Allard v. Flamingo Hilton (In re Chomakos)
69 F.3d 769 (1995)
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Rule of Law:
A debtor's wagers at a lawful, state-regulated casino are transfers for 'reasonably equivalent value' under the Bankruptcy Code because the debtor receives a combination of legally enforceable contract rights (the chance to win) and intangible entertainment value at the time the bet is placed.
Facts:
- George and Nikki Chomakos were insolvent from January 1988 onwards.
- During their insolvency, the Chomakoses gambled at the Flamingo Hilton Corporation casino in Las Vegas, Nevada.
- The gambling activities at the Flamingo casino were lawful and regulated by the state of Nevada.
- In June and September of 1989, Nikki Chomakos won a total of $9,000 but lost a total of $14,000 playing slot machines.
- After January 1988, George Chomakos incurred a net loss of $2,710 at the casino.
- The combined net gambling losses for the couple during their period of insolvency amounted to $7,710.
Procedural Posture:
- George and Nikki Chomakos filed a Chapter 11 bankruptcy petition, which was subsequently converted to a Chapter 7 liquidation case.
- The bankruptcy trustee initiated an adversary proceeding against Flamingo Hilton Corporation in the U.S. Bankruptcy Court for the Eastern District of Michigan.
- The trustee sought to avoid and recover the debtors' gambling losses as fraudulent transfers under 11 U.S.C. § 548 and the Michigan Uniform Fraudulent Conveyance Act.
- Following a trial, the bankruptcy court entered a judgment in favor of Flamingo, holding that the casino provided reasonably equivalent value for the bets.
- The trustee, as appellant, appealed the decision to the U.S. District Court, with Flamingo as appellee.
- The district court affirmed the bankruptcy court's judgment.
- The trustee then appealed to the U.S. Court of Appeals for the Sixth Circuit.
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Issue:
Does an insolvent debtor's payment of money for bets at a lawful, state-regulated casino constitute a transfer for 'reasonably equivalent value' under 11 U.S.C. § 548(a), thereby preventing a bankruptcy trustee from recovering the gambling losses as a fraudulent conveyance?
Opinions:
Majority - David A. Nelson, Circuit Judge.
Yes, an insolvent debtor's payments for bets at a lawful casino constitute transfers for 'reasonably equivalent value.' The critical time for assessing value is the moment the transfer is made—when the bet is placed—not after the outcome is known. At that moment, the debtor receives legally enforceable contract rights which constitute 'property' with economic value; specifically, the chance to win a potential payoff. This contractual right is analogous to a speculative investment, like a futures contract, which has value regardless of its ultimate success. The court reasoned that this value, augmented by the intangible entertainment value of the casino experience, is reasonably equivalent to the money wagered, especially in a heavily regulated and competitive market with fair payout ratios. This differs from a charitable contribution, where the return is spiritual and provides no potential monetary benefit to creditors, whereas a gambling win could directly benefit them.
Analysis:
This decision establishes that legitimate, regulated gambling is treated as a valid economic exchange, not a voidable transfer, in the context of bankruptcy. It clarifies that 'reasonably equivalent value' under § 548 of the Bankruptcy Code can encompass probabilistic and intangible benefits, such as the chance to win and entertainment. The ruling provides a significant defense for the gaming industry against fraudulent conveyance claims by bankruptcy trustees, effectively shielding casinos from having to disgorge the losses of insolvent patrons. It sets a precedent that the fairness of such transactions should be evaluated at the time of the exchange, not with the benefit of hindsight after a loss has occurred.
