Opinion
CIVIL NO. 98-2647(JBS).
March 19, 1999
Richard Hiersteiner, Esq., Mark C. Rosenthal, Esq., Palmer Dodge LLP, Boston, Massachusetts, and Richard M. Meth, Esq., Friedman Siegelbaum LLP, Roseland, New Jersey, Attorneys for Appellant.
Paul R. DeFilippo, Esq., Frederick H. Kraus, Esq., James N. Lawlor, Esq., Gibbons, Del Deo, Dolan, Griffinger Vecchione Newark, New Jersey, Attorney for Appellees.
Eric A. Browndorf, Esq., Patrick F. Cox, Esq., Cooper Perskie April Niedelman Wagenheim Levenson, Atlantic City, New Jersey, Attorney for Unsecured Creditors Committee.
O P I N I O N
Appellant/Indenture Trustee State Street Bank and Trust Company appeals from a ruling made by the United States Bankruptcy Court for the District of New Jersey, the Honorable Judith H. Wizmur presiding, granting the Verified Motion for Order Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363 of Appellee/Debtor Greate Bay Hotel Casino ("GBHC"). In a May 5, 1998 Order (docketed on May 8, 1998), the Bankruptcy Court granted Debtors' motion such that Debtors would have use of their cash collateral. In doing so, the Bankruptcy Court incorporated findings and conclusions in an April 3, 1998 Opinion (docketed on April 4, 1998), including the Bankruptcy Court's conclusions that Appellant does not have a perfected security interest in Debtor's gaming revenues and that Appellant is not entitled to a constructive trust over certain funds for which it does not have a perfected security interest.
Appellant timely filed a Notice of Appeal with the Bankruptcy Court on April 16, 1998, and this Court has jurisdiction over the appeal pursuant to 28 U.S.C. § 158(a)(1). The principal issues to be decided are whether the agreement between State Street, as Indenture Trustee, and Debtors, entitled State Street to a security interest in gaming revenues, and, if so, whether such an arrangement complies with New Jersey law. Because, as stated herein, I find that even if the agreement did provide for such a security interest it would be illegal, I will affirm the Bankruptcy Court's Order.
I. BACKGROUND
A. Procedural Background
In February of 1994, GBHC, a New Jersey corporation which owns the Sands Hotel and Casino (the "Sands"), GB Property Funding Corp. ("Funding"), and GB Holdings, Inc. ("Holdings") (together referred to as "Debtors"), and others entered into a series of agreements with Shawmut Bank Connecticut, N.A. as Indenture Trustee, whereby Debtors borrowed and became obligated, either directly or as guarantors, to repay $185,000,000 in principal amount of the 10-7/8% First Mortgage Notes due January 15, 2004 of Funding (the "Notes"). The Notes are issued pursuant to the Indenture dated February 15, 1994 (the "Indenture"), and they are secured pursuant to the Indenture, a Mortgage, Fixture Filing and Security Agreement dated February 17, 1994 (the "Mortgage"), and a Security Agreement dated February 17, 1994 (the "Security Agreement") (all collectively referred to as the "Security Documents"). State Street, appellant here, later succeeded Shawmut Bank as Indenture Trustee.
On January 5, 1998, the Debtors commenced this case by filing Voluntary Petitions for Relief pursuant to Chapter 11 of the United States Bankruptcy Code (the "Petition Date"). As of that date, Debtor still owed $182,500,000 in principal and $9,372,135.42 in accrued interest. The Notes were not in default on the Petition Date, although the payment due on January 15, 1998, after the Petition Date, was not made.
On the Petition Date, the Debtors also filed a Verified Motion for Order Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363. In that motion, Debtors acknowledged that State Street had a lien and security interest upon non-gaming receivables, real estate, improvements, and equipment, and it proposed that a replacement lien been provided as adequate protection for their use of food and beverage inventory, room rents, and their proceeds. The Debtors also asserted that Trustee possessed no lien on cash in most of the Debtors' deposit accounts (except certain Pledged Accounts) and in casino revenues.
