Court Opinion

ID: 3003212
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:40:29.871282+00
Date Added: 2024-06-11T11:39:12.196817
License: Public Domain

In the

United States Court of Appeals
               For the Seventh Circuit

No. 08-3994

IN RE:

    R OBERT B. JAFARI and P OOPAK A. JAFARI,
                                                             Debtors.

R OBERT B. JAFARI, P OOPAK A. JAFARI and
M ARK W ITTMAN, Postconfirmation Trustee,
                                                       Appellants,
                                v.

W YNN L AS V EGAS, LLC and D ESERT P ALACE INC.
d/b/a C AESAR’S P ALACE,
                                                            Appellees.

           Appeal from the United States Bankruptcy Court
               for the Western District of Wisconsin.
            No. 06-10155-11–Thomas S. Utschig, Judge.

         A RGUED A PRIL 17, 2009—D ECIDED JUNE 17, 2009

  Before F LAUM, E VANS, and W ILLIAMS, Circuit Judges.
  F LAUM, Circuit Judge. Creditors Wynn Las Vegas LLC
(“Wynn”) and Desert Palace Inc. d/b/a Caesar’s Palace
2                                                No. 08-3994

(“Caesar’s”) filed timely proofs of claim against
individual Chapter 11 debtors Robert and Amanda Jafari
for gaming debts owing. Debtors objected to the proofs
of claim. The bankruptcy court entered an order sus-
taining debtors’ objections and disallowing the claims,
based on its finding that Wisconsin substantive law
applied to the claims and the gaming debts were unen-
forceable under Wisconsin law. Creditors appealed to the
district court, and the district court determined that
Nevada substantive law applied to the claims. The
district court remanded the case to the bankruptcy court
for further determination as to whether the claims were
allowed under Nevada law. Upon remand, the bank-
ruptcy court, applying Nevada law, allowed creditors’
claims. This appeal followed, and we now affirm the
bankruptcy court’s order allowing the claims.

                      I. Background
  Debtor Robert Jafari, a former CEO of the Meadowbrook
Manor chain of nursing homes, has a history of gambling
problems. In 2003 or 2004, he borrowed roughly $3,000,000
from family friends to cover gambling losses. His father
then bailed him out from those gambling debts.
  Jafari continued to gamble, though. In 2005, Jafari met
casino developer Steve Wynn, who personally approved a
credit line at his Las Vegas, Nevada casino for Jafari. Jafari
traveled from his Wisconsin residence to Las Vegas to
gamble at Wynn and elsewhere on numerous occasions
during 2005. As of September 2, 2005, Jafari did not owe
anything to Wynn for credit extended to gamble.
No. 08-3994                                               3

  On or about September 17, 2005, Jafari executed a new
credit agreement with Wynn. The agreement established
an initial credit line of $150,000. On September 17, Septem-
ber 19, and September 26, Jafari executed credit line
increase requests in which he obtained increases
totaling, at one point, up to $1,000,000. The initial credit
agreement and the increase requests contained Nevada
choice-of-law provisions.
  Caesar’s, based in Las Vegas, similarly extended credit,
totaling $250,000, to Jafari between September 25 and
September 30, 2005. Each of Caesar’s markers con-
tained Nevada choice-of-law provisions as well.
  Both Wynn and Caesar’s had performed credit checks
on Jafari and, in exchange for the credit, prepared
markers that were executed by Jafari and post-dated.
Jafari did not repay the credit advance by the post-date,
and the casinos submitted the markers for payment
against Jafari’s bank account. Both the Wynn and Caesar’s
markers were returned with payment denied, stamped
“Refer to Maker.”
  When Jafari’s markers were returned unpaid, Wynn and
Caesar’s sued Jafari in federal district court in Nevada. On
February 6, 2006, two days before his deadline for filing
an answer in Nevada, Jafari and his wife Amanda filed an
individual Chapter 11 bankruptcy proceeding in the
United States Bankruptcy Court for the Western District
of Wisconsin. The bankruptcy filing stayed the Nevada
lawsuit.
  On August 8 and 11, 2006, Caesar’s and Wynn filed
timely proofs of claim in bankruptcy court for the
4                                              No. 08-3994

