Recovering a Fraudulent Transfer? A Slot Machine License Is No Safe Bet.

July 21, 2021Herrick Restructuring Review

The Herrick Restructuring Review provides insights and information related to restructuring and finance litigation. The Herrick team regularly represents official and ad hoc creditor committees, hedge funds, distressed debt investors, bondholders, and other parties in interest, and often serve as conflicts or special counsel for large-scale complex litigation matters.

Philadelphia Entertainment and Development Partners LP, the bankrupt limited partnership that did business as Foxwoods Casino Philadelphia (“Foxwoods”), will not be able to recover the $50 million it paid to the Pennsylvania Gaming Control Board for a slot machine license. Foxwoods planned to open a sizable slot machine facility in Philadelphia and paid for the license in 2007 before its location was final. Neighborhood opposition forced substantial delays and when Foxwoods missed a series of deadlines the Board revoked the license in December 2010.

Foxwoods filed for bankruptcy in 2014 after it unsuccessfully tried to get the license back in state court. In bankruptcy court, it brought a fraudulent transfer claim against the Commonwealth of Pennsylvania to recover the payment it made for the revoked license. The claim was initially dismissed in 2016, remanded on appeal, and then dismissed by the Eastern District of Pennsylvania on sovereign immunity grounds. Foxwoods appealed again, arguing it had a property interest in the revoked license. A sovereign immunity defense is not available in cases that further a bankruptcy court’s in rem jurisdiction. In other words, if Foxwoods had a property interest in the revoked license, the claim could move forward.

The Third Circuit, looking to the Pennsylvania Horse Racing Development and Gaming Act, found that Foxwoods did not have a property interest in the license. The Gaming Act provides that a license is a revocable privilege. It also provides that the license cannot be sold or transferred and that the Gaming Act should not be construed “to create in any person an entitlement to a license.” These comments conflict with the Pennsylvania Uniform Fraudulent Transfer Act commentary, which says that generally licenses should be considered property, even if they can’t be transferred. The Third Circuit resolved the conflict in favor of the Gaming Act because it found the more specific provisions govern the slot machine license at issue, ahead of PUFTA.

This case demonstrates that whether a government license is property for a fraudulent transfer action depends heavily on the specifics of the state’s laws for that license. As many states liberalize their gaming rules, their treatment of the licenses may not seem like a big deal, but in this case it cost Foxwoods $50 million. The story of Foxwoods’ license has a happy ending, at least for Philadelphia gamblers. The license was repurchased in November 2014 and under a new developer finally opened for business in February 2021, complete with 2,200 slot machines.

The case is In re Philadelphia Entertainment & Development Partners LP, No. 20-3171 (3d Cir. June 29, 2021).

For more information on this alert or other restructuring & finance litigation matters please contact:

Stephen B. Selbst at +1 212 592 1405 or [email protected]

© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.