A federal District Court in New York has ruled in favor of a lender against a borrower, who happens to be a lawyer.
The borrower's offense? He played poker.
Actually, the lawyer did more than just play poker – he used his law firm's loan to finance high-stakes games. And it did not matter that the lawyer claimed he was a fairly consistent winner.
The case started on October 13, 2005, when Counsel Financial Services, LLC, agreed to lend Michael J. Melkersen's law firm up to $250,000 – at 18% interest. Counsel Financial is a commercial lender which specializes in loans to law firms. Melkersen Law, P.C., calls itself "A Serious Law Firm."
About two years later, Melkersen asked that his line of credit be increased to $500,000. A Counsel Financial representative told him his law firm was one of the company's "success stories" and that it looked forward to a "long and mutually beneficial relationship."
But then something happened. Megan Brooks Payne, Senior Vice President of Counsel Financial, asked for more financial documentation and sent an auditor to review Melkerson's books. Payne said that she would not approve the increase in the credit line and suggested that he find other individuals who would personally guarantee the loan. So, Melkersen got his wife to co-sign, and sent in her financial information.
But Payne wanted an additional personal guaranty by an "individual of substance." So Melkersen came up with another co-signer, a doctor friend and client with significant assets and income.
But that was not enough.
The problem became clear when Counsel Financial called to say that not only was it not increasing the line of credit, but it was calling in the balance due on the existing note. The reason? "Counsel Financial decided not to extend my line or renew it because it believed I was using its money to play poker in violation of my contract."
Melkersen objected. He said, "I was not aware that I could not take personal draws from the Counsel Financial line in a reasonable amount, nor was I aware that there were any restrictions on how I used my partnership draws or otherwise spent my personal funds."
As for the poker, Melkersen "explained that he had been successful in that endeavor for many years, and therefore, my activity in that regard was always done with an expectation of a profit and improving my personal financial situation." Melkersen was rated 3,828th on the World Series of Poker's website.
Credit for gaming is an unusual beast. Ever since Queen Anne of England signed the Statute of Anne in 1710, gambling debts have not been collectable in court. That is beginning to change, by statute in some cases, by court decision in others. In Nevada, for example, the State Legislature wrote a law allowing casinos to sue players on written markers, but players can only file claims with the Gaming Control Board, not file suits in courts against casinos, to collect winning bets.
Lenders want to make sure they are paid back. If they knowingly lend money to enable the borrower to gamble, they often cannot sue to get their money back, even if the borrower wins. Of course, the bigger danger is that the players will lose, and may lose everything.
Imagine walking into a bank, like you would a casino, and asking for $10,000 to play craps, or even to enter the WSOP.
Although Melkersen's note said the loan could only be used for his law firm's working capital, the case was resolved on a separate issue. Although Melkersen claimed Counsel Financial breached its agreement by improperly calling in the loan, he failed to say how this caused him any damages.
Since he had stopped making payments on the note, the Court sided with the lender.
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