amounts owing. Wynn submitted a proof of claim for
$1,205,178.60. Caesar’s submitted a proof of claim for
$250,000. The Jafaris and the bankruptcy trustee, Mark
Wittman, objected to the casinos’ claims, arguing that
they were gambling debts unenforceable under the Wis-
consin Anti-Gaming Statute.
  The question whether to allow or disallow the claims
was presented to the bankruptcy court. The bankruptcy
court concluded that it was required to follow the
choice-of-law rules of the forum state, Wisconsin, rather
than federal choice-of-law rules; that a Wisconsin court
would apply Wisconsin substantive law to the casinos’
claims; and that the claims were not allowed because
they were “unenforceable” under the Wisconsin Anti-
Gaming Statute, which states:
    Gaming contracts void. (1) All promises, agreements,
    notes, bills, bonds, or other contracts, mortgages,
    conveyances or other securities, where the whole or
    any part of the consideration of the promise, agree-
    ment, note, bill, bond, mortgage, conveyance or other
    security shall be for money or other valuable thing
    whatsoever won or lost, laid or staked, or betted at or
    upon any game of any kind or under any name what-
    soever, or by any means, or upon any race, fight, sport
    or pastime, or any wager, or for the repayment of
    money or other thing of value, lent or advanced at the
    time and for the purpose, of any game, play, bet or
    wager, or of being laid, staked, betted or wagered
    thereon shall be void.
Wis. Stat. § 895.055.
No. 08-3994                                                  5

  Wynn and Caesar’s appealed to the United States District
Court for the Western District of Wisconsin. The district
court noted, as an initial matter, that much of the Jafaris’
brief was devoted to policy arguments regarding the
harmful nature of gambling to suggest that both equity
and public policy required the court to invalidate the
casinos’ claims. The district court declined to so rule,
stating, “[I]t is neither necessary or appropriate for this
Court to venture into that tangled thicket of moral judg-
ment and public policy.” The district court then
reversed the bankruptcy court. Notably, the district court
declined to decide whether federal common law
choice-of-law rules or Wisconsin choice-of-law rules
applied. Rather, it determined that under either federal
common law choice-of-law rules or Wisconsin
choice-of-law rules, Nevada substantive law would
apply in determining the enforceability of the contracts on
which the claims were based. The court remanded the
case to the bankruptcy court for further determination as
to whether the claims were allowed under Nevada law.
Upon remand, the bankruptcy court applied Nevada
substantive law, allowed the Wynn claim in the amount of
$1,310,697.03 (the amount filed plus legal fees), and
allowed the Caesar’s claim in the amount of $263,354.99
(the original amount claimed plus additional expenses
and interest). Debtors and their trustee then brought
this appeal.

                        II. Analysis
  We review questions of choice-of-law de novo, Tanner
v. Jupiter Realty Corp., 433 F.3d 913, 915 (7th Cir. 2006), and
6                                              No. 08-3994

we review the bankruptcy court’s findings of fact for
clear error. In re ABC-Nako, Inc., 483 F.3d 470, 472 (7th
Cir. 2007).
  Appellants argue that in the absence of a federal policy
or interest compelling a different result, when a question
of state law is presented in federal court, including
federal bankruptcy court, the choice of which state’s law
to apply should be governed by the forum state’s
choice-of-law rules. They seek to demonstrate that there
is no federal policy or interest favoring enforcing
out-of-state gambling debts in bankruptcy cases. Therefore,
they argue that we should apply Wisconsin choice-of-law
rules to this case. They continue that under Wisconsin
choice-of-law rules, Wisconsin substantive law would
apply (in part because of Wisconsin’s interest in
enforcing its anti-gambling public policy). They con-
clude that the casinos’ claims are disallowed under Wis-
consin law. They add that to the extent there is any con-
fusion over whether a Wisconsin court would apply
Wisconsin substantive law to the facts presented, we
should certify that question to the Wisconsin Supreme
Court. In connection with their appeal, appellants filed a
motion for certification of question of state law.
  Appellees first argue that we should conclude that
the bankruptcy court must apply federal common law
choice-of-law rules because such an approach leads to
uniformity in administering the bankruptcy code. They
state that under federal common law choice-of-law rules,
Nevada substantive law would apply to this case, and their
claims would be allowed under Nevada law. They con-
No. 08-3994                                                 7

