Court Opinion

ID: 9897480
Source: CourtListenerOpinion
Date Created: 2023-11-14 19:14:54.399071+00
Date Added: 2024-06-11T09:14:28.969508
License: Public Domain

139 Nev., Advance Opinion c2(19

                       IN THE SUPREME COURT OF THE STATE OF NEVADA

                LUCKY LUCY D LLC, D/B/A LUCKY                           No. 83833
                CLUB CASINO & HOTEL,
                Appellant,                                                   FRE t
                vs.
                LGS CASINO LLC; LUCKY CLUB, LLC;
                                                                           ELL7        Mi A. BR
                AND 3227 CIVIC CENTER, LLC,                             C:LE                 ME
                Respondents.                                           BY_         .
                                                                                                      -
                                                                           r   -ilvF"ToEpuire CLERK

                LUCKY LUCY D LLC, D/B/A LUCKY                           No. 84257
                CLUB CASINO & HOTEL,
                Appellant,
                vs.
                LGS CASINO LLC; LUCKY CLUB, LLC;
                AND 3227 CIVIC CENTER, LLC,
                Respondents.

                           Consolidated appeals from district court orders on motions for
                summary judgment and a post-judgment award of attorney fees and costs
                in a contract action. Eighth Judicial District Court, Clark County; Timothy
                C. Williams, Judge.
                           Affirmed in part and reversed in part.

                McNutt Law Firm P.C., and Daniel R. McNutt and Matthew C. Wolf, Las
                Vegas,
                for Appellant.

                The Wright Law Group, P.C., and John Henry Wright, Las Vegas,
                for Respondents.

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                BEFORE THE SUPREME COURT, CADISH, PICKERING, and BELL,
                JJ.

                                                 OPINION

                By the Court, BELL, J.:
                             In these consolidated appeals, we consider whether business
                actions taken in response to the COVID-19 pandemic violated an ordinary
                course covenant in an asset purchase agreement. Generally, an ordinary
                course covenant requires the seller to operate its business in the usual
                manner between the time the agreernent is signed and closing. Such a
                covenant was included in the purchase agreement for the sale of a casino
                and hotel at issue here, and when the seller closed the casino and laid off
                employees due to the pandemic and the Governor's resulting emergency
                directive, the buyer asserted breach of the covenant.
                             In granting a motion for summary judgment in favor of the
                buyer, the district court agreed that the seller had breached the ordinary
                course covenant by closing the casino and hotel in response to thë COVID-
                19 pandemic.      We hold the district court erred in granting summary
                judgment for the buyer. In closing the casino and hotel pursuant t.o the
                emergency directive, the seller was merely following the law so as to
                maintain its gaming licenses and thus did not materially breach the
                agreement.    Accordingly, we reverse that portion of the district court's
                order.
                             The district court also denied the seller's motion for summary
                judgment based on the buyer's failure to obtain the necessary gaming
                licenses.   Because the record reflects that the buyer's applications for
                gaming licenses were delayed—not refused—we affirm that portion of the
                district court's order.
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                            Finally, the district court granted the buyer's motion for
                attorney fees and costs as the prevailing party under the agreement.
                Because we reverse the portion of the district court's order granting
                summary judgment to the buyer, we also reverse the order granting
                attorney fees and costs.
                                              BACKGROUND
                            The relevant facts in this case are undisputed. The Lucky Club
                Casino & Hotel, located in North Las•Vegas, is owned by Appellant Lucky
                Lucy D, LLC. In April 2019, Lucky Lucy entered into an agreement to sell
                the property to Respondent LGS Casino LLC. The agreement required LGS
                to make an earnest money deposit of $350,000.          The agreement also

                provided for a forty-five-day due diligence period. After the expiration of a
                forty-five-day due diligence period, the earnest money deposit became
                refundable only in the event of a "material default" by Lucky Lucy, per

