Money Center of America

In a decision signed September 8, 2017 in an adversary proceeding related to the Money Center of America bankruptcy (case 14-10603), Judge Sontchi of the Delaware Bankruptcy Court denied a defendants FRCP 12(b)(6) motion to dismiss a complaint filed in the adversary proceeding 15-50250. Judge Sontchi’s opinion is available here (the “Opinion”).

The chapter 7 trustee of the Money Center of America bankruptcy, Maria Aprile Sawczuk (the “Trustee”) filed a complaint against Christopher Wolfington, Jason Walsh and Lauren Anderson, alleging breach of fiduciary duty, aiding and abetting breach of fiduciary duty, corporate waste, conversion, recovery of avoidable transfers, and equitable subordination.  Defendant Walsh filed a motion to dismiss, arguing that the Trustee failed to adequately plead non-dischargeability in his personal bankruptcy or fraud.  His motion to dismiss was the subject of the Opinion.

After analyzing and reciting the complaint, the Court determined that “the Trustee’s Complaint sufficiently alleged that Walsh perpetrated fraudulent transfers through conduct “of the kind” specified in sections 523(a)(2) and (a)(4) in order to withstand a motion to dismiss.”   Opinion at *6.  The Court further held that “the Trustee has sufficiently alleged facts showing that Walsh’s conduct of the kind specified under sections 523(a)(2) and (a)(4).”  Opinion at *7.

This Opinion, although short, provides a strong reminder of the requirements of the pleading standards in the Delaware Bankruptcy Court.  Complaints do not need to contain long recitations of facts supported by extensive evidence.  Rather, a complaint need only contain allegations of sufficient facts to support the claims alleged.  In a prior blog post I discussed a time when this did not occur: You Don’t Get Three Strikes when Filing a Complaint – Lessons from Tropicana.  When a complaint clears this hurdle, it will not be dismissed by the Bankruptcy Court.

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.

The Opinion

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.

In a 16 page opinion released January 28, 2016 in the Casino Caribbean, et al. v. Money Centers of America adversary proceeding (Bank. D. Del. Adv. No. 14-50437), Judge Christopher S. Sontchi of the Delaware Bankruptcy Court granted the motion of Quapaw Casino to intervene in the adversary proceeding.  Judge Sontchi’s opinion is available here (the “Opinion”).

Plaintiffs in the adversary proceeding had obtained a court order requiring the Debtors’ to maintain a cash balance of $900,000 or more, in order to compensate the Plaintiffs if it should be determined that the Debtors were holding funds as a ‘mere conduit’ to which the Plaintiffs were entitled.  Opinion at *2.  Quapaw claimed that the Debtors were likewise holding funds to which it was entitled, and moved to intervene in the adversary proceeding, in order to obtain the same relief.  Plaintiffs opposed the motion, fearing that the set-aside funds would be insufficient to compensate them and Quapaw.  Opinion at *2.

The Debtors had entered into an agreement with Quapaw to provide ATM and other cash advance services to Quapaw’s customers, and that any funds advanced to a customer by Quapaw would be reimbursed by the Debtors.  Quapaw is listed on the Debtors’ schedules and filed a proof of claim for $502,018.  Opinion at *4.

The adversary complaint was filed on July 7, 2014.  Quapaw filed its motion to intervene on January 21, 2015.  As of that time, the Debtors had not yet filed an answer in the adversary proceeding.  Pursuant to Fed. R. Civ. P. 24(a) “A movant has an unconditional right to intervene when its motion is timely filed and either (A) a federal statute grants an unconditional right to intervene or (B) the movant claims an interest that is related to the property or transaction that is the subject of the adversary proceeding and disposing of the proceeding impairs or impedes the movant’s ability to protect its interest as a practical matter, unless the parties adequately represent that interest.”  Opinion at *7.  Ultimately, Judge Sontchi found that Quapaw satisfied this requirement.  Opinion at *8.

Judge Sontchi then examined the case under the permissive intervention standard of Fed. R. Civ. P. 24(b), finding that Quapaw also satisfied those requirements.  Opinion at *16.

As this Opinion illustrates, it is difficult to prevent another party from following the path you create and obtaining the same relief, when their claims are practically identical to your own.  In cases like this one, where a finite quantity of funds are available, it may be worth your time to investigate whether your relief would be diminished if another party received identical treatment.  If it would, then you may want to spend a bit more time investigating whether those similarly situated parties exist and take them into account in the relief you seek.

The Court held that QCA had a right to intervene under both Fed. R. Civ. P. 24(a)(1) and (a)(2), and that permissive intervention was warranted under Fed. R. Civ. P. 24(b)(1)(B).  Rule 24(a) has 4 requirements,