Collins Entertainment Settlements: SC Video Poker Verdicts and Fines

Collins Entertainment Corporation, the Greenville, South Carolina video poker operator owned by Fred Collins Jr., was a party to a run of lawsuits between the late 1990s and mid-2000s that produced several multimillion-dollar judgments. The company won a roughly $1.7 million tortious interference verdict against American Bingo and Gaming Corporation that established the “lost volume seller” doctrine in South Carolina, and lost a $3 million fraud and breach-of-contract verdict to its own former president, J. Marshall Armstrong. It also litigated a regulatory dispute with the state Department of Revenue, a distributorship fight in federal court, and a collections case with a RICO counterclaim. The major Collins Entertainment lawsuits are laid out below.

The Company Behind the Cases

Collins Entertainment Corporation was incorporated in South Carolina on November 13, 1992, with its principal office at 1341 Rutherford Road in Greenville.¹ Video poker machines were its core product through the 1990s, accounting for about 80 percent of gross revenue and generating roughly $63 million a year in gross revenue and $12 to $13 million in annual net profits.²

South Carolina banned cash payouts from video poker machines effective July 1, 2000, and after July 8 the machines were classified as contraband.³ The ban wiped out Collins Entertainment’s most profitable line and left it carrying between $13 million and $20 million in debt to SouthTrust Bank.² Most of the major litigation traces back to this transition period.

Armstrong v. Collins: The $3 Million Verdict Against Fred Collins Jr.

The biggest judgment against Collins came from his own president. J. Marshall Armstrong had worked for Collins since 1980 and took over day-to-day operations in 1998.²

As the video poker ban approached, the two men developed a replacement product called “Skillpins,” a modified bingo machine that qualified for a $100 annual license fee rather than the $2,000 charged for Class III gaming machines. According to Armstrong, they agreed to form a separate corporation, Skillpins, Inc., that would be 90 percent owned by Collins and 10 percent by Armstrong, with Armstrong receiving a $150,000 annual salary. By November 2000, between 200 and 300 Skillpins machines were in operation, and by 2001 they accounted for 67.5 percent of Collins Entertainment’s total revenue.²

The relationship broke when Collins folded the Skillpins operation into the debt-heavy Collins Entertainment umbrella rather than keeping it in the promised independent corporation. Armstrong refused, worried SouthTrust’s claims on Collins Entertainment’s assets would consume the new venture. Collins then dissolved Skillpins, Inc. within 30 days. Armstrong resigned and started his own company, which went on to operate about 250 Skillpins machines and 100 video redemption games.²

Armstrong sued Fred Collins Jr. personally in Greenville County. After a four-day trial in August 2003, the jury found for Armstrong on six causes of action: fraud, constructive fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, and breach of contract accompanied by a fraudulent act. It awarded $3 million total, split as $1.8 million in actual damages and $1.2 million in punitive damages.⁴ The South Carolina Court of Appeals affirmed, upholding the trial court’s general verdict of $1.8 million in actual damages.⁵

Collins Entertainment v. Coats: Tortious Interference and the Lost Volume Seller Doctrine

Collins Entertainment’s most legally significant case came out of a soured video poker lease. In 1996, Collins contracted to lease video poker machines, coin-operated music and amusement machines, and a multi-player blackjack/poker unit to two bingo hall operations, Ponderosa Bingo and Shipwatch Bingo, under a six-year agreement that required any purchaser of the premises to assume the contract.⁶

In 1997, American Bingo and Gaming Corporation bought the parlors’ assets, refused to honor the lease, and removed the machines. Collins sued for unfair trade practices, civil conspiracy, and intentional interference with contract. A Charleston County master-in-equity found American Bingo liable for intentional interference, concluding the company had orchestrated the purchase specifically to sidestep the Collins agreement despite full knowledge of it.⁷

The trial court awarded Collins $157,449.66 in actual damages on the tortious interference claim and $1,569,013 in punitive damages. In a related breach-of-contract action, Collins also received $232,628 in actual damages plus $66,255 in pre-judgment interest, calculated under the lease’s liquidated damages provision.⁶

