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In re Racing Servs., Inc.

United States Court of Appeals, Eighth Circuit

February 20, 2015

In re: Racing Services, Inc., Debtor, PW Enterprises, Inc., a Nevada corporation, Appellee,
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; North Dakota Promotions Fund, a special fund, Appellants

Submitted October 6, 2014

Appeal from United States District Court for the District of North Dakota - Fargo.

For PW Enterprises, Inc., a Nevada corporation, Appellee: Leanna Anderson, Dentons Us, Llp, Dallas, TX; Martin J. Foley, Martin J. Foley, Plc, Los Angeles, CA; Mark Richard Hanson, Nilles Law Firm, Fargo, ND.

For 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, North Dakota Promotions Fund, a special fund, Appellants: Douglas Bruce Anderson, Assistant Attorney General, Attorney General's Office, Bismarck, ND; Roger James Minch, Serkland & Lundberg, Fargo, ND.

Before RILEY, Chief Judge, WOLLMAN and BYE, Circuit Judges.

OPINION

Page 499

RILEY, Chief Judge.

North Dakota, the North Dakota Racing Commission, and three special funds administered by the commission (collectively, state) appeal from a district court[1] decision reversing the bankruptcy court's grant of summary judgment to the state

Page 500

against PW Enterprises, Inc. (PWE)--the largest non-governmental creditor of Racing Services, Inc. (RSI), formerly a state-licensed horse racing simulcast service provider. After RSI filed bankruptcy, PWE derivatively brought this suit on behalf of all creditors to recover the money the state collected from RSI as taxes on parimutuel[2] account wagering. See In re Racing Servs., Inc., 540 F.3d 892, 901-02 (8th Cir. 2008). On appeal, the district court concluded " [t]he money collected from RSI in the form of taxes on account wagering must be returned to the bankruptcy estate" because North Dakota law did not authorize the state " to collect taxes on account wagering during the time period in question." With appellate jurisdiction under 28 U.S.C. § 158,[3] we affirm.

I. BACKGROUND[4]

In 1987, the North Dakota legislature authorized parimutuel betting for live horse races in North Dakota. See N.D. Cent. Code § 53-06.2-10 (1987); 1987 N.D. Laws ch. 618, § 10. In what the state calls the " Takeout Statute," N.D. Cent. Code § 53-06.2-11, the legislature established formulas for deducting from the wager pool to (1) offset the licensed service provider's expenses, and (2) make revenue payments to the state treasurer--i.e., taxes. See 1987 N.D. Laws ch. 618, § 11. The balance of the pool went to the winning bettors. Id. Beginning in 1989, the state allowed " off track" parimutuel wagering for races inside and outside of North Dakota--later reclassified as " simulcast wagering" --and modified the takeout formulas to include this new type of wagering. See N.D. Cent. Code § 53-06.2-10.1 (1989); 1989 N.D. Laws ch. 624, § 8; 1991 N.D. Laws ch. 556, § § 5, 6.

In 2001, the state legislature authorized " account wagering," which is " a form of parimutuel wagering in which an individual deposits money in an account and uses the account balance to pay for parimutuel wagers." 2001 N.D. Laws ch. 466, § 1. But, as the state concedes, the legislature did not amend § 53-06.2-11 to include deductions for account wagering. Id. The legislature adjusted the takeout formulas in 2003 and 2005, but again did not amend the statute to include account wagering. See 2003 N.D. Laws ch. 452, § 1; 2005 N.D. Laws ch. 469, § 1. In 2007, the legislature amended § 53-06.2-11 to create a new subsection for account wagering and

Page 501

included specific formulas for account wagering that charged, at certain wagering levels, lower rates than live-race wagering and simulcast wagering. See 2007 N.D. Laws ch. 448, § 7, ch. 449, § 2.

RSI, the debtor in this case, was a licensed simulcast service provider that assumed responsibility for paying the required taxes to the state. Starting in 1999, PWE used RSI's services to place a high volume of parimutuel wagers on North Dakota horse races. PWE's bets were very successful. By 2003, PWE had accumulated an account balance at RSI of $2,248,100.86.

In July 2003, when PWE learned RSI was being investigated by the federal government for illegal gaming, PWE stopped betting through RSI and demanded its account balance. PWE also contacted the state to discuss RSI. After several detailed discussions, PWE believed the state would protect PWE's interests, in part to prompt PWE to resume wagering in North Dakota.

On August 21, 2003, the state sued RSI and secured a court-appointed receiver to stabilize the floundering company. PWE originally cooperated with the receiver, but grew dissatisfied with the receiver's performance. When the state, without notice to PWE, drew on an RSI letter of credit secured by a $225,000 certificate of deposit PWE had pledged, the bank liquidated PWE's certificate and paid its funds to the state. PWE felt betrayed. PWE later learned that in the year before RSI filed bankruptcy, the state had also inconspicuously collected $5,270,101.20 in taxes from RSI.

On February 3, 2004, RSI filed a voluntary Chapter 11 reorganization petition, later converted to a Chapter 7 bankruptcy. PWE submitted a proof of claim for the $2,248,100.86 balance of its account with RSI. The ...


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