In re Armstrong
| Decision Date | 04 March 1998 |
| Docket Number | Adversary No. 96-5056.,Bankruptcy No. 96-50087 S |
| Citation | 217 BR 569 |
| Parties | In re Murray F. ARMSTRONG. William S. MEEKS, Trustee, Plaintiff, v. GREENVILLE CASINO PARTNERS, L.P., Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Arkansas |
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Thomas Streetman, Arnold Hamilton & Streetman, Crossett, AR, for Plaintiff.
Scott T. Vaughn, Little Rock, AR, for Defendant.
William Meeks, Trustee.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
THIS CAUSE is before the Court upon the trial of the Second Amended Complaint. The trustee seeks to recover funds from a casino under Bankruptcy Code sections 548(a)(1), (a)(2), 547, 544(b) and Ark.Code section 16-118-103. The Court has jurisdiction over this action pursuant to 28 U.S.C. § 157(b)(2)(F), (H), (O).
Murray Armstrong, residing now and forevermore in a state penitentiary,1 was before 1996 an attorney who organized Ponzi schemes2 and embezzled massive amounts of funds from his clients to support the snow-balling Ponzi schemes and gambling debts. In 1990 Armstrong began experiencing financial difficulties. In order to rectify his problems, he began operating a Ponzi scheme based upon a non-existent timber contract. As in the nature of Ponzi schemes, his financial difficulties were exacerbated rather than rectified. In an effort to support the snow-balling debts a rising from his scheme he borrowed money, and, in 1994, began gambling in hopes of winning enough money to fund the collapsing Ponzi scheme. Cheek kiting also became a means of supporting his new way of life. In the final days of his financial collapse Armstrong also defrauded elderly clients of their life savings. When one of his schemes was finally exposed, they all collapsed. On January 30, 1996, an involuntary bankruptcy petition was filed. An order for relief was entered on March 13, 1996.
The defendant operates the Las Vegas Casino ("LVC"), a gambling establishment located in Greenville, Mississippi. LVC is licensed and operates under the laws of the state of Mississippi and the regulations of the Mississippi Gaming Commission. See generally Miss.Code Ann. § 75-76-1, et seq.
Beginning in 1994, Armstrong became a "good customer" at LVC, and was considered in the top five to ten percent level of players. In 1994 and 1995, Armstrong made thirty-nine trips to LVC. In 1994, Armstrong won $31,000, but lost $65,000 at LVC. In 1995, Armstrong won $230,900, but lost $486,800 at LVC. The casino kept meticulous, accurate and copious computerized records on Armstrong, as it did on all of its numerous top level players. Indeed, the casino kept a database of the people from which they could determine numerous facts, including where the patrons were coming from. For some individual players the casino kept records called a "player trip analysis" of each trip to the casino. The trip analysis would include the amount of time spent in the casino, the amount of time at each table, the average wager at each table, as well as the theoretical and actual wins and losses.
LVC operated its credit system in a different manner from most of the other casinos at which Armstrong gambled. As a general rule, rather than issuing "markers"3 to credit customers, LVC granted check cashing privileges at the casino to qualified individuals. In granting check cashing privileges, LVC obtained a copy of Armstrong's driver's license and credit card account number. He also provided the names of his banks and account numbers as well as an authorization allowing the casino to check his account balances. Thereafter, he was permitted to cash checks. In this manner, Armstrong could cash a check with the cashier, receive cash, then obtain chips from a particular gambling table. It is uncontroverted, that, upon cashing a check, there was no requirement that the funds be used in the casino. Upon cashing a check, Armstrong, like any other customer with such privileges, could walk out the door with the cash rather than spend the money on chips. Although referred to as a credit system, the privilege of cashing checks was not, unless other privileges were granted, considered an extension of credit by the casino. Not surprisingly, Armstrong never divulged his deep financial problems to anyone at the casino.
In addition to check cashing privileges, LVC also extended credit to Armstrong. LVC did have a marker system, although it was not their usual method of business. LVC had a four-part form, essentially a blank bank draft. Although the form states on its face that it is nonnegotiable, LVC testified that they were considered as a negotiable instrument. Armstrong remembers only one instance of receiving a marker, but the evidence demonstrated that he received numerous markers from LVC.4
It is uncontroverted that, during the one year period prior to January 30, 1996, when the involuntary bankruptcy ease was filed, Armstrong customarily and regularly bet large sums of money at LVC, losing approximately $623,600 at the casino. The evidence was overwhelming that, in this one year period, the debtor was hopelessly insolvent. Further, it is clear that Armstrong was insolvent for at least several years prior to the filing of this bankruptcy case.
