A Pennsylvania Gambling License Isn’t ‘Property’ Recoverable as a Fraudulent Transfer

The revocation of a gaming license cannot be avoided as a fraudulent transfer because the license is not property, at least in Pennsylvania, according to Chief Bankruptcy Judge Magdeline D. Coleman of Philadelphia.

And because a gaming license is not property, Judge Coleman also held that sovereign immunity barred the trustee from suing.

The Facts and the Third Circuit Reversal

The debtor had paid the state $50 million for a gaming license. When the casino’s opening was years behind schedule, the state cancelled the license, essentially causing the debtor to forfeit the $50 million. The debtor unsuccessfully challenged license revocation in state trial and appellate courts.

Two years later, the debtor filed a chapter 11 petition and sued the state, alleging constructively fraudulent transfers under Section 548 and Pennsylvania’s version of the Uniform Fraudulent Transfer Act, or PUFTA.

Citing Rooker-Feldman, the bankruptcy court dismissed the suit, concluding a fraudulent transfer would necessarily overturn the state court judgment upholding license cancellation. The debtor was succeeded by a litigation trustee who took over the appeal.

After the district court upheld dismissal, the trustee appealed to the Third Circuit and won in a reversal in January 2018. Philadelphia Entertainment & Development Partners LP v. Dept. of Revenue (In re Philadelphia Entertainment & Development Partners LP), 879 F.3d 492 (3d Cir. 2018).

The circuit’s opinion was notable for cutting back on the circumstances when invocation of Rooker-Feldman is appropriate. In sum, the appeals court said that dismissal is proper for lack of subject matter jurisdiction under the doctrine only when the plaintiff seeks review of a state court judgment. The doctrine did not apply, the appeals court said, because the trustee was not asking for appellate review of license revocation. For ABI’s report on the Third Circuit opinion, click here.

The Third Circuit remanded for the lower courts to decide (1) whether claim or issue preclusion would bar the fraudulent transfer claim, (2) whether the trustee had stated a fraudulent transfer claim, and (3) whether sovereign immunity under the Eleventh Amendment would bar the trustee’s claim.

The Suit Is Dismissed Again

In her December 31 opinion, Judge Coleman ruled for the trustee in one respect: The fraudulent transfer suit was not barred by claim or issue preclusion based on prior proceedings in state court aimed at reinstating the license.

Claim preclusion, or res judicata, did not apply, Judge Coleman ruled, because fraudulent transfer claims could not have been brought in the prior state court proceedings. At the time, bankruptcy had not been filed. The trustee could not have asserted claims in state court under Sections 548 or 544, which require the pendency of bankruptcy.

The trustee could not have sued under PUFTA because the state statute only allows a creditor to mount a fraudulent transfer suit.

Issue preclusion, or collateral estoppel, did not bar the suit, Judge Coleman ruled, because the proceedings in state court related to the unfairness or impropriety of license revocation, not the lack of consideration for cancellation of the license.

Judge Coleman concluded, however, that the gaming license was not property, thus knocking out the fraudulent transfer suit on two grounds.

Under Section 548 and PUFTA, the trustee could mount a fraudulent transfer claim only to recover “property.” Judge Coleman consulted the Pennsylvania gaming statute, because state law generally determines property interests.

The state statute provides that a gaming license “shall be deemed as privilege, conditioned upon the proper and continued qualification of the licensee . . . .” Judge Coleman therefore concluded that a gaming license is a “revocable privilege,” not property. She rejected the trustee’s argument that PUFTA defines property more broadly, because the gaming statute is more specific.

Since the gaming license was not property, Judge Coleman dismissed the fraudulent transfer claims under PUFTA and Section 548.

The lack of a property interest also had fatal ramifications for the trustee with regard to the state’s assertion of Eleventh Amendment sovereign immunity.

Judge Coleman analyzed Supreme Court authority, beginning with Central Virginia Community College v. Katz, 546 U.S. 356 (2006). In Katz, the high court held that proceedings to set aside a preference were not barred by sovereign immunity because the proceedings were essentially in rem.

Judge Coleman also dissected U.S. v. Nordic Village Inc., 503 U.S. 30 (1992), where the Supreme Court ruled that a suit against the Internal Revenue Service to recover an unauthorized post-petition transfer under Section 549 was barred by sovereign immunity. The high court said there was no exercise of in rem jurisdiction because the suit sought to recover a sum of money, not particular dollars or the return of tangible property.

Judge Coleman found the trustee’s suit more akin to Nordic Village than Katz, given that the trustee was seeking money damages, not the reinstatement of the license. In other words, the suit was not an ancillary exercise of the bankruptcy court’s in rem jurisdiction over a res.

Through an historical analysis, Judge Coleman had decided that the “States waived their sovereign immunity with respect to fraudulent transfer actions generally” by having ratified the constitution and its inclusion of the Bankruptcy Clause. Nonetheless, she said, “the Fraudulent Transfer Claims at issue in this case do not fall under that waiver, and the [state’s] sovereign immunity serves as a defense to those claims.”