On January 8, 1998 and February 19, 1998, the Bankruptcy Court entered two interim consent orders authorizing the use of cash collateral and granting a replacement lien and security interest in post-petition collateral. The second interim order governed until the Bankruptcy Court resolved the issues raised by the parties. After briefing by the parties, the Bankruptcy Court held oral argument at which the parties debated the extent and validity of Trustee's security interest in Debtors' property, specifically whether the security interest extends to gaming revenues. All parties agreed that the Trustee's interest extended to hotel room revenues, proceeds of non-gaming receivables, and inventory, and that it excluded accounts receivable consisting solely of gaming debts. However, they disagreed as to whether the Trustee's clear security interest in items such as casino chips/tokens and hotel room and food and beverage revenues extends to casino revenues as the cash collateral or proceeds of those items, as well as to whether Trustee either had a perfected security interest in, or the right to a constructive trust in, funds in non-pledged deposit accounts. The Bankruptcy Court rejected Trustee's arguments in this regard, and on May 5, 1998 entered an Order (docketed on May 8, 1998) which allowed the Debtors to use their cash collateral and provided for the Trustee replacement liens and security interests for those items in which the Trustee had a perfected security interest as of the Petition Date. The Order did not give the Trustee a replacement lien or constructive trust in any item for which it did not have a perfected security interest. It is from that Order which Appellant appeals.
B. The Bankruptcy Court's April 3, 1998 Opinion
1. Factual Findings
The Bankruptcy Court first set out its findings. It began by reviewing the Indenture and Security Documents, and noted that the Security Agreement grants the Trustee a security interest in Debtors' equipment, inventory, receivables (including from room rentals and food and beverage sales, but excluding "any accounts receivable consisting solely of gaming debts"), security collateral (including stock in Debtors), assigned agreements (two of them, including a Management Services Agreement dated August 19, 1987, as amended on February 17, 1994, between New Jersey Management, Inc. ("NJMI") and Debtors (including any right of Debtors "to receive moneys due or to become due under or pursuant to the Assigned Agreements"), three "Pledged Accounts" (including a Construction Account, a Capital Expenditures Account, and a Collateral Account), and the proceeds of any of the foregoing collateral and cash. The Casino Control Commission approved all of the Indenture and Security Documents.
One of the Assigned Agreements referenced in the Security Agreement, the NJMI Management Services Agreement, shows that the Debtors employed NJMI to act as its sole and exclusive agent responsible for the supervision, direction, and control of management of the Sands Hotel and Casino. NJMI had sole and exclusive jurisdiction over operational matters, employment and compensation decisions, and gaming credit issue and gaming policy. NJMI also was supposed to establish bank accounts necessary for hotel and casino operation. The Debtors were to deposit funds in these accounts as initial operating capital, and then, at least monthly, NJMI was to deposit cash on hand in excess of that needed for 30 days of operations in accounts which Debtors designated. NJMI was compensated with a percentage of gross revenues and a percentage Incentive Fee based upon gross operating profit. NJMI signed a Consent and Agreement form which acknowledged that it would act in accordance with the Security Agreement, such that if there was an Event of Default by the Debtors, any payments owing from NJMI to the Debtors would instead be held in trust for the Trustee. The Security Agreement, at Section 14, proscribes cancellation, termination, or substantial modification of the Assigned Agreements, and it requires the Debtors to perform and observe all the terms and provisions of those agreements.
While the Consent and Agreement Form itself (attached as Appellant's App. J) said NJMI would act in accordance with Section 14 of the Security Agreement, the Bankruptcy Court found that they meant to write Section 15, and this Court agrees. Section 15 of the Security Agreement (Appellant's App. F) states that if an Event of Default occurs, payments due or to become due in connection with an Assigned Agreement "shall be received in trust for the benefit of the Trustee hereunder. . . ."
The Prospectus issued in connection with the Indenture in January 1994, along with the Annual Reports which the Debtors submitted to the Security and Exchange Commission for 1994 through 1996, related that NJMI acted as the sole and exclusive agent of GBHC in the supervision, direction, and control of the management of the Sands. Debtors' Vice President for Finance, in an Officer's Certificate, also stated that, to his knowledge, GBHC was "in compliance with all conditions and covenants under the Indenture or the Security Documents."
As it turns out, however, Debtors' daily operations were never actually placed under the control or direction of NJMI or its affiliate, Hollywood Casino Corp ("HCC"). Other than a monthly fee payment to NJMI, there was no cash flow to NJMI or HCC, and NJMI has never possessed cash on behalf of GBHC. Neither NJMI nor HCC actually ran or supervised day to day operations at the Sands. Their role was limited to services such as investment banking, pensions, insurance, and some marketing, as well as a bit of involvement with senior management at GBHC. Bank accounts were kept in GBHC's name. The three Pledged Accounts in GBHC's name which Trustee control's are not utilized in Debtors' daily business. The Bankruptcy Court found that Debtors failed to follow the letter of the Management Services Agreement.