                section 1.4(b) of the agreement. LGS provided the earnest money deposit in
                May 2019.
                            The agreement also contained an ordinary course covenant:
                under section 2.2(i), Lucky Lucy warranted that it would, before closing,
                maintain the property and conduct related business "in a manner generally
                consistent with the manner in which [Lucky Lucy] has operated and
                maintained the [p]roperty and [a]ssets prior to the date hereof." Further,
                while the sale was pending, section 1.5(c) required Lucky Lucy to remain
                "in material compliance with       all applicable licensing and gaming
                regulations." Closing was contemplated to occur within a year after the due
                diligence period ended.
                            In March 2020, in response to the COVID-19 pandemic, the
                Governor issued Declaration of Emergency Directive 002, mandating
                closure of all nonessential businesses. With limited exceptions, the closures
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                included casinos, restaurants, hotels, and nonessential governmental
                agencies. Lucky Lucy complied with the directive and temporarily closed

                the Lucky Club.
                            In an email to LGS, as required by section 2.4(c) of the
                agreement, Lucky Lucy provided notice that the Governor's emergency
                directive materially affected the business. LGS then sent Lucky Lucy a
                notice of breach and demanded Lucky Lucy cure the breach as provided in
                sections 2.2(i) and 2.2(q) (warrantying that "[s]ince the most recent
                financial statements delivered to [respondents], there ha.ve not been any
                material adverse changes in the business, financial condition, operations,
                results of operations, or future prospects of [Lucky Lucyl").   Given the

                continuing closure directives from the Governor, Lucky Lucy was unable to
                reopen the Lucky Club within the agreement's fifteen-day cure period.
                            The pandemic affected LGS's duties under the agreement a.s
                well. The agreement required LGS to take "all steps necessary including
                obtaining necessary approvals from the Nevada Gaming Commission and
                other governmental authorities (the 'Gaming Approvals') to ensure" closing
                within one year following the due diligence period. Due to the directive,
                however, the Nevada Gaming Commission vacated a required class for one
                of LGS's members and continued a previously scheduled May 2020 hearing
                where LGS had planned to obtain gaming license approval. The actions of
                the Gaming Commission prevented the sale from moving forward at that
                time.
                           After these obstacles arose, LGS terminated the agreement on
                April 14, 2020.    LGS's termination letter did not reference any uncured

                breach by Lucky Lucy. The letter focused on the impossibility of completing
                the transaction.    After termination of the agreement, the parties were

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                unable to agree on who was entitled to the earnest money deposit. LGS
                sued Lucky Lucy for return of the deposit, alleging various contract claims.
                Lucky Lucy answered and counterclaimed, alleging breach of contract and
                seeking declaratory relief. The district court ultimately granted summary
                judgment for LGS and denied Lucky Lucy's competing summary judgment
                rnotion. The district court later granted LGS's motion for attorney fees and
                costs pursuant to the parties' purchase agreement.          Lucky Lucy now
                appeals.
                                               DISCUSSION
                Lucky Lucy did not materially breach the agreement
                           Lucky Lucy argues the district court erroneously determined
                Lucky Lucy breached section 2.2(i) of the agreement. Reviewing de n.ovo,
                Wood u. Safeway, Inc., 121 Nev. 724, 729, 121 P.3d 1026, 1029 (2005)
                (reviewing summary judgments de novo), we agree.
                            As noted, section 2.2(i) of the agreement contained an ordinary
                course covenant requiring Lucky Lucy to maintain the property and conduct
                the busi.ness "in a manner generally consistent with the manner in which
                [Lucky Lucy] has operated and maintained" the property and business
                before the agreement. The relevant question here is whether temporarily
                closing the property pursuant to the Governor's directive constituted a
                material breach of the agreement that permitted LGS to seek a return of its
                earnest money deposit. To answer that question, we look to the plain
                language of the ordinary course covenant. Davis v. Beling, 1.28 Nev. 301,
                321, 278 P.3d 501, 515 (2012) (holding that in interpreting contracts, "the
                initial focus is on whether the language of the contract is clear and
                unambiguous; if it is, the contract will be enforced as written").
                            First, as the party asserting a breach of the agreement, and of
                the ordinary course covenant specifically, LGS carried the burden to
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                demonstrate Lucky Lucy's actions deviated frorn how it had generally
                conducted its business in the past. See Rivera u. Peri & Sons Farms, Inc.,
                735 F.3d 892, 899 (9th Cir. 2013) ("Under Nevada law, 'the plaintiff in a
                breach of contract action [must] show (1) the existence of a valid contract,
                (2) a breach by the defendant, and (3) damage as a result of the breach."
                (alteration in original) (quoting Saini v. Int'l Game Tech., 434 F. Supp. 2d
                913, 919-20 (D. Nev. 2006))); AB Stable VIII LLC v. MAPS Hotels & Resorts
                One LLC, C.A. No. 2020-0310-JTL, 2020 WL 7024929, at *50 (Del. Ch.
                Nov. 30, 2020), aff'd, 268 A.3d 198 (Del. 2021) (holding that where a buyer
                claims that a seller has breached an ordinary course covenant, the buyer

