On February 28, 2017, Judge Sontchi of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) in the Money Center of America bankruptcy – Bankr. D. Del., Case 14-10603. The Opinion is available here. This Opinion decided two separate, but similar, motions to dismiss filed by 2 entities owned by federally recognized Indian Tribes and sovereign nations (the “Tribes”). Each of these Tribes owned a casino (through wholly owned entities) in which the Debtor placed ATMs and other cash advance services, in order to allow casino patrons ready access to funds. The process that was followed in each case is that the Debtor would provide the ATM or service, the casino would advance the funds by providing payments and stocking the ATMs, and the Debtor would reimburse the casinos from the funds transferred by the patrons’ banks. In this process, the Debtor would also charge the patrons a fee, funding its operations.
This was a process in which large sums of money flowed, but with little direct benefit to the casinos or the Debtor, as the majority of funds came from a patron’s bank and was paid to the patron. Of course, I make no judgment as to how much additional profit this allowed the casinos to recognize, as the direct and initial transfers involved were to the patrons, through the casinos and Debtor. Naturally, the Debtor was required to make frequent payments to the casinos as reimbursement for funds advanced and, following the Debtor’s bankruptcy filing and the appointment of the Trustee in this bankruptcy, significant preference and fraudulent conveyance lawsuits were initiated.
Judge Sontchi carefully weighs several issues in this Opinion, ultimately holding that (1) the Tribes sovereign immunity arguments are to be considered as Rule 12 motions, not as affirmative defenses [Opinion at *15], (2) the casinos enjoy the sovereign immunity of the Tribes [Opinion at *22], (3) the Bankruptcy Code does no abrogate the sovereign immunity [Opinion at *27], and (4) the filing of a claim by one of the Tribes will allow the Trustee’s action to proceed solely to determine if the preference action can recoup the amount of the claim [Opinion at *36].
This is a lengthy opinion, containing a large number of citations to controlling authority. At no point did Judge Sontchi gloss over any of the case law supporting his holdings. Accordingly, I consider this Opinion to be important reading material for any attorneys involved in preference litigation against foreign sovereigns. It also makes me regret not having taken the class on “Native American Law” when in school – the issues involved are very interesting.
We have published a number of posts about preference actions on this blog. The key issue of note here, is that many trustee’s merely look at a debtor’s check register and sue each and every recipient of transfers in the 90-day time period immediately preceding the debtor’s bankruptcy filing. As this is what is allowed under the Bankruptcy Code, this is the procedure most frequently used by trustees. Most of the time, the trustee involved has an informational problem and the only way to start talking with opposing parties in is to file suit. I haven’t ever had a conversation go well when it starts, “you might owe me money and I’d like to talk to you about whether you do.” But this is exactly the situation trustees often find themselves in.
If you are a named defendant in a preference action, the first step is to make sure you understand the law surrounding preference litigation. Educate yourself, then have your lawyer start a dialogue with the Trustee’s lawyer. The vast majority of preference actions settle or are dismissed once the parties understand whether there were actual preference payments or not. If you are in the lucky position to have not yet had a client or customer go through bankruptcy, (1) count yourself lucky and (2) start making plans to protect yourself for when one of them does go under. It isn’t pretty, but since most of us aren’t foreign sovereigns, we need to plan carefully toy reduce our preference exposure.