets based on whether a strategically significant card was dealt. This knowledge shifted the house advantage from approximately 1.06% to about 6.765% in favor of Ivey. Initially, Ivey placed lower bets until the edge sorting was finished, after which he consistently bet the maximum amount. Analysis of his betting patterns revealed that when betting on 'player' after sorting, the first card dealt was likely to be strategically important, while betting on 'banker' resulted in less advantageous cards. Borgata alleges that Ivey's actions constituted a deliberate scheme to exploit card defects for an unfair advantage, leading them to file a complaint against Ivey and Sun for breach of contract, fraud, conspiracy, and RICO violations. Ivey and Sun have moved to dismiss these claims, which Borgata opposes.
Subject matter jurisdiction is established under 28 U.S.C. § 1332 due to complete diversity of citizenship between the parties and an amount in controversy exceeding $75,000. Borgata is a limited liability company with members Boyd Atlantic City, Inc. and MAC-Corp., both incorporated in New Jersey. Defendants Ivey and Sun are citizens of Nevada, while Gemaco is a Missouri corporation.
For a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the court must accept well-pleaded allegations as true and view them favorably to the plaintiff. Pleadings must provide a short and plain statement of the claim, offering fair notice to the defendant of the grounds for the claim, without requiring intricate detail or evidence. Following the standards set by Twombly and Iqbal, courts engage in a two-part analysis: (1) distinguishing factual allegations from legal conclusions, accepting all well-pleaded facts as true; and (2) assessing whether these facts give rise to a plausible claim for relief. The burden lies with the defendant to demonstrate the absence of a claim.
Moreover, courts limit their review to the pleadings and attached documents, treating the motion as one for summary judgment under Rule 56 if external materials are considered without exclusion. In their defense, Ivey and Sun argue that the central claim rests on Ivey's alleged superior knowledge regarding the asymmetrical patterns on Borgata’s purple playing cards, which Borgata asserts constitutes illegal conduct.
Borgata maintains that it had exclusive control over all gambling implements while Phil Ivey was on its premises, arguing that Ivey's actions did not meet the necessary legal standards for the criminal claims made against him. Borgata claims Ivey's use of his eyesight and information available to all customers does not constitute illegal activity. Ivey and his associate, Sun, seek to dismiss Borgata's lawsuit based on three arguments: (1) the New Jersey Casino Control Act (CCA) does not provide a private cause of action for Borgata against them; (2) Borgata failed to file suit within six months after paying Ivey and Sun their winnings from the alleged 'illegal game'; and (3) the RICO claims are unfounded as Ivey and Sun did not engage in any predicate fraud. In response, Borgata contends the CCA only prevents patrons from suing casinos and that its claims are based on common law contract and fraud rather than direct enforcement of the CCA. Borgata further argues that its allegations focus on Ivey and Sun’s intent rather than the legality of the game itself. Regarding RICO claims, Borgata asserts it has identified sufficient predicate acts, including fraud schemes and communications between the parties. Borgata also claims Ivey and Sun agreed to adhere to the rules set by New Jersey's Division of Gaming Enforcement, and that their actions led to an unfair game, ultimately undermining the essential element of chance in Baccarat.
Borgata alleges that Ivey and Sun violated multiple New Jersey statutes related to gambling, specifically N.J.S.A. 5:12-115(b), which prohibits the use or possession of marked cards, and N.J.S.A. 5:12-113.1, making it a crime to use devices designed to gain an advantage in casino games. Additional statutes, N.J.S.A. 5:12-114 and N.J.S.A. 5:12-115(a), address the use of cheating devices and fraudulent schemes in gambling, respectively. Borgata asserts it fulfilled its contractual obligations, which were breached by Ivey and Sun, resulting in damages of $9,626,000 plus legal fees. The contract implied both parties would adhere to the Casino Control Act (CCA), which governs legal gambling in New Jersey. Borgata claims that since it complied with the CCA while Ivey and Sun did not, the latter breached their agreement. The document notes that gambling is illegal unless conducted under the CCA's strict regulations, which encompass extensive statutory provisions. Borgata contends that while a casino can sue a patron for CCA violations, patrons cannot similarly sue casinos for such violations, a point contested by Ivey and Sun, who argue that the CCA preempts Borgata's claims.
