PW Enterprises Inc. v. State of North Dakota et al

Filing 27

ORDER reversing the bankruptcy court's decision granting summary judgment in favor of the State and remanding the case for further proceedings by Chief Judge Ralph R. Erickson.(SH)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
SOUTHEASTERN DIVISION
In re:
Racing Services, Inc.,
Debtor.

PW Enterprises, Inc., a Nevada corporation,
Appellant,
-vsState 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.

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Bankruptcy No. 04-30236
Chapter 7
Adversary No. 06-7020

Case No. 3:12-cv-112
Appeal from District of North Dakota
Bankruptcy Court

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

1

The State collectively includes the State of North Dakota, the North Dakota Racing
Commission, and the funds administered by the Racing Commission, including the North Dakota
Breeders Fund, the North Dakota Purse Fund, and the North Dakota Promotions Fund.
1

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.
LEGISLATIVE BACKGROUND
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 § 5306.2-10. 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 rases 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

2

The North Dakota Racing Commission is the administrative agency responsible for
regulating horse racing and has the authority to adopt administrative rules. In 1990, the Racing
Commission adopted regulations for “simulcasting” of horse racing, which, at the time, the
statute referred to as parimutuel wagering.
2

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 Dakota racing 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. Onehalf 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
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formulas specific to account wagering:
1. For wagering on live horse racing and simulcast wagering:
a. In win, place, and show parimutuel polls, 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 parimutuel 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.
FACTUAL BACKGROUND
RSI applied for a simulcast service provider3 license on March 26, 1993. The Racing
Commission approved the application. RSI and Team Makers, Inc., a charity and service
operator4, 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
3

A simulcast service provider means a person engaged in providing simulcasting services
to a simulcast operator and establishing, operating, and maintaining the combined parimutuel
pool, but does not include persons authorized by the federal communications commission to
provide telephone service or space segment time on satellite transponders. N.D. Admin. Code §
69.5-01-11-01.
4

A simulcast operator means an eligible organization licensed by the Racing
Commission to offer, sell, case, redeem, or exchange parimutuel tickets on races being simulcast
from a sending track. N.D. Admin. Code § 69.5-01-11-01.
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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
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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
claim for taxes should be disallowed.

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Between August 14, 2003 and August 26, 2003, which was a short period of time before
and after the receiver was appointed, the State collected seven checks totaling just over $1.7
million dollars. Six checks were dated August 14 and one check was dated August 19.
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DISCUSSION
A.

Standard of Review.

A district court reviewing a bankruptcy court’s order on appeal adopts the following
standard of review:
Findings of fact, whether based on oral or documentary evidence, shall not be set
aside unless clearly erroneous, and due regard shall be given to the opportunity of
the bankruptcy court to judge the credibility of witnesses.
Fed.R.Bankr.P. 8013. The Eighth Circuit has further elaborated that when a bankruptcy court’s
judgment is appealed to the district court, the district court acts as an appellate court. Fix v. First
State Bank of Roscoe, 559 F.3d 803, 808 (8th Cir. 2009) (quoting In re Falcon Prods., Inc., 497
F.3d 838, 840-41 (8th Cir. 2007)). Findings of fact are evaluated for clear error, and all legal
determinations made by the bankruptcy court are reviewed de novo. DeBold v. Case, 452 F.3d
756, 761 (8th Cir. 2006). Conclusions involving mixed questions of law and fact are also
reviewed de novo. Id. A factual finding is clearly erroneous “when although there is evidence to
support it, the reviewing court on the entire evidence is left with the definite and firm conviction
that a mistake has been committed.” Anderson v. City of Bessemer City, N.C., 470 U.S. 564,
573 (1985) (quotation omitted).
B.

The State of North Dakota Did Not Have Authority to Collect Taxes on
Account Wagering Before 2007.

