In re Armstrong

• Decision Date: 29 May 2002
• Docket Number: No. 01-2011.,No. 01-1949.,01-1949.,01-2011.
• Citation: 291 F.3d 517
• Parties: In re: Murray F. ARMSTRONG, Debtor. Harrah's Tunica Corporation, d/b/a Harrah's Casino Cruises-Tunica, Appellant/Cross Appellee, v. William S. Meeks, Trustee, Appellee/Cross Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

291 F.3d 517 In re: Murray F. ARMSTRONG, Debtor.
Harrah's Tunica Corporation, d/b/a Harrah's Casino Cruises-Tunica, Appellant/Cross Appellee,
v.
William S. Meeks, Trustee, Appellee/Cross Appellant. No. 01-1949. No. 01-2011. United States Court of Appeals, Eighth Circuit. Submitted: December 13, 2001. Filed: May 29, 2002.

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Richard L. Ramsay, argued, Little Rock, AR, for appellant/cross-appellee.

Thomas S. Streetman, argued, Crossett, AR, for appellee/cross-appellant.

Before MORRIS SHEPARD ARNOLD, BEAM, and RILEY, Circuit Judges.

RILEY, Circuit Judge.

William S. Meeks (Meeks or the trustee) initiated this adversary proceeding in the bankruptcy court to avoid preferential transfers from the debtor, Murray F. Armstrong (Armstrong), to Harrah's Tunica Corporation (Harrah's) under 11 U.S.C. §§ 547, 548(a)(1), and Arkansas Code § 16-118-103. Harrah's appeals the decision of the district court¹ which affirmed the bankruptcy court's² decision for the trustee. We affirm.

I. BACKGROUND

Armstrong, the debtor, is an Arkansas attorney who organized Ponzi schemes³ to defraud investors, embezzled funds from his elderly clients' life savings to support his fraud, and then attempted to become solvent through check kiting⁴ and gambling. He is currently incarcerated in a state penitentiary serving a 156-year sentence for his crimes. On January 30, 1996, an involuntary bankruptcy petition was filed with the bankruptcy court and an order for relief was entered on March 13, 1996. Meeks was appointed trustee in the bankruptcy proceeding. Harrah's is the operator of Harrah's Casino Cruises in Tunica, Mississippi.

In the early 1990's, Armstrong was in a very bad financial position, earning less from his legal practice than was required to finance his expensive lifestyle. Finding his income insufficient for his spending habits, Armstrong began organizing Ponzi schemes, embezzling the life savings of elderly clients, check kiting and gambling heavily.

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On the night of October 12, 1995, Armstrong made a gambling trip to Harrah's in Robinsville, Mississippi, that lasted into October 13. Armstrong signed a "Casino Credit Application" in order to obtain markers from Harrah's. The Casino Credit Application gave Harrah's authorization to investigate Armstrong's financial history "for the approval of [his] credit limit." The credit application also noted in bold type that "APPLICANT IS RESPONSIBLE FOR PAYMENT OF CREDIT ISSUED." Armstrong requested on the application a fourteen day "disposition," or holding time, before Harrah's would deposit the markers for payment from Armstrong's checking account. After looking into Armstrong's credit and his background with other casinos, Harrah's initially granted him a $20,000 line of credit, and then later on October 13, increased this line of credit to $50,000. During this two-day period, Harrah's allowed Armstrong to sign twenty-six markers totaling $50,000. Armstrong received $50,000 in gambling chips from the casino in return for the markers.

Harrah's at first agreed to hold the markers for fourteen days before depositing them for payment from Armstrong's bank account. Harrah's later extended this time to thirty days, the maximum period that Harrah's would hold a marker. Harrah's policy, in line with casino industry standards, was to hold the markers for the agreed upon "disposition," here fourteen and then thirty days, before depositing the markers at the customer's bank. Also under its policy, markers could be repaid in chips or cash before the borrower left the casino, or in the alternative, the casino would send the markers to the bank and the bank would honor the markers. Harrah's policy was to deposit immediately all personal or payroll checks paid to the casino. During his October 12 and 13 gambling trip, Armstrong lost $48,400 gambling at Harrah's.

After holding the markers for thirty days, Harrah's deposited them on November 12 and 13, 1995. The markers were presented for payment on November 14, 1995 from Armstrong's farm account at the Bank of Rison in Rison, Arkansas. On that date, Armstrong had insufficient funds in his farm account to pay off the markers. The bank held the markers for a day to allow Armstrong to come up with the funds. Armstrong then fraudulently secured a loan for $65,000 from the Warren Bank and Trust Company using a fictitious lumber deed as collateral and deposited the funds in his farm account. The Bank of Rison then paid the markers on November 15 and 16, 1995.

