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Stars Interactive Holdings (Iom) Ltd. v. Commonwealth ex rel. Tilley

Court of Appeals of Kentucky

December 21, 2018

STARS INTERACTIVE HOLDINGS (IOM) LTD., F/K/A AMAYA GROUP HOLDINGS (IOM) LTD.; AND RATIONAL ENTERTAINMENT ENTERPRISES LTD. APPELLANTS
v.
COMMONWEALTH OF KENTUCKY EX REL. JOHN TILLEY, SECRETARY, JUSTICE AND PUBLIC SAFETY CABINET APPELLEE

          APPEAL FROM FRANKLIN CIRCUIT COURT HONORABLE THOMAS D. WINGATE, JUDGE ACTION NO. 10-CI-00505

          BRIEFS AND ORAL ARGUMENT FOR APPELLANTS: Sheryl G. Snyder Theresa A. Canaday Griffin Terry Sumner Jason P. Renzelmann Louisville, Kentucky.

          BRIEF AND ORAL ARGUMENT FOR APPELLEE: William C. Hurt, Jr. James L. Deckard William H. May, III Lexington, Kentucky.

          BEFORE: ACREE, JOHNSON, [1] AND JONES, JUDGES.

          OPINION

          JONES, JUDGE.

         Appellee, the Commonwealth of Kentucky ex rel. John Tilley, Secretary, Justice and Public Safety Cabinet ("the Commonwealth"), initiated the underlying action in Franklin Circuit Court against numerous entities seeking to recover treble damages under Kentucky's Loss Recovery Act (the "LRA").[2] After extensive motion practice and a multitude of discovery issues, the Franklin Circuit Court entered an order finding Appellants, Stars Interactive Holdings (IOM) Limited f/k/a Amaya Group Holdings (IOM) Limited ("Amaya") and Rational Entertainment Enterprises Limited ("REEL"), liable to the Commonwealth in the amount of $870, 690, 233.82. Amaya and REEL now appeal. Following review of the record, applicable law, and oral arguments, we REVERSE and REMAND for the reasons more fully explained below.

         I. Background

         The procedural history of this case is long and somewhat complicated. Accordingly, we recite only the facts and procedural history relevant to the parties to this appeal.

         In March of 2010, the Commonwealth filed a complaint against Pocket Kings, Ltd. and "Unknown Defendants" seeking recovery for the Commonwealth under the LRA. The provisions of the LRA relied on by the Commonwealth state as follows:

If any person loses to another at one (1) time, or within twenty-four (24) hours, five dollars ($5) or more, or anything of that value, and pays, transfers, or delivers it, the loser or any of his creditors may recover it, or its value, from the winner, or any transferee of the winner, having notice of the consideration, by action brought within five (5) years after the payment, transfer or delivery. . . .

KRS 372.020.

If the loser or his creditor does not, within six (6) months after its payment or delivery to the winner, sue for the money or thing lost, and prosecute the suit to recovery with due diligence, any other person may sue the winner, and recover treble the value of the money or thing lost, if suit is brought within five (5) years from the delivery or payment.

KRS 372.040.

         Thereafter, the Commonwealth filed a number of amended complaints, each of which added various online poker playing forums and casinos, as well as some individuals, as party defendants. On November 2, 2011, the Commonwealth filed a third amended complaint adding, among others, PYR Software Ltd. ("PYR"), Oldford Group Ltd. ("Oldford"), and REEL (collectively referred to as the "PokerStars Defendants"). The third amended complaint alleged that the PokerStars Defendants were three of several entities used to conduct business for PokerStars, an Internet poker company that provided real-money gambling on Internet poker games to Kentucky residents. The Commonwealth alleged that when PokerStars hosted these online poker games, the PokerStars Defendants took a percentage of the amount bet, won, or lost as the "rake" or "commission" for hosting the poker games. The Commonwealth contended that thousands of Kentucky residents had lost five dollars or more, either at one time or within 24 hours, while playing on the PokerStars websites. Therefore, those residents were considered "losers" under KRS 372.020. Additionally, the Commonwealth contended that receiving a "rake" from the games played qualified the PokerStars Defendants as "winners" under the statute. As the Commonwealth believed none of the Kentucky "losers" had brought a claim under KRS 372.020, it contended that it was entitled to collect trebled damages from the PokerStars Defendants pursuant to KRS 372.040. Like the prior complaints, the Commonwealth's third amended complaint was generic insomuch as it did not identify the specific transactions at issue, the names of any affected Kentucky residents, the specific locations the gambling took place within this Commonwealth, the amounts bet, or any specific information of the like.