The bankruptcy court found in the adversarial proceeding that the State conceded there
was no direct legislative authority to collect a tax on account wagering prior to the 2007
amendments. On appeal, the State disputes it made such an admission and asserts, instead, that
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although the specific term “account wagering” did not appear in the statute before 2007, N.D.
Cent. Code §53-06.2-11 impliedly imposes a tax on account wagering (Doc. #12, p. 41).
The North Dakota Constitution provides that “No tax shall be levied except in pursuance
of law, and every law imposing a tax shall state distinctly the object of the same, to which only it
shall be applied.” N.D. Const. Art. X, § 3. The North Dakota Supreme Court has reiterated that
“[t]he taxing power is exclusively a legislative function.” Scott v. Donnelly, 133 N.W.2d 418,
(N.D. 1965)). The power to tax cannot be delegated to an administrative board. Id. at 426.
Statutes are construed to ascertain legislative intent. Stephenson v. Hoeven, 737 N.W.2d
260, 267 (N.D. 2007). “In ascertaining legislative intent, [courts] look first to the words used in
the statute, giving them their plain, ordinary, and commonly understood meaning. If the plain
language of the statute is clear and unambiguous, the letter of the statute cannot be disregarded
under the pretext of pursuing its spirit because legislative intent is presumed clear from the face
of the statute.” In re G.R.H., 711 N.W.2d 587, 593 (N.D. 2006) (citations omitted). Courts are
to presume the legislature said all that it intended to say. Larsen v. North Dakota Dept. of
Transp., 693 N.W.2d 39, 43 (N.D. 2005). Words or phrases cannot be added by a court. Id.
The taxes at issue arose out of PW Enterprises’ account wagering at RSI during 2002 and
2003. Two prongs must be satisfied before a tax can be collected: (1) there must be legislative
action, and (2) there must be specification as to the target of the tax. N.D. Const. Art. X, § 3;
See Gange v. Clerk of Burleigh County Dist. Court, 429 N.W.2d 429, 435 (N.D. 1988)
(constitution requires a statutory objective before a tax can be collected). The 2001 version of
the statute provided, in relevant part:

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§ 53–06.2–10.1. Simulcast wagering
In addition to racing under the certificate system, as authorized by this chapter, and
conducted upon the premises of a racetrack, simulcast parimutuel wagering may be
conducted in accordance with this chapter and interim standards that need not
comply with chapter 28–32, or rules adopted by the commission under this chapter.
. . .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. An account wager may be made in
person, by direct telephone communication, or through other electronic
communication in accordance with rules adopted by the commission. Breakage for
interstate or international combined wagering pools must be calculated in accordance
with the statutes or rules of the host jurisdiction and must be distributed among the
participating jurisdictions in a manner agreed to among the jurisdictions.
The statute’s heading references simulcast wagering. A headnote, however, whether
designating an entire title, chapter, section, subsection, or subdivision, is not part of the statute.
N.D. Cent. Code § 1-02-12. The headnote cannot equate account wagering with simulcast
wagering.
Until 2001, only two types of parimutuel wagering were allowed in North Dakota - live
race wagering and off-track simulcast wagering. In 2001, the legislature allowed for a third type
of parimutuel wagering - account wagering - which it specifically defined as “a form of
parimutuel wagering.” Giving the words their ordinary meaning, account wagering in this
context is simply is a type of betting pool in which the bettors place a sum of money on an horse
race. Account wagering is not defined in the statute as a form of simulcast parimutuel wagering.
If the legislature intended account wagering to equate to or be a subset of simulcast parimutuel
wagering, it could have done so.
While there was legislative action expanding legal gambling in North Dakota to include
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account wagering, the legislature did not enact a law allowing the State to collect taxes for
account wagering activities. N.D. Cent. Code § 53-06.2-11 (2001). There is nothing in the takeout statute prior to 2007 that would indicate the State was authorized to collect taxes on account
wagering activities.6
When PW Enterprises was engaged in account wagering through RSI, there was neither
legislative action directed at the collection of taxes for account wagering nor was there
specification as to the amount of the tax. The bankruptcy court erred when it concluded account
wagering is simulcast wagering and thus the State was authorized to collect taxes on account
wagering. Because the State lacked the authority to collect taxes for account wagering activities
during the 2002 to 2003 time period in question, the taxes collected by the State must be returned
to the bankruptcy estate.
C.

There is No Legal Basis to Infer or Imply the Authority to Tax.

The bankruptcy court stated: “Had the legislature not intended for account wagering to be
subject to taxation under N.D.C.C. § 53-06.2-11, the activity authorized by the legislature in
N.D.C.C. § 53-06.2-10.1 would have been in contravention of the prohibition against games of
change without a charitable purpose as delineated in the North Dakota Constitution.” The court
concluded: “Consistent with the rules of statutory construction, the Court presumes the
legislature did not intend this absurd result.” Similarly, the State argues on appeal, even if there
is no authorized taxation, the Court should imply a tax because absent the means of taxation, the
provisions of § 53-06.2-10.1 violate the State’s constitutional restrictions on charitable gaming.

6

The 2007 amendment to N.D. Cent. Code § 53-06.2-11 confirms that the legislature
perceived a problem. The amendment created a “take-out” formula specific to account
wagering.
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North Dakota’s Constitution does not provide for implied taxes. Likewise, courts
presume the legislature “meant what it said and said all it intended to say.” Estate v. Christeson
v. Gilstad, 829 N.W.2d 453, 457 (N.D. 2013). Courts are not to “correct an alleged legislative
‘oversight’ by rewriting unambiguous statutes to cover the situation at hand.” Id. (citation
omitted). Moreover, there is no rule of construction requiring courts to ferret out an
interpretation in order to preserve the constitutional integrity of an unambiguous statute.7
Here, the legislature’s intent is apparent from the words of the statutes and there is no
room for construction. The legislature plainly defined “account wagering” in N.D. Cent. Code §
53-06.2-10.1. When it created this new form of parimutuel wagering, the legislature, either
intentionally or unintentionally, did not amend the take-out statute, N.D. Cent. Code § 53-06.211, to provide formulas for account wagering activities. It is not within the Court’s purview to
rewrite the statutes to engraft additional meanings. Judges have no right to substitute their
policy preferences for the legitimate policy preferences of the legislature, even though they
might consider the policy unwise.
The Court need not delve into the legislative history because the statutes at issue are not
ambiguous.8 There are no words or phrases that are undefined. There is no inconsistency in

