Bankruptcy May Not Solve Your Clients' Problems
An op-ed by Tripp Scott's Charles Tatelbaum and Christina Paradowski
As Published in the DAILY BUSINESS REVIEW
With the increase and proliferation of Native American and other casinos, as well as the advent of internet sports gambling, many of those suffering substantial losses are turning to a bankruptcy filing in order to obtain a “fresh start” by filing a Chapter 7 liquidation bankruptcy proceeding. Unfortunately, for those individuals who fail to meet the strict standards relating to obtaining a discharge in bankruptcy, a foray into a bankruptcy proceeding may turn out to be a journey in quicksand.
Among the more recent bankruptcy court decisions focusing on the area of gambling losses, the recent case of Eric Ferguson from the U.S. Bankruptcy Court for the Northern District of Illinois (Adv. Pro 20ap00426) is highly instructive as to what prospective debtors, attorneys and other professionals need to consider when those with gambling (or similar) losses seek bankruptcy protection.
The findings of fact from Bankruptcy Judge Timothy Barnes adequately sets the stage for the ultimate ruling when the Judge found the following:
- The defendant sold real estate located at 2911 W. Harrison St., Chicago, IL on 25, 2019.
- As a result of the sale, the defendant received net proceeds of $70,159.22, which were wired into his account the next day.
- On Sept. 25, 2020, the defendant filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, listing his unsecured debt on Schedule F as $51,617.00.
- At the time the Defendant filed for bankruptcy, he had essentially no money in his bank accounts.
- The defendant withdrew $15,210.22 from ATMs at various casinos between 26, 2019, and Jan. 10, 2020.
- The defendant made “counter cash bank withdrawals” of $37,000 between 2, 2019, and Dec. 23, 2019.
- The defendant testified at the trial that he spent the ATM and counter cash withdrawals gambling.
- The defendant testified at the trial that he frequently gambles and that his gambling losses in 2019 were $80,000–$90,000 greater than the amount at issue here.
- The defendant testified he lost the relevant cash withdrawals playing poker, staying at casino poker tables for multiple days without getting a hotel room..
- The defendant testified the casinos provide no receipts for his type of gambling.
- One casino the defendant frequented provided letters reflecting that the Defendant lost $13,786 at the casino in 2019 and $725 in 2020.
- The letter for 2019 represented an estimate of the defendant’s losses and included gambling from before the November 2019 real estate sale.
- The defendant testified he has no further documentation that he used the cash from his ATM or counter cash withdrawals for gambling.
Section 727(a)(5) of the Bankruptcy Code provides that a debtor is ineligible to receive a discharge in bankruptcy if “the debtor has failed to explain satisfactorily, … any loss of assets or deficiency of assets to meet the debtor’s liabilities.” If an objection to discharge is filed, the objecting party first carries the burden of proving that the debtor at one time owned substantial and identifiable assets that are now no longer available for his/her creditors. If the objector meets this burden, the debtor must then offer a satisfactory explanation for the loss.
Thus, if there is a challenge by a trustee or a creditor objecting to the general discharge of a debtor where all or part of the cause has been as a result of gambling or similar losses, the ultimate burden is on the debtor to satisfactorily prove that the losses of funds were created as a result of gambling. As to what evidence a gambler may provide in order to meet the burden, one bankruptcy court observed that possible evidence includes “wagering tickets, canceled checks, credit records, bank withdrawals, statements of winnings, along with corroborating evidence including geographic evidence such as hotel bills, airplane tickets, gas receipts or testimony from someone with knowledge of the wagering activity.”
In the Ferguson case, the bankruptcy judge found that the debtor provided no records from either of the two casinos at which he allegedly primarily gambled. The court noted “while gambling typically leaves little the way of documentary evidence (especially poker as the defendant testified), there is more the defendant could have done to convince the court. For instance, the defendant could have provided a witness to corroborate his gambling, traveling, absences from work/community/home, etc.” The bankruptcy judge also found a lack of specificity in the debtor’s testimony as to his gambling activity.
Interestingly, the Bankruptcy Court also found “The lack of even a basic accounting of gambling wins and losses (beyond simply what was withdrawn in cash) makes it impossible for the court to determine whether the cash was really lost gambling or was hidden away to avoid creditors.”
As a result of insufficient documentation or explanation, Judge Barnes agreed with the Chapter 7 trustee and denied the debtor’s bankruptcy discharge.
Those of us who regularly represent creditors in bankruptcy proceedings are finding more and more situations where assets either disappear or are unaccounted for when a bankruptcy proceeding is filed. This includes not only situations involving gambling losses, but also extends to other types of deficiencies in asset disposition explanations. The analysis by Judge Barnes in the Ferguson case as well as a number of other recent similar bankruptcy court opinions creates a roadmap or outline for debtors and attorneys as to what to do and what not to do in order to obtain a bankruptcy discharge when confronted with gambling or unexplained losses which may lead to a bankruptcy filing.
This is an important lesson to learn for those who may be considering a bankruptcy filing when the absence of assets or the cause of losses cannot be adequately documented or explained.