PW Enters., Inc. v. State (In re Racing Servs., Inc.)
| Decision Date | 03 January 2014 |
| Docket Number | Bankruptcy No. 04–30236.,No. 3:12–cv–112.,Adversary No. 06–7020.,3:12–cv–112. |
| Citation | 504 B.R. 549 |
| Parties | In re RACING SERVICES, INC., Debtor. PW Enterprises, Inc., a Nevada corporation, Appellant, v. State of North Dakota, a governmental entity; North Dakota Racing Commission, a regulatory agency; North Dakota Breeders Fund, a special fund; North Dakota Purse Fund, a special fund; and North Dakota Promotions Fund, a special fund, Appellees. |
| Court | U.S. District Court — District of North Dakota |
OPINION TEXT STARTS HERE
Mark R. Hanson, Nilles Law Firm, Fargo, ND, Leanna M. Anderson, Dentons U.S. LLP, Martin J. Foley, Martin J. Foley, PLC, Los Angeles, CA, for Appellant.
Douglas B. Anderson, Attorney General's Office, Bismarck, ND, Roger J. Minch, Serkland, Lundberg, Erickson, Marcil & McLean, Ltd., Fargo, ND, for Appellees.
INTRODUCTION AND SUMMARY OF DECISION
PW Enterprises, Inc. appeals from an adverse bankruptcy court decision in which the bankruptcy judge concluded that North Dakota law authorized the collection of taxes on account wagering. Aside from the State,1 PW Enterprises was the largest creditor in Racing Services, Inc.'s (“RSI”) bankruptcy. PW Enterprises initiated an adversary proceeding to recover money collected by the State when RSI was insolvent.Because there was no statutory authority directing the collection of taxes for account wagering during the time period in question, the State must return the money to the bankruptcy estate. The bankruptcy court's decision granting summary judgment in favor of the State is REVERSED and this case is REMANDED for further proceedings consistent with this opinion.
North Dakota's parimutuel horse racing laws evolved over a number of years. A brief time line gives context to the status of the law during the time period in question. In 1987, North Dakota legalized parimutuel horse racing under the certificate system. N.D. Cent.Code § 53–06.2–10. In order to participate bettors had to attend a live horse race in North Dakota. The legislature also enacted a “take-out statute”, N.D. Cent.Code § 53–06.2–11, which established formulas for collecting certain amounts from each day's parimutuel pool total, including allotments for tax payments to the State of North Dakota. Revenue derived from parimutuel horse racing was directed to the general fund under the state treasurer's control and to three special funds administered by the North Dakota Racing Commission—the North Dakota Breeders Fund, the North Dakota Purse Fund, and the North Dakota Promotions Fund.
Two years later, the legislature authorized off-track parimutuel wagering. N.D. Cent.Code § 53–06.2–10.1 (1989). This allowed bettors to wager on horse races within and outside of North Dakota. The legislature also modified the take-out formulas. In 1991, the legislature amended § 53–06.2–10.1 to reclassify “off track wagering” to “simulcast wagering.” 2
It was not until 2001 that the North Dakota Legislature authorized “account wagering” as a form of parimutuel horse racing. N.D. Cent.Code § 53–06.2–10.1 (2001). The statute provided, in relevant part:
The certificate system also permits parimutuel wagering to be conducted through account wagering. As used in this section, ‘account wagering’ means a form of parimutuel wagering in which an individual deposits money in an account and uses the account balance to pay for parimutuel wagers. An account wager made on an account established in this state may only be made through the licensed simulcast service provider authorized by the commission to operate the simulcast parimutuel wagering system under the certificate system....
Players could thus bet against each other rather than the “house.” An account wager could be made in person, by telephone, or through other electronic communication. Id. There was no change made to the take-out statute during the 2001 legislative session. Thus, the 1995 version remained in effect, which provided the following bet payoff formulas:
1. For each day of a live race meet or a simulcast day in this state on win, place, and show parimutuel pools, the licensee shall deduct up to twenty percent of the total win, place, and show pool. The licensee may retain seventeen percent for expenses. One-half of one percent must be paid to the North Dakota racing commission to be used for the North Dakota purse fund. One-half of one percent must be paid to the North Dakotaracing commission to be used for the North Dakota breeders' fund for the respective breed of horses racing at that meet. The remaining two percent must be paid to the state treasurer to be deposited in the general fund.
