State ex rel. Stenehjem v. Bala (In re Racing Servs., Inc.)

• Decision Date: 16 September 2020
• Docket Number: No. 20-6002,20-6002
• Citation: 619 B.R. 681
• Parties: IN RE: RACING SERVICES, INC., Debtor State of North Dakota, ex rel. Wayne Stenehjem, Attorney General, Claimant - Appellant v. Susan Bala; Kip M. Kaler, Trustee, Objectors - Appellees
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

619 B.R. 681

IN RE: RACING SERVICES, INC., DebtorState of North Dakota, ex rel. Wayne Stenehjem, Attorney General, Claimant - Appellant

v.Susan Bala; Kip M. Kaler, Trustee, Objectors - Appellees

No. 20-6002

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: August 7, 2020

Filed: September 16, 2020

Counsel who filed a brief and presented argument on behalf of the appellant was Mr. Douglas B. Anderson of Bismarck, North Dakota.

Counsel who filed a brief on behalf of appellee Susan Bala were Mr. Michael S. Raum and Mr. Steven R. Kinsella, both of Fargo, North Dakota. Counsel who filed a brief on behalf of appellee Kip Kaler was Mr. Asa K. Burck, of Fargo, North Dakota. Mr. Steven R. Kinsella presented argument on behalf of the appellees.

Before NAIL, SHODEEN and DOW, Bankruptcy Judges.

Dow, Bankruptcy Judge

The subject of this case is a claim filed by the State of North Dakota, ex rel. Wayne Stenehjem, Attorney General (the "State") in its purported representative capacity on behalf of eligible nonprofit organizations and as assignee of Team Makers (the "Claim"). Susan Bala ("Bala"), a creditor and sole equity holder of Racing Services, Inc. (the "Debtor"), objected to the Claim as did the Chapter 7 Trustee (the "Trustee"). The Bankruptcy Court denied the State's claim filed on behalf of unnamed charities for lack of standing, and denied the State's claim on behalf of Team Makers on the equitable doctrine of laches. The State appealed. For the reasons that follow, we affirm in part, and reverse and remand in part.

STANDARD OF REVIEW

A bankruptcy court's legal conclusions are subject to de novo review. Fisette v. Keller (In re Fisette ), 455 B.R. 177, 180 (8th Cir. BAP 2011). Here we review de novo the Bankruptcy Court's legal conclusions on the issue of the State's standing, and the availability of laches as a matter of law. Dalton v. NPC Intl., Inc. , 932 F.3d 693, 695 (8th Cir. 2019) (citations omitted).¹

FACTUAL BACKGROUND

This case has a long and complex history that has made its way through several courts. While a detailed recitation of the facts is not necessary for this ruling, an abbreviated version of the factual and procedural history is warranted.²

The Debtor operated a pari-mutuel horse racing technology and service business in North Dakota. It filed its Chapter 11 petition on February 3, 2004. The case was converted to Chapter 7 months later. The major controversy is rooted in a ruling by the District Court, ten years into the case, that the State was not authorized to collect taxes under North Dakota law on account of wagering. As a result, the State owed the Debtor's bankruptcy estate millions of dollars for taxes improperly collected. The parties eventually settled; the State paid the estate over $15 million. Other creditors then asserted new claims for a piece of the large cash infusion. The Bankruptcy Court sustained the objections to these claims (other than one of Bala's claims) after a multiple-day trial.

The State filed a new proof of claim over a month after the Bankruptcy Court issued its ruling on the other claims. Its Claim was made "as Representative for the benefit of eligible nonprofit organizations" under the doctrine of parens patriae . The only charity listed by name, however, was Team Makers. Acknowledging that the majority of (if not the only) account wagering activity was conducted through Team Makers, the State subsequently entered into a Consent and Assignment Agreement (the "Consent Agreement") with Team Makers for the express purpose of eliminating any question regarding its ability to pursue the Claim against the Debtor's estate for the charity's benefit. Bala and the Trustee objected to the Claim on the grounds that the State lacked standing, the Claim lacked merit, and the Claim was untimely. PW Enterprises, Inc. ("PWE"), a major creditor, filed a brief in support of the State's Claim.

After an evidentiary hearing on the claim objection (the "Evidentiary Hearing"), the Bankruptcy Court denied the State's Claim for lack of standing. It focused on the State's failure to establish 1) that a substantial segment of the population was injured, and 2) that the Claim belonged to anyone other than Team Makers, and if there were indeed any other identifiable charities that were involved, that they were incapable of bringing an action on their own. The Bankruptcy Court also held that while the State may have standing to represent Team Makers by virtue of the Consent Agreement, the Team Makers Claim was barred by laches.