         On January 11, 2013, REEL filed a motion to dismiss the third amended complaint or in the alternative, a motion for a more definite statement.[3]In its memorandum accompanying the motion, REEL argued that the Secretary, acting as relator for the Commonwealth, lacked standing to pursue a claim against REEL under the LRA and that the third-amended complaint failed to satisfy the notice pleading requirements of CR[4] 8.01. On January 22, 2013, PYR filed a motion to dismiss the third amended complaint or, in the alternative, for a more definite statement. PYR's motion adopted and incorporated by reference the motion to dismiss filed by REEL.

         In its response to the motions to dismiss, the Commonwealth noted that other defendants in the case had previously asserted standing and insufficiency of pleading arguments, which the circuit court had rejected. Accordingly, the Commonwealth incorporated by reference its earlier memoranda to the court. In those memoranda, the Commonwealth maintained that the allegations in its complaint were sufficient under CR 8.01, as KRS Chapter 372 does not require a heightened pleading standard, and that the Commonwealth had standing to bring the claims as "any other person" under KRS 372.040. Following a hearing, the circuit court denied both motions to dismiss by order entered April 17, 2013, and ordered the parties to proceed with discovery.[5]

         The Commonwealth obtained service on Oldford on March 17, 2014. Thereafter, Oldford filed a notice of removal to federal district court. As grounds for removal, Oldford contended that the Secretary, in his individual capacity, was the actual real party in interest in this case, not the Commonwealth. Accordingly, Oldford alleged that diversity of citizenship existed, giving the federal court jurisdiction under 28 U.S.C.[6] § 1332(a)(2). Once the case had been removed to federal court, REEL filed a motion to stay discovery, the Commonwealth filed a motion to remand to state court and a motion to stay the proceedings, and Oldford filed a motion to dismiss the third-amended complaint. By opinion and order dated March 31, 2015, the federal district court remanded the case to state court. Commonwealth v. Pocket Kings, Ltd., No. 14-27-GFVT, 2015 WL 1480311 (E.D. Ky. Mar. 31, 2015). In its opinion, the federal district court noted the question of who was the proper real party in interest was "difficult"; however, it ultimately concluded that the proper party was the Commonwealth, thereby divesting the federal district court of jurisdiction. Id. The pending motions were therefore dismissed as moot. Id. During the pendency of the case's removal to federal court, all PokerStars Defendants were sold to Amaya.

         On May 14, 2015, the Commonwealth moved for partial summary judgment against REEL and Oldford. The Commonwealth stated that in Oldford's objections and answers to the Commonwealth's first request for admissions, Oldford had admitted that, between October 12, 2006, and April 15, 2011, residents of Kentucky had played and lost money on PokerStars' sites and that Oldford and REEL had received part, or all, of a "rake" charged as a fee for hosting the games. The Commonwealth contended that Kentucky law on the LRA was clear: one who receives any part of a losing bet, including a "rake" charged in a game of poker, was liable for the full amount of the lost bet. Accordingly, the Commonwealth stated that the only remaining issue to be decided was the amount of damages owed, and that it was entitled to judgment as a matter of law on the issue of liability.

         Oldford and REEL filed a joint motion in opposition to the Commonwealth's motion for partial summary judgment. Therein, they contended that the Commonwealth's motion had obscured the numerous remaining genuine disputes of material fact. Specifically, Oldford and REEL contended that: while Oldford had admitted that there were individuals living in Kentucky who had lost money playing on a PokerStars site, the Commonwealth had yet to identify any specific "loser" under the statute; there was still an issue as to whether poker was a game of skill, as opposed to a game of chance as used in KRS 528.010(3); and there was still a genuine issue of fact as to whether the Secretary was legally authorized to bring claims under the LRA. The parties further argued that the Commonwealth could not rely on admissions made by Oldford to prevail on summary judgment against REEL. REEL and Oldford additionally disputed the Commonwealth's contention that Kentucky law was clear on their liability under the LRA.