2. For each day of a live race meet or a simulcast day in this state for each daily double, quinella, exacta, trifecta, or other wager combining two or more horses for winning payoffs, the licensee shall deduct up to twenty-five percent of each wagering pool. Of this amount, the licensee may retain twenty-one percent for expenses. One-half of one percent must be paid to the commission to be deposited in the purse fund. One-half of one percent must be paid to the commission to be deposited in the promotion fund. One-half of one percent must be paid to the commission to be deposited in the breeders' fund. The remaining two and one-half percent must be paid to the state treasurer to be deposited in the general fund.
N.D. Cent.Code § 53–06.2–11 (1995).
In 2007, the legislature amended the take-out statute to create a new category for account wagering. N.D. Cent.Code § 53–06.2–11 (2007). This is the first time the legislature established formulas specific to account wagering:
1. For wagering on live horse racing and simulcast wagering:
a. In win, place, and show pari-mutuel pools, the licensee may deduct no more than twenty percent of the amount wagered. Of the amount wagered, the licensee shall pay ...
2. For account wagering:
a. In win, place, and show pari-mutuel pools, the licensee may deduct no more than twenty percent of the amount wagered.
(1) Before eleven million dollars is wagered ...
(2) After eleven million dollars is wagered ...
N.D. Cent.Code § 53–06.2–11 (2007).
Gambling is a closely regulated activity that expanded over a number of years in North Dakota. The focal point of the dispute in this case is the State's authority to collect taxes on account wagering during 2002 and 2003.
RSI applied for a simulcast service provider 3 license on March 26, 1993. The Racing Commission approved the application. RSI and Team Makers, Inc., a charity and service operator 4, entered into a parimutuel wagering service agreement, in which Team Makers was responsible for collecting the net proceeds, including the taxes. RSI, in turn, was responsible for disbursing the money to authorized regulatory agencies, including the State.
PW Enterprises developed software for the sole purpose of wagering on horse races in the United States and Canada. From 2002 to 2003, PW Enterprises engaged in parimutuel account wagering on horse races in North Dakota through an account deposited with RSI. At the end of July 2003, PW Enterprises' account reflected $2,245,301.11 in winnings and other monies on deposit with RSI.
In approximately July 2003, PW Enterprises learned RSI was under investigation for an illegal gaming operation. PW Enterprises stopped wagering through RSI. On July 31, 2003, PW Enterprises made a demand for its account holdings with RSI.
Between July 2003 and September 2003, PW Enterprises' attorney contacted the State on behalf of PW Enterprises to inquire about the State's plan for stabilizing RSI. PW Enterprises was concerned about protecting its interests and was open to discussing a mutually beneficial path for both the State and PW Enterprises. PW Enterprises had identified two options for recovering its money held by RSI: (1) file a lawsuit and seek a writ of attachment for the amount RSI owed PW Enterprises, or (2) support the State's decision to appoint a receiver and rely on the State to protect its interests.
As of August 18, 2003, PW Enterprises believed the State was going to protect its interests and that if it filed a lawsuit, it would have a catastrophic effect on the future business of RSI. PW Enterprises believed that if a “major player” filed a complaint against RSI alleging RSI was not distributing winnings there would be a tremendous disincentive to participate in North Dakota wagering. PW Enterprises was interested in (1) maximizing its recovery, and (2) exploring the possibility of once again wagering in North Dakota. PW Enterprises signed an affidavit supporting the State's decision to appoint a receiver.
The State sought a receiver for RSI on August 21, 2003, and the next day a receiver was appointed. PW Enterprises assumed the receiver would operate RSI, stabilize RSI, and find a way to maximize the monies owed to both the State and PW Enterprises. Between February 2003 and December 2003, the State collected a total of $5,320,101.20 from RSI as taxes due and owing for parimutuel account wagering.5 PW Enterprises, RSI's largest non-governmental creditor, has not recovered any money from the account it held at RSI.
RSI filed a petition for relief under Chapter 11 of the Bankruptcy Code on February 3, 2004. The case was converted to a Chapter 7 bankruptcy on June 15, 2004. The State submitted a proof of claim for taxes incurred by RSI between October 2002 and August 2003 in the amount of $6,726,872.72. PW Enterprises submitted a proof of claim for money loaned, wagering winnings, and deposits in the amount of $2,248,100.86.
The bankruptcy court found, in part, there was an authorized tax on account wagering and even if RSI was not statutorily obligated to pay the tax, there was no prohibition against RSI paying the tax. PW Enterprises contends that because the State had no right to tax account wagering, the State should be ordered to return all monies collected to the estate and the State's...
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