Borgata claims that it is not seeking relief based on Ivey and Sun’s violations of the Casino Control Act (CCA) but rather for their breach of a promise not to commit such violations. Borgata alleges Ivey made five specific requests to facilitate 'edge sorting', which alters the game’s odds under the guise of superstitious behavior, thus violating common law prohibitions against illegal gambling practices. The CCA legalizes certain gambling activities but does not create new causes of action. Therefore, a court cannot adjudicate breaches of an agreement regarding illegal gambling activity, as such agreements are unenforceable.
Borgata argues that Ivey and Sun promised to comply with the CCA, specifically not to engage in cheating or swindling as defined in N.J.S.A. 5:12-115(a). However, if their actions do not constitute a violation of the CCA, it raises the question of how they can be found to have breached their promise. The New Jersey Supreme Court has determined that the Casino Control Commission (CCC) retains primary jurisdiction to interpret the CCA and its regulations, suggesting that the courts should defer to the CCC for any interpretations that could affect the stability of the casino industry. Thus, Borgata’s breach of contract claim is effectively a claim that Ivey and Sun violated the CCA, which undermines its argument for relief.
Borgata's breach of contract claims against Ivey and Sun are not explicitly preempted by the Casino Control Act (CCA), but it is suggested that the Casino Control Commission (CCC) or the Division of Gaming Enforcement (DGE) should evaluate whether their actions violated the CCA. Borgata has requested permission to file a sur reply to clarify its interactions with the DGE regarding Ivey and Sun's alleged misconduct, but has not detailed what occurred with the DGE. Consequently, the Court denies this motion but mandates Borgata to demonstrate why its breach of contract and related claims should not be administratively terminated and referred to the relevant administrative body for resolution.
In addition to breach of contract, Borgata alleges fraud and RICO conspiracy against Ivey and Sun, asserting that they misrepresented their intentions to adhere to the CCA's honest play rules. To establish a fraud claim under common law, Borgata must show: 1) a material misrepresentation; 2) the defendant's knowledge of its falsity; 3) intent for the other party to rely on it; 4) reasonable reliance by the other party; and 5) resulting damages. A civil conspiracy requires at least two parties acting together to commit an unlawful act or lawful act through unlawful means that inflicts harm. Under the federal RICO statute, a violation requires allegations of: 1) conduct; 2) of an enterprise; 3) through a pattern; 4) of racketeering activity. New Jersey's RICO statute similarly prohibits acquiring or maintaining control of an enterprise through racketeering activity or unlawful debt collection.
To establish a violation of the New Jersey RICO statute, a plaintiff must demonstrate: 1) the existence of an enterprise; 2) that the enterprise engaged in trade or commerce activities; 3) that the defendant was associated with the enterprise; 4) that the defendant participated in its affairs; 5) that participation occurred through a pattern of racketeering activity; and 6) that the plaintiff suffered injury due to the conspiracy. The New Jersey RICO statute is broader than its federal counterpart, allowing more liberal pleading of violations. A valid RICO claim must be based on predicate offenses outlined in 18 U.S.C. 1962 or a conspiracy to commit such offenses, emphasizing a broad standard for 'relatedness' in establishing a pattern of racketeering activity, which may also consider 'continuity.'
In a racketeering conspiracy, a defendant does not need to commit predicate acts but must share a common purpose with co-conspirators. Each defendant must agree to commit two or more racketeering acts and adopt the goal of facilitating the criminal endeavor. Claims of fraud or misrepresentation must specify the circumstances of fraud clearly enough to alert defendants to the exact misconduct.
Borgata alleges that Ivey and Sun misrepresented their motivations, claiming superstitious beliefs to manipulate the casino into allowing them to execute a scheme that defrauded Borgata of millions, with funds transferred to a Mexican bank account. This scheme involved using specific playing cards and an automatic shuffler to gain an unfair advantage. Borgata’s fraud and RICO conspiracy claims are independent of its breach of contract claims and focus on the misrepresentations regarding the purpose of their requests, which enabled Ivey and Sun to perpetrate their edge carding scheme.