         On June 22, 2015, the circuit court heard the Commonwealth's motion for partial summary judgment, as well as its motion for sanctions against the PokerStars Defendants for alleged violations of discovery orders. In support of its motion for partial summary judgment, the Commonwealth pointed to the admissions Oldford had made and again stated that Kentucky law on liability under the LRA was clear. The Commonwealth reminded the circuit court that it had previously granted partial summary judgment against another defendant in the action, Party Gaming, under substantially similar facts. REEL and Oldford argued that Oldford's admissions could not be used to support partial summary judgment against REEL. Further, REEL and Oldford disagreed with the Commonwealth that the law was in the Commonwealth's favor. REEL and Oldford distinguished cases relied on by the Commonwealth, noted that there was no precedent for the Commonwealth bringing an action under the LRA, and contended that there was still a factual issue of whether poker was a game of chance or a game of skill.

         On August 12, 2015, the circuit court entered an order granting the Commonwealth's motion for partial summary judgment on liability, granting the Commonwealth's motion for sanctions in part, and entering default judgment against the PokerStars Defendants as a sanction. In its order granting partial summary judgment in the Commonwealth's favor, the circuit court first addressed REEL and Amaya's[7] liability under the LRA. The circuit court found that, under Kentucky law, any party who takes a portion of money lost in gambling is a "winner" under the LRA; this includes one who takes a rake from a poker game. As Amaya had admitted that it and REEL received a "rake" from games played on the PokerStars sites, the circuit court concluded that they were "winners" under KRS 372.020, despite the fact that they stood no chance of losing. The circuit court found that the Commonwealth had the ability to bring its claims against Amaya and REEL as "any other person" under KRS 372.040 and that Amaya had admitted that Kentucky residents had played poker on the PokerStars sites thereby making the Commonwealth's failure to identify any specific residents irrelevant. The circuit court also noted that Amaya and REEL had offered no persuasive legal authority for their contention that playing poker could not be considered gambling because skill predominated over chance. Accordingly, the circuit court concluded as a matter of law that the Commonwealth was entitled to partial summary judgment on the issue of liability.

         Thereafter, the parties litigated the issue of damages before the circuit court. The parties disputed how damages should be calculated, the reliability of the Commonwealth's damages calculation, as well as whether treble damages should be awarded in this instance. During this same time period, Amaya and REEL moved the circuit to reconsider its decision on liability. On November 20, 2015, the circuit court entered an opinion and order denying Amaya and REEL's motion to reconsider, granting partial summary judgment in favor of the Commonwealth, and awarding the Commonwealth $290, 230, 077.94 in damages. The circuit court reserved the issue of whether the Commonwealth was entitled to receive treble damages for a later date. Following additional motion practice and briefing, on December 23, 2015, the circuit court entered an opinion and order. Therein, the circuit court clarified its position as to whether damages recovered under the LRA should reflect "net" or "gross" losses and concluded that, under the facts of this case, the Commonwealth was not required to "net" the losses incurred by Kentucky poker players. The circuit court ultimately concluded that Amaya and REEL were liable for the full amount of losses incurred by Kentucky players because they shared a "community of interest" with the actual winners. Accordingly, the circuit court concluded that the Commonwealth was not required to "net" the winnings it sought to recover and confirmed its original award of $290, 230, 077.94. The circuit court then concluded that treble damages were mandatory. The circuit court entered a judgment in favor of the Commonwealth in the amount of $870, 690, 233.82, plus post-judgment interest calculated at a rate of 12% per annum.

         Amaya and REEL filed a motion to alter, amend, or vacate the final judgment and requested the circuit court make detailed findings of fact. Following a hearing, the circuit court denied the motion to alter, amend, or vacate in substance. It did, however, amend its prior judgment to properly reflect the names of the judgment debtors.

         This appeal followed.

         II. Analysis

         Appellants raise numerous assignments of error as part of this appeal. The primary argument put forth by Appellants, and the one we conclude is ultimately dispositive, is that the circuit court erred as a matter of law when it denied their motions to dismiss. Appellants argue that the circuit court should have dismissed the complaints against them because the Commonwealth/Secretary does not have standing to sue under the LRA. Alternatively, Appellants argue that even if the Commonwealth has ...


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