                carries the burden of demonstrating a breach).
                            Next, because the ordinary course covenant is limited to the
                manner in which Lucky Lucy operated before the parties signed the
                agreement, the court may look only to how Lucky Lucy has operated in the
                past. See Level 4 Yoga, LLC v. CorePower Yoga, LLC, C.A. No. 2020-0249-
                JRS, 2022 WL 601862, at *24 (Del. Ch. Mar. 1, 2022) (holding that where
                "an ordinary course provision includes the phrase 'consistent with past
                practice' or a similar phrase," the court looks only to how the specific
                company has operated in the past (quoting Snow Phipps Grp., LLC v.
                KCAKE Acq., Inc., C.A. No. 2020-0282-KSJM, 2021 WL 1714202 at *38
                (Del. Ch. Apr. 30, 2021))). The ordinary course covenant at issue here,
                however, also broadly provides that Lucky Lucy need only conduct its
                business in a manner that is "generally consistent" with the manner in
                which it had done so in the past. "Generally," is defined as "in a general
                manner," or "in disregard of specific instances and with regard to an overall
                picture." Generally, Merriam Webster's Collegiate Dictionary 521 (11th ed.
                2007).

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                           In reviewing Lucky Lucy's actions in response to the COVID-19
                pandemic, we conclude Lucky Lucy conducted the business in a manner that
                was generally consistent with the manner in which it had done so in the
                past. Under NRS 463.615(1)-(2), if any gaming company "does not comply
                with the laws of this state and the regulations of the [Gaming] Commission,
                the Commission may, in its discretion . . [rlevoke, limit, condition or
                suspend the license" of the company or fine the company "in accordance with
                the laws of this state and the regulations of the [Gaming] Commission."
                And under Section 3.14 of the agreement, "[t]he parties further agree that
                if anything in this [a]greernent is in violation or contravention of any

                gaming laws that such provision shall be null and void."
                            Further, the Governor's Emergency Directives ordering the
                temporary closure of casinos carried with them the force of law for the
                duration of the state of emergency. See Nevada's COVID-19 Declaration of
                Emergency Directive 002; see also generally NRS 414.060-414.070 (listing
                the governor's powers during a state of emergency, including the power to
                enforce all laws and regulations relating to the emergency). Because Lucky
                Lucy previously complied with Nevada laws and maintained its gaming
                licensing, we conclude LGS failed to meet its burden in establishing Lucky
                Lucy's actions in response to the COVID-19 pandemic were not generally
                consistent with Lucky Lucy's prior actions. Lucky Lucy maintained the
                property and was able to reopen on June 4, 2020, once certain COVID
                restrictions were lifted—in fact, Lucky Lucy reported increased revenue

