Using a Casino’s ATM Makes the Casino the Initial Transferee, Not a ‘Mere Conduit’

Without saying so explicitly, Bankruptcy Judge Stuart M. Bernstein of Manhattan appears to have made a special fraudulent transfer rule for casinos: If a gambler makes a cash withdrawal from an ATM at a casino using a corporate ATM card, the casino is absolutely liable as the initial recipient of a constructively fraudulent transfer (if the corporation is insolvent).

The opinion means that casinos can be automatically liable as initial recipients of fraudulent transfers if they allow gamblers to use corporate ATM cards. Judge Bernstein says that casinos are in the best position to investigate and know whether a fraudulent transfer is afoot.

In this writer’s view, the principle is sound. The question is whether the rule should be imposed by a court or by statute.

The Corporate ATM Card

A pharmacy ended up in a chapter 11 case that converted to chapter 7 in New York. The sole owner of the pharmacy was an inveterate gambler. He wagered about $1.75 million at a particular casino in Atlantic City, N.J. His winnings were almost $500,000.

Before the pharmacy’s bankruptcy, the owner used a corporate ATM card to receive some $860,000 in cash withdrawals at the casino.

Not that it seemed to matter with regard to the outcome, but here’s how it worked. The owner had an ATM card linked to the corporate bank account. The ATM card allowed the owner to withdraw cash at ATM machines.

When the owner took cash advances at the casino, the ATM machine gave him a receipt that he took to the cashier’s window at the casino, where he was given the cash less a 4% fee split between the casino and the card processor.

After conversion to chapter 7, the pharmacy’s trustee sued the casino for receipt of a constructively fraudulent transfer under Section 548(a)(1)(B) of the Bankruptcy Code and similar provisions in state law.

The trustee and the casino both made motions for summary judgment. The casino contended that it was not a transferee, or if it was, it was a subsequent transferee entitled to raise the good faith defense under Section 550(a)(1)(B).

The casino lost. Judge Bernstein granted summary judgment in favor of the trustee in his July 24 opinion.

The Casino Was the Initial Transferee

The casino argued it was a “mere conduit” because it never had any dominion or control over the funds. If it were a conduit, the casino would not have been a transferee and would not be liable under Section 550.

If the casino were a “conduit,” the owner would have been the initial transferee. In that case, the casino could have been liable as a subsequent transferee if the trustee could prove that the casino was not a “good faith” subsequent transferee under Section 550(a)(1)(B).

Judge Bernstein did not answer the “mere conduit” contention directly. He seems to assume that taking a cash advance at a casino is for no purpose other than gambling. He also seems to assume (or perhaps the casino conceded) that the owner used all of the cash advances to gamble at the casino that was the defendant, and not at another casino in Atlantic City.

Judge Bernstein dealt with the “mere conduit” question, but in a different fashion. He analyzed the facts and decided that the ATM processor was a conduit, thus making the casino the initial transferee.

Judge Bernstein did not analyze whether the owner was the initial recipient, except to say in a footnote that the transaction was the same as though the owner had given a corporate check directly to the casino. He also noted that the casino had not argued that the owner was the initial transferee.

It’s as though Judge Bernstein assumed that a cash advance at a casino goes directly onto gaming tables, making the casino the initial transferee that effectively has no defenses.

To Judge Bernstein, making the casino the initial transferee was “consistent with the practical concerns expressed by the Bonded Financial Court when it compared the potential liability of initial and subsequent transferees.” See Bonded Fin. Servs. Inc. v. European Am. Bank, 838 F.2d 890 (7th Cir. 1988).

In Bonded Financial, the Seventh Circuit said that the “initial transferee is the best monitor; subsequent transferees usually do not know where the assets came from and would be ineffectual monitors if they did.” Id. at 892-893.

Applying Bonded Financial to the case at hand, Judge Bernstein said that “[the casino] bore the risk that the transfer of funds by the Debtor to [the casino] to allow [the owner] to gamble or use as he saw fit might be fraudulent and had the ability to decide whether that risk was worth the reward.”

Judge Bernstein granted summary judgment to the trustee because “[the owner] got the cash; the Debtor got none.”

Other Issues of Note

Judge Bernstein made two other rulings of note. On choice of law, he employed New Jersey’s fraudulent transfer law, not New York’s.

In New York, a fraudulent transfer is a tort. New York’s choice-of-law rules for torts look to the state that has the significant contacts and the interest in regulating conduct and allocating loss. New Jersey came out on top in both tests, impelling Judge Bernstein to apply New Jersey law.

The casino might have been entitled to have Judge Bernstein only issue proposed findings and conclusions. However, he said the casino had waived its right to issue a final ruling by having litigated the case to summary judgment without questioning the constitutional power of the bankruptcy court.