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Tohono O'odham Nation v. Ducey

United States District Court, D. Arizona

December 19, 2016

Tohono O'odham Nation, Plaintiff,
v.
Douglas A. Ducey, et al., Defendants.

          ORDER

          David G. Campbell United States District Judge

         In May 2013, this Court ruled that the 2003 Gaming Compact between the State of Arizona and the Tohono O'odham Nation (the “Compact”) did not prohibit the Nation from building a new casino in the Phoenix metropolitan area. Arizona v. Tohono O'odham Nation, 944 F.Supp.2d 748 (D. Ariz. 2013). Subsequently, the Nation began constructing a casino known as the West Valley Resort (“WVR”) in Glendale, Arizona, a suburb of Phoenix. In April 2015, while construction was ongoing, Daniel Bergin, Director of the Arizona Department of Gaming (“ADG”), wrote a letter to the Nation alleging that the Nation engaged in fraud during the formation of the Compact and asserting authority to withhold certification from the WVR's vendors and employees based on this conduct. In response, the Nation brought this lawsuit against the Arizona Governor and Attorney General, as well as Director Bergin, claiming that federal law preempts any state-law authority to withhold these certifications.

         The Court dismissed claims against the Governor and Attorney General, leaving Director Bergin as the sole Defendant. Doc. 82. The Director has asserted counterclaims against the Nation. Doc. 93. In an order dated March 30, 2016, the Court dismissed the Director's counterclaim for promissory estoppel, but left in place his counterclaims for fraudulent inducement and material misrepresentation. Doc. 127.

         After completion of discovery, the Nation moved for summary judgment against the Director on the remaining counterclaims. Doc. 253. The Nation also seeks summary judgment on its preemption claim. Id. The Court heard oral argument on December 14, 2016. Ruling from the bench, the Court found that disputed issues of fact prevent summary judgment on several of the Nation's arguments: that the Nation had no definite plans to game in the Phoenix area before the Compact was signed, that the Nation made no actionable omissions, that the State did not actually or justifiably rely on any alleged misrepresentations or omissions in entering into the Compact, and that sovereign immunity bars the counterclaims. The Court took three of the Nation's arguments under advisement: that the State ratified the Compact after it learned of the alleged fraud and cannot now seek partial rescission, that the alleged misrepresentations and omissions were not made with the authority of the Nation, and that the Nation is entitled to summary judgment on preemption. This order will address those issues. The Court will also address the Nation's pending motion for spoliation sanctions. Doc. 251.

         I. Summary Judgment Standard.

         A court must grant summary judgment “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). Under summary judgment practice, the movant bears the initial responsibility of presenting the basis for its motion and identifying those portions of the record that it believes demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. If the movant meets this initial responsibility, the burden shifts to the nonmovant to demonstrate the existence of a genuine dispute of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 250 (1986). The Court's function is not to weigh the evidence and determine the truth, but to determine whether there is a genuine issue for trial. Id. at 249. The Court must believe the nonmovant's evidence and draw all inferences in its favor. Id. at 255.

         II. Ratification.

         The Nation argues that the Court should grant summary judgment on the Director's fraud and misrepresentation counterclaims because “the State has ratified the Compact by continuing to accept contractual benefits and exercise contractual rights since learning in 2009 of the Nation's alleged fraud.” Doc. 253 at 10.[1] In support of this argument, the Nation relies primarily on the Restatement (Second) of Contracts. Indeed, the Nation cites to the Restatement at least ten times in its four-page argument. Id. at 14-18. The Director also cites the Restatement on this issue. Doc. 273 at 18.

         The Court agrees that the Restatement provides the relevant law. In a related case, the Ninth Circuit held that the Compact in this case is governed by general principles of “federal contract law.” Arizona v. Tohono O'odham Nation, 818 F.3d 549, 560 (9th Cir. 2016). Federal contract law, in turn, looks to the Restatement. See Pauma Band of Luiseno Mission Indians of Pauma & Yuima Reservation v. California, 813 F.3d 1155, 1163 (9th Cir. 2015) (“We ‘often look to the . . . Restatement when deciding questions of federal common law.'”) (quoting Curtin v. United Airlines, Inc., 275 F.3d 88, 93 n.6 (D.C. Cir. 2001)); Cty. of Santa Clara v. Astra USA, Inc., 588 F.3d 1237, 1244 (9th Cir. 2009) (looking to Restatement to define federal common law of contracts), reversed on other grounds, Astra USA, Inc. v. Santa Clara Cty., 563 U.S. 110 (2011); Wallach v. Eaton Corp., 837 F.3d 356, 368 (3d Cir. 2016) (explaining that Restatement (Second) of Contracts carries persuasive force in defining federal common law); Bowden v. United States, 106 F.3d 433, 439 (D.C. Cir. 1997) (explaining that the principles of the Restatement (Second) of Contracts are those “from which we would be inclined to fashion a federal common-law rule”); Turner v. American Fed'n of Teachers Local 1565, 138 F.3d 878, 882 (11th Cir. 1998) (similar).

