PW Enters., Inc. v. Susan Bala & Kip Kaler, for Racing Servs., Inc. (In re Racing Servs., Inc.), Case No. 3:18-cv-263

CourtUnited States District Courts. 8th Circuit. United States District Court of North Dakota
Citation617 B.R. 641
Docket NumberCase No. 3:18-cv-263,Bankruptcy Case No. 04-30236
Parties IN RE RACING SERVICES, INC., Debtor. PW Enterprises, Inc. and Robert Carlson, Appellants, v. Susan Bala and Kip Kaler, as Chapter 7 Trustee for Racing Services, Inc., Appellees.
Decision Date18 June 2020

Leanna M. Anderson, Dentons U.S. LLP, Dallas, TX, Martin J. Foley, Martin J. Foley, PLC, Los Angeles, CA, Mark R. Hanson, Nilles Law Firm, Joel M. Fremstad, Fremstad Law, Michael S. Raum, Fredrikson & Byron P.A., Fargo, ND, Bruce A. Schoenwald, Stefanson Plambeck Foss & Fisher, Moorhead, MN, Steven Robert Kinsella, Pro Hac Vice, Fredrikson & Byron, P.A., Minneapolis, MN, for Appellant.

Jonathan R. Fay, O'Keeffe, O'Brien, Lyson & Foss, Ltd., Asa K. Burck, Patrick J. Sinner, Kaler Doeling PLLP, Fargo, ND, for Appellee.

Douglas B. Anderson, Attorney General's Office, Bismarck, ND, for Amicus.


Peter D. Welte, Chief Judge

Appellants PW Enterprises, Inc. ("PWE") and Robert Carlson ("Carlson") appeal from the Bankruptcy Court's1 Ruling on Claims (the "Order"), which was issued on November 28, 2018. In re Racing Servs., 595 B.R. 334 (Bankr. D.N.D. 2018).2 This appeal involves two claims: PWE's Amended Claim3 for over $10.8 million in unauthorized taxes assessed on PWE's account wagering4 activity through Debtor Racing Services, Inc. ("RSI"), and, similarly, Carlson's Claim for over $380,000 in unauthorized taxes assessed on his account wagering through RSI.5 PWE and Carlson appeal the denial of their respective claims, arguing that the Bankruptcy Court committed a number of legal and factual errors in concluding that (1) they failed to show that they were entitled to the money under their respective oral rebating agreements with RSI and (2) they failed to show that RSI would be unjustly enriched if it got to retain the money instead of returning it to them. For the reasons explained below, the Order is affirmed.

A. The Parties and Trial Witnesses

Appellee Susan Bala ("Bala") served as the president and chief executive officer of RSI, the debtor in this action. RSI is wholly owned by RSI Holdings, Inc., the latter of which is wholly owned by Bala. Beginning in 1993, RSI possessed the sole license to engage in North Dakota's pari-mutuel horse wagering industry6 as a service provider.7

PWE and Carlson are both professional players who used RSI's services to bet in high volumes on horse racing. Peter Wagner ("Wagner") is the owner of PWE, and William (Bill) Wass ("Wass") is the chief operating officer.

David Cuscuna ("Cuscuna") is another professional gambler who used RSI to engage in horse betting. Cuscuna is not a party to this appeal, but he testified at trial in support of Bala.

Kip Kaler ("Trustee") has been the Chapter 7 bankruptcy trustee of RSI since June 2004.

B. Procedural History

In 2004, RSI filed for bankruptcy after both it and Bala had come under federal investigation and indictment for illegal gambling and money laundering.8 PWE obtained derivative standing to bring an adversary proceeding against the State of North Dakota (the "State") on behalf of all of RSI's creditors. PWE challenged whether the State had the authority to tax account wagering and sought the return to the bankruptcy estate of all money collected as taxes as well as the denial of the State's claim for taxes that the State believed RSI still owed. Ultimately, in 2015, the Eighth Circuit determined that North Dakota law did not authorize taxes on account wagering and remanded to the Bankruptcy Court to calculate the amount of unauthorized taxes the State had to return to the estate. PW Enters., Inc. v. North Dakota (In re Racing Servs.), 779 F.3d 498, 507 (8th Cir. 2015). In short, when the North Dakota Legislature amended N.D. Cent. Code § 53-06.2-10.1 to authorize account wagering, it failed to correspondingly amend the takeout formulas in N.D. Cent. Code § 53-06.2-11 to include taxes for account wagering. Id. at 502.

Upon remand, PWE and the Trustee entered into a settlement with the State for the return of $15.872 million to the bankruptcy estate. The Bankruptcy Court approved the settlement over Bala's objection.9 With the return of millions of dollars to the estate, PWE amended its original claim and Carlson filed his claim. Bala objected to both claims. The Trustee joined her objection to Carlson's Claim and partially joined her objection to PWE's Amended Claim.

