Robert Jafari v. Wynn Las Vegas, LLC

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