2. Application of Law to Facts
The Bankruptcy Court then went on to review applicable law and apply it to the facts as found.
a. No Perfected Security Interest in Deposit Accounts and Cash
First, the Bankruptcy Court found that the Trustee had no security interest in Debtors' deposit accounts and cash, except for the three separate Pledged Accounts. The Trustee made a number of arguments as to why the Security Agreement, which did not expressly provide for a security interest in these accounts, nonetheless gave the Trustee that interest because of various provisions in the Security Agreement and one of the Assigned Agreements mentioned in the Security Agreement.
The Trustee first argued that the deposit accounts were Receivables under the Security Agreement. The Bankruptcy Court disagreed because, in order to perfect this security interest, under New Jersey law, the Trustee would have had to possess those deposit accounts. That, the Bankruptcy Court found, the Trustee did not do. These accounts were not pledged to it (which was one way to get possession), and they were always handled by either the Debtors themselves or NJMI (the Debtors' agent), and thus they were always possessed (actually or constructively) by the Debtors, not the Trustee.
The Bankruptcy Court next noted that it appeared that the Trustee had abandoned its argument that a security interest arises in gaming revenues in the deposit accounts "because such revenues represent proceeds of non-gaming collateral such as hotel rooms and food and beverage functions." Thus, the Bankruptcy Court did not address that argument.
The Bankruptcy Court rejected the contention that NJMI's obligation under the Management Services Agreement to "pay over" money to GBHC is a "Receivable" in which the Trustee has a perfected security interest. Whether the Sands' accounts were operated by GBHC or by NJMI, the Court said, NJMI was GBHC's agent, and any accounts which NJMI and its designees supervised were either in the actual or constructive possession of the Debtors at all times. Moving cash from one bank account owned by the Debtors to another account owned by the Debtors is not a "payment" requirement, for that is not cash flow, but rather management of GBHC property by NJMI. The only payment under the Management Services Agreement owed to Debtor upon which the Trustee has a perfected security interest is a $15,000 debt listed "Due from Affiliates" designation in Debtors' financial statements. Money which NJMI was supposed to transfer from one operating account to another account was never NJMI's money, and thus it was not a payment.
This is different than the earlier argument, also rejected by the Bankruptcy Court, that the deposit accounts themselves were Receivables. This argument is that the right to payments in the Management Services Agreement is a Receivable under the Security Agreement. The Bankruptcy Court did not disagree with the fact that payments due under the Management Services Agreement would be a Receivable, perfected upon an Event of Default, but merely rejected contentions that the money NJMI was to deposit in GBHC accounts constituted payments and that an Event of Default had occurred pre-Petition Date.
For that same reason, the Bankruptcy Court rejected the suggestion that the Management Agreement constituted Agreement Collateral in which it had a valid perfected security interest. (Security Agreement, § 1(e).) These money transfers were not, and were never intended to be, payments or "moneys due." The only "moneys due" was the $15,000 listed in the Debtors' financial statements.
We would add that there also could have hypothetically been additional debts or agreements at later times which created more "moneys due" from NJMI to the Debtors. It just so happens that there were not, in fact, additional payments to be made, so the $15,000 is the only payment from NJMI to the Debtors in which the Trustee could have a security interest.
Moreover, even if these deposits were "payments," the Bankruptcy Court said, the Trustee still did not have a perfected security interest in them. The duty to segregate "moneys due," allegedly the excess cash, would not arise until there had been an Event of Default. Because the default on the Notes here arose after the Petition Date, at which point, due to the automatic stay, no security interest could arise (citing 11 U.S.C. § 362(a)(4)), the Trustee never gained a valid perfected security interest in the deposit account.
