North Dakota May Owe Bankrupt ADW Millions

A bettor who has spent more than a decade pursuing the nearly $2.25 million he says he was owed at the time a controversial North Dakota account-deposit wagering outlet and rebate shop filed for bankruptcy, may have moved a step closer to collecting some or all of that money.

In a decision that could pave the way for bettor Peter Wagner to collect that money—and cost the state of North Dakota millions of dollars—the U.S. Court of Appeals for the Eighth Circuit this month upheld a U.S. district court's ruling that the state should not have collected millions of dollars in taxes from the bankruptcy reorganization of the former ADW outlet Racing Services Inc.

The appeals court ruled state laws did not tax ADW outlets like Racing Services.

The lengthy appeal had been pursued by Wagner's PW Enterprises, a high-volume successful betting operation that was owed nearly $2.25 million from Racing Services when the bankruptcy was filed in 2004. A bankruptcy court had allowed the state to collect taxes from the bankrupt ADW operation, but the U.S. Court of Appeals agreed with a district court decision that, at the time in question, the state had not updated its laws to call for taxation of ADW wagering. 

The Court of Appeals agreed with the district court, ruling that North Dakota law, at the time in question, did not authorize taxation of ADW outlets like Racing Services.

"Based on the plain meaning of the relevant statues and fundamental principles of North Dakota law, we agree with the district court and conclude North Dakota law did not expressly or impliedly authorize the state to collect taxes for account wagering during the time period in dispute here," the U.S. Court of Appeals ruled Feb. 20.

Following the decision, the court remanded the case to bankruptcy court for calculation of the amount of unauthorized taxes the state must return to the bankruptcy estate. PW Enterprises has suggested that figure could be in excess of $11 million.

PW Enterprises is the pari-mutuel gambling operation of Wagner, who developed computer software to scan pari-mutuel pools for value and deliver wagers, a legal and largely accepted practice in pari-mutuel wagering called computer-robotic wagering. PW Enterprises lists William Wass as its chief operating officer and Wagner as its chief executive officer. Racing Services awarded PW Enterprises lucrative rebates as a high-volume player.

An FBI investigation initiatedin 2003 would lead to Racing Services founder Susan Bala being convicted in 2005 of 12 felonies involving charges of running an illegal gambling business. Bala was sentenced to 27 months in prison and RSI was ordered to forfeit $99 million but those rulings would be overturned on appeal. In 2007, a federal appeals court in Fargo, N.D. overturned Bala's conviction, ruling the evidence was insufficient to convict.

PW Enterprises said it had an account at Racing Services of $2,248,100.86 in 2003, when the FBI began its investigation of the ADW and rebater. Wagner said he ceased wagering with Racing Services when the FBI investigation began and demanded the full account balance be paid.

That balance was not paid and when RSI filed a voluntary Chapter 11 reorganization petition in February 2004, the $2.25 million PW Enterprises' claim was included among the listed creditors. The state had a proof of claim of $6,422,243. Also, Wagner's PW Enterprises says it learned that in the year before the bankruptcy filing, the state "had also inconspicuously collected $5,270,101 in taxes from Racing Services."

Taxes are  typically moved to the front of the line in bankruptcy proceedings, but in this case, PW Enterprises argued that the bankruptcy court should disallow the state's claim against the state for unpaid taxes, deny priority to the state's claim, void and recover allegedly preferential and fraudulent transfers to the state, and equitably subordinate the state's claim. 

The bankruptcy court rejected that claim, stating that "during the times relevant to the case, N.D. authorized taxation on account wagering." The bankruptcy court reasoned that the state characterized account wagering as a form of simulcast pari-mutuel wagering, so that legislation applied to account wagering activity.

PW Enterprises appealed the bankruptcy court's decision and the a U.S. District Court reversed and remanded for further proceedings. The District Court called North Dakota's gambling laws "plain and unambiguous."

"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," the District Court ruled. The state appealed the District Court's ruling.

The U.S. Court of Appeals agreed with the District Court decision.

"The state has not provided and we have not found, any authority recognizing a judicial power to infer an implied tax under North Dakota law," said the U.S. Court of Appeals in its decision. "Not only must this court presume the legislature meant what it said and said all it intended to say, but also that the legislature made no mistake in expressing its purpose and intent."

In background, the U.S. Court of Appeals pointed out that the state in 2001 authorized account wagering, but did not amend its previous pari-mutuel tax legislation to include account wagering. The court said the state missed opportunities in 2003 and 2005 to update the legislation when it adjusted takeout formulas on account wagering.