tinue that even if we were to conclude that the bankruptcy
court must follow the forum state’s choice-of-law rules,
Nevada law would apply because Jafari’s contacts with
Nevada favor application of Nevada law. Thus, they
argue that we should allow their claims whether we
determine: (a) that federal common law choice-of-law
rules apply in a bankruptcy case; (b) that the forum
state’s choice-of-law rules apply in a bankruptcy case; or
(c) that we need not decide whether state or federal law
supplies the choice-of-law rules in a bankruptcy case
because federal and forum state choice-of-law principles
would lead to the same outcome in this case.
  When a federal court sits in diversity, it generally
applies the choice-of-law rules of the state in which it sits.
Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941). It
does so to avoid intrastate forum-shopping and inconsis-
tent results. Id. at 946. However, a federal bankruptcy
court’s jurisdiction does not arise from diversity, but
from federal bankruptcy law, which has a goal of national
uniformity rather than congruence with state law. Yet
state law governs the validity of most property rights,
and except when the bankruptcy code specifies other-
wise, bankruptcy courts must apply the relevant state
law. Butner v. United States, 440 U.S. 48, 54 (1979); In re
Wright, 492 F.3d 829, 832 (7th Cir. 2007) (“[S]tate law
determines rights and obligations when the [Bankruptcy]
Code does not supply a federal rule.”). Thus, there is a
tension as to whether bankruptcy courts follow federal
common law choice-of-law principles or the forum
state’s choice-of-law principles.
8                                                 No. 08-3994

  A review of the case law does little to resolve this
tension. In contemplating which set of laws to apply to
determine a creditor’s claim for interest on unpaid
interest, the Supreme Court once observed that:
    [O]bligations . . . often have significant contacts in
    many states, so that the question of which particular
    state’s law should measure the obligation seldom
    lends itself to simple solution. In determining
    which contact is the most significant in a particular
    transaction, courts can seldom find a complete solution
    in the mechanical formulae of the conflicts of
    law. Determination requires the exercise of an in-
    formed judgment in the balancing of all the interests
    of the states with the most significant contacts in
    order best to accommodate the equities among the
    parties to the policies of those states.
Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156,
161-62 (1946). Some have taken this passage to indicate
the Court’s intent to separate bankruptcy jurisdiction
from diversity jurisdiction for choice-of-law purposes.
See, e.g., In re SMEC, Inc., 160 B.R. 86, 90-91 (Bankr. M.D.
Tenn. 1993); In re Kaiser Steel Corp., 87 B.R. 154, 158 (Bankr.
D. Colo. 1988). The Court in Vanston did not have to
make a choice of state laws to decide the claim before
it, however, and so the passage was only dicta. Since
Vanston, the Supreme Court has not addressed whether
federal choice-of-law rules or the choice-of-law rules of
the forum state apply in bankruptcy, and the courts of
appeals that have reached the question have been
divided. Compare In re Lindsay, 59 F.3d 942, 948 (9th Cir.
No. 08-3994                                                   9

