The revocation of a gaming license in Pennsylvania cannot be avoided as a fraudulent transfer because the license is not property. Consequently, the Third Circuit upheld the two lower courts by ruling that sovereign immunity barred the debtor from suing the state to recover $50 million paid for a slot machine license.
Contrary to the state’s gaming laws, a license is property under Pennsylvania’s fraudulent transfer law. Because gaming laws are more specific, Circuit Judge Patty Shwartz held in her nonprecedential opinion on June 29 that the gaming statute controlled.
The case is another example of how bankruptcy’s deference to state definitions of property may bring results that are not uniform from state to state.
Cancellation of the $50 Million Slot Machine License
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.
In December 2010, Chief Bankruptcy Judge Magdeline D. Coleman of Philadelphia concluded that a revocable gaming license is not property. Her finding had two consequences: (1) Since the gaming license was not property, Judge Coleman dismissed the fraudulent transfer claims under PUFTA and Section 548; and (2) because there was no estate property that the debtor was seeking to recover, the state was protected by sovereign immunity.
The district court affirmed in September 2020. To read ABI’s reports on the decisions, click here and here.
Sovereign Immunity
For Judge Shwartz, the outcome turned on the state’s assertion of sovereign immunity. She cited Third Circuit authority that sovereign immunity is unavailable for suits in bankruptcy court that rely on the bankruptcy court’s in rem jurisdiction over estate property.
If the debtor could not show a property interest in the license, “then this adversary proceeding does not concern [the debtor’s] bankruptcy estate and is barred by sovereign immunity because it does not further the Bankruptcy Court’s in rem jurisdiction,” Judge Shwartz said.
Judge Shwartz therefore turned to state law to decide whether a gaming license is property.
Pennsylvania’s gaming statute provides that a license is a “revocable privilege” that is conditional, revocable and non-transferable. Under the text of the statute, Judge Shwartz concluded that “the license is not something a licensee owns and hence it is not property under PUFTA.”
The debtor argued that PUFTA itself should lead to a different result, because the state’s fraudulent transfer statute defines “property” broadly. Indeed, commentary says specifically that a governmental license is property, even if it is not transferable.
“When two statutes conflict irreconcilably,” Judge Shwartz said, the more specific one governs, according to the state constitution. The gaming law therefore governed, because it was “the more specific provision.” In other words, she said, the gaming law “is an exception to PUFTA’s general commentary providing a licensee has a property interest in a governmental license for purposes of fraudulent conveyances.”
Since the license was not property to underpin the bankruptcy court’s in rem jurisdiction, Judge Shwartz upheld the lower court and ruled that the state retained immunity requiring dismissal of the suit.
The revocation of a gaming license in Pennsylvania cannot be avoided as a fraudulent transfer because the license is not property. Consequently, the Third Circuit upheld the two lower courts by ruling that sovereign immunity barred the debtor from suing the state to recover $50 million paid for a slot machine license.
Contrary to the state’s gaming laws, a license is property under Pennsylvania’s fraudulent transfer law. Because gaming laws are more specific, Circuit Judge Patty Shwartz held in her nonprecedential opinion on June 29 that the gaming statute controlled.
The case is another example of how bankruptcy’s deference to state definitions of property may bring results that are not uniform from state to state.