Nor, said the Bankruptcy Court, did the Trustee ever gain a perfected security interest in the cash on hand in excess of reasonably anticipated operating capital needs, for under N.J.S.A. 12A:9-304(1), the Trustee would have needed actual or constructive possession of that cash. That cash was never actually possessed by the Trustee, and because NJMI was the Debtor's agent, and not the Trustee's agent (and only would have become the Trustee's agent after any Event of Default), the Trustee never constructively possessed the cash either. Thus, the Bankruptcy Court found that the Trustee did not have a perfected security interest prior to the Petition Date.
b. Chips and Tokens Do Not Give Trustee a Security Interest in Gaming Revenues
The Trustee next contended that the "sale" of chips and tokens to customers at the Sands constituted proceeds of either "Inventory" or "general Intangibles," both of which are "Receivables" in which the Trustee has a perfected security interest, much like the designation of tickets sold at an auto racetrack as inventory in Klinger v. Pocono Int'l Raceway, Inc., 433 A.2d 1357 (Pa.Super. 1981.)
The Bankruptcy Court noted that inventory is defined as goods "held by a person who holds them for sale or lease or to be furnished under contracts of service or if he has so furnished them, or if they are raw materials, work in process or materials used or consumed in a business." N.J.S.A. 12A:9-109(4). General intangibles are "any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, and money." N.J.S.A. 12A:9-106. The gambling chips and tokens, and the "sale" thereof, however, are neither inventory/general intangibles or the proceeds of those.
In Zarin v. Commissioner, 916 F.2d 110, 113-14 (3d Cir. 1990), the Third Circuit held that gambling chips are not property, but "are merely an accounting mechanism to evidence debt . . . [without] any independent economic value beyond the casino . . . . In short, the chips have no economic substance." See also N.J.A.C. 19:46-1.6(f). The Bankruptcy Court reasoned that because the chips and tokens are just evidence of a debt (owed by the casino to the gambler), without economic value beyond the casino, and that cannot be transferred outside the casino, there can be no security interest in them. Therefore, the chips and tokens are not inventory because they are not "sold," but are rather "used," and while the chips and tokens are general intangibles (so the Trustee has a perfected security interest in the chips themselves), because those chips and tokens are not sold, there are no "proceeds" in which to have a perfected security interest. The Bankruptcy Court did not allow the chips and tokens to be a tool for getting to gaming revenues.
c. The Agreement Here Did Not Violate the New Jersey Statutory and Regulatory Scheme
The Bankruptcy Court next held that the Indenture Documents, including the Security Agreement and the Management Services Agreement, do not violate the New Jersey Casino Control Act, N.J.S.A. 5:12-1, et seq. The Court acknowledged that the Casino Control Act prohibits taking a security interest in percentages of gaming revenues, N.J.S.A. 5:12-104(a)(1), but also stated that there is an exception to the general prohibition for "[a]greements which provide only for the payment of a fixed sum which is in no way affected by the amount of any such money, property, revenues, profits or earnings. . . ." N.J.S.A. 5:12-104(a)(2). Already having found that the Indenture and Security Agreements did not give the Trustee a perfected security interest in gaming revenues, either through the deposit accounts and cash or through the chip and token exchanges, the Bankruptcy Court found that the "Indenture and security documents provide for the payment of a fixed sum." (Opinion at 23.) While the regulations do require approval of the Casino Control Commission for the transfer or sale of a security, N.J.A.C. 19:43-2.8, these documents were provided to the Commission and were expressly approved in their entirety.
The parties here misread this aspect of the Bankruptcy Court's opinion. Debtors, for example, ask this Court to uphold the Bankruptcy Court's ultimate ruling on a ground "rejected" by the Bankruptcy court (Debtors' Opp'n Br. at 32 n. 11): that if the security agreement granted the Trustee a lien on cash generated from gaming, it would be unenforceable as a violation of gaming laws. The Trustee, too, characterizes the Opinion in that way, indicating its belief that the Indenture Agreement and security documents give Trustee a security interest in gaming revenues, and noting that the Bankruptcy Court said that the entire structure (including that interest) had been approved. Ultimately, as will be discussed infra , I agree with the Debtors that any such security interest would violate New Jersey law. However, unlike the parties, I do not read the Bankruptcy Court's Opinion as being to the contrary. The Bankruptcy Court did not say that the agreements would comport with New Jersey law even if they gave Trustee a perfected security interest in gaming revenues (whether through unpledged deposit accounts, casino tokens and chips, or "revenues" from "comping"). Rather, the Bankruptcy Court simply said that the particular agreements here, which had already been found to exclude perfected security interests in gaming revenues, comported with New Jersey law.
