The Family Trust Foundation of Kentucky, Inc., D/B/A the Family Foundation v. the Kentucky Horse Racing Commission

• Court: Kentucky Supreme Court
• Decided: September 24, 2020
• Docket: 2018 SC 000630
• Status: Unknown

Opinion

RENDERED: SEPTEMBER 24, 2020 TO BE PUBLISHED

Supreme Court of Kentucky 2018-SC-0630-TG

THE FAMILY TRUST FOUNDATION OF APPELLANT KENTUCKY, INC., D/B/A THE FAMILY FOUNDATION

ON APPEAL FROM FRANKLIN CIRCUIT COURT V. HONORABLE THOMAS D. WINGATE, JUDGE NO. 10-CI-1154

THE KENTUCKY HORSE RACING APPELLEES COMMISSION; THE KENTUCKY DEPARTMENT OF REVENUE; KEENELAND ASSOCIATION, INC.; TURFWAY PARK, LLC; PLAYERS BLUEGRASS DOWNS; APPALACHIAN RACING, LLC; KENTUCKY DOWNS, LLC; ELLIS PARK RACE COURSE, INC.; LEXINGTON TROTS BREEDERS ASSOCIATION, LLC AND CHURCHILL DOWNS INCORPORATED

OPINION OF THE COURT BY JUSTICE VANMETER

REVERSING AND REMANDING

For the second time, this case is before this Court for consideration of

the Kentucky Horse Racing Commission’s regulations as applied to historical

horse racing, and, on this occasion, the Franklin Circuit Court’s determination

that the Encore system constitutes a “pari-mutuel system of wagering.”

Because we hold that the Encore system does not create a wagering pool

among patrons such that they are wagering among themselves as required for

pari-mutuel wagering, the trial court misapplied the applicable regulation as a matter of law. We therefore remand this matter to the Franklin Circuit Court

for entry of a judgment consistent with this opinion.

I. Factual and Procedural Background.

The procedural history of this case is found in our previous opinion,

Appalachian Racing, LLC v. Family Trust Found. of Kentucky, Inc., 423 S.W.3d

726 (Ky. 2014). In summary, the Commission, the Department of Revenue and

eight horse racing associations sought judicial approval for wagering on

historical horse racing, pursuant to Commission regulations. 810 KAR1

1:001(30), 810 KAR 1:011, 810 KAR 1:120. As described by Justice Venters,

writing for the Court,

One such device, similar in appearance to a slot-machine, is a patented product marketed under the name “Instant Racing.”[2] 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.

423 S.W.3d at 730. The Family Foundation of Kentucky, Inc. (“Foundation”)

was permitted to intervene. It challenged both the validity of regulations and

the premise that wagering on historical horse races was truly pari-mutuel

wagering as mandated by KRS3 230.215 and 230.361. Significantly, the trial

1 Kentucky Administrative Regulations. 2 This device is not in use by any Kentucky racing association. 3 Kentucky Revised Statutes. 2 court denied the Foundation any opportunity for discovery at that time. Id. at

731–32.

Our prior opinion addressed four issues.4 First, justiciability of the

proceeding and KRS 418.020. 423 S.W.3d at 732–35. We held that the

Foundation’s intervention cured any infirmities on this issue. Id. at 735.

Second, the Commission’s authority to license and regulate pari-mutuel

wagering on historical horse racing. Id. at 735–38. Within our discussion of

this aspect of the case, we rejected the Foundation’s arguments that the

legislature had not authorized the Commission to permit wagering on historical

horse racing, and that wagering on a terminal could not qualify generally as

“pari-mutuel wagering.” As to the latter argument, we noted that KRS Chapter

230 does not provide a definition of pari-mutuel wagering and looked to the

definitions in the federal Interstate Horse Racing Act, 15 U.S.C. § 3002(13) and

Kentucky’s common law, specifically as stated in Commonwealth v. Kentucky

Jockey Club, 238 Ky. 739, 747, 38 S.W.2d 987, 991 (1931). We held that the

Commission’s regulations defining pari-mutuel wagering, as set forth in 810

KAR 1:001(48), 811 KAR 1:005(54), and 811 KAR 2:010(68), were “consistent

with the references to pari-mutuel wagering in KRS Chapter 230.” 423 S.W.3d

at 737–38. Third, the Department of Revenue’s collection of a tax on historical

horse racing. Id. at 738–41. We held that the Department exceeded its

authority in amending its regulation. Id. at 741. And fourth, although the

4 The first and third issues in our prior opinion are not germane to this appeal

but are included for sake of completeness. 3 regulations allowing for pari-mutuel wagering on historical horse racing may be

valid, whether the operation of historical horse racing as contemplated by the

respective horse racing associations constituted a pari-mutuel form of

wagering. Id. at 741–42. As to this final issue, we remanded the case to the

trial court to permit the Foundation to conduct discovery and present proof.