         The Nation notes that “fraud in the inducement and misrepresentation do not void a contract; they merely render the contract ‘voidable' at the election of the purportedly defrauded party.” Doc. 253 at 15 (citing Restatement §7 & cmt. b). The defrauded party then has a choice: it can either rescind or affirm the contract. Id. If the defrauded party “acts in a manner ‘inconsistent with disaffirmance' after the alleged misrepresentation is known - such as by accepting benefits or performing under the contract - it no longer has any right to rescind.” Id. (citing Restatement § 380(2)).

         Relying on these principles, the Nation contends that the State ratified the Compact by accepting benefits and performing obligations under the Compact for some 27 months after it learned of the Nation's alleged fraud, and thereby lost its right to rescind. The Court might agree, except that the Nation has not established the first step in this argument - when the State learned of the Nation's fraud.

         Section 380(2) of the Restatement, which is the primary provision on which the Nation relies, makes clear that actual knowledge of fraud is required. It states:

The power of a party to avoid a contract for mistake or misrepresentation is lost if after he knows or has reason to know of the mistake or of the misrepresentation if it is non-fraudulent or knows of the misrepresentation if it is fraudulent, he manifests to the other party his intention to affirm it or acts with respect to anything that he has received in a manner inconsistent with disaffirmance.

Restatement (Second) of Contracts § 380(2) (1981) (emphasis added). Thus, constructive knowledge - “knows or has reason to know” - is sufficient to trigger the election obligation only for non-fraudulent misrepresentation. Actual knowledge is required for fraudulent misrepresentation. Because the Director claims fraudulent misrepresentation, the State's duty to act arose only when it actually knew of the Nation's fraud.[2]

         The Nation's motion does not establish when the State knew of the alleged fraud. The Nation asserts that it met with the Governor in January 2009 to discuss its plans to build the WVR, and announced the plans publicly on January 27, 2009. Doc. 254, ¶¶ 3-4. The Director does not dispute that the WVR plans became public at this time. Doc. 274 at 12. But the Nation makes no attempt to show that a 2009 disclosure of plans to build the WVR was tantamount to disclosure that the Nation (as the Director alleges) was planning in 2001 and 2002 to open a casino in the Phoenix area. The Director's allegation of fraud focuses on the 2001-2002 time period when the Compact was being negotiated: “the Nation had a secret plan at the time it was negotiating the Compact to build a gaming facility in the Phoenix metropolitan area and to assert the right to do so under IGRA and the Gila Bend Act, notwithstanding its contrary, false, representations to the State, the public and the Arizona voters.” Doc. 96 at 32-33 (emphasis added). The Nation's disclosure in 2009 of plans to open the WVR said nothing about when those plans were formed or the truthfulness of representations made during negotiation of the Compact. It was quite possible that the plans were formed well after the Compact was signed, in which case they would not support a claim of fraudulent inducement.

         The Director does not address this issue. He disputes the Nation's factual assertion that the State “knew or should have known” of the fraud no later than January 2009. See Doc. 254, ¶ 5; Doc. 274 at 12, ¶ 5. But he makes no argument on this point. The Court cannot act as counsel for the Director, and normally would not raise an issue his lawyers have failed to address, but, as shown above, the Nation bears the initial responsibility of presenting the basis for its motion and identifying those portions of the record that demonstrate the absence of a genuine issue of material fact. See Fed. R. Civ. P. 56(a) (summary judgment warranted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law”) (emphasis added); Celotex, 477 U.S. at 323 (“Of course, a party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, ” which it believes demonstrate the absence of a genuine issue of material fact.”). If the Nation fails to discharge this duty, the Court cannot grant summary judgment.

         The Nation cites only one item of evidence in support of its assertion that the State knew of the fraud in January 2009 - a January 19, 2010 letter from Governor Brewer to the Nation's chairman. Doc. 256-1. But that letter, which was written one year after plans for the WVR were disclosed, says nothing about fraud. The letter does assert that the State and others understood that “casino style gambling would be limited to existing tribal communities and would not become part of off-reservation neighborhoods” under the Compact. Id. at 2. But this assertion could be nothing more than an allegation that the Nation was breaching the Compact, as the State later asserted in court. It does not suggest that the Nation had plans for the WVR during negotiation of the Compact. The letter also asserts that the WVR would produce an imbalance by placing an urban gaming facility “within the markets of several other tribes, ” would not ...


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