Monday, September 18, 2006

An Interesting Gambling Bankruptcy Case

An electronic newsletter from the ABA today pointed out a recent Eighth Circuit opinion brings to light two interesting problems: gambling and corruption (or at least the appearance thereof).

The case is In re Neal, --- F.3d ----, 2006 WL 2472751 (8th Cir.(Mo.) Aug 29, 2006) (NO. 06-1878). This bankruptcy case (decided below at 336 BR 421 (2005)) involved a sad story involving a municipal court judge in Kansas City, Missouri who had a gambling problem. Oddly enough, the gambling problem was revealed during a raid on an illegal gambling facility in Kansas City, Missouri, in April 2004. However, this judge had previously filed a Chapter 13 bankruptcy case in 2000, suggesting that financial mismanagement may have been occurring before the raid. (For those who don’t follow bankruptcy, a Chapter 13 case involves setting up a repayment plan for creditors. A chapter 7 petition, which she later filed after the April 2004 incident, involves a liquidation of available assets, and generally a loss to creditors.)

It should be noted that this judge lived in Missouri, where there are lots of casinos. It is a curious thing that she is caught in what the bankruptcy court described as an “early-morning raid” of an illegal casino in Kansas. Legal gambling options were apparently not attractive, and one wonders why. Discussion of marginal benefits from a tax-free environment, coupled with perhaps better odds given the absence of costs associated with govenment compliance efforts, ring hollow here. The fact that one is willing to engage in potentially career-ending acts as a judge is itself a curious thing, suggesting that there may be pathology at work here.

But the judge’s bad judgment does not stop with illegal gambling involvement. The judge admitted to using her position to obtain loans from attorneys – some of whom appeared in her court. Though she vigorously denies any improper influence in matters before her, I’m sure you will join me in listening to that denial with a skeptical ear.

That brings us to the main issue of the case: can the names of attorneys who loaned her money, and thus who must be listed as creditors in her bankruptcy petition, be disclosed to the public? That would be a no-brainer but for a provision in the bankruptcy code that allows the court to seal portions of the record that would be considered “scandalous” or “defamatory.” Here, the bankruptcy court found this list to be scandalous, and kept it from the prying eyes of reporters from the Kansas City Star. Not giving up easily, they appealed and ultimately won.

The Eighth Circuit disagreed (as did the federal district court below) that this was a scandalous matter. In this case, the identity of an attorney as a creditor does not, per se, mean there was anything improper. For example, the judge may be your friend, and you only practice in federal court, meaning no particular foul. The Eighth Circuit was apparently unwilling to allow for the possibility that people would make the normal association in this case, opting instead for a technical approach. (This strikes me as something like the approach of a politician caught in bed with his intern - of course they were just working late and grew sleepy.)

Though free access may be important here, it is also true that if there if there is to be a scandal exception in the bankruptcy code, it is hard to find a more clearly applicable case for it. In thise sense, the bankruptcy judge probably had the better view of the meaning of the term, though it may not make sense to have such a loosely-defined concept to form the basis for denying the public right to know.

This case also provides some anecdotal evidence of the potential impacts of problem gambling behavior. Those impacts go beyond the individual’s own finances, and in this case affect not only creditors, but possibly the administration of justice. Perhaps in this case the judge, who engaged in illegal gambling, would have found a way to do that in any event. However, there is surely no shortage of options for gambling in most states these days.

What is curious in her case is why she would risk her career to gamble illegally – knowing the possibility that she may get caught. It may be the case that she did not think the authorities were serious about enforcing gambling laws. Apparently that belief was incorrect. The messages sent to the community through law enforcement efforts are vital to deterrence.

It is also curious that attorneys would play along, knowing the potential harms to their careers from this behavior. They may have believed that the short-run harm to their reputation or to the interests of their clients may have justified the outlay – but you have to wonder why they thought it would never come to light. After all, they were lending to someone with a Chapter 13 bankruptcy – something no other creditor would be likely to do without a very high interest rate. It makes sense for the judge to believe she would win and pay them back, though I am not sure why the person lending the money would believe that .

Something tells me these attorneys not only did poorly in their ethics course, but they may have needed better instruction in business associations.

EAM

1 comment:

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