Returning to Harrah's on November 15 and 16, 1995, Armstrong signed eight more markers that were redeemed with chips during that trip and are not the subject of this litigation. On December 15, 1995, Armstrong gambled again at Harrah's and signed an additional thirteen markers worth $50,000 that remain unpaid. Only the October 12 and 13 markers are the subject of this proceeding. The trustee seeks to avoid the payment on these October markers.

Armstrong was insolvent throughout all of the relevant time period, with his financial obligations exceeding his assets by a net deficit of $1,596,483 in October, 1995.

II. DISCUSSION

Following the district court's review of the decision of the bankruptcy court, we sit as a second court of review in this matter. Owens v. Miller (In re Miller), 276 F.3d 424, 428 (8th Cir.2002). We apply the same standard of review as the district court, reviewing the bankruptcy court's findings of fact for clear error and

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the bankruptcy court's conclusions of law de novo. Id.

The trustee's cause of action to avoid the transfer of $50,000 from Armstrong to Harrah's is based upon a preference under 11 U.S.C. § 547(b). In order to establish a prima facie case for a preference under the statute, the trustee must establish an interest:

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made —

(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if —

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

Id. It is undisputed that the trustee presented sufficient evidence on all of the elements of § 547(b), except for subsection (2). Harrah's argues the trustee did not make a prima facie case for a preference because he did not prove under § 547(b)(2) that the transfer was "for or on account of an antecedent debt owed by the debtor before such transfer was made."

A. Antecedent Debt

Harrah's argues the casino markers at issue are negotiable instruments — "checks" made out by Armstrong in a concurrent transaction for gambling chips. The bankruptcy court, however, concluded the markers were part of a loan transaction and thus met the antecedent debt element.

The Bankruptcy Code defines "debt" as a "liability on a claim." Laws v. United Mo. Bank of Kansas City, N.A., 98 F.3d 1047, 1049 (8th Cir.1996) (citing 11 U.S.C. § 101(12)). "A debt is `antecedent' if it was incurred before the allegedly preferential transfer." Jones Truck Lines, Inc. v. Cent. States, Southeast and Southwest Areas Pension Fund (In re Jones Truck Lines, Inc.), 130 F.3d 323, 329 (8th Cir.1997). "A debt is incurred `on the date upon which the debtor first becomes legally bound to pay.'" Id. (quoting In re Iowa Premium Serv., Co., 695 F.2d 1109, 1111 (8th Cir.1982) (en banc)). Here, it is clear Armstrong became obligated to pay on October 12 and 13. The issue is whether Armstrong simultaneously paid for the $50,000 of chips at that time.

The bankruptcy court and district court both relied upon our decision in United States v. Abodeely, 801 F.2d 1020, 1022 (8th Cir.1986), a criminal tax evasion case, in which we stated that "[a] marker is an advance or loan which may be exchanged... for chips in order to gamble." Harrah's argues this was mere dicta and not binding precedent upon this court. While we were correct in Abodeely that a marker is a short term loan exchanged for gambling chips, a more in-depth analysis is warranted here.

The legal definition of a casino marker is a crucial factor in determining the rights of the parties. Harrah's argues a marker meets the statutory definition of a check

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under the Mississippi Uniform Commercial Code. Each marker states on its face that it is governed by the laws of Mississippi. The Uniform Commercial Code (UCC) as adopted by Mississippi defines a check as "(i) a draft, other than a documentary draft, payable on demand and drawn on a bank or (ii) a cashier's check or a teller's check." Miss.Code Ann. § 75-3-104(f). Each marker states on its face: the name of the drawee, the amount of money, the date of issue, the signature of Murray Armstrong, the bank it is to be drawn from, and the bank account number. The markers also read, "I hereby represent that I have received cash for the above amount and that said amount is on deposit in said institution in my name and is free from claims and is subject to this check." Upon presentment to the bank for payment, the markers at issue legally operate as checks under the UCC. However, this does not end our analysis.

With the expanding legalization of gambling and the pervasiveness of casino business operations almost nationwide, other courts have been called upon to analyze the legal effect of markers. Louisiana and Nevada have both concluded that a marker falls within the definition of a check under the UCC and markers are therefore enforceable under state bad check criminal...