“In keeping with the city’s tourism slogan, these liabilities happened in Vegas, and they must stay in Vegas.”

So concludes U.S. Bankruptcy Judge Thomas S. Utschig, in holding that, without an out-of-state judgment, the debts owed by a Wisconsin gambler to Las Vegas casinos are not valid in a Wisconsin bankruptcy court.

As a result, if a client returns from Las Vegas bankrupt and in debt to the casinos, the best and only strategy is to win the “race to the courthouse” by filing for bankruptcy before the casinos reduce the debt to a judgment in Nevada.

Robert Bahram and Poopak Amanda Jafari filed for bankruptcy after Robert lost millions in Vegas casinos and millions more advanced him by two casinos in Las Vegas, and one in the Bahamas.

At the time of the filing, the casinos had not reduced their debts to judgments in Nevada or New Jersey (the contract with the Bahamas casino provided that New Jersey provided the law and forum for any disputes).

In addition, the casinos could not legally proceed against Jafari in Wisconsin courts, because sec. 895.055 provides that gambling contracts (except for those with Indian casinos) are void and unenforceable.

Beginning with a history of the enforceability of gambling debts, the court noted that, traditionally, gambling debts were universally unenforceable, and that remains the case in Wisconsin, with the noted exception.

Other states, however, now allow enforcement; in addition, longstanding U.S. Supreme Court precedent requires even those states that prohibit enforcement of gambling debts to honor judgments obtained in other states. Fauntleroy v. Lum, 210 U.S. 230 (1908).

Thus, the court noted, casinos frequently obtain judgments in “friendly” states, and then domesticate them in the state of the debtor’s residence.

Describing the current legal environment, the court colorfully explained, “it seems that both parties seek to claim the law and the forum which is most favorable to them: one as a sword, and one as a shield. Both sides have played their best cards, as it were, and the issue is now which hand trumps the other.”

The court framed the issue as follows: “Can these debts be enforced in the absence of a valid judgment which would compel respect by Wisconsin courts, or does Wisconsin law render the claims unenforceable as against the debtor or the debtor’s estate?”

The court chose the latter.

Conflict Preemption

The court first held that the Wisconsin statute is not preempted by the bankruptcy code’s broad definition of “claim,” rejecting the reasoning of a bankruptcy court in Florida to the contrary. In re Simpson, 319 B.R. 256 (Bankr.M.D.Fla. 2003).

Instead, the court adopted reasoning of a California bankruptcy court that state law determines the validity of a “claim,” regardless of how broadly federal law may define the term. In re Miller, 292 B.R. 409 (B.A.P. 9th Cir. 2003).

Choice of Law

The issue thus became whether Wisconsin law should apply, or the law of Nevada (and New Jersey). On this issue, the court parted with the court in Miller, which determined that Nevada had a more “significant relationship” than California with the claim.

For support, the court cited Seventh Circuit precedent which generally favors application of the forum state’s substantive law, unless conflict-of-law rules require otherwise. In re Iowa R. Co., 840 F.2d 535, 543 (7th Cir. 1988).

The court thus applied Wisconsin choice of law rules — the five-factor test articulated in Heath v. Zellmer, 35 Wis.2d 578, 151 N.W.2d 664 (1967): the predictability of results; the maintenance of interstate and international order; the simplification the judicial task; advancement of the forum’s governmental interest; and application of the better rule of law.

The court found that all five factors favor application of Wisconsin law.

Predictability of results is served, because the reasonable expectation of both parties to a gambling transaction is that it is unenforceable in most jurisdictions unless the creditor obtains a judgment in another state.

The court also concluded that interstate order would not be undermined by application of Wisconsin law, noting the routine litigation practice of casinos of obtaining judgment first in Nevada before pursuing collection elsewhere. The third factor — simplification of the judicial task — is always furthered by employing the forum state’s law.

Addressing the fourth and fifth factors together, the court concluded that Wisconsin has the better rule of law, and that Wisconsin’s governmental interest against gambling on credit would be undermined by employing Nevada law.

The court concluded, “When contrasting the fact that the creditors are ‘out’ only their profits on a gambling transaction with the very real social costs which would result from the wholesale enforcement of such claims, the Court can only find that the better, more equitable result is to apply Wisconsin law.”

Because Wisconsin law does not permit gambling debts to be enforced in court, except for those to Indian casinos, the court held the casinos’ claims must be disallowed.

Case analysis

The theme that permeates the court’s decision is best summarized as: the winner shall be determined by a race to the courthouse … not that there’s anything wrong with that.

The court made repeated references to the “casinos’ litigation strategy” of reliance on Fauntleroy to obtain judgments in Nevada, and then enforce them in the state of their debtors’ residences.

In response to the casinos’ argument that they should not be prevented from recovery, solely because of the “race” to the courthouse, the court dismissed the argument by finding that they too are guilty of forum-shopping.

In applying the first Heath factor — predictability of results — the only reason given by the court for finding Wisconsin law should apply is the “reasonable expectation” that the debts are unenforceable in most states “up until the moment the creditor obtains a valid judgment.”

In a lengthy footnote, the court wrote, “The Court is not sympathetic to the suggestion that the debtor ‘raced’ to file bankruptcy, especially since the creditors are themselves engaged in their own practice of forum shopping by seeking a judgment in a ‘friendly’ jurisdiction which would thereafter be entitled to full faith and credit elsewhere. … Many creditors find the validity of enforceability of their claims adversely impacted by the timing of a bankruptcy petition, and the creditors’ failure to reduce their claims to judgment … is not a far cry from the plight of other creditors whose claims are judged by their status as of the petition date.”

Addressing the second factor — maintenance of interstate order — the court again relies solely on the ability of the casinos to liquidate their claims in Nevada first, and seek to collect elsewhere.

The third factor — simplification of the judicial task — always favors whichever party files first and seeks application of the forum state’s law.

Thus, while attorneys may pride themselves on their legal acumen, it will count for nothing in cases such as these; the court has unabashedly held that your success depends solely on the “race to the courthouse.” The best attorney shall be whoever wins that race.