For those of you lucky enough to attend the Business Reorganization Committee’s excellent CLE panel at the Winter Leadership Conference in Tucson, Ariz., on gaming, destination resort and hotel chapter 11 cases, or to have purchased ABI’s CD-rom of 2002 Winter Leadership Conference educational materials, panelist Rudy Cerone has been kind enough to assemble a “pocket part” to the materials on gaming insolvencies. Below is your free update, in “pocket part” format, to the article, Bankruptcy Trends in the Gaming Field, 10 J. BANKR. L. & PRAC. 293 (May/June 2001).
VI. CLAIMS PROCEEDINGS AND AVOIDANCE ACTIONS
A. Casino v. Gambler
Page 311, add at the end of the carryover paragraph:
*
See also, In re Baumblit, 15 Fed. Appx. 30, 2001 WL 880872 (2nd Cir., Aug. 6, 2001) (gambling debt was not within the exception to dischargeability on the grounds that the debtor obtained credit through “false pretenses, a false representation, or actual fraud”); In re Liu, 2002 WL 31954445 (Bankr. N.D. Ga., Dec. 12, 2002) (UST’s objection to the debtor’s discharge based on the amount of money lost gambling pre-petition).
In a case of man bites dog, gamblers have struck back against casinos who refer matters to the Bad Check Collections Unit (“BCU”) of the District Attorney’s office of Clark County, Nevada. The courts in two cases have granted debtors relief from the casinos’ attempts to use the DA’s office to collect their unpaid gambling debts. In Baumblit, supra, the Second Circuit affirmed the bankruptcy court’s finding that Caesar’s Palace’s post-petition referral of the debtor’s markers to the BCU violated the automatic stay and that the referral was not the commencement of a criminal action or proceeding that would be excepted from the automatic stay pursuant to §362(b)(1). Id. at *35 and **4. Moreover, the court found that the casino’s actions constituted a deliberate violation of the automatic stay entitling the debtor to actual damages pursuant to §362(h). Id. In In re Simonini, 282 B.R. 604 (D. W.D.N.C. 2002), the court found that Nevada’s attempted prosecution of the debtor for unpaid markers was really a debt collection action, and not a criminal prosecution, stating that the BCU’s prosecution was a “debt collection in sheep’s clothing.” Id. at 614. The court granted the debtor a permanent injunction against Nevada’s prosecution and extradition from North Carolina to Nevada.
Other suits and potential actions by gamblers against casinos either are in the works or are on the horizon. See Addicted Gambler, Bankrupt Sues Casino For His Losses, Wall Street Journal, Oct. 22, 2002, http://online.wsj.com/article/0,,SB1035228816558331071.djm,00.html; Organization: Casinos Could Be Sued, Las Vegas Review-Journal, June 6, 2002, at http://www.lvrj.com/lvrj_home/2002/Jun-06-Thu-2002/news/18909265.html (casinos could be the next “big tobacco”).
B. Cash-advancing Credit Card Company v. Gambler
Page 313, insert a new final paragraph:
Online gamblers also lost a significant attempt to avoid paying their debts by blaming credit card companies. A class action lawsuit to that effect was filed in 2000 against Visa, MasterCard and the banks that issued their cards. In In re MasterCard Int’l Inc. Internet Gambling Litigation, Case No. 01-CV-30389 (5th Cir. Nov. 20, 2002), the court held that the gamblers “got exactly what they bargained for – gambling ‘chips’ with which they could place wagers.” A unanimous 5th Circuit panel dismissed the suit because the gamblers failed to show the predicate acts necessary to sustain a civil RICO action.
Page 313, add at the end of footnote 38:
; Matter of Mercer, 246 F.3d 391 (5th Cir. 2001) (each use of pre-approved credit card by chapter 7 debtor was in nature of implied representation by debtor of her intent to repay any credit extended; credit card issuer “actually relied,” as a matter of law, on debtor’s implied, card-use representation regarding her intention to repay credit card debt; and the case would be remanded for determination on knowing falsity, intent to deceive and justifiable reliance issues); In re Alnajjar, 276 B.R. 844 (Bankr. N.D. Ohio 2002) (debtor’s unsuccessful gambling at casino would not be excepted from discharge as debt for money or credit obtained by debtor’s “false pretenses, false representation or actual fraud.”).
