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Home / Case News / Pennsylvania Court – What May Constitute Property for Purposes of Entitlement to Due Process Protections Does Not, However, Govern Whether It is Property For Other Purposes Under State Law

Pennsylvania Court – What May Constitute Property for Purposes of Entitlement to Due Process Protections Does Not, However, Govern Whether It is Property For Other Purposes Under State Law

January 4, 2020, Eastern District of Pennsylvania– On December 20, 2006, the Pennsylvania Gaming Control Board awarded one of two slot machine licenses to a Debtor. Due to unexpected delays and the inability to secure financial backing, the Debtor was not able to open its casino within one year, as required. The Debtor’s request for an extension of time to pay the license fee of $50 million was denied, and it paid the fee in October 2007. However, the Debtor sought and received an extension of time to commence operations until May 2011. In granting an extension, the Gaming Board imposed conditions upon the Debtor, including milestone deadlines and daily fines when they were not met. The Debtor was unable to meet these conditions, and on December 23, 2010, the Gaming Board issued a revocation order, revoking the Debtor’s license for financial unsuitability, for failing to commence construction of the casino, and for failing to comply with the Gaming Board’s orders. The Commonwealth did not return any part of the $50 million license fee. The Debtor appealed the revocation order to the Commonwealth

The Commonwealth Court affirmed the revocation order, finding that the Gaming Board applied the correct test in deciding whether the license should be revoked, that the revocation guidelines were not unconstitutionally vague as applied, that the Debtor was given the opportunity to be heard, that there was evidence to support the Gaming Board’s decision, and that revocation of the $50 million license was not an excessive sanction.

Subsequently on March 31, 2014, the Debtor filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Pennsylvania. In April 2014, the Debtor made a demand upon the Commonwealth for the return of the license fee. The Commonwealth refused.

On May 29, 2014, the Debtor filed an adversary complaint against the Commonwealth, seeking to avoid the license revocation and demanding payment of $50 million, which it claimed was property of the bankruptcy estate. The Debtor asserted bankruptcy claims for turnover (for the Commonwealth’s failure to return the license fee), and for fraudulent transfer arising from the Commonwealth’s revocation of the license and failure to provide the reasonably equivalent value for the license after it was revoked.

On April 8, 2016, the bankruptcy court dismissed the adversary complaint and concluded that the Trustee failed to state a claim for turnover pursuant to 542and, to the extent the actions implicated some transfer other than the revocation of the license, a claim for fraudulent conveyance. The Court further held that the application of the Rooker-Feldman Doctrinedivested it of subject matter jurisdiction to consider the avoidance of the revocation of the license; and sovereign immunity deprived the court of subject matter jurisdiction to hear the Trustee’s non-bankruptcy causes of action. The court refused to determine whether sovereign immunity applies to the fraudulent conveyance claims.

The Trustee appealed the April 8, 2016 order entered by the bankruptcy court dismissing the fraudulent transfer claims. The Trustee argued that the bankruptcy court misconstrued its fraudulent transfer claims as a challenge to the revocation of the license itself. The Trustee also asserted that the bankruptcy court erroneously perceived the pre-petition Debtor’s claims to be the same as the Trustee’s, and misapplied Rooker-Feldman doctrine. The Commonwealth filed a cross-appeal, asserting that the bankruptcy court’s order can be affirmed on the alternative ground that the Commonwealth is immune from the Trustee’s fraudulent transfer claims pursuant to the Eleventh Amendment.

The Court held that the Debtor’s fraudulent transfer claims were not barred by claim or issue preclusion because the 11 U.S.C.S. § 548 claim was a creature of the Bankruptcy Code and was dependent on the existence of a bankruptcy case, which had not yet been filed. Also, the Court held that the Debtor was not a creditor who could bring a claim under the Pennsylvania Uniform Fraudulent Transfer Act (PUFTA).

However, the Court added that while in general, states have waived their sovereign immunity to suit in fraudulent transfer actions in bankruptcy court, the fraudulent transfer claims in this case were barred by sovereign immunity because the claims involving the Debtor’s slot machine license did not invoke the court’s in rem jurisdiction. 

The Court also held that even if sovereign immunity were inapplicable, the complaint failed to state a claim because the license did not constitute an interest of the debtor in its property or an asset.

The Court granted the Defendants’ Motion to dismiss the Debtor’s adversary complaint