State v. Bala (In re Racing Servs., Inc.)
| Citation | 635 B.R. 498 |
| Decision Date | 07 January 2022 |
| Docket Number | No. 21-6007,21-6007 |
| 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 | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Eighth Circuit |
Counsel who wrote the brief and presented argument on behalf of the appellant was Douglas Bruce Anderson of Bismarck, North Dakota.
Counsel who presented argument on behalf of appellee Susan Bala was Steven Robert Kinsella, of Minneapolis, Minnesota. The following attorney(s) appeared on that appellee's brief: Michael S. Raum, of Fargo, North Dakota, Steven Robert Kinsella, of Minneapolis, Minnesota. Appellee Kip Kaler did not participate in the appeal.
Before SHODEEN, DOW and RIDGWAY, Bankruptcy Judges.
This appeal centers on two claims. The first is a claim (the "Statutory Claim") filed by the State of North Dakota, ex rel. Wayne Stenehjem, Attorney General (the "State"), as assignee of Team Makers Club, Inc. ("Team Makers"). Susan Bala ("Bala"), a creditor and sole equity holder of Racing Services, Inc. (the "Debtor"), objected to the Statutory Claim as did the Chapter 7 Trustee. The bankruptcy court denied the Statutory Claim, and the State appealed. On appeal to this Panel, a portion of that ruling was reversed and remanded for further consideration. On remand, the bankruptcy court sustained Bala's objection to the Statutory Claim. It also denied the second claim asserted by the State (the "Contract Claim"). The State appealed. For the reasons that follow, we affirm.1
The other matters before us are a Motion to Strike and a Motion for Sanctions filed by Bala against the State. As explained below, the Motion to Strike is denied as moot, and the Motion for Sanctions is denied.
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). Factual findings will only be overturned if they are clearly erroneous. DeBold v. Case , 452 F.3d 756, 761 (8th Cir. 2006). Here we review the bankruptcy court's factual findings and legal conclusions regarding three issues: 1) the merits of the Statutory Claim, 2) the State's efforts to assert the Contract Claim and supplement the record, and 3) the merits of the Contract Claim.
This case has a complicated history that has spanned over 17 years.2 While a detailed recitation of the facts is not necessary for this ruling, an abbreviated version of the factual and procedural history is warranted.3
The Debtor was a licensed service provider under North Dakota's pari-mutuel wagering system, and filed for chapter 11 in 2004. The case was converted to chapter 7 several months later. Ten years into the case, the district court ruled that the State was not authorized to collect taxes from the Debtor under North Dakota's law on account wagering. As a result, the State settled with the Debtor's estate, agreeing to pay over $15 million. Creditors asserted claims for a piece of the large cash infusion. The State did not raise the rights of Team Makers or any other charities at that time, nor did Team Makers file a claim. In November of 2018, the bankruptcy court issued its final ruling on claims after a week-long evidentiary hearing.
The following month, more than 14 years into the case, the State filed a new proof of claim. The bankruptcy court held an evidentiary hearing (the "Evidentiary Hearing"), and at the close of evidence, the State orally moved to amend it to add a theory of breach of contract as additional grounds for its claim. Bala opposed the oral motion to amend. The court ultimately denied the State's claim on behalf of the charities, finding that the State lacked parens patriae authority to assert it. It also found that the Team Makers claim was barred by laches.
On appeal, we affirmed the bankruptcy court's ruling on the State's lack of standing, but reversed the court's ruling on laches, and remanded the case for reconsideration of the Team Makers claim and any other objections thereto.4
The bankruptcy court held a status conference with the parties to determine how to proceed on remand. Hours before the conference, the State filed yet another new claim which purported to formally include the breach of contract claim the State had previously attempted to assert orally. Bala argued that the court should rule on the existing record, and requested that it deny the Contract Claim on the merits. The State argued that the Bankruptcy Appellate Panel's ("BAP") remand order was broad enough to permit consideration of its amended claim and requested that the court supplement the evidentiary record.
