Update on bankruptcy and restructuring disputes – November 2021 | Quinn Emanuel Urquhart & Sullivan, LLP

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The third court upheld the dismissal in reliance on a technical exception to the general rule that immunity from states does not apply in bankruptcy cases

In a recent non-precedent decision, based on the technical distinction between a “property interest” and a “revocable privilege,” the United States Court of Appeals for the Third District upheld the dismissal of claims against the Commonwealth of Pennsylvania resulting from it its revocation resulted in a slot machine license after the Commonwealth increased the state’s sovereign immunity to defense. See Philadelphia Ent. & Dev. Partners LP vs. Dep’t of Revenue, 2021 WL 2666690 (3rd Cir. June 29, 2021). Although fraudulent transfers are usually not protected by state immunity, the disputed Pennsylvania gambling statue specifically classified the license as a “revocable, non-transferable privilege”. Therefore, the court found that the Commonwealth’s revoked license was not “property” owned by the bankruptcy court in deep sleep Jurisdiction.

Although the third court upheld the bankruptcy court’s decision to refuse the exercise of jurisdiction, its decision does not interfere with the more general proposal that prevents sovereign immunity from interfering with critical bankruptcy functions, including avoidance actions in general and, in particular, inheritance claims to challenge and recover a government license, provided that the debtor retains an interest in the thing transferred.

That of the Supreme Court cat decision

The doctrine of sovereign immunity prohibits federal courts from exercising jurisdiction over state government defendants. However, in bankruptcy the doctrine has limited scope. In Central Virginia Community College v. cat, 546 US 356 (2006), the Supreme Court said that by ratifying the Constitution of the Bankruptcy Clause, Congress empowered to establish “uniform laws on bankruptcy” that waived states immunity protections over matters “in addition to and to promote the court in deep sleep Jurisdiction. ” ID card. under 372. This waiver is codified in Section 106 (a) of the Bankruptcy Act.

Despite this widespread renunciation cat did not categorically rule out the defense of sovereign immunity for all bankruptcy matters. See I would. at 378 n.15 (“We do not mean to imply that any law referred to as ‘bankruptcy’ law, consistent with the bankruptcy clause, could adequately affect the sovereign immunity of the state.”). In determining whether sovereign immunity applies in a bankruptcy context, courts generally ask whether the proceedings encourage: (i) the exercise of jurisdiction over estates (e.g., Preventive measures); (ii) the equitable distribution of that property among stakeholders (e.g., remain violations); and (iii) the fundamental purpose of bankruptcy (e.g., Right of discharge of the debtor). See ID. at 363-64. To the extent that a claim includes one of these three critical functions, states have no immunity from legal action. ID card. 364-35.

Philadelphia Entertainment and Development Partner, LP

In 2006 Philadelphia Entertainment and Development Partners, LP (“PEDP”) planned to build and operate a casino and paid $ 50 million to the Commonwealth of Pennsylvania Department of Revenue (the “Commonwealth”) to obtain a slot machine license. The Pennsylvania Gaming Control Board revoked the license in 2010 after PEDP failed to meet certain time limits required by the license.

After failing to regain its license in a state court in 2014, PEDP filed a Chapter 11 case and initiated adversarial proceedings against the Commonwealth. The adversarial process aimed to reclaim the value of the license that the Commonwealth had revoked as a fraudulent transfer under Sections 544 and 548 of the Bankruptcy Code and applicable state law – here Pennsylvania.

The bankruptcy court dismissed the adversarial proceeding on the grounds that (among other things) the license was not the property or asset of PEDP’s estate and therefore the lawsuit was precluded by the doctrine of immunity from states. The district court upheld and PEDP appealed.

To analyze PEDP’s alleged ownership interest in the gaming license, the Third Circuit turned to state law, specifically the Pennsylvania Horse Racing Development and Gaming Act (the “Gaming Act”), under which the license was issued, and the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”).

The court first found that the Gambling Act clearly provides that “[t]the granting or renewal of a license … is a revocable privilege “and the board of directors can” … revoke any … license … [if] the applicant … violates any provision of this part. “The court also found that the Gambling Act states that a license issued by the board of directors” may not be sold, transferred or assigned “and that the Gambling Act should not be construed as that “a person has a right to a license”. Therefore, the court found that the Gambling Act grants PEDP “a revocable, discretionary, non-transferable privilege to operate a gaming machine facility”, not a refundable property right.

The Court stated that in the PUFTA the definition of “[p]Roperty “including”[a]everything that could be property. ”Property, in turn, was defined as“ the right to own a thing ”. However, the court reverted to the Gambling Act but concluded that the license was not something a licensee could “own” and therefore found that the adversarial case was duly dismissed.

PEDP demanded that the license be estate property, as the PUFTA comment states that “state licenses are property, even if they are non-transferable”. The court rejected this argument, finding that the more specific provisions of the Gambling Act prevail. The court concluded that the Commonwealth retained its immunity as a license cannot be owned by a licensee under the Gambling Act.

Takeaways

The decision of the third circle in Philadelphia entertainment is tight and a product of gambling laws that are unique to Pennsylvania. The Court’s ruling has long left undisturbed exceptions to sovereign immunity in a bankruptcy context and should have little impact on fraudulent transfer claims against government entities where the debtor retains a stake in the transferred assets. In particular, the debtor in Philadelphia entertainment did not attempt to avoid the $ 50 million fee paid to the Commonwealth in 2006 (this transfer was statute-barred). Rather, the “fraudulent transfer” focused on the Commonwealth’s approved license revocation in 2010, which did not legally deprive the debtor of any property rights.

In fact, this ruling follows another, precedented Third District opinion in which the court denied defense of the sovereign immunity of the State of California. In this case, the estate attempted to regain the value of the debtor’s gas and oil processing facility, which had been seized by reverse conviction of the California Land Commission. See Davis v. California State (In re Venoco), 998 F.3d 98 (3d Cir. 2021). The Third Circle noted that although the opposing process was ambiguous, in deep sleep formally, its function was to rule on rights to property of the debtor. the Davis Decision confirms the strength of the general thesis that state immunity is not an obstacle to fraudulent transfer acts in bankruptcy.


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