Collins Entertainment Settlements: Armstrong, Coats, and SCDOR

Collins Entertainment Corporation, the Greenville-based video poker operator run by Fred Collins Jr., was party to a cluster of lawsuits between the late 1990s and mid-2000s that produced millions in judgments and left a mark on South Carolina law. The Collins Entertainment lawsuits ranged from a $3 million fraud verdict won by the company’s own former president, to a tortious interference case that led South Carolina courts to adopt the “lost volume seller” doctrine, to regulatory fights with the state Department of Revenue and smaller contract disputes. The outcomes split both ways: Collins won some, lost others, and in at least one case ended up on the receiving end of a jury’s finding of fraud.

A Quick Note on the Company

Collins Entertainment Corporation was incorporated in South Carolina on November 13, 1992.¹ Video poker machines were its core product through the 1990s, accounting for roughly 80 percent of gross revenue and generating about $63 million a year in gross revenue and $12 to $13 million in annual net profits before South Carolina banned cash payouts from the machines effective July 1, 2000.² The ban and the pivot that followed set up the biggest of the lawsuits.

Armstrong v. Collins: The $3 Million Fraud Verdict

The most costly case for Fred Collins Jr. personally came from inside his own company. J. Marshall Armstrong had worked for Collins since 1980 and became president in 1998, running day-to-day operations.²

As the video poker ban approached, Collins and Armstrong developed a modified bingo machine called “Skillpins” that qualified for a $100 annual license fee instead of the $2,000 fee for Class III gaming machines. According to Armstrong, the two agreed to form a separate corporation, Skillpins, Inc., 90 percent owned by Collins and 10 percent by Armstrong, with Armstrong guaranteed a $150,000 annual salary.³ By 2001, Skillpins machines accounted for 67.5 percent of Collins Entertainment’s revenue.²

The relationship broke down when Collins folded Skillpins into the Collins Entertainment umbrella, which was carrying $13 million to $20 million in debt owed to SouthTrust Bank, instead of keeping the venture in the promised independent corporation. Armstrong refused, warned the bank’s claims would swallow the new business, and resigned. Collins dissolved Skillpins, Inc. within 30 days. Armstrong went on to run his own operation of roughly 250 Skillpins machines and 100 video redemption games.²

Armstrong sued Collins 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. The award was $3 million, split between $1.8 million in actual damages and $1.2 million in punitive damages.⁴ The South Carolina Court of Appeals affirmed, upholding the general verdict of $1.8 million in actual damages.³

Collins Entertainment v. Coats: The Lost Volume Seller Case

In 1996, Collins contracted to lease video poker machines, music and amusement machines, and a multi-player blackjack/poker unit to Ponderosa Bingo and Shipwatch Bingo under a six-year agreement. The lease required any purchaser of the premises to assume the contract.⁵

In 1997, American Bingo and Gaming Corporation bought the bingo 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 had orchestrated the purchase specifically to get around the Collins agreement despite full knowledge of it.⁶

The trial court awarded Collins $157,449.66 in actual damages and $1,569,013 in punitive damages on the tortious interference claim. A related breach of contract action produced another $232,628 in actual damages plus $66,255 in pre-judgment interest under the lease’s liquidated damages provision.⁵

The case’s lasting importance was doctrinal. The court adopted the “lost volume seller” rule, which holds that when a seller or lessor has enough inventory to fulfill both the original contract and later deals, income from those later deals does not offset the original loss. Because Collins maintained a warehouse of surplus machines and had the capacity to serve additional locations beyond the ones it lost, the court ruled it was a lost volume seller entitled to recover lost net profits without reduction.⁷

The South Carolina Court of Appeals affirmed the full judgment in 2003, including the roughly 10-to-1 ratio of punitive to actual damages, pointing to what the court called American Bingo’s “carefully orchestrated scheme” and its use of shell entities to shield itself from liability.⁶ The South Carolina Supreme Court affirmed in 2006. Chief Justice Toal dissented, arguing the lost volume seller doctrine should not apply to a tortious interference case and that the combined awards amounted to a double recovery.⁵

SCDOR v. Collins Entertainment: The Regulatory Win

In a 2000 case before the South Carolina Supreme Court, the state Department of Revenue tried to fine Collins Entertainment for violations of the “one employee/one location” rule, which required a separate employee during business hours at each video poker location. Collins held licenses for fifteen machines spread across three adjoining rooms, and the Department found the arrangement in violation. It revoked the machine licenses, fined the on-site operator, and then sought additional fines from Collins as the licensed owner.⁸

The Supreme Court sided with Collins. Applying the rule that penal statutes must be strictly construed, it held the Department had not proved Collins directly applied for, maintained, or permitted the use of the permits in violation of the rule, and that the penalties reached those directly involved in operating the business rather than a licensed owner without proof of direct involvement.⁸

Collins Entertainment v. Drews Distributing: A Loss in the Fourth Circuit

Collins had been the exclusive South Carolina distributor for “Pot-O-Gold” gambling machines made by Leisure Time Technologies starting in 1992. After Collins missed its quarterly purchase quotas beginning in the third quarter of 1993, Leisure Time downgraded it to non-exclusive status. Collins then sued Drews Distributing, which stepped in as a distributor, for tortious interference with contract and unfair trade practices.⁹

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, treating Drews’ conduct as legitimate competition protected under South Carolina law.⁹

Collins Entertainment v. White: A Collection Case

By the time of this suit the company had changed its name to Collins Entertainment Inc. It sued Gary White and Gary Couillard over $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. The trial court granted Collins a directed verdict on every counterclaim because the defendants offered no proof of damages, and the jury awarded Collins the full amount sought. The South Carolina Court of Appeals affirmed in 2005.¹⁰

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