The bankruptcy court denied the entirety of the State's claims. In so ruling, the court analyzed the two distinct bases for the State's claim(s): 1) the Statutory Claim made under certain provisions of the North Dakota Administrative Code, North Dakota Century Code, and North Dakota Constitution, and 2) the Contract Claim based on the simulcast parimutuel wagering service agreements between the Debtor and Team Makers. Besides the substantive issues raised, the latter involved the procedural questions of whether to allow the amendment of the claim on remand, and if so, whether to allow additional evidence to support the new claim.
With respect to the motion to amend the claim to add breach of contract, the bankruptcy court denied it based on the court's inherent authority to control its docket and prevent undue delays in the disposition of its cases under Rule 1 of the Federal Rule of Civil Procedure and section 105 of the Bankruptcy Code. In addition, the court concluded that there was no justification to allow additional evidence, denying the State's request to supplement the record. The court also ruled that even if it were to consider the Contract Claim, the claim had no merit.
With respect to the merits of the statutory claim, the bankruptcy court agreed with Bala -- the State failed to articulate an enforceable right to payment or to fully define how net proceeds were not properly paid. Thus, Bala's objection to the statutory claim was sustained.
The State's primary assertion in this appeal is that the bankruptcy court erred when it disallowed the Statutory Claim because North Dakota's Constitution and statutes, as well as the Eighth Circuit and District Court, direct that Team Makers should recover the remaining tax settlement funds (i.e. , the excess after the payment of allowed claims), not the Debtor. Additionally, it asserts that the court erred when it disallowed the Contract Claim on both procedural and substantive grounds, and when it declined to consider the supplemental evidence.
One of the bases of the State's Statutory Claim is North Dakota's constitutional requirement that "the entire net proceeds of such games of chance are to be devoted to educational, charitable, patriotic, fraternal, religious, or other public-spirited uses." N.D. Const. Art. XI, § 25. However, the State neglects to include the context of that language. Section 25 prohibits the legislative assembly from authorizing games of chance with certain exceptions, one of those being when the entire net proceeds are to be devoted to the aforementioned uses. Nothing in that section of the North Dakota Constitution governs the actions of private parties such as the Debtor. Thus, Section 25 is inapplicable.
The State also suggests that the Court of Appeals ruled that the account wagering in which the Debtor was engaged is subject to the "net proceeds" requirement of Section 25, and that RSI holds no claim to the tax settlement funds. No such conclusion is set forth in the opinion. The Eighth Circuit, in dicta , stated that "[w]ithout the assessment of taxes, more money is available for the beneficent purposes" enumerated in Section 25. It went on to note that "[I]f the state were to determine some part of the net proceeds of statutorily authorized account wagering were not serving such purposes, the state could simply stop those unconstitutional activities." PW Enterprises., Inc. v. N.D. (In re Racing Services, Inc.) , 779 F.3d 498, 506 (8th Cir. 2015). As Bala points out, the Eighth Circuit did not rule that North Dakota's Constitution authorized a cause of action against a private party; rather, it confirmed that the State has other means to enforce the relevant statutes.
The State admits that the Eighth Circuit has determined that section 53-06.2-11 (the "Takeout Statute") does not apply to account wagering. See In re Racing Services , 779 F.3d at 500.5 The Takeout Statute was enacted as part of the legislation passed in 1987 in North Dakota authorizing pari-mutuel wagering on live horse racing. The Debtor was authorized under the statute to separately contract with eligible non-profit organizations that operated off-track betting. Under such an arrangement, site operators received a portion of each wager made at their location and the Debtor retained a percentage of each bet (the "takeout") for handling the betting transaction.
The bankruptcy court relied on the plain language of the Takeout Statute to reach its conclusion that the statute's payoff provision only applies to live racing and simulcast wagering, not to account wagering. There are no amounts deducted for expenses from account wagers under the plain language of the Takeout Statute.6 Rather, the statute authorized the Debtor to apply the takeout rate of the host jurisdiction.
In this case, the account wagering system worked without the application of the Takeout Statute. The Debtor had contracts with charity site operators that were approved by the North Dakota Racing Commission, and the Debtor could adopt the takeout percentage dictated by the host jurisdiction where the race was conducted. N.D. Cent. Code § 53-06.2-10.1. The Debtor was transparent insofar as its annual...
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