d. No Constructive Trust is Warranted
Finally, the Bankruptcy Court addressed an issue which had been raised for the first time at the conclusion of the March 31, 1998 hearings: that if there was no valid, perfected security interest in the excess cash that either had been or was supposed to have been deposited by NJMI, a constructive trust should be imposed. The Bankruptcy Court noted that, under New Jersey law, a court may impose a constructive trust upon finding that there was "some wrongful act, usually, though not limited to, fraud, mistake, undue influence, or breach of a confidential relationship, which as resulted in a transfer of property." D'Ippolito v. Castoro, 51 N.J. 584, 589 (1968). Constructive trusts might also be appropriate to stop unjust enrichment, even if there was no wrongful act.In re First Interregional Advisors Corp., No. 97-22513, 1997 WL 862823, * 9 (Bankr.D.N.J. Oct. 29, 1997); Stewart v. Harris Structural Steel Co., 198 Super. 255, 265 (App.Div. 1984) (citing D'Ippolito, 51 N.J. at 588). On the facts in the record, there was no wrongful act of the sort reflected in previous cases. Moreover, there was no unjust enrichment because the Trustee did not hold a security interest in these monies pre-petition; since no Event of Default occurred pre-petition (monetary default was after the Petition Date, and the breach of the Management Services Agreement, not couples with a notice of default from the Trustee to the Debtors, was not an Event of Default), the funds always were within the Debtors' control, and so it is not unjust enrichment to let the estate keep its own money. As a result, the Bankruptcy Court said no constructive trust would be imposed.
II. DISCUSSION
The Trustee challenges the Bankruptcy Court's Order, arguing to me, as they did to the Bankruptcy Court, that the Trustee has a perfected security interest in casino revenues as proceeds of various collateral, and that even if it does not, the Bankruptcy Court erred in not imposing a constructive trust. Because I find that any such interest which would depend on the amount of revenues would violate New Jersey law, it is unnecessary for me to review the Bankruptcy Court's findings as to whether the Agreements themselves actually did grant such a perfected security interests. Additionally, largely because any such interest would violate New Jersey law, I find that the Bankruptcy Court's decision to not impose a constructive trust was not in error. Accordingly, I uphold the Bankruptcy Court's Order, albeit on different grounds.
In bankruptcy proceedings, property rights are defined by state law.Butner v. United States, 440 U.S. 48, 54-55 (1979). New Jersey extensively regulates the casino industry, stringently guarding ownership of licensed casinos. Specifically, the Casino Control Act, N.J.S.A. 5:12-1, et seq., makes unlawful any agreement which would purport to give a party an interest in gaming revenue:
Unless otherwise provided in this subsection, no agreement which provides for the payment, however defined, of any direct or indirect interest, percentage or share of any money or property gambled at a casino or simulcasting facility or derived from casino gaming activity or wagering at a simulcasting facility of any such interest, percentage, or share of any revenue, profits or earnings of a casino or simulcasting facility shall be lawful.
N.J.S.A. 5:12-104(a)(1) (emphasis added). The next subsection, § 104(a)(2), provides a reminder that if payment (including payment by way of giving someone a security interest in property) does not depend upon the amount of gaming revenues, it is not covered by this subsection:
Agreements which provide only for the payment of a fixed sum which is in no way affected by the amount of any such money, property, revenues, profits, or earnings shall not be subject to the provisions of this subsection. . . .
N.J.S.A. 5:12-104(a)(2).
If the agreements between the Debtors and the Trustees here do not provide for a security interest in gaming revenues, then, as the Bankruptcy Court said, these agreements fall squarely within section 104(a)(2). However, assuming for the moment that the Indenture Agreement and security documents do give the Trustee a security interest in gaming revenues, then it cannot be said that its security interest does not depend upon the amount of gaming revenues. Indeed, one of Trustee's own arguments before this Court is that it is entitled to gaming revenues that appear in either the form of cash or deposit accounts consisting of cash in excess of that needed to run operations — amounts which vary depending upon the amount of revenues in the casino. Therefore, even if the agreements do give Trustee a security interest in gaming revenues, they would by definition fall within § 104(a)(1)'s prohibition against such security interests, and they would be illegal.
