Is the CGCC Taking An Unnecessary Gamble?

Article originally appeared in Gaming Management on 02/15/10

Are gambling debts legally enforceable in California? If you read the California Gambling Control Commission’s (CGCC) extension of credit regulation, you would think the answer is yes. Unfortunately for gaming operations in California, the answer is less than crystal clear. In fact, recent California court decisions have held and continue to hold that the California judicial system is not available to resolve gambling debts. This article encourages a change in state law that would allow tribal gaming operations and card rooms the ability to enforce markers evidencing gambling debts in state court.

Extension of Credit Regulation

Before this year, there was no clear method by which California card rooms were permitted to extend gambling credit to their patrons. To the extent that card rooms were extending credit before January, it was completely unregulated. The void of regulation on credit extension has been filled to some extent. The CGCC approved regulations authorizing card rooms to extend credit to their patrons, effective Jan. 8, 2010. These new regulations defining the procedure for the extension of credit to card room patrons are found in the Minimum Internal Control Standards (MICS) for gambling establishments: Checks Credit, ATMs and Unclaimed Property (hereinafter “Extension of Credit Regulation”). The specific authority for promulgation of this regulation regarding the extension of credit is in the Gambling Control Act (GCA). The GCA requires the CGCC to promulgate regulations regarding the extension of credit. The text of the GCA confirms that the extension of credit by a gambling establishment is clearly contemplated and authorized by state law. While statutory authority for the extension of credit is clear, the GCA does not expressly provide that credit instruments evidencing gambling debt, aka “markers,” are enforceable as a matter of California law.

The most interesting portion of the regulation, and most important to gaming operations, is the section that states that checks and credit documents complying with the regulation are “valid and enforceable instruments.” This provision appears to overturn more than 100 years of California case law. The intent of this provision is to make a patron’s delinquent marker enforceable in state court. There is significant uncertainty as to whether an administrative commission regulation can, without express statutory language, unilaterally change the judicial position on the enforceability of gambling debts.

Courts Refuse to Enforce Gambling Debts

Gaming credit or a “marker” advanced to a person is debt of that person, and is a debt incurred for the purpose of gambling, commonly known as a gambling debt. California courts have historically refused to enforce gambling debts. The underlying public policy regarding the unenforceability of gambling debts is that “wagers that tend to excite a breach of the peace, or are contrabonos mores (against good morals) or that are against the principles of sound policy, are illegal; and no contract arising out of any such illegal transaction, can be enforced.” In conjunction with this reasoning, the California Civil Code requires that the consideration for all contracts must be “lawful.” Contract consideration is not lawful if the consideration is “contrary to the policy of express law, though not expressly prohibited” or “otherwise contrary to good morals.” A contract that does not have lawful consideration will have enforceability problems.

Recent judicial decisions clearly establish that the use of the California court system for enforcement of gambling debts is against public policy. Recent judicial decisions took it one step further stating that “California’s long-standing public policy regarding gambling is a broad, strong policy against judicial resolution of civil claims arising out of gambling contracts or transactions; and this public policy absent a statutory right to bring such claims, applies to both actions for recovery of gambling losses and actions to enforce gambling debts.” It would seem appropriate that the CGCC and California gaming operations would be wise to take heed of the words of the state judiciary and seek a change in California statutory law, rather than administrative regulation, in order to permit the lawful enforcement of gambling debts.

Authorizing Credit and Enforcement of Gambling Debts

While the GCA provides that the commission clearly has authority to adopt regulations regarding the extension of credit, there does not appear to be a basis within the GCA that would make credit instruments evidencing gambling debts enforceable pursuant to state law. This issue has arisen previously in California and in other states. Specifically, California has authorized and licensed state sanctioned gambling and accordingly public policy toward gambling in the state has changed. However, California courts have repeatedly stated that:

While the public policy against gambling has significantly eroded, the public policy against the enforcement of gambling debts has not…It matters little that gambling itself has become more accepted in California. The cornerstone of the…rule against enforcement of gaming house debts is not simply that the game played is unlawful, but that the judiciary should not encourage gambling on credit by enforcing gambling debts, whether the game is lawful or not.

There are two public policy points to be considered when extending credit for the purpose of gambling. The first is the general acceptance of gambling. It is clear that regulated gambling itself does not offend the state notions of established public policy. However, the second policy point—enforcement of gambling debts—has not been addressed by the legislature. Thus, while many forms of gambling have been legalized within California and therefore public policy has changed with respect to those legalized forms of gambling, at least according to the Metropolitan and Kelley courts, the underlying public policy of enforcement of a gambling debt may not have changed.

Has Public Policy Changed?

It is not completely unreasonable to believe that public policy regarding the enforcement of gambling debts has changed in the state of California. The best evidence of the change in public policy is the text of the GCA itself, passed by the legislature in 1997, which contemplates extensions of credit, and the Extension of Credit regulation itself.

The two leading California cases analyzing this issue did not analyze the extension of credit language within the GCA. The Metropolitan case was decided in 1993, well before the passage of the GCA and, therefore, could not consider the GCA. The Kelley decision on the other hand was decided more than a year after the effective date of the GCA, however, the court did not consider the extension of credit text of the GCA. That being said, the hurdle that must be overcome, in addition to the state’s general public policy regarding enforcement of gambling debts, is language within the Metropolitan decision that refers to and possibly incorporates the Statute of Anne provision regarding the unenforceability of gambling debts into state common law. If the Statute of Anne prohibition is incorporated into state common law, gambling establishments in California are in the same position that Nevada casinos were prior to the 1983 change in Nevada law.