The lasting importance of the case was the court’s adoption of the “lost volume seller” doctrine. Under that principle, when a seller or lessor has enough inventory to fulfill both the original contract and any later deals, income from the later deals does not count as mitigation of the original loss. Collins kept a warehouse of machines rotating through about 130 locations and demonstrated surplus capacity, so the court ruled it was a lost volume seller entitled to recover lost net profits without offset.⁸

The South Carolina Court of Appeals affirmed the full judgment in 2003, including the punitive damages, finding the roughly 10-to-1 ratio was not excessive given what it called American Bingo’s “carefully orchestrated scheme” and use of shell entities.⁷ The South Carolina Supreme Court affirmed in 2006. Chief Justice Toal dissented, arguing the doctrine should not apply in a tortious interference case and that the combined awards were an improper double recovery.⁶

SCDOR v. Collins Entertainment: The Regulatory Fine Case

In 2000, the South Carolina Supreme Court decided a fight between Collins and the state Department of Revenue over the “one employee/one location” rule, which required a separate employee at each video poker location during business hours. Collins held licenses for fifteen machines spread across three adjoining rooms, and the machines were found in violation. The Department revoked the licenses and fined the on-site operator, then sought additional fines from Collins as the licensed owner.⁹

The Supreme Court sided with Collins. Applying the rule that penal statutes must be strictly construed, it held the Department had failed to prove Collins directly applied for, maintained, or permitted the use of the permits in violation of the regulation, and that penalties applied to those directly involved in operating the business rather than a licensed owner absent proof of direct involvement.⁹

Collins Entertainment v. Drews Distributing: The Federal Case Collins Lost

Collins had become the exclusive South Carolina distributor for “Pot-O-Gold” gambling machines made by Leisure Time Technologies in 1992. After Collins missed quarterly purchase quotas starting in the third quarter of 1993, Leisure Time downgraded it from exclusive to non-exclusive distributor. Collins sued Drews Distributing, the company that took over as distributor, for tortious interference with contract and unfair trade practices.¹⁰

The district court directed a verdict for Drews, finding no evidence Drews knew about the Collins contract or intentionally procured a breach. The Fourth Circuit affirmed in March 1999, ruling that Drews’ actions were legitimate competition protected under South Carolina law and that Collins had not offered substantial evidence of any element of tortious interference.¹⁰

Collins Entertainment v. White: A Collections Case With a RICO Counterclaim

By the mid-2000s the company was operating as Collins Entertainment Inc., having dropped “Corp.” from its name. It sued Gary White and Gary Couillard to collect $18,687.32 in unpaid video poker machine license fees. The defendants counterclaimed for breach of contract, fraud, unfair trade practices, and a violation of the federal Racketeer Influenced and Corrupt Organizations Act, alleging Collins was trying to extort money from them.¹¹

The trial court directed a verdict for Collins on all counterclaims because the defendants offered no proof of damages, and a jury awarded Collins the full amount it sought. The South Carolina Court of Appeals affirmed in 2005.¹¹

What Happened to the Company

Collins Entertainment Corporation’s Georgia corporate registration eventually moved to “withdrawn” status, and its South Carolina operations wound down after the video poker ban and the string of lawsuits that followed it.¹

1
Georgia Secretary of State. Collins Entertainment Corporation Business Information
2
South Carolina Judicial Department. Armstrong v. Collins, Opinion No. 4028
3
Stateline. S.C. Video Poker Ban Energizes Gaming Friends, Foes
4
Harpootlian Law Firm. One-Time Collins Entertainment President Awarded $3 Million in Breach of Contract Dispute
5
FindLaw. Armstrong v. Collins, No. 4028
6
FindLaw. Collins Entertainment Corp. v. Coats and Coats Rental Amusement
7
FindLaw. Collins Entertainment Corp. v. Coats and Coats Rental Amusement, No. 3596
8
South Carolina Judicial Department. Collins Entertainment Corp. v. Coats, Opinion No. 3596
9
South Carolina Judicial Department. SCDOR v. Collins Entertainment Corp., Opinion No. 25110
10
U.S. Court of Appeals, Fourth Circuit. Collins Entertainment Corp. v. Drews Distributing, No. 98-1083
11
South Carolina Judicial Department. Collins Entertainment Inc. v. White, Opinion No. 3935