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No Dice: State Law Precludes Recovery of $50,000,000 Gaming License Fee

By Shane G. Ramsey, Woods Drinkwater

In 2007, Philadelphia Entertainment and Development Partners, LP dba Foxwoods Casino Philadelphia (“Plaintiff”) secured a gaming license from Pennsylvania for $50,000,000 with the understanding that it open its casino business within one year. Plaintiff failed to do so and, despite a number of extensions, Pennsylvania cancelled and revoked the gaming license in December 2010. Without a gaming license, Plaintiff found itself in chapter 11 by spring of 2014. In an adversary proceeding filed against Pennsylvania, Plaintiff challenged the revocation of its gaming license, which it painted as a constructively fraudulent transfer under section 548 of the Bankruptcy Code and the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”).

The adversary proceeding was initially dismissed after the bankruptcy court concluded that a ruling may overrule a Pennsylvania court judgment confirming the license cancellation in violation of the Rooker-Feldman doctrine. The Rooker-Feldman doctrine mandates that a plaintiff find a state court remedy or obtain relief from the United States Supreme Court; it is improper for a lower federal court to review state court decisions without specific authorization from Congress.

The District Court confirmed. On appeal, the Third Circuit reversed, stating that the nature of the adversary proceeding complaint did not request review of a state court judgment but instead sought relief under the Bankruptcy Code regarding the revocation of a license—a claimed asset of Plaintiff—without receiving reasonably equivalent value in exchange.

On remand, the bankruptcy court took up the question of whether the license cancellation qualifies as a fraudulent transfer under either section 548 of the Bankruptcy Code or PUFTA. The court concluded definitively that it did not qualify under either provision.

A threshold requirement for a fraudulent transfer claim under section 548 is that the debtor must first have an interest in the transferred property. Likewise, under PUFTA, the transferred property must first be an asset of the debtor. For the purposes of section 548 or a Uniform Fraudulent Transfer Act claim, a court must first determine the law under which the asset may—or may not—qualify as property.

For the purposes of section 548, a gaming license is not considered property under Pennsylvania law because the Pennsylvania Gaming Act deems a gaming license a “privilege, conditioned upon the proper and continued qualification of the licensee.” 4 Pa. C.S. § 1102(7). Further, absent a change in ownership or control of the license, a gaming license “shall not be sold, transferred, or assigned to any other person; nor shall a licensee…pledge or otherwise grant a security interest or lien” in the same. 4 Pa. C.S. § 1327.

As such, Plaintiff’s gaming license qualifies only as a revocable privilege and fails to meet the threshold requirement that it first qualify as an asset. The court found that a gaming license is similarly unsatisfactory to meet the threshold requirements under PUFTA—it does not qualify as property under Pennsylvania state law.

Ultimately, Plaintiff purchased only an opportunity and not an asset. The house does not always win.

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