C. Chapter 7 Trustee v. Casino
Page 313, insert after the “Armstrong” citation:
, aff’d, 285 F.3d 1092 (8th Cir. 2002).
Page 314, insert in the “Armstrong” citation in lieu of the Westlaw cite:
260 B.R. 454 (E.D. Ark. 2001), aff’d, 291 F.3d 517 (8th Cir. 2002).
Page 314, add the following final paragraph:
In a non-bankruptcy case, which easily could occur in a bankruptcy context, a state court receiver, appointed to recover assets on behalf of duped investors in a fraudulent company, brought an action against casinos under California’s version of the Uniform Fraudulent Transfer Act (“UFTA”). Fisher v. Las Vegas Hilton Corp., 47 Fed. Appx. 824, 2002 WL 31085332 (9th Cir., Sep. 18, 2002). In that case, the Ninth Circuit held that allegations that the head of a company transferred $26 million to casinos and then gambled that money in the casinos’ slot machines were sufficient to allege “transfer” under UFTA; that fact issues regarding whether the casinos knew or should have known that proceeds were being gambled by the head of the company were illegal precluded judgment on the pleadings on the issue of whether the casino had an affirmative defense to the receiver’s action under the UFTA; that the receiver’s allegations that transfers from the head of the company to casinos through gambling were constructively fraudulent and voidable under the UFTA had to fail absent an allegation that the head of the company did not receive reasonably equivalent value for his transfers to the casino; and that the receiver adequately pled a claim for relief under California statute providing that a receiver appointed oversee a defendant’s assets may avoid transfers of unlawfully obtained property.
Page 314, add the following new section and renumber the conclusion to VIII:
VII. MISCELLANEOUS MATTERS
Can earnings received by a debtor from gambling activities be used to fund the debtor’s chapter 13 plan? Not surprisingly, one court has said no. In re Cushman, 263 B.R. 293 (Bankr. W.D. Mo. 2001). Section 1325(a)(6) of the Bankruptcy Code requires that a debtor “will be able to make all payments under the plan . . . .” Gambling winnings apparently are too uncertain, as a matter of law, to meet that requirement:
Setting all moral and policy arguments aside for the moment (which weigh strongly against allowing a debtor to attempt to fund a chapter 13 plan with gambling winnings), the court believes that gambling, regardless of the ability of the gambler, is inherently too uncertain a source of income to fund a chapter 13 plan.
Id. at 295. The court also noted that, despite his success at gambling, the debtor still was unable to pay his debts pre-petition and found it necessary to file for bankruptcy in the first place. Id.
While gambling winnings are not a stable enough source of revenue to fund a chapter 13 plan, they are property of the debtor’s bankruptcy estate. In In re Kedrowski, 284 B.R. 439 (Bankr. W.D. Wis. 2002), the court considered the provisions of the Indian Gaming Regulatory Act, which permits tribes to distribute a portion of the tribal gaming revenues to members on a per capita basis, 25 U.S.C. §2710(b), when considering a chapter 7 trustee’s claim in a member’s bankruptcy that the distributions due to the member were property of the bankruptcy estate. The court found that the debtor’s right to receive distributions from the tribe’s gaming operations is a property right within the meaning of §541(a) of the Bankruptcy Code. Id. at 459, citing Johnson v. Cottonport Bank, 259 B.R. 125, 131 (W.D. La. 2000).
Finally, much has been made in the public debate about whether the spread of legalized gambling has resulted in an increased number of bankruptcies. Undoubtedly, the growth of legalized gambling and the increase in bankruptcy filings are two concurrent trends of the recent past. However, is there a cause-and-effect relationship between the two? The Treasury Department has concluded that there exists only a “weak relationship between frequent high-risk gambling and the probability of declaring bankruptcy.” U.S. Dep’t. of the Treasury, A Study of the Interaction of Gambling and Bankruptcy, Executive Summary at i (July 1999). It, thus, appears that the recent rise in consumer bankruptcies cannot be laid at the feet of the gambling industry.
* Rudy J. Cerone is a member of McGlinchey Stafford PLLC, and resides in its New Orleans office. He is certified as a Business Bankruptcy Specialist by the American Board of Certification and by the Louisiana State Bar Association.