In re Racing Servs., Inc.

• Decision Date: 28 November 2018
• Docket Number: Case No. 04-30236
• Citation: 595 B.R. 334
• Parties: IN RE: RACING SERVICES, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of North Dakota

595 B.R. 334

IN RE: RACING SERVICES, INC., Debtor.

Case No. 04-30236

United States Bankruptcy Court, D. North Dakota.

Signed November 28, 2018

John D. Demmy, Stevens and Lee, Wilmington, DE, Max D. Rosenberg, Max D. Rosenberg, P.C., Fargo, ND, for Debtor.

Sarah J. Wencil, Office of the U.S. Trustee, Minneapolis, MN, Berman & Rabin, PA, Overland Park, KS, Gene W. Doeling, Kaler Doeling Law Office, David L. Johnson, McNair, Larson & Carlson, Ltd., Kip M. Kaler, Patrick J. Sinner, Kaler Doeling, PLLP, Kip M. Kaler, Bankruptcy Trustee, Michael D. McNair, Fargo, ND, Jonathan R. Fay, Jonathan Fay, PC, Detroit Lakes, MN, Aureliano Gonzalez-Baz, Bryan Gonzalez Vargas & Gonzalez-Baz, El Paso, TX, Richard Howell, Aylesworth, Thompson, Phelan, O'Bri, Toronto, Ontario, Craig W. Simpson, Simpson & Gauchay, Idaho Falls, ID, Andrew Sklar, Cherry Hill, NJ, for Trustee.

Jon R. Brakke, Vogel Law Firm, Fargo, ND, Leanna M. Anderson, Dentons U.S. LLP, Dallas, TX, Phillip L. Kunkel, Gray Plant Mooty, P.A., St. Cloud, MN, for Creditor Committee.

RULING ON CLAIMS

Thad J. Collings, United States Bankruptcy Judge, Sitting by Designation

Three claims came before the Court for trial in Fargo, North Dakota.¹ Michael Raum, Steve Kinsella, and Bruce Schoenwald appeared for Creditor Susan Bala. Martin Foley and Leanna Anderson appeared for Creditor PW Enterprises, Inc ("PWE"). Joel Fremstad appeared for Creditor Robert Carlson. Jonathan Fay and Patrick Sinner appeared with and for Kip Kaler as Chapter 7 Trustee. The Court heard evidence and arguments. The parties requested delay in filing post-trial briefs in order to have a full transcript. By agreement, the briefs were not submitted until late March 2018. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).

STATEMENT OF THE CASE

The three claims before the Court for determination arise in a very unusual context. More than eleven years after this case was filed, the State of North Dakota was ordered to return millions in taxes it collected from Debtor Racing Services, Inc.'s ("RSI") activities. The bankruptcy estate now has funds to pay all or a substantial portion of creditors' claims.

After this money came back to the estate, PWE, the largest remaining creditor, filed an amended claim asserting its right to the majority of that money. Robert Carlson, another creditor, made a similar argument, albeit for a much smaller amount. Both of these creditors assert they had oral rebate agreements with RSI and under those rebate agreements the tax money returned to the estate should be paid to them. Susan Bala, sole owner of RSI, objects to PWE's and Carlson's claims. She argues that PWE and Carlson have already received all they bargained for in the oral rebate arrangements. She argues the tax money should go for general distribution on unsecured claims and then to her as sole owner of RSI.

Bala has also recently filed her own unsecured claims. She seeks indemnification for legal fees she paid in defending criminal charges against her related to her work at RSI, indemnification for legal fees she incurred seeking payment on a lease she had with RSI, and reimbursement for the value of a life insurance policy that was surrendered as a part of her now-reversed criminal conviction. PWE and Trustee object to Bala's claims.

FINDINGS OF FACT

I. Background

The Court begins its fact-finding by reciting some critical, relevant history of these proceedings. This history forms the context for these claim disputes, the background for the parties' arguments, and a major basis for the Court's ultimate ruling.

RSI filed this bankruptcy in 2004 after both RSI and Bala came under criminal investigation and eventual indictment on federal charges. The State of North Dakota filed a claim against RSI for unpaid taxes. PWE, as an interested party, filed an objection to North Dakota's claim. PWE argued the North Dakota statute the State relied upon for its claim did not authorize the tax on account wagering. N.D. Cent. Code § 53-06.2-11. In the 1980's, the North Dakota legislature added N.D. Cent. Code § 53-06.2-10.1, allowing "simulcast" horse betting. The legislature, however, did not amend N.D. Cent. Code § 53-06.2-11 —providing for taxes on horse racing—to specify that the taxes were also applicable to simulcast and account wagering activity. That amendment did not happen until 2007—long after the betting relevant to this case occurred. Before 2007, N.D. Cent. Code § 53-06.2-11, on its face, addressed only live horse racing.

