Thoughts on the Legal Ramifications of Casino Bankruptcy and the Impact of the Slowdown on the Casino Industry (1)

The Economic Slowdown Reaches the Gaming Industry: Thoughts on the Legal Ramifications of Casino Bankruptcy and the Impact of the Slowdown on the Casino Industry (1)

11/12/2008
By: Robert W. Stocker II and Peter J. Kulick Recent news reports that the Las Vegas Sands Corp. may file bankruptcy emphasizes that the global economic slowdown has extended its reach beyond the financial sector to the gaming industry. Recent statistics published by Bloomberg News Service reported that gambling revenue on the Las Vegas Strip has fallen by 6.7% through August compared to 2007 -- which is on pace to be the Strip's largest annual decline ever recorded(2). Already this year, Detroit, Michigan based Greektown Casino filed for Chapter 11 bankruptcy protection. It is possible - as evidenced by the public announcement of the Las Vegas Sands Corp. - that other casino operators could soon be under supervision of a bankruptcy court. Thus, gaming market participants, including casinos and suppliers, should be aware of the ramifications of a casino bankruptcy. Additionally, the credit crisis and reactionary economic stimulus packages present both challenges and opportunities to the gaming industry. Due to the highly regulated nature of the gaming industry, a casino bankruptcy presents unique and complicated legal issues. Bankruptcy courts obtain some level of control over the operation of a debtor's business. The interaction of state gaming regulation and federal bankruptcy law may present competing interests. The focus of gaming regulators is to protect the public integrity of commercial casinos. Bankruptcy law is intended to assist creditors to receive payment and to have an on-going business successfully emerge from bankruptcy. The competing interest of gaming regulators and bankruptcy courts can trigger jurisdictional fights. This article provides a basic overview of the tensions between state gaming regulation and a bankruptcy proceeding under the Federal Bankruptcy Code(3). The article then separately addresses the impact of the current state of the credit markets on the gaming industry, including potential challenges and opportunities. I. Balancing the Competing Interests of State Regulators and Bankruptcy Courts The United States Constitution federalized bankruptcy law by granting Congress the power to establish "Uniform Laws on the subject of bankruptcies throughout the United States."(4) States ordinarily have plenary power over the regulation of commercial gambling.(5) Thus, there is an inherent tension between the original jurisdiction of a bankruptcy court and state regulatory oversight of casinos. The Automatic Stay as a Means to Present State Regulatory Action Once a bankruptcy petition is filed, the jurisdiction of other judicial or administrative tribunals is limited. The automatic stay also prohibits an entity from taking any act to gain possession of property of the debtor's estate.(6) An important exception to the automatic stay exists for the exercise of police powers by a governmental unit.(7) Broadly construed, the automatic stay could effectively deny state gaming regulators from taking disciplinary action against a casino under the supervision of a bankruptcy court.(8) In contrast, if the automatic stay does not apply, a bankruptcy court would effectively be denied jurisdiction to oversee the operation and reorganization of a bankrupt casino. Interestingly, courts have not adopted an entirely uniform rule of law with respect to whether the automatic stay prevents state gaming regulators from taking licensing actions. A recent decision by the Seventh Circuit Court questioned whether a casino license is "property of" a bankruptcy estate.(9) An older decision emanating from the Federal Bankruptcy Court, District of New Jersey, invoked the automatic stay to prevent the New Jersey Casino Control Commission from taking action to revoke a casino license. Ultimately, the applicability of and, if determined to be applicable, the automatic stay will depend upon (1) venue of the bankruptcy court, and (2) the underlying basis of the regulatory action. Approving Loans and Financing Arrangements A key aspect of a bankruptcy reorganization proceeding is for a debtor to obtain post-petition financing. The Federal Bankruptcy Code expressly authorizes a trustee or debtor in possession to obtain unsecured credit or incur unsecured debt.(10) At the same time, state gaming regulations ordinarily require notice of financing arrangements and approval of the financing.(11) As a result, the approval of post-petition financing can cause significant tension between the jurisdiction of the bankruptcy court and state gaming regulators. In the event that state regulatory approval of post-petition financing is not sought, state gaming regulators could attempt to rescind the financing arrangement or take other disciplinary action against the casino licensee.(12) No reported court decision has addressed whether state gaming regulators retain authority to approve or rescind post-petition financing arrangements approved by a bankruptcy court. Practically, the bankruptcy court and state regulators will need to work in tandem; nevertheless, competing interests could develop to lead to a jurisdictional dispute.(13) Licensing the Bankruptcy Trustees and Personnel to Operate a Casino During Bankruptcy State gaming regulation is comprehensive over all aspects of commercial gaming. Not only do licensing requirements apply to the actual casino, but also may apply to employees, key personnel and certain equity owners. As a result, a bankruptcy trustee is more likely than not subject to state gaming regulation. A bankruptcy trustee's ability to operate a casino will likely be conditioned upon obtaining a license from state regulators.(14) Bankruptcy courts, on the other hand, will likely have limited ability to compel the appointment of a trustee.(15) Nevada has adopted procedures to permit a trustee to use an existing casino license with the caveat that the trustee must file an application which must be approved prior to operating the casino.(16) Therefore, the orderly administration of Chapter 11 casino bankruptcy proceedings through the use of a trustee can be imperiled without the cooperation of state gaming regulators. Competing Claims to the Daily Cash Flow of Casinos Casinos are businesses which deal in large amounts of cash.(17) The rights to the cash of a casino present several ancillary questions in connection with administrating a bankruptcy proceeding. These questions include how to perfect a security interest in casino cash and what rights, if any, do state gaming regulators have to casino cash to pay expenses, such as wagering taxes. Claims to casino cash are often addressed in the all important first-day orders. No case has expressly addressed how to perfect a security interest in the cash of a casino.(18) A security interest in cash is ordinarily perfected by possession.(19) The appointment of a receiver is likely required in order to control casino cash.(20) The appointment of a receiver will necessitate approval by state gaming regulators.(21) The use of the post-petition cash proceeds of a casino raises the issue whether states may make a priority claim to the cash proceeds or take disciplinary action relating to the payment of wagering taxes. The first bankruptcy court decision which addressed this issue, In re Elsinore Shore Associates, enjoined an attempt by the New Jersey Casino Control Commission to require payment of pre-bankruptcy petition taxes and fees as a condition of renewing a casino license.(22) More recently, the Seventh Circuit's decision in Rosemont suggests that courts should not seek to undermine the regulatory authority of state gaming regulators. Such uncertainty and basis for protracted disputes further encourages cooperation among the casino-debtor, state gam
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