Bala v. PWE Enters., Inc. (In re Racing Servs., Inc.)
| Decision Date | 28 November 2018 |
| Docket Number | Bankruptcy No. 04-30236,Adversary No. 17-07034 |
| Citation | 594 B.R. 678 |
| Parties | IN RE: RACING SERVICES, INC., Debtor. Susan Bala, Plaintiff, v. PWE Enterprises, Inc., and Kip M. Kaler, Chapter 7 Trustee, Defendants. |
| Court | U.S. Bankruptcy Court — District of North Dakota |
Clinton E. Cutler, Steven R. Kinsella, Fredrikson & Byron, PA, Minneapolis, MN, Michael S. Raum, Fredrikson & Byron, P.A., Fargo, ND, for Plaintiffs.
Leanna M. Anderson, Dentons US LLP, Dallas, TX, for Defendant.
Kip M. Kaler, Fargo, ND, pro se.
RULING ON CROSS MOTIONS FOR SUMMARY JUDGMENT
Thad J. Collins, United States Bankruptcy JudgeThis matter came before the Court for hearing in Fargo, North Dakota.1 Michael Raum, Steve Kinsella, and Bruce Schoenwald appeared for Susan Bala ("Bala"). Martin Foley and Leanna Anderson appeared for PW Enterprises, Inc. ("PWE"). Jonathan Fay and Patrick Sinner appeared with and for Kip Kaler as Chapter 7 Trustee. The parties filed post-trial briefs. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).
As a part of a criminal conviction, the United States received an order of forfeiture against Debtor, Racing Services Inc. ("RSI"). In response to that forfeiture, Trustee, the United States, and PWE entered into a settlement agreement that included disposition of property. Later, RSI's conviction and the order of forfeiture were overturned. The United States then returned the money and property exchanged under the settlement agreement to the bankruptcy estate. The parties now dispute whether the agreement continues to be effective as between PWE and RSI's bankruptcy estate.
Bala filed this adversary seeking a declaratory judgment that the settlement agreement is void, making PWE's releases ineffective. PWE and Trustee argue that the agreement is still in effect between PWE and RSI's bankruptcy estate. PWE argues that Bala does not have standing to challenge the settlement and that the United States is a necessary party.
Bala moves for summary judgment. She argues that this Court did not have jurisdiction to approve the settlement. She also argues that the United States and the Trustee voided or rescinded the settlement agreement after the reversal of the criminal conviction and forfeiture. PWE also moves for summary judgment arguing that the agreement was severable, that res judicata applies, that PWE was a good faith purchaser under section 363(m), and that the issue is moot. The Court finds that it did have jurisdiction and that the settlement agreement is severable. The agreement thus remains valid between PWE and RSI's bankruptcy estate.
This adversary action is a small piece in a much larger puzzle. The main bankruptcy case has spanned over a decade and undergone many twists and turns. The parties to this action have a long history that the Court need not restate in its entirety here. The Debtor, RSI, was an off-track horse racing service provider. It took bets and managed betting pools for off-track horse race betting in North Dakota. Susan Bala is the sole owner of RSI.
PWE is an entity owned by Peter Wagner ("Wagner"), a high-volume professional gambler. PWE was one of RSI's biggest clients for many years. In the early 2000's Bala and Wagner, through RSI and PWE, started a new betting operation together in Mexico. When RSI filed for bankruptcy in 2004, it held some claims against PWE relating to the betting operation in Mexico.
In 2003, RSI was indicted on charges of illegal gambling. In 2005, the jury convicted RSI of these charges. The jury also reached a verdict on the corresponding forfeiture allegations. The jury found RSI did not have a valid license for a second betting location and issued a criminal forfeiture in the amount of wagers that passed through that location, $99,013,200. The jury also found that the statutory "takeout"-a percentage of the betting pool RSI took out to pay expenses and keep as profit-amounted to $19,719,186 and was subject to criminal forfeiture by Ms. Bala personally, as the sole owner of RSI. Accordingly, the United States District Court for the District of North Dakota entered a $99,013,200 order of forfeiture against RSI and a $19,719,186 order of forfeiture against Bala.