1995) (“In federal question cases with exclusive jurisdic-
tion in federal court, such as bankruptcy, the court
should apply federal, not forum state, choice-of-law
rules.”), with In re Gaston & Snow, 243 F.3d 599, 605-06 (2d
Cir. 2001) (concluding that a bankruptcy court should
apply the choice of law rules of the forum state). The
Seventh Circuit has not reached the question. See In re
Morris, 30 F.3d 1578, 1582 (7th Cir. 1994) (acknowledging
the difficult question of whether federal or forum
choice-of-law rules apply in bankruptcy cases, but declin-
ing to resolve it because federal and forum state
choice-of-law principles yielded the same result in that
case); see also Fogel v. Zell, 221 F.3d 955, 966 (7th Cir. 2000)
(referencing “persisting uncertainty as to whether state
or federal law supplies the choice of law rules in a bank-
ruptcy case.”).
  Appellants do not dispute that if a federal choice-of-law
analysis applies to this case, Nevada substantive law
would apply and—based on the bankruptcy court determi-
nation on remand—the claims would be allowed. There-
fore, if we conclude that Wisconsin choice-of-law princi-
ples would produce a result consistent with the applica-
tion of the federal common law approach, we need not
resolve whether federal or forum state choice-of-law rules
apply in bankruptcy, because our answer to that ques-
tion would not matter to the outcome of this case.
  To determine which jurisdiction’s laws a Wisconsin
court would apply to a contractual dispute such as this
one, we need to look to Wisconsin contract choice-of-law
10                                                  No. 08-3994

rules.1 While the Wisconsin Supreme Court has acknowl-
edged that Wisconsin’s choice-of-law jurisprudence “had
something of a checkered past,” Drinkwater v. Am. Family
Mut. Ins. Co., 714 N.W.2d 568, 574 (Wis. 2006), it is clear
that in contractual disputes, Wisconsin courts now apply
the “grouping of contacts” rule. State Farm Mut. Auto. Ins.
Co. v. Gillette, 641 N.W.2d 662, 670-671 (Wis. 2002) (quoting
Haines v. Mid-Century Ins. Co., 177 N.W.2d 328, 330 (Wis.
1970)). That is, contract rights must be “determined by
the law of the [jurisdiction] with which the contract has
its most significant relationship.” Id. (quoting American
Std. Ins. Co. v. Cleveland, 369 N.W.2d 168, 171 (Wis. Ct.
App. 1985)). The “first rule” in the choice-of-law analysis
is “that the law of the forum should presumptively apply
unless it becomes clear that nonforum contacts are of the
greater significance.” Drinkwater, 714 N.W.2d at 575-76
(quoting Gillette, 641 N.W.2d at 676). In a close contracts
case, if it is not clear that the nonforum contacts are of
greater significance, then the court typically analyzes as
a tie-breaker the five choice-influencing factors developed
in Heath v. Zellmer, 151 N.W.2d 664, 672 (Wis. 1967). See
Haines, 177 N.W.2d at 332-33.2 However, if it is clear that

1
  The district court’s statement that “neither party addresses the
applicability or relevance of the choice-of-law provisions in-
cluded in the casinos’ contracts” remains true on appeal.
2
   The five Heath factors are: (a) Predictability of results;
(b) Maintenance of interstate and international order;
(c) Simplification of the judicial task; (d) Advancement of
the forum’s governmental interests; and (e) Application of the
                                                (continued...)
No. 08-3994                                                 11

the nonforum contacts are of greater significance in a
contracts case, then Wisconsin courts will apply the law
of the nonforum state without analyzing the Heath fac-
tors. Relevant contacts include: (a) the place of the con-
tracting; (b) the place of negotiation of the contract; (c) the
place of performance; (d) the location of the subject matter;
and (e) the respective domiciles, places of incorporation
and places of business of the parties. Hystro Prods., Inc. v.
MNP Corp., 18 F.3d 1384, 1387 (7th Cir. 1994); Haines, 177
N.W.2d at 330.
  Here, there is no question that Jafari was in Nevada
when he negotiated for and reached agreement on the
credit lines that gave rise to the casinos’ claims. The credit
agreements, credit line increase requests, and markers
were executed and consummated in Nevada, and they
were to be performed in Nevada. Moreover, creditors’
casinos do business in Nevada, and Jafari used the pro-
ceeds of his loans to gamble at the casinos. The debt was
payable to Wynn and Caesar’s in Nevada. In contrast,
Wisconsin’s only contact with the contracts was that
Jafari happened to reside in Wisconsin at the time he
entered into the agreements. The significant contacts in
this case strongly favor Nevada, not Wisconsin. Because
the nonforum contacts undoubtedly are of the greater
significance, we do not need to consider the five Heath