Although most of the checks to LVC were written on Armstrong's "farm account," a few checks were written on his law office escrow account, and at least nine checks were written on a business account labeled "Armstrong & Binns, Attorneys at Law, Escrow Account." Six of these nine checks were written in mid-December 1995, the other three being written one each in March, May and June 1995. Although labeled as an escrow account, LVC never asked Armstrong any questions about these checks.
Counts I, V, and VIII of the trustee's complaint state causes of action for actual fraud. Count I seeks recovery of $623,600 expended at LVC in the year prior to bankruptcy under section 548(a)(1) of the Bankruptcy Code. Count V seeks alternative recovery under section 548(a)(1) of $87,500 for certain other credit transfers made by Armstrong in the year prior to bankruptcy. Finally, Count VIII seeks recovery of $109,000 under Arkansas law, Ark.Code Ann. §§ 4-59-204(a)(1), 4-59-207, for transfers made during 1994 and 1995.
Under Section 548(a)(1) of the Bankruptcy Code, the trustee may recover any transfer of an interest in property of the debtor, or an obligation incurred by the debtor, if the debtor made the transfer or incurred the obligation with the actual intent to hinder, delay, or defraud any entity. See generally Brown v. Third National Bank (In re Sherman), 67 F.3d 1348 (8th Cir.1995). This statute is broad, not requiting by its terms that the fraud be directed at any particular entity. The section merely requires that an interest in property of the debtor be transferred and that the debtor made the transfer with fraudulent intent. Fraud or bad faith on the part of the recipient of the transferred interest is not an element of proof. Of course, proof of fraud by direct evidence is rare, such that the court must generally infer fraud from the circumstances of the transfer. Id. at 1353.
Transfer of an interest of the debtor. Armstrong obtained funds through numerous fraudulent methods, including his Ponzi schemes, check kiting, and embezzlement from his clients. These funds were deposited into his various accounts at local banks. It was from these accounts that he wrote checks to LVC, thereby passing title to the funds. See Mossler Acceptance Co. v. Johnson, 109 F.Supp. 157, 168 (W.D.Ark.1953) ().5
Transfer made with actual intent to defraud. Armstrong knew that he could not pay his snowballing debts. Although he testified that, while actually gambling, he did not contemplate where he could obtain the funds to cover the checks he had written, he also testified that the consideration arose in his mind the next day. Although he may have been "driven" to gamble and to obtain funds to cover his illegal schemes, in fact he knew at the time he placed the bets that he could not win sufficient funds to cover his gambling losses and Ponzi schemes. Indeed, during 1994, Armstrong lost over $70,000. He knew, despite his compulsion, that he could not in fact win sufficient funds to cover the losses and schemes.
Although it is true that a debtor's "honest but somewhat questionable belief that he would soon get lucky at gambling and pay off his debts" can defeat a finding of the requisite scienter, AT&T Universal Card Services v. Alvi, 191 B.R. 724, 734 n. 19 (Bankr. N.D.Ill.1996), Armstrong did not hold such a belief. There is no evidence that he was a gambling addict, which may require analysis under a more subjective approach. Cf. AT & T Universal Card Services v. Crutcher (In re Crutcher), 215 B.R. 696 (Bankr.W.D.Tenn. 1997). He was desperate, but not a fool.
Armstrong is a well educated and articulate man who deliberately ventured on a path of fraud and deception, heedlessly gambling the funds obtained through fraud. Indeed, he testified that he did not care where the money came from. He drafted, executed, and forged documents to support his Ponzi schemes, deliberately defrauding friends, business associates, clients, neighbors and anyone he could draw within his web. As he testified, in 1995, and particularly the last six months of that year, all of his working hours were spent supporting his schemes (many times into the early morning hours). He readily admitted that he began gambling, thereby making the transfers to LVC, in order to support the schemes. He not only had the requisite fraudulent intent in obtaining the funds, but also in transferring them to LVC because the transfers were admittedly made in pursuance of his efforts to maintain his various...
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