7

Even if the Court were to look at the alleged constitutional issue noted by the State,
North Dakota’s gaming laws and Constitution require the involvement of educational, charitable,
patriotic, fraternal, religious, or “public-spirited uses.” Taxes are not enumerated on this list.
8

The parties have competing versions of what the legislature intended. PW Enterprises
contends the legislature intended to create account wagering and entice wagerers to the State
with an initial promise of no taxes and then after they were established to impose a tax. The
State believes the legislature authorized account wagering as a way to bring additional revenue
to North Dakota. The Court need not resolve the conflict because the language in the statutes is
clear and there is no need to examine legislative history. In re G.R.H., 711 N.W.2d 587, 593
(N.D. 2006) (legislative intent is presumed clear from the face of the statute).
11

reading the statutes together. Uncertainty arose because the State collected money in the form of
taxes when there was no specific legislative action authorizing it to do so. “It is for the
legislature to amend a statute if the language of the statute does not accurately reflect the
legislature’s intent; the duty of the judiciary is to simply enforce the law as it exists.” State v.
Blunt, 785 N.W.2d 909, 928 (N.D. 2010). There was no legislative authority to collect taxes on
account wagering during the time period in question and there is no legal basis to infer or imply
authorization to do so.
D.

No Binding Precedent Exists that Would Preclude this Court from
Reviewing De Novo Whether the State Can Collect Taxes on Account
Wagering Prior to 2007.

The State argues that PW Enterprises’ statutory interpretation claim has been waived or
should be rejected by inference or implication, citing to documents and decisions filed in this
Court in the criminal prosecution of Susan Bala and RSI. The focus on Bala’s criminal
convictions stemmed from the requirement that, under North Dakota’s gambling laws, some
portion of account wagers must go to a charitable organization. United States v. Bala, 489 F.3d
334, 339 (8th Cir. 2007). The Eighth Circuit Court of Appeals, in reversing Bala’s convictions,
noted the “uncertain regulatory environment” under which RSI was operating. Id. at 340. The
Court of Appeals concluded the prosecution failed to prove RSI or Bala violated a state
gambling law; therefore, there was insufficient evidence to support the convictions. The State
also cites to documents relating to Bala’s motion for a certificate of innocence. Bala contended
in one of her briefs that the statutory take-out scheme did not provide for taxing of account
wagering during the time period at issue (Doc. #194). Neither the district court nor the Court of
Appeals addressed Bala’s specific argument.

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In addition, the State refers to Bala’s § 1983 complaint and order dismissing the claims
filed in this Court in 2009. In that case, Judge Hovland determined that in 2001, N.D. Cent.
Code § 53-06.2-10.1 did not expressly require that payments be made to the State from account
wagering activities. Bala v. Stenehjem, 671 F.Supp.2d 1067, 1088-87 (D.N.D. 2009). He found
that in 2007, the legislature amended the statutory laws to specify the amount that must be
deducted from account wagering activities.
The State contends that a logical inference or implication that can be gleaned from Bala’s
criminal and civil files is that the court must have concluded that statutory authority existed to
collect taxes on account wagering prior to 2007. “Questions which merely lurk in the record,
neither brought to the attention of the court nor ruled upon, are not to be considered as having
been so decided as to constitute precedents.” Webster v. Fall, 266 U.S. 507, 511 (1925). The
Court declines the State’s invitation to rely on inferences or implications in deciding whether the
State was statutorily authorized to collect taxes on account wagering.
DECISION
North Dakota’s gambling laws are plain and unambiguous. The State was not authorized
to collect taxes on account wagering during the time period in question. RSI had no obligation
to pay taxes on account wagering and should not have depleted its assets to pay unowed taxes.
The money collected from RSI in the form of taxes on account wagering must be returned 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.
The remaining issues, including whether the bankruptcy court erred when it found RSI

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received reasonably equivalent value in exchange for the tax value, whether the State was a nonstatutory insider, and whether the State’s claims should be equitably subordinated, raised by PW
Enterprises are moot.

IT IS SO ORDERED.
Dated this 3rd day of January, 2014.

/s/ Ralph R. Erickson
Ralph R. Erickson, Chief Judge
United States District Court

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