Debtors remind this Court that all of the relevant documents were reviewed by the Casino Control Commission ("CCC") and were approved. Based on this, Debtors argue, the agreements were valid. It is true that the New Jersey Administrative Code provides that "[n]o person shall issue or transfer any security or ownership interest in a casino licensee or applicant or any non-publicly traded subsidiary or holding company thereof without the express, prior written approval of the Commission." N.J.A.C. 19:43-2.8 (emphasis added). Clearly, the Security Agreement and the Consent relied upon by the Trustee would constitute a "security" and a "transfer" of an interest in a casino licensee, GBHC, see N.J.S.A. 5:12-44 and 47.2, requiring the express written approval of the Commission. Debtors argue that because the CCC did issue its express written approval of the documents at issue here, that requisite was met and the transaction, including its alleged security interest in gaming revenues, was legal.
There are two main problems with Debtors' reasoning. First, though the CCC did approve the transaction, it is not clear that they were aware that they might be approving the transfer of a security interest in gaming revenues. The Indenture Agreement and security documents do not expressly and clearly provide for a security interest in gaming revenues, and, in fact, the "Grant of Security" section of the Security Agreement expressly excludes security interest in "any accounts receivable consisting solely of gaming debts." Security Agreement, § 1(c)(ii). If the Indenture documents, then, do give the Trustee a security interest in gaming revenues, it could only have done so indirectly, in a covert manner, by counting gaming revenues as either the proceeds of chips and tokens, the proceeds of hotel room and beverage and food services (those gaming revenues deriving from players whose room and food was "comped"), or the contents of deposit accounts allegedly held for Trustee because of some Event of Default. The significant regulatory issues which these hidden grants would create were never discussed in the report of the Commission's Division of Financial Evaluation and Control [H.E. P-16, P-17], in the Transcript of the Hearing before the Commission [H.E. P-18], or in the Resolution of the Commission [H.E. P-15]. It is difficult for the Debtors to argue that the CCC expressly approved the transfer of a security interest in gaming revenues when the CCC never even discussed that issue, an issue which is extremely important given the Act's ban of such a payment. The Commission never discussed § 104(a)(1). Nor did they discuss how giving a company a perfected security interest in gaming revenues (such as cash in excess of that needed for operations) might affect other statutory requirements, such as N.J.A.C. 19:43-4.1, 4.2 (casino must maintain a casino bankroll, which is cash in excess of that needed for operations, in order "to assure the financial integrity of casino operations . . .[and] adequate to pay winning wagers to patrons when due), N.J.A.C. 19:46-1.5(g) (casino must be able to satisfy the outstanding chip liability), and N.J.S.A. 5:12-1(b)(6) (public policy of Act is to ensure the public's confidence in the integrity of casino operations). There just is no evidence that the CCC ever thought about this issue, much less that the CCC gave approval to the transfer of a security interest in gaming revenues.
More important, however, is the second problem with Debtors' arguments: nothing in the Act or the regulations indicates that the CCC could approve an illegal arrangement. "Administrative adjudication is subject to judicial review where it. . .is ultra vires of statutory grant. . . ." Trombetta v. Mayor and Comm'rs of City of Atlantic City, 181 N.J. Super. 203 (Law Div.), aff'd, 187 N.J. Super. 351 (App.Div. 1981). Government agencies only have powers which the state legislature has given them. Silverman v. Berkson, 141 N.J. 412 (1995). An ultra vires act is one which goes beyond the administrative agency's delegated powers, for "administrative officers must act only within the bounds of authority delegated by the legislature." Southern New Jersey Newspapers, Inc. v. Township of Mount Laurel, 275 N.J. Super. 465, 482 (App.Div.), certif. granted, 139 N.J. 289 (1994), aff'd as modified and remanded, 141 N.J. 56 (1995). If an agency implements a statute in a way that deviates from the principle and policy of that statute, the agency's actions are ultra vires and do not withstand judicial review. See Malone v. Fender, 158 N.J. Super. 190 (App.Div. 1978).
Here, nothing in § 104(a)(1) indicates that it is illegal to grant a security interest in gaming revenues unless the CCC approves the transaction. Rather, there is a clear statement that such a grant is not legal, except in certain circumstances set out in the other provisions of § 104 which are not relevant here. While there is also a regulation that security interests involving casino licensees must be approved by the CCC, N.J.A.C. 19:43-2.8, there is no statement that such approval makes that which is illegal, legal. Thus, even if the CCC had approved Trustee's alleged security interest in Debtors' gaming revenues, that approval would be ineffective as ultra vires, and such grant of security interest could not stand.