2
  (...continued)
better rule of law. These factors play a more prominent role
in tort cases and in cases in which tort and contract law are
both relevant.
12                                              No. 08-3994

factors. Wisconsin courts, applying their forum’s
choice-of-law analysis, would apply Nevada law to
govern the Wynn and Caesar’s claims.
  Appellants seem to argue that regardless of the result of
the “grouping of contacts” test, if enforcing nonforum
law would contravene Wisconsin public policy, a Wis-
consin court will refuse to do so and will apply Wis-
consin law instead. They continue that enforcing
gambling debts is against Wisconsin’s public policy. The
cases that they cite in making this argument are distin-
guishable from the instant case, though. Most of their
cases stand for the proposition that the freedom to
contract for choice-of-law is qualified because parties
cannot override public policies of the state whose law
would apply absent the choice-of-law clause. For
instance, the Wisconsin Supreme Court has stated that
although parties may seek to promote “certainty and
predictability in contractual relations,” they will not be
“permitted to do so at the expense of important public
policies of a state whose law would be applicable if the
parties choice of law provision were disregarded.” Bush
v. Nat’l Sch. Studios, Inc., 407 N.W.2d 883, 886 (Wis. 1987);
see also General Med. Corp. v. Kobs, 507 N.W.2d 381, 384
(Wis. Ct. App. 1993) (“parties cannot, by contract, override
fundamental polices of the state whose law would be
applicable absent the choice of law provision”). In
Drinkwater, the court determined that the express
choice-of-law provision for Iowa law contravened Wis-
consin policy, and that the contract would not control if
the “significant contacts” choice-of-law analysis led to a
determination that, “absent the clause, Wisconsin law
No. 08-3994                                                 13

would apply.” Drinkwater, 714 N.W.2d at 574. The court
then conducted its choice-of-law analysis and deter-
mined that absent the clause Wisconsin law would
apply. The court therefore voided the forum selection
provision as contrary to public policy. The court never
suggested that if it had determined that Iowa law would
have applied under a grouping of contacts analysis, it
nevertheless would have applied Wisconsin law to
enforce Wisconsin public policy. Indeed, we find no
authority for the conclusion that a Wisconsin court that
determines through a significant contacts choice-of-law
analysis that the nonforum state’s law should apply
nevertheless will apply Wisconsin law if enforcing
nonforum law would contravene Wisconsin public
policy. To the contrary, Wisconsin cases clearly indicate
that a Wisconsin court would apply Nevada law to the
Wynn and Caesar’s claims.
  With regard to the request that we certify a question of
state law to the Wisconsin Supreme Court, that court is
only permitted to answer certified questions “as to
which it appears to the certifying court there is no con-
trolling precedent in the decisions of the supreme court
and the court of appeals of [Wisconsin].” Wis. Stat.
§ 821.01. Certification is appropriate when the case
“concerns a matter of vital public concern, where the
issue will likely recur in other cases, where resolution
of the question to be certified is outcome determinative
of the case, and where the state supreme court has yet
to have an opportunity to illuminate a clear path on
the issue.” In re Badger Lines, Inc., 140 F.3d 691, 698-99 (7th
Cir. 1998). The Wisconsin Supreme Court has illuminated
14                                           No. 08-3994

that it would apply Nevada law to the claims at issue
here, so we cannot certify the question to the state high
court. Moreover, we need not decide whether state or
federal law supplies the choice-of-law rules in a bank-
ruptcy case because Nevada substantive law would
apply either way.

                    III. Conclusion
  We A FFIRM the bankruptcy court’s conclusion on
remand that the Wynn and Caesar’s claims are allowed.
We D ENY appellants’ motion for certification of question
of state law.

                         6-17-09