In January 2018, PWE's Amended Claim and Carlson's Claim came before the Bankruptcy Court for a three-day trial. On November 28, 2018, after post-trial briefing, the Bankruptcy Court issued the Order on appeal here. PWE and Carlson filed timely Notices of Appeal and elected to have their appeals heard by this Court rather than the Bankruptcy Appellate Panel ("BAP"), pursuant to 28 U.S.C. § 158 and Fed. R. Bankr. P. 8005.

C. RSI's Business

Bala first became involved in the horse racing industry in 1988 when she was asked by the State to develop a feasibility study on the horse racing industry in North Dakota. After the state legislature passed legislation allowing off-track betting,10 Bala started a company called Dakota Race Management and obtained the exclusive service provider license in North Dakota. In 1993, she formed RSI, which took over as the licensed service provider. RSI referred to itself not only as a service provider but also as a technology integrator and market developer. The services provided by RSI were wide-ranging and included satellite signals, data links, and betting pool reconciliations.

RSI had two kinds of customers: (1) regular players who would go to a teller and place their bets, and (2) professional players like PWE and Carlson, who bet in significantly higher volumes. Professional players sought—and RSI provided them with—a variety of additional services, such as private betting rooms and tellers, informational support for handicapping and individual wagering, accounting support, technology, and access to a wide menu of tracks.

The total amount bet by a player over a specific period through a service provider like RSI is referred to as the handle. RSI would deduct a percentage of the handle—called the takeout or retainage—and the remainder of the handle would go into the pari-mutuel pool to be distributed to the winning bettors. The takeout rate is set by statute and varies based on the jurisdiction of the race, the particular racetrack, and the type of bet made. RSI used the takeout to pay a variety of fees and expenses, including track fees,11 tote fees,12 charitable contributions, and taxes. RSI paid money to the State—which the State accepted—for pari-mutuel taxes that RSI believed at the time that it owed. These taxes varied depending on the pool, but they averaged around 3.7% or 3.8% of the handle.

Around 1995, Bala first became aware of rebating in the horse betting industry. Under a rebating agreement, a service provider agrees to pay a portion of its takeout to a player as a bonus incentive on the player's volume. Rebates provide an incentive for professional players to gamble because whether the bet is a winning or losing one, the player is guaranteed to get some portion of the handle back. Early rebates were fairly unsophisticated, with service providers simply paying flat rates. Flat rate rebates were risky for providers because the takeout percentage for the pools a player bet into would dictate how much of the takeout remained for the provider to pay its expenses. For example, if a player with a 10% flat rate rebate bet into a pool with a 15% takeout, the provider was only left with 5% with which to operate. If the provider's expenses were to exceed 5%, the provider would lose money on every bet. Thus, service providers had to develop rebating formulas that enabled them to provide rebates at rates that were competitive in the industry while still keeping enough of the takeout in order to operate in the black.

In 1997, RSI entered into its first rebating agreement. That spring, Cuscuna came to RSI seeking a 10% rebate. Cuscuna told Bala that his bets tended to be in jackpot pools that had a higher-than-average takeout of around 24% or 25%. Bala was willing to give Cuscuna a 10% rebate if the takeout on his bets were really that high, but she expressed concern that he would not meet that projected takeout. To allow Cuscuna to achieve his goal while making Bala comfortable about the takeout for his bets, the two developed what is called the variable rate model. Under the variable rate model, the percentage offered to the player as a rebate depends on the takeout rate of the particular pool that the player bets into. For example, Cuscuna's agreement with RSI essentially had 13.75% of the takeout going to RSI (before expenses) and the remainder of the takeout going to Cuscuna. If Cuscuna bet into a 24% takeout pool, he would get a 10.25% rebate. If he bet instead into a higher or lower takeout pool, he would receive a higher or lower rebate, respectively. Over time, players could achieve a desired effective rate, the average rebate over all their bets among all the different pools.

RSI only offered variable rate rebates. When a player approached RSI seeking a rebating agreement, RSI would calculate the projected average takeout based on the player's style of play, ask the player what amount of rebate the player was seeking with RSI or was getting elsewhere, and determine whether it was feasible to meet the desired rebate. Because of constantly changing variables in the industry, RSI's rebating agreements were all oral with no continuing obligations on either side. The player was not obligated to bet, and RSI was not obligated to accept the player's bets; however, if a bet was made, RSI was obligated to pay the agreed-upon rebate.

D. RSI's Dealings with PWE

Bala met Wagner in early 1999 after the service provider that PWE was playing through terminated PWE's wagering because of PWE's use of computer algorithms in determining how to...

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