After four years of discovery, in January 2018, the trial court conducted

a hearing with respect to the Encore system5 in use by three associations,

Kentucky Downs, LLC, Ellis Park Race Course, Inc., and the Lexington Trots

Breeders Association, Inc. (collectively the “Association Appellees”). The trial

court then entered an extensive Opinion and Order. It recounted the history of

the case and provided a four-part definition of pari-mutuel wagering, based on

810 KAR 1:001(48):

1) A system or method of wagering approved by the Commission;

2) In which patrons are wagering among themselves and not against the association;

3) Amounts wagered are placed in one or more designated wagering pools; and

4) The net pool is returned to the winning patrons.

Kentucky Horse Racing Comm’n v. Family Trust Found. of Kentucky, Inc., No.

10-CI-02254, slip op. at 6, Franklin Circ. Ct. (Oct. 24, 2018).

The trial court made the following factual findings. The operation of the

Encore or Exacta system was approved by the Commission. It uses a triple

5 The Encore system is also known as the Exacta system. The Instant Racing terminal that was the ostensible focus of the prior opinion is no longer used, apparently, by any Kentucky racing association. 4 race method, by which the system randomly selects three historical horse

races. The three races are presented to the patron, who is “given the

opportunity to handicap the race or choose a built-in function . . . which uses

the ‘off odds’ order of the horses.” Id. at 14. “The ‘off odds’ are the pari-mutuel

odds that represent the amount a patron will win if his or her chosen horse

wins, as set at the time the horses left the starting gate.” Id. The patron places

his or her wager, from which the association’s “takeout” amount is deducted.

KRS 230.3615; 810 KAR 1:001 § 1(75). After the patron selects the order of

finish, digital replays of the races’ final furlong are displayed, showing the order

of finish. The patron’s selections and order of finish are compared to determine

the patron’s payout, if any.

The trial court noted that the initial seed pool, also known as the

“threshold,” is provided by the association. 810 KAR 1:001 § 1(33).6 It found,

based on testimony, that “if the balance of the pool is above the threshold, the

winning patron will receive either par or all of the net pool7 depending on the

accuracy of the patron’s selections. If the amount of the pool is below the

threshold, the winning patron receives a guaranteed minimum amount

according to the games’ rules.” The trial court found, based on testimony, that

“[a]ll payouts on winning wagers come from the pool, not any separate account

of the [a]ssociation[,]” and that “the net pool is going to be paid out many times

6 This definition defines “[i]nitial seed pool” as “a nonrefundable pool of money funded by an association in an amount sufficient to ensure that a patron will be paid the minimum amount required on a winning wager on an historical horse race.” 7 The Commission, by regulation, defines “net pool” as “the total amount

wagered less refundable wagers and takeout.” 810 KAR 1:001 § 1(44). 5 over.” Additionally, the daily wagering reports demonstrate that the pools

fluctuate based on the outcomes of patrons’ wagers. Finally, the trial court

noted the testimony of the Commission’s witness, Richard LaBrocca, that

patrons’ wagers into the same pool affected following wagers by either

increasing or decreasing the pool.

Included among the trial court’s findings of fact are the following

conclusions of law:

92. Pari-mutuel wagering does not require patrons to wager on the same horse races, nor does it require reciprocity among patrons, or for a pool to remain open for a specified period of time.

93. Similar to the Exacta System design, it is typical in pari-mutuel wagering for pools to be paid out to various patrons over time.

Slip op. at 18.

The trial court concluded that the Encore system constituted a pari-

mutuel system of wagering, approved by the Commission and meeting the

elements of 810 KAR 1:001 § 1(48).

The Foundation appealed. We accepted transfer from the Court of

Appeals, as this matter involves “great and immediate public importance.” CR8

74.02(2).

II. Standard of Review.

After our first opinion, the Franklin Circuit Court, on remand, permitted

discovery and held a bench trial, following which it entered an Opinion and

Order which contained its factual findings. Our standard of review for such a

8 Kentucky Rules of Civil Procedure. 6 proceeding is clear: “[f]indings of fact, shall not be set aside unless clearly

erroneous, and due regard shall be given to the opportunity of the trial court to

judge the credibility of the witnesses.” CR 52.01. On the other hand, a trial

court’s conclusions of law, i.e., the application of the law to those facts, are

reviewed de novo. Payton v. Commonwealth, 327 S.W.3d 468, 471-72 (Ky.

