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Appalachian Racing, LLC v. Family Trust Foundation of Kentucky, Inc.

Supreme Court of Kentucky

February 20, 2014

APPALACHIAN RACING, LLC, CHURCHILL DOWNS INCORPORATED, ELLIS PARK RACE COURSE, INC., KEENELAND ASSOCIATION INC:, KENTUCKY DOWNS, LLC, PLAYERS BLUEGRASS DOWNS, INC., LEXINGTON TROTS BREEDERS ASSOCIATION, LLC, AND TURFWAY PARK, LLC APPELLANTS
v.
THE FAMILY TRUST FOUNDATION OF KENTUCKY, INC., D/B/A THE FAMILY FOUNDATION, THE KENTUCKY HORSE RACING COMMISSION, AND KENTUCKY DEPARTMENT OF REVENUE APPELLEES AND THE KENTUCKY DEPARTMENT OF REVENUE APPELLANT
v.
THE FAMILY TRUST FOUNDATION OF KENTUCKY, INC., D/B/A THE FAMILY FOUNDATION, THE KENTUCKY HORSE RACING COMMISSION, APPALACHIAN RACING, LLC, CHURCHILL DOWNS INCORPORATED, ELLIS PARK RACE COURSE, INC., KEENELAND ASSOCIATION INC., KENTUCKY DOWNS, LLC, PLAYERS BLUEGRASS DOWNS, INC., LEXINGTON TROTS BREEDERS ASSOCIATION, LLC, AND TURFWAY PARK, LLC APPELLEESTHE KENTUCKY HORSE RACING COMMISSION APPELLANT
v.
THE FAMILY TRUST FOUNDATION OF KENTUCKY, INC., D/B/A THE FAMILY FOUNDATION, THE KENTUCKY DEPARTMENT OF REVENUE, APPALACHIAN RACING, LLC, CHURCHILL DOWNS INCORPORATED, ELLIS PARK RACE COURSE, INC., KEENELAND ASSOCIATION INC., KENTUCKY DOWNS, LLC, PLAYERS BLUEGRASS DOWNS, INC., LEXINGTON TROTS BREEDERS ASSOCIATION, LLC, AND TURFWAY PARK, LLC APPELLEES

ON REVIEW FROM COURT OF APPEALS CASE NO. 2011-CA-000164-MR FRANKLIN CIRCUIT COURT NO. 10-CI-01154

COUNSEL FOR APPALACHIAN RACING, LLC, ELLIS PARK RACE COURSE, INC., KENTUCKY DOWNS, LLC, AND LEXINGTON TROTS BREEDERS ASSOCIATION, LLC: William A. Hoskins, III Jay Edward Ingle

COUNSEL FOR CHURCHILL DOWNS INCORPORATED: Sheryl G. Snyder Jason Patrick Renzelmann

COUNSEL FOR KEENELAND ASSOCIATION, INC., PLAYERS BLUEGRASS DOWNS, INC., AND TURFWAY PARK, LLC: William M. Lear, Jr. Shannon Bishop Arvin Christopher L. Thacker

COUNSEL FOR FAMILY TRUST FOUNDATION OF KENTUCKY, INC., D/B/A THE FAMILY FOUNDATION: Stanton L. Cave

COUNSEL FOR THE KENTUCKY HORSE RACING COMMISSION: Peter Frank Ervin Susan Bryson Speckert Gordon Ray Slone La Tasha Arnae Buckner

COUNSEL FOR KENTUCKY DEPARTMENT OF REVENUE: Douglas M. Dowell Eugene Jeffrey Mosley Laura Marie Ferguson

OPINION

VENTERS JUSTICE

We granted discretionary review in this case to consider whether the Kentucky Horse Racing Commission (the Commission) has the statutory authority to license the operation of mechanical and electronic devices for wagering on previously run horse races, so called "historical horse racing"; to consider whether the Kentucky Department of Revenue (the Department) has the statutory authority to tax the wagering upon historical horse races; and to consider whether the licensed operation of wagering on historic horse racing, pursuant to the Commission's authority, violates the gambling provisions of the Kentucky Penal Code. In a summary proceeding, the Franklin Circuit Court answered the first two of the foregoing questions in the affirmative, and the third in the negative, as matters of law. The Court of Appeals reversed that decision and remanded the case to the Franklin Circuit Court to enable the parties to undertake discovery procedures to more fully develop a record of facts relevant to the wagering on historic horse racing.

For the reasons set forth below, we affirm the Court of Appeals, in part, and we reverse the Court of Appeals, in part. Specifically, we conclude that: 1) the Commission has the statutory authority to license and regulate the operation of pari-mutuel wagering on historic horse racing; 2) under the present statutory scheme for taxing the wagering handle on horse racing in Kentucky, the Department does not have the authority to collect the statutory excise tax on the wagering on historic horse races; and 3) whether the licensed operation of wagering on historic horse racing, pursuant to the Commission's authority, violates the gambling provisions of the Kentucky Penal Code is an issue that depends upon facts not in the record, and therefore, must be deferred pending further proceedings in the circuit court.