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                after reopening. Accordingly, Lucky Lucy did not materially default under
                section 1.4(b) of the agreement.1
                            Additionally, Lucky Lucy held the property off the market for
                nearly a year after the conclusion of the due diligence period. During that
                time, LGS had the exclusive right to purchase the Lucky Club. The terms
                of the contract support the conclusion that the earnest money deposit was
                intended to be compensation for keeping the property off the market,
                refundable only if Lucky Lucy materially breached the agreement. As LGS
                failed to establish a material breach of the agreement attributable to Lucky
                Lucy, the earnest money deposit was not refundable to LGS under section
                1.4(b) and Lucky Lucy, not LGS, was entitled to receive the earnest money
                deposit from the title company. We conclude the district court erred in
                granting LGS's motion for summary judgment and denying Lucky Lucy's
                motion for summary judgment as to the earnest money deposit and reverse
                to that extent.
                LGS did not breach the agreement by failing to obtain the necessary gaming
                licenses
                            Lucky Lucy asserts that LGS failed to obtain the necessary
                gaming licenses and bore the risk of default for failing to obtain the licenses.
                Reviewing de novo, see Wood, 121 Nev. at 729, 121 P.3d at 1029, we
                disagree.
                            While a buyer typically bears the risk of default where it cannot
                obtain governmental licensing, see Nebaco, Inc. v. Riverview Realty Co., 87
                Nev. 55, 58, 482 P.2d 305, 307 (1971), the record does not reflect that LGS's

                      1 LGS also does not come to terms with section 1.5(e), which would cast
                Lucky Lucy in material breach due to a post-due-diligence period financial
                change only if that change was "within Seller's control," which the pandemic
                was not.
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                gaming license applications were denied. The Nevada Gaming Control
                Board delayed the compliance classes and informed LGS that its application
                did not qualify to be placed on the May 2020 agenda. Thus, the record
                reflects the pandemic and the Governor's directives caused a delay in
                obtaining approval—not a refusal to approve.
                            Moreover,    the   parties   used    a   traditional     qualifier,
                 commercially reasonable efforts," in section 1.11 of their agreement. with
                regard to the effort level LGS was required to exert to obtain the necessary
                gaming approvals. See Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-
                0300-JTL, 2018 WL 4719347, at *86-87 (Del. Ch. Oct. 1, 2018), aff'd, 198
                A.3d 724 (Del. 2018) (outlining the five common standards, including "best
                efforts," "reasonable best efforts," "reasonable efforts," "commercially
                reasonable efforts," and "good faith efforts"). Thus, in obtaining these
                approvals, LGS was not required "to take any action that would be
                commercially    detrimental,   including the     expenditure    of   material
                unanticipated amounts or management time."             Id. at 87 (defining
                "commercially reasonable efforts"). Accordingly, we conclude LGS did not
                need to go beyond the efforts made here in seeking license approval.
                            Because the record demonstrates LGS's gaming licenses were
                delayed—not refused—we conclude the district court did not err by denying
                Lucky Lucy's summary judgment rnotion as to the breach asserted with
                respect to the gaming licenses. It is not clear from the record whether Lucky
                Lucy's counterclaims sought relief beyond the award to it of the earnest
                money deposit but, to the extent Lucky Lucy asserted and sought summary
                judgment on such claims, we affirm the denial of summary judgment as to
                them.

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                Attorney fees and costs
                             Lastly, because we reverse the district court's order granting
                summary judgment in favor of LGS, we necessarily reverse the attorney
                fees and costs award to LGS as the prevailing party. See Bower v. Harrah's
                Laughlin, Inc., 125 Nev. 470, 494-95, 215 P.3d 709, 726 (2009) ("[I]f we
                reverse the underlying decision of the district court that made the recipient
                of the costs the prevailing party, we will also reverse the costs award.").
                                               CONCLUSION
                             Lucky Lucy did not violate the agreement's ordinary course
                covenant when it closed the Lucky Club as mandated by the Governor's
                emergency directive. Because the district court erred in granting LGS's
                motion for summary judgment and refunding the earnest money deposit to
                LGS, we reverse that portion of the district court's order and conclude that
                Lucky Lucy is entitled to retain the earnest money deposit. We further
                conclude the record reflects LGS's gaming licenses were delayed, not
                refused. Accordingly, we affirm the portion of the district court's order
                denying Lucky Lucy's motion for summary judgment to the extent it sought
                relief beyond the award to it of the earnest money deposit. Finally, because
                we reverse the district court's grant of summary judgment in favor of LGS,
                we also reverse the award of attorney fees and costs to LGS.

                                                                                      J.
                                                     Bell

                We concur:

                Cadish                                      Pickering

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