DISCUSSION

Parens Patriae Authority

The concept of parens patriae creates a right for a state to sue to prevent or repair harm to quasi-sovereign interests. Hawaii v. Standard Oil Co. of Cal. , 405 U.S. 251, 258, 92 S.Ct. 885, 31 L.Ed.2d 184 (1972). To have parens patriea standing, a state must prove two elements: a quasi-sovereign interest distinct from that of a particular party, and injury to a substantial segment of the state's population. Alfred L. Snapp & Son, Inc. v. Puerto Rico, ex rel. Barez , 458 U.S. 592, 607, 102 S.Ct. 3260, 73 L.Ed.2d 995 (1982) ; Lynch v. Nat'l Prescription Adm'rs, Inc., 787 F.3d 868, 872 (8th Cir. 2015). Regarding the first element, a state's mere assertion of quasi-sovereign interests is not sufficient to grant parens patriae standing if the relief sought is limited to monetary damages for injuries suffered to individual parties; such an award will not compensate the state for any harm done to its quasi-sovereign interest. See Snapp , 458 U.S. at 602, 102 S.Ct. 3260 ; People of State of N.Y. by Abrams v. Seneci, 817 F.2d 1015, 1017 (2d Cir. 1987). Regarding the second element, there is no specific number of persons who must be affected for a state to invoke the doctrine, but "more must be alleged than injury to an identifiable group of individual residents." Snapp , 458 U.S. at 607, 102 S.Ct. 3260.

The State dedicates a substantial amount of its briefing to cases and statutes supporting the position that the State's authority to regulate gaming activities and to oversee charitable organizations for the benefit of the public is broad, and that it has a quasi-sovereign interest in protecting the integrity of the system.³ While that position may have merit, it does not speak to the question that the State must address, and that the Bankruptcy Court asked directly at the Evidentiary Hearing: How is the State's interest distinct from Team Makers? The State failed to demonstrate a quasi-sovereign interest distinct from the Team Makers Claim, a necessary element to establish parens patriae standing. It sought monetary damages for one private charitable organization rather than compensation for any damage done to its quasi-sovereign interest in protecting the public from inappropriate gaming activities. Therefore, we affirm the Bankruptcy Court's holding that the State lacked parens patriae authority in this case.

Even if the State had established the first element of parens patriae standing, it did not establish the second: injury to a substantial segment of North Dakota's population. When questioned on this point by the Bankruptcy Court at the Evidentiary Hearing, the State responded that the substantial population was North Dakota State University ("NDSU"), the "sports," the "kids going to college." The Bankruptcy Court pointed out that the State was not representing NDSU, but Team Makers, and it did not see how Team Makers represented a substantial segment of North Dakota's population. This exchange followed:

State: Well, it may be a factual matter.

...

Court: No, I'm talking about as a matter of factual proof, I'm driving home with this case submitted to me and you're saying that might be a factual matter; saying, well, I didn't see the facts to support it so you haven't shown that as a factual matter. Am I wrong?

State: No.

Evidentiary Hearing Transcript, page 65, lines 6-18.

The State argued further that the indirect effects of the injury must be considered as well in determining whether the State has alleged injury to a sufficiently substantial segment of its population, citing Snapp , 458 U.S. at 607, 102 S.Ct. 3260. However, the record is devoid of evidence establishing the "indirect effects" to which the State refers. The State offered only one witness at the Evidentiary Hearing, an attorney representing PWE. (It is noteworthy that the State did not call a representative of Team Makers or of NDSU to testify.) That witness produced no evidence that any charitable organizations other than Team Makers was affected by the account wagering at the relevant time. The State produced no other evidence regarding the specific injury incurred by NDSU, nor did it demonstrate the substance or magnitude of the "indirect effects" of the injury allegedly caused by the Debtor. We therefore concur with the Bankruptcy Court's finding that the State failed to show the requisite injury to a substantial segment of North Dakota's population, and affirm its ruling that the State did not have parens patriae standing to file a claim on behalf of Team Makers and other charities.

Laches

The Bankruptcy Court ruled that to the extent the State had authority to assert Team Makers' Claim by virtue of the Consent Agreement, it was nonetheless barred by laches, and therefore denied. Laches is an equitable defense based on the maxim that equity aids the vigilant, not those who sleep on their rights. In re Jemal , 496 B.R. 697, 703 (Bankr. E.D.N.Y. 2013). It applies when a claimant inexcusably delays in asserting its claim and thereby unduly prejudices the party against whom the claim ultimately is asserted. Roederer v. J. Garcia Carrion, S.A. , 569 F. 3d 855, 858-59 (8th Cir. 2009) (citations omitted). To successfully assert laches as a defense, a defendant must prove three elements: 1) a delay in asserting a right or claim; 2) that the delay was inexcusable; and 3) undue prejudice to the party against whom the claim is asserted. Id.

At the Evidentiary...