In 2006, this Bankruptcy Court entered an order approving a settlement between PWE, Trustee, and the United States (the "Settlement Agreement") dealing with the forfeiture order. The Settlement Agreement provided, among other things, that: (1) RSI's bankruptcy estate would pay $132,500 to the United States and the Trustee would give the United States an assignment of certain assets; (2) the United States would release RSI, Trustee, and the bankruptcy estate from liability on the forfeiture; (3) PWE would pay $150,000 to RSI's bankruptcy estate; (4) RSI's estate would release PWE and PWE's affiliates of all claims arising out of, or related to, the business relationship between RSI and PWE and its affiliates. RSI likely would not have been able to fund a settlement payment to the United States without simultaneously settling its claims with PWE. PWE paid $150,000 to the RSI bankruptcy estate in exchange for releases. RSI paid $132,500 to the United States (along with other specified assets) in exchange for a release of the United States forfeiture rights against RSI.
In 2007, the United States Court of Appeals for the Eighth Circuit reversed RSI's conviction and the accompanying order of forfeiture. United States v. Bala, 489 F.3d 334 (8th Cir. 2007). After this reversal, the United States returned the $132,500 it received to the RSI estate, along with the assignments it received under the Settlement Agreement. PWE did not return anything it received under the Settlement Agreement. The Bankruptcy Trustee and PWE have continued to operate as if the Settlement Agreement is still in force between them. Bala argues that the Settlement Agreement is void in its entirety. This is the dispute currently before the Court.
Bala filed this adversary seeking a declaratory judgment that the Settlement Agreement is void for two reasons. First, she argues the Bankruptcy Court lacked jurisdiction and constitutional authority to enter the Order approving the Settlement Agreement. Second, she argues the United States and Trustee voided the Settlement Agreement when the United States returned money and property transferred under the agreement and Trustee accepted the returned money and property.
PWE and Trustee argue that Bala does not have standing to bring this action, that the United States is an indispensable party, that this Court had jurisdiction to approve the Settlement Agreement and that, at most, the Agreement was rescinded only as between the United States and RSI. They argue that the agreement remains valid between PWE and RSI. The Court will address the specific arguments and the facts underlying those specific arguments as needed in the next section.
The Court has previously held hearings on this matter. At those hearings, the parties agreed that the dispute was a purely legal one. As a result, they agreed to submit this adversary for ruling on cross-motions for summary judgment. Nevertheless, along with the briefs in this case, they have submitted extensive requests for the Court to take judicial notice of many documents. It is unclear what, if any, factual dispute is at issue in this matter that would need to be resolved by resorting to those documents. The parties agree about what happened leading up to the Settlement Agreement, the terms of the Settlement Agreement, and what happened after RSI's conviction and forfeiture were reversed. These facts are set forth clearly in their pleadings and briefs and are sufficient for resolution of this purely legal dispute.
The Court will first address PWE's Motion to Dismiss due to Bala's purported lack of standing and failure to join the United States. Next, the Court will address Bala's arguments that the Court did not have jurisdiction to approve the Settlement Agreement and that the actions of United States and the Bankruptcy Trustee acted to void the entire agreement under the doctrine of mutual mistake. Finally, the Court will address PWE's arguments that the provisions of the Settlement Agreement are severable, leaving the PWE portions of the agreement in full effect.
PWE and Trustee argue that the Court should dismiss Bala's complaint because she does not have standing and she failed to join the United States as a party. In re Petters Co., Inc., 565 B.R. 154, 160 (Bankr. D. Minn. 2017) (footnote omitted). "A motion to dismiss for lack of standing is properly brought under Rule 12(b)(1), because standing is a jurisdictional matter." In re Merritt, 529 B.R. 845, 857-58 (Bankr. E.D. Pa. 2015), aff'd, No. 11-18134, 2016 WL 930696 (E.D. Pa. Mar. 10, 2016), aff'd. 711 F. App'x 83 (3d Cir. 2017).
PWE and Trustee argue Bala does not have standing because she was not a party to the Settlement Agreement. They argue that only PWE, the United States, or Trustee have standing to challenge the continued validity of the agreement. They rely on authority that discusses standing to bring an appeal for support. In re Zahn, 526 F.3d 1140, 1142 (8th Cir. 2008) (). Bala argues that these cases address standing to appeal, not standing to challenge a settlement, like she does here. Bala argues that, as a creditor of the Estate, she has standing to seek a declaratory judgment that will directly affect whether an asset is property of the bankruptcy...
To continue reading
Request your trial