Thus, the Bankruptcy Court's ruling that Trustee does not have a perfected security interest in Debtors' gaming revenues is affirmed, although for a different reason. Likewise, the Bankruptcy Court's ruling that a constructive trust is not warranted is affirmed. The Bankruptcy Court ruled that this case involved neither the wrongful conduct nor the unjust enrichment which would justify imposition of a constructive trust. Whether to impose an equitable remedy like a constructive trust is a question of fact in federal bankruptcy court proceedings. In re Visiting Nurse Association of Western Pennsylvania (Kemp v. Bowen), 143 B.R. 633, 637 (W.D.Pa. 1992); In re Heston Oil Co., 63 B.R. 711, 714 (Bankr.N.D.Okla. 1986). While the factors which must be considered in determining whether to impose a constructive trust are provided by state law and are subject to plenary review, the findings themselves are subject to a clearly erroneous standard. See Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988). See also In re Haber Oil Co., Inc., 12 F.3d 426, 434 (5th Cir. 1994) (applying clearly erroneous standard to imposition of constructive trust); In re Mid-Center Redevelopment Corp., 383 F. Supp. 954 (D.N.J. . 1974) (applying clearly erroneous standard). Such findings are only clearly erroneous "when although there is evidence to support it, the reviewing court on the entire evidence is left with a firm and definite conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364 (1948). In any case, the findings of a bankruptcy judge on equitable remedies such as constructive trusts are generally afforded great deference. See In re Goldberg, 168 B.R. 382, 384 (9th Cir. BAP 1994) (bankruptcy court is a federal court with broad remedial powers subject to an abuse of discretion standard, and reviewing court "cannot reverse unless it has a definite and firm conviction that the court below committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant factors."). See also Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206, 211 (3d Cir. 1990) (discussing similar abuse of discretion standard for appellate court review of district court's findings in equitable remedies).
The Bankruptcy Court here correctly stated New Jersey law that "`a constructive trust will be impressed in any case where to fail to do so will result in an unjust enrichment'; and where there has been a transfer of property as a result of `some wrongful act' (which need not be fraudulent in nature) or `breach of confidential relationship.'" In re Mid-Center Redevelopment Corp., 383 F. Supp. at 1972 (citing D'Ippolito v. Castoro, 51 N.J. 584, 588 (1968)). Based upon the facts that the deposit accounts for which the Trustee seeks a constructive trust were always within the Debtors' actual or constructive possession and that, though the Debtors technically breached the Management Services Agreement, the Trustee was aware of the nature of the relationship between NJMI and the GBHC at the moment the Trustee entered into the Indenture, I cannot say that the Bankruptcy Court's refusal to impose a constructive trust because of lack of wrongful conduct or unjust enrichments is clearly erroneous.
Moreover, to impose a constructive trust in this situation would be to nullify § 104(a)(1). If the Bankruptcy Court were to grant a constructive trust over the deposit accounts so that the Trustee could get at gaming revenues, it would be doing indirectly what § 104(a)(1) prohibits doing directly. Such a constructive trust would be void against public policy, and the Bankruptcy Court's decision not to impose a constructive trust can be affirmed even on that basis alone.
III. CONCLUSION
For all of the foregoing reasons, the Bankruptcy Court's Order of May 5, 1998, which granted Debtors' motion to use cash collateral and incorporated its April 3, 1998 Opinion that Trustee does not have a perfected security interest in Debtors' gaming revenues and that Trustee is not entitled to a constructive trust, is affirmed. Even if the Indenture Agreement and security documents do grant Trustee a security interest in gaming revenues, such agreement would be illegal, and any constructive trust aimed at accomplishing what the law makes illegal should be denied as a matter of public policy. The accompanying Order is entered.
O R D E R
This matter having come before the Court upon the appeal of State Street Bank and Trust Company, the Indenture Trustee, from the May 5, 1998 Order (docketed May 8, 1998) of the United States Bankruptcy Court for the District of New Jersey, the Honorable Judith H. Wizmur presiding; and the Court having considered the submissions of the parties; and for the reasons stated in the Opinion of today's date;
IT IS this day of March 1999 hereby
ORDERED that the May 5, 1998 Order of the United States Bankruptcy Court for the District of New Jersey be, and hereby is, AFFIRMED.