I. FACTUAL AND PROCEDURAL BACKGROUND

Appellants herein are the Commission and the Department, and eight horse racing associations (the Associations)[1] in Kentucky that would like to expand their businesses to include wagering upon historical horse racing. The Appellee is The Family Trust Foundation of Kentucky, Inc., also known as The Family Foundation (the Foundation), a Kentucky non-profit corporation, which the trial court permitted to intervene in the action without objection by the Appellants.

Faced with serious financial challenges and seeking a means to develop new revenue sources, Kentucky's horse racing industry expressed interest in developing the use of devices for wagering on historical horse races. Historical horse races are horse races that have been run sometime in the past at an approved racing facility and are then currently presented in the form of a video display on an electronic device, or terminal, at which individual wagerers may place bets.[2] One such device, similar in appearance to a slot-machine, is a patented product marketed under the name "Instant Racing." The bettor inserts money or its equivalent into the Instant Racing terminal and then chooses a horse identified by a number. The terminal then displays a video recording of the race for the bettor to watch, or, as the name "Instant Racing" implies, the bettor may forego the excitement of the actual race by opting to see immediately the results of the race and the outcome of his wager. Bettors are not given information from which they might identify the specific time and place of the actual running of the race, or the identity of the horse, but some statistical data regarding the horses is provided for bettors who wish to place their bets with some degree of deliberation.

Proponents of historical horse racing promoted legislation introduced in the 2010 General Assembly that would have explicitly authorized the licensed operation of such non-traditional forms of horse racing and horse race wagering. However, the proposed legislation was not enacted into law. Following the 2010 legislative session, in July 2010, the Commission promulgated a series of regulatory changes designed to accommodate the industry's request for expanded wagering by way of "terminals" displaying video recordings of prior races.[3]

These regulatory changes prescribe the rules by which the wagering on historical races shall be conducted, but the most critical element of the regulations is the requirement that all such wagering must be "pari-mutuel." That is so because, pursuant to KRS 230.215 and KRS 230.361, any wagering on horse racing in Kentucky must be based upon a pari-mutuel system. In other words, the Commission has no authority to license an operation for wagering on horse racing that is not utilizing a form of pari-mutuel wagering.

In conjunction with the Commission's new regulations to license the use of devices for wagering on historical horse racing, the Department amended its regulations and revised its applicable tax forms so that wagering on historical horse racing, like other forms of horse racing in Kentucky, would be subject to the excise tax set forth in KRS 138.510(1).

Together, as Joint-Petitioners, Appellants filed an action for a declaration of rights in the Franklin Circuit Court as an "agreed case" pursuant to KRS 418.020. The Petition requested the court to declare that:

1. the Racing Commission's adoption of new regulations to license the operation of pari-mutuel wagering on "historical horse racing" was a valid and lawful exercise of the Commission's statutory authority under KRS Chapter 230; and,
2. the licensed operation of pari-mutuel wagering on historical horse races pursuant to the new regulations did not violate the gambling prohibitions of KRS Chapter 528 because they fit within the pari-mutuel wagering exemption of KRS 436.480; and,
3. the Department's amended regulation and tax form requiring the payment of the excise tax on the revenue generated from wagering on historical horse racing was a valid and lawful exercise of its statutory authority.

There was no Respondent or opposing party named in the Petition.

A few days after the filing of the Petition, the trial court determined, sua sponte, that the case presented a justiciable controversy. The court directed Appellants to submit briefs on the matter. Soon afterwards, the Foundation intervened in the action and challenged both the validity of the new administrative regulations and the premise that wagering on historical horse racing, as allowed in the new regulations and as argued by the Associations, was truly pari-mutuel wagering. The Foundation also attempted to engage in pretrial discovery to develop the information it deemed pertinent to the issues pending before the court.

The Franklin Circuit Court denied the Foundation's request to conduct discovery, and ultimately entered judgment as requested by Appellants declaring: 1) that the Commission's regulations for licensing the operation of pari-mutuel racing on historical horse racing were valid; 2) that the Department's move to collect the excise tax on wagering on historical racing was valid; and 3) that the licensed operation of historical racing devices pursuant to the Commission's new regulations did not violate the prohibitions on gambling as contained in KRS Chapter 528. The Foundation appealed.

Although the Court of Appeals affirmed the trial court's conclusion that the case presented a justiciable controversy, it further concluded that the Foundation should have had the opportunity to use the conventional discovery processes to "develop proof and to present evidence." Because the trial court had blocked the effort to develop such proof through discovery, the Court of Appeals vacated the judgment and remanded the case to the Franklin Circuit Court. We granted discretionary review. Appellants contend that the Court of Appeals erred in its conclusion that the Foundation had ...


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