Borgata's allegations against Ivey and Sun have met the pleading standards for fraud, conspiracy, and RICO claims under Rules 8 and 9(b), allowing these claims to proceed despite the defendants’ motion to dismiss. Additionally, Borgata has raised alternative claims for rescission due to unilateral mistake and illegality, unjust enrichment, and conversion, all based on the same factual allegations as its primary claims. Rescission is limited to specific circumstances such as fraud or material breach, while unjust enrichment does not stand as an independent claim but can arise outside quasi-contractual contexts. Conversion involves the wrongful exercise of control over another's property. Since Borgata's fraud and RICO claims are valid, it may also pursue these alternative theories. Ivey and Sun contend that Borgata consented to their actions and that their play methods were lawful, challenging Borgata's portrayal as a victim. They argue that the casino's environment incentivizes loss through manipulative practices. The court acknowledges the defendants' points but finds that Borgata has presented plausible claims of fraud, allowing the case to advance to discovery. The court will determine the validity of the claims and the appropriateness of the defendants' actions, with an order to follow. Additionally, the rules of Baccarat are outlined in the complaint, explaining the game's mechanics and betting options.
Scores in the game range from 0 to 9, with no possibility of "busting." It is played with six or eight decks in a dealing "shoe." Players must place one of three bets: "banker," "player," or "tie." A "banker" bet wagers that the banker will have the hand closest to nine, a "player" bet wagers that the player will win, and a "tie" bet wagers that both hands will tie. Hands are dealt with the player receiving the first card, and a third card may be dealt based on specific score conditions. Winning bets pay out differently: "banker" bets pay 19 to 20, "player" bets pay even money, and "tie" bets pay 8 to 1. The house advantage is approximately 1.06% for "banker," 1.24% for "player," and 4.84% for "tie" bets.
Knowledge of the first card significantly influences winning probabilities, granting players an advantage of about 6.765% over the house when aware of the first card's value, with advantages reaching 21.5% for "player" bets and 5.5% for "banker" bets. Borgata alleges that Ivey intentionally lost part of his winnings during his October 2012 play and has brought claims against Gameco for breach of contract, breach of warranty, and indemnification. Gemaco has responded to Borgata's complaint, with no pending motions.
Borgata seeks to apply res judicata from Ivey's previous case against the Crockfords Club in London concerning £7.7 million in winnings that were denied. In that case, Ivey used the same "edge-carding" technique. Crockfords argued that Ivey was not entitled to his winnings because he had advance knowledge of the first card, violated an implied no-cheating term, and breached the Gambling Act. The judge ruled that Punto Banco was played, but noted the lack of clear legal definitions around cheating in this context. Ultimately, it was left to the judge's discretion to determine whether Ivey's conduct constituted cheating, acknowledging Ivey's belief that he did not cheat, which had some support.
The judge determined that Ivey's actions constituted "cheating" under civil law due to his manipulation of the dealer for personal advantage throughout the game, unlike a card-counter who gains an advantage later. The judge emphasized that it was unnecessary to assess whether Ivey's actions were criminal. The court clarified that the Crockfords case does not have preclusive effect because it does not satisfy res judicata standards, as the determination of cheating under English common law differs from U.S. standards governed by the Casino Control Act (CCA) and common law. While the CCA does not allow for private causes of action, it does not preempt all common law claims, permitting patrons or casinos to pursue certain claims. Examples include cases where patrons have successfully argued common law defenses against casino contracts based on duress and unconscionability. The court noted that even within New Jersey's highly regulated casino environment, the legislature did not intend to prevent casinos from pursuing common law claims, particularly in cases of fraud. Additionally, if a party engages in illegal gambling and incurs a loss, they may file a civil action to recover that loss within six months, provided it pertains to unlawful wagers or bets.
No legal action can be taken for breaches of agreements related to illegal gambling activities, as there is no statutory or common law basis for such claims. The New Jersey Division of Gaming Enforcement (DGE) oversees the enforcement of the Casino Control Act (CCA) and associated regulations, addressing various operational issues in casinos. A recent New Jersey Superior Court case highlighted the role of the DGE and the Casino Control Commission (CCC) in interpreting the CCA. In Golden Nugget v. Gemaco, Inc., the court intervened after two and a half years of inaction from the DGE and CCC regarding the legality of a baccarat game played with unshuffled cards. The court ruled that it would determine the legality of the game. Additionally, an unpublished Third Circuit ruling in Mankodi v. Trump Marina Associates, LLC, dismissed a claim against a casino, emphasizing that the CCA does not provide a private right of action. The court noted that claims framed as common law breach of contract or conversion were essentially violations of the CCA, and fraud claims cannot be based on these violations until the legal interpretation of the regulations is clarified.