This Court first ruled on PWE's objection to the State's tax-based claim in 2010. PW Enters., Inc. v. North Dakota (In re Racing Servs., Inc. ), Bankr. No. 04-30236, Adv. No. 06-7020, 2010 WL 5376222 (Bankr. D.N.D. Dec. 22, 2010). The Court ruled that the tax was applicable to simulcast and account wagering and granted North Dakota summary judgment on PWE's objection to its claim. Id. at *8.

In 2012, a different but related issue came before this Court for trial. PW Enters., Inc. v. North Dakota (In re Racing Servs., Inc. ), 482 B.R. 276 (Bankr. D.N.D. 2012). There, PWE, acting in a trustee-like role on behalf of the bankruptcy estate, sought to claw back tax money collected by North Dakota from RSI. PWE argued several theories for the recovery, including that the State improperly collected tax on simulcast horse racing. This Court again ruled for North Dakota on the tax issue, as well as numerous other issues, and dismissed the claw back complaint. Id.

PWE appealed that decision to the United States District Court for the District of North Dakota. The District Court reversed this Court's holding on the taxation issue. PW Enters., Inc. v. North Dakota (In re Racing Servs., Inc. ), 504 B.R. 549 (D.N.D. 2014). The District Court found that North Dakota "was not authorized to collect taxes on account wagering during the time period in question." Id. at 557.

North Dakota appealed the District Court's ruling to the Eighth Circuit Court of Appeals, which affirmed the District Court. PW Enters., Inc. v. North Dakota (In re Racing Servs., Inc. ), 779 F.3d 498 (8th Cir. 2015). The Eighth Circuit found that "the unambiguous statutory language did not authorize the taxes the state collected on account wagering." Id. at 507. The Eighth Circuit then "remand[ed] to the bankruptcy court for the calculation of the amount of unauthorized taxes the state must return to the bankruptcy estate." Id.

Following the Eighth Circuit's ruling, the RSI bankruptcy estate reached a settlement with North Dakota on the amount of tax funds to be returned. The Court approved that settlement on December 20, 2017, over the objection of Susan Bala. North Dakota paid the bankruptcy estate $15,872,000.00 under that settlement. With that procedural background and recent factual developments as context, the Court now turns to its findings of facts on the evidence presented at trial.

II. Bala, Formation of RSI and Purpose

Susan Bala is the sole owner of RSI and a central figure in all these claim issues. She grew up in Fargo, North Dakota. She became involved in the horse racing industry in 1988, a year after North Dakota passed legislation allowing wagering on live horse races. The State asked her to develop a feasibility study on the horse racing industry and how the State could generate revenue from horse racing. The study concluded that, in order to have a sustainable horse wagering industry in North Dakota, there needed to be a network of off-track betting locations, not just live race wagering. Because of that study, North Dakota eventually passed legislation allowing off-track betting.

Bala then decided to start a company called Dakota Race Management. Her company competed for and obtained a license to become involved in horse race betting. She later started another company that would participate in the horse race betting industry in North Dakota—Racing Services, Inc. ("RSI"), the Debtor in this case. Bala is president and CEO of RSI. Bala owns RSI through RSI Holdings, a company she owns outright.

RSI became the simulcast operator for off-track horse race betting in North Dakota.

RSI would eventually distribute video of live horse racing from around the United States to players at off-track betting sites. RSI had authorization and contractual rights to take bets and to transmit those bets into the on-track betting pools. It also had the authorization to provide all accompanying services: satellite signals, data links, betting pool reconciliations, and other services necessary for off-track betting.

RSI's customers were the players—the bettors on the races. RSI would provide the race signal to them, take their bets, and transmit their bets into the betting pools for the races. RSI generally had two kinds of customers: (1) regular players, members of the public who would go to a teller and place their bet; and (2) professional players, who bet in high volumes.

Professional players generally did not want to stand in line and place their bets at the teller window. Instead, these players sought special accommodations for their operations and the high number of bets they played. Some professional players approached RSI seeking out those accommodations. Generally, the professional players were looking for a private space with private tellers to place their bets. Some players wanted to tape the races or wanted an office within RSI's facility where they, or their agent, could place bets through RSI. In addition, they often wanted information services or computer services to aid their betting. Most importantly, these players wanted to be able to play more than one track at a time. They wanted a full menu of the tracks RSI had available and would pick betting pools where they wanted to play.

At first, RSI did not specifically compete for professional players. As time went on, however, it became clear that professional players were a large potential market for bets. RSI began to compete with other simulcast providers for the business of these...