It is more likely that public policy regarding the enforcement of gambling debts has not changed. New Jersey changed state law in 1976 to allow for enforcement of certain gambling debts, not too far behind Nevada, which changed state law in 1983 to allow for enforcement of certain gambling debts. It would be an uphill battle to argue that California gaming operations and the California legislature were not aware of case law regarding enforceability of gambling debts in 1997 (when the CGA was passed), and the hurdles that other states have gone over to ensure that such debts are enforceable at law. Accordingly, because of the very strong case law in California on the subject, and the legislature’s silence on the issue, gambling debts are probably still unenforceable in California. It stands to reason that the fatal flaw in the Extension of Credit regulation is that while there is a process for gaming operations to extend credit, the language within purporting to give a gaming operation a judicial remedy may be ineffective. Gaming operations seeking to rely on this regulation and ultimately obtain a state court judgment should proceed with caution, as there is a reasonable probability that California state courts will not hear such an action as public policy continues to forbid the enforcement of gambling debts.

Nevada Resolves Same Issue

The law and history of the enforceability of gambling debts in Nevada is particularly instructive. Nevada state courts did not enforce gambling debts until a change in state law in 1983, which confirmed the enforceability of certain gambling debts. Like California, in Nevada the general rule is that gaming contracts are not enforceable. However, there are two major exceptions to this rule. The first exception is casino debts that are evidenced by a credit agreement. This exception allows casinos to enforce markers against gaming patrons in state law. The second exception is patron claims related to winnings from a game.

Before 1983, the bar to enforceability of gaming debts in Nevada dated back more than 100 years. In 1872, the Nevada Supreme Court held that the English prohibition against the recovery of gaming debts was the law of Nevada, even though gaming itself was legal. This was affirmed several times over the next century. This history is based upon Nevada state statute that incorporates the common law of England as of the date of Nevada joining the Union. This English common law included the Statute of Anne, which confirms that gambling debts are unenforceable. Despite the lack of enforceability of gambling debts at Nevada state law, many Nevada casinos extended credit prior to 1983 and enjoyed an estimated 96 percent collection rate on gambling debts. This extraordinarily high rate of collections dipped to approximately 88 percent in 1982, likely due to the recession the country was neck deep in at the time and which bears similarity to the recession the country is undergoing currently. In response to concerns from the Nevada gaming industry, the increase in amount of gambling debts, and lack of alternative legal means within which to enforce those debts, the Nevada legislature changed the law to allow for the enforceability of credit instruments evidencing gambling debts.

As of 1983, Nevada state law clearly permits enforcement of gambling debts provided that certain procedures are followed. Similarly, the commission’s Extension of Credit regulation seeks to do the same. The problem is that while California state law clearly contemplates the extension of credit to patrons, no where in the California Gambling Control Act does the state authorize enforcement of gambling debts by statute.

Statutory Remedy

With the uncertainty surrounding the enforceability of credit instruments entered into in accordance with the Extension of Credit regulation, it appears that the best course of action would be to seek a change in state law that permits enforcement of gambling debts. By following in the footsteps of the Nevada and New Jersey legislatures, California needs only to adopt a brief statute confirming the enforceability of gambling debts incurred at tribal gaming operations and other gaming operations in the state. Until the legislature speaks clearly on this issue, such debts run the risk of being unenforceable.

Applications for California’s Indian Country

The 1999 tribal-state gaming compact between the state of California and more than 60 Indian tribes does not address the enforceability of gambling debts. Instead, the compact states that tribal gaming operations must “adopt and comply with standards that are no less stringent than state laws, if any, prohibiting extensions of credit.” As the GCA does not prohibit the extension of credit, there is no requirement that a tribal gaming operation prohibits the extension of credit.

The extension of credit by a tribal gaming operation is governed by tribal law, not state law (unless otherwise agreed to by the tribe).Accordingly, assuming that there is a tribal law permitting the extension of credit and enforcement of credit instruments evidencing that debt, the question then turns to enforceability of the credit instrument, or marker, extended by a tribal gaming operation to its patrons. Assuming some form of change in state law, their methods for enforceability of gambling debts incurred at tribal gaming operations immediately come to mind.

First, the debt could be enforced in tribal court. To reach a debtor’s bank assets, which are likely located off of the tribe’s reservation, the tribal gaming operation would want to seek to domesticate and enforce that judgment in state court. As state courts are not required to give tribal court judgments full faith and credit, except in limited situations, a tribal gaming operation would request that a state court use its discretion to recognize the tribal court judgment based upon the principle of comity.

The California Supreme Court has stated that “the doctrine of comity prescribes that a court of this nation recognize the judgment of a court of a foreign nation when the foreign court had proper jurisdiction and enforcement does not prejudice the rights of United States citizens or violate domestic public policy.” Provided that there is a change in state law that changes state public policy with regard to gambling debts, then state courts could recognize and domesticate such judgments based upon principles of comity as they do not clearly offend state notions of public policy. The second method for ensuring enforceability of such debts would be through a state statute that confirms such debts to a tribal gaming operation are directly enforceable in state court.

Finally, again assuming a change in state law, a third method of enforcement that may be effective is the use of binding arbitration. A tribal gaming operation could, consistent with tribal law, provide that persons seeking to obtain gaming credit must agree to binding arbitration for resolution of disputes relating to the extension of that credit. Upon an arbitration award, the tribal gaming operation could then seek to have that arbitration award confirmed in state court. As a patron’s assets are probably not located on-reservation, a tribal gaming operation would again need the assistance of the state court system to assist in the enforcement of that arbitration award.

Uncertain Enforcement

There is significant uncertainty regarding the enforcement of credit instruments issued in accordance with the Extension of Credit regulation. Gaming operations in California may want to seek a statutory change in state law that expressly states that gambling debts, subject to certain limitations, are enforceable at law.

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