2010).

III. Analysis.

Our prior opinion summarized both federal law and Kentucky common

law and set out two of the essential elements of pari-mutuel wagering: “patrons

are wagering among themselves and not against the association,” and

“amounts wagered are placed in one or more designated wagering pools.” As

we have reviewed this case, the factual findings and arguments of counsel, two

aspects of the Encore System fail to constitute “pari-mutuel wagering.”

Both the federal statutory definition of pari-mutuel wagering and the

Kentucky common law definition refer to a discrete, individual event on which

wagers are made. See 15 U.S.C. § 3002(13) (defining “pari-mutuel” as “any

system whereby wagers with respect to the outcome of a horserace are placed

with, or in, a wagering pool”) (emphasis added); Commonwealth v. Ky. Jockey

Club, 238 Ky. 739, 747, 38 S.W.2d 987, 991 (1931) (“French pool” or “Paris

Mutual” definition includes “the effect of which is that all who buy pools on a

given race bet among themselves”) (emphasis added).9 The Commission’s

9 Ky. Jockey Club’s definition of “French pool” was quoted from City of Louisville v. Wehmoff, 116 Ky. 812, 846, 79 S.W. 201, 201 (1904). Wehmoff, in turn, cites an earlier case, Commonwealth v. Simonds, 79 Ky. 618 (1881) which includes the first Kentucky description of “French pool” or “Paris mutual” as 7 regulations incorporate this understanding of a pool generated based on a

discrete race. See, e.g., 810 KAR 1:011 § 1(1) (providing “[t]he only wagering

permitted on a live or historical horse race shall be under the pari-mutuel

system of wagering[]”); 810 KAR 1:011 § 3(1) (providing “[w]agering on an

historical horse race is hereby authorized and may be conducted in accordance

with KRS Chapter 230 and 810 KAR Chapter 1[]”) (emphasis added). The

subsequent subsections of 810 KAR 1:011 similarly emphasize the wagering on

“an historical horse race.”

The Association Appellees argue that our previous conclusion, that the

Commission’s regulatory definition of pari-mutuel wagering is consistent with

definitions established by Kentucky’s common law and federal statute,

constitutes law of the case and that we implicitly, if not explicitly, rejected the

a small machine, containing the name of each horse to be run in a particular race written or printed on the side, and printed numbers placed on the inside of the machine, which, could be seen through holes in it. It is used by the owner or person operating it, and by those engaged in betting on horse-racing in this way: The owner or operator sells the tickets for five dollars each; they bear numbers corresponding with the number given the horse on the machine, and by turning a crank or screw attached to the machine the betters are shown at once the number of tickets sold on each horse as each of said tickets is sold, so as to enable him to bet more intelligently and safely, and lessen the chances of disaster to himself. After the race is over, the machine is examined to see how many tickets have been sold, and those persons holding tickets on the winning horse get the amount of all the money received by the operator for all the tickets sold by him on all the horses that have run in the particular race, less five per cent, commission on the pool, which the operator of the machine retains for his services. 79 Ky. at 619. This earliest definition contained the essential elements of pari- mutuel wagering, which are unchanged in 140 years: patrons wagering on a particular race, creating the pool, and setting the odds, with the winners sharing the pool, less the pool operator’s commission. 8 Foundation’s argument. We disagree. As noted, both definitions we quoted

referred to a discrete event, as opposed to multiple, disconnected, randomly-

selected, historical horse races. The Commission’s regulations repeatedly refer

to a singular historical horse race. If the law of the case precludes an

argument, it is that of the Association Appellees.

The trial court erred in its conclusion that “[p]ari-mutuel wagering does

not require patrons to wager on the same horse races, nor does it require

reciprocity among patrons.” Without providing simultaneous access to one

historical horse race to the same group of patrons, no pari-mutuel pool can be

created among the patrons in which they are wagering among themselves,

setting the odds and the payout. The testimony presented to the trial court

disclosed that odds are established by the “off odds” as set at the time the

horses left the starting gate. In other words, patrons wagering on randomly-

generated historical horse races within the Exacta System are not establishing

odds with other patrons wagering on the same race(s).10 Emphatically, such

patrons are not wagering among themselves as required by pari-mutuel

wagering.

To the extent that our prior opinion is read by some to suggest that the

random generation of multiple historical horse races with patrons placing

wagers on different races qualifies as pari-mutuel wagering, that reading is

simply wrong. To be clear, pari-mutuel wagering requires that patrons generate

10 See MEC Oregon Racing, Inc. v. Oregon Racing Comm’n, 225 P.3d 61, 67 (Or. 2009) (noting lack of mutuel pools for specific races since players bet on any of 20,000 different races). 9 the pools based on wagering on the same discrete, finite events.11 Only in that

way are patrons “wagering among themselves” and setting the odds and the

payouts, the exceptions being possible minimum payouts and minus pools.

KRS 230.3615.

Furthermore, and as the Commission’s regulations appear more in focus

in this proceeding, the fact that “initial seed pool” is furnished by the

association impermissibly involves an association in creating the pool. The

betting pools are required to be established only by the patrons. And, as found

by the trial court, based on testimony, a possibility exists that one patron could

win all of the net pool, which would then require the association to step back in

and replenish the seed pool. At such points, the pools are not created by the

patrons as required by pari-mutuel wagering.

The foregoing mandates reversal of the Franklin Circuit Court’s Opinion

and Order. But we are compelled to note an additional matter. The legislature

created the Commission and expressed that the purpose and intent of KRS

Chapter 230 “in the interest of the public health, safety, and welfare, [is] to vest

in the racing commission forceful control of horse racing in the Commonwealth

with plenary power to promulgate administrative regulations prescribing

conditions under which all legitimate horse racing and wagering thereon is

conducted in the Commonwealth[.]” KRS 230.215(2). Notwithstanding this

broad remit, the Commission, like all administrative agencies, may not exceed

11 This requirement would thus authorize Pick-4 and Pick-6 type wagers

whereby the possibility exists for carryover pools to the following race day. 10 its statutory authority. GTE v. Revenue Cabinet, 889 S.W.2d 788, 792

(Ky.1994). Thus, an agency may not assume any power not expressly granted

to it by the general assembly. Id. An administrative body’s powers are defined

and limited by the agency’s enabling statute. Public Serv. Comm’n v. Attorney

Gen., 860 S.W.2d 296, 297–98 (Ky. App. 1993).

The Commission’s powers with respect to pari-mutuel wagering are

indeed broad, but the only legal wagering is pari-mutuel as authorized by KRS

Chapter 230. KRS 436.480. We note the legislative governance over pari-

mutuel wagering. Historically, pari-mutuel wagering in Kentucky was

permitted “only upon the licensed premises and on the dates and hours for

which racing has been authorized by the commission.” See, e.g., KRS

230.361(1) (1980) (wagering on thoroughbred races); KRS 230.385(1) (1982)

(wagering on harness races); KRS 230.447(1) (1982) (wagering on quarter horse

or Appaloosa races).12 In 1980, the legislature enacted KRS 230.3611,

prohibiting any thoroughbred pari-mutuel pool “where it is required to select

more than two (2) horses.”13 Beginning in 1982, however, presumably

12Prior to 1992, KRS Chapter 230 provided for three separate racing commissions. In that year, the legislature created one body, the Kentucky Racing Commission, to administer all racing, irrespective of breed. Act of Mar. 30, 1992, ch. 109, 1992 Ky. Acts 267–92. 13 This statute served to limit much exotic wagering, except daily double (wagering on the first-place finishers in the first two races of an association’s daily race card) and an exacta wager (wagering on the first- and second-place finishers, in order, of a given race). The statute essentially codified the Kentucky State Racing Commission’s action, in November 1979, of abolishing exotic wagering, except the daily double. Dave Koerner, “No Racing on Sunday, panel rules; Commission kills ‘exotic’ wagering,” Courier-Journal, Mon. Nov. 9, 1979, p. 78. Churchill Downs challenged the constitutionality of the statute in Franklin Circuit Court in 1984 since harness racing had no such prohibition. “Churchill to offer Pick-Six wagering; Injunction paves the way for move,” Courier-Journal, Wed., July 18, 1984, p. 16. KRS 11 responding to requests from the horse industry, the legislature began to loosen

the requirements for permissible pari-mutuel wagering. In that year, the

legislature amended KRS 230.361 to permit a licensed association to conduct

pari-mutuel wagering on thoroughbred racing conducted at another Kentucky

licensed association, and on “special event races” in other states or foreign

countries as determined to be of national or international significance or

interest to permit interstate wagering.14 Act of March 23, 1982, ch. 100 § 6(2),

1982 Ky. Acts 183, 186. The legislature, thus, set the policy to permit

expansion of pari-mutuel wagering: intertrack wagering, simulcasting, and

interstate and international wagering. These pari-mutuel wagering

innovations, as well as others, continue to be set forth in Kentucky statutes,

e.g., Interstate Racing and Wagering Compact, KRS 230.3761; simulcasting

and intertrack wagering, KRS 230.377, 230.3771, 230.3773, 230.380;

telephone account wagering, KRS 230.378. 230.379; use of credit card for

wagering, KRS 230.379, and International Racing Hubs, KRS 230.775–

230.780.

These statutes all refer to pari-mutuel wagering, which we addressed in

this and our prior opinion. The legislature has never altered or changed the

230.3611 was repealed in 1988. Act of Apr. 10, 1988, ch. 376 § 13, 1988 Ky, Acts 1049, 1055. 14 See generally Robert T. Garrett, “Plan brings off-track betting closer to reality: Horsemen reach tentative accord after talks with legislative leaders,” Courier-Journal, Tue., Jan. 5, 1982, p. 1. The paper had reported in 1979 that Churchill Downs had reached an agreement with the New York Off-Track Betting Corp. to permit New York betting on the Kentucky Derby, Kentucky Oaks, and the Stepping Stone Purse. Dave Koerner, “Downs agrees to allow OTB wagers on Derby, 2 other races,” Courier- Journal, Wed., Apr. 25, 1979, p. 43. Kentucky statutes at that time had no provisions limiting licensed association’s permitting out-of-state wagering on its races. 12 definition of pari-mutuel wagering, whether it is referred to as combination,

French, Paris mutuel or pari-mutuel pools. The Commission is charged with

regulating pari-mutuel wagering. But without positive legislative action and

sanction, it has no authority to create from whole cloth and to approve a

wagering pool in which each patron is wagering on a different event or set of

events. Such a wagering pool by no means can be considered a pari-mutuel

wagering pool in which patrons, as among themselves, are setting the betting

odds and payout.

We acknowledge the importance and significance of this industry to this

Commonwealth. We appreciate the numerable economic pressures that impact

it. Appalachian Racing, 423 S.W.3d at 730; see generally Bennett Liebman,

Pari-Mutuels: What Do They Mean and What Is at Stake in the 21st Century, 27

Marq. Sports L. Rev. 45, 45–46 (2016) (noting declining popularity of horse

racing and dropping attendance and pari-mutuel handle). If a change,

however, in the long-accepted definition of pari-mutuel wagering is to be made,

that change must be made by the people of this Commonwealth through their

duly-elected legislators, not by an appointed administrative body and not by

the judiciary.15

15 We recognize that the legislature has taxed “pari-mutuel wagering on historical horse races,” KRS 138.510; defined “historical horse race,” KRS 138.511(9)(a), and exempted “[d]evices dispensing or selling combination or French pools on historical races at licensed, regular racetracks as lawfully authorized by the Kentucky Horse Racing Commission” from the definition of a prohibited “gambling device.” KRS 528.010(5)(d)2. This latter statute was enacted in 2015. Act of Mar. 15, 2015, ch. 5, § 1, 2015 Ky. Acts. The same bill, however, also provided, No provision of this Act shall be construed as a recognition or finding concerning whether the operation of wagering on historical horse races constitutes a pari-mutuel form of wagering or concerning 13 IV. Conclusion.

The Franklin Circuit Court’s Opinion and Order is reversed, and this

matter is remanded to that court for entry of a judgment consistent herewith.

All sitting. Minton, C.J.; Hughes, Lambert, Nickell and Wright,

JJ., concur. Keller, J., concurs by separate opinion.

KELLER, J., CONCURRING: In good faith, the Commission initiated this

action in circuit court to assure themselves, and the businesses they regulate,

that the proposed operations fell under KRS 436.480’s exemption to KRS

Chapter 528. Our holdings in Appalachian Racing were limited to affirming the

Commission’s statutory authority to promulgate regulations regarding

historical horse racing if such racing was pari-mutuel, but we lacked a

sufficiently developed record to determine whether any specific system was

pari-mutuel. As to the second question, the trial court undertook a yeoman’s

task with the limited guidance we provided. Ultimately, however I agree with

the majority that the operation of the Exacta System is not pari-mutuel as

defined in the common law.

the legality of wagering on historical horse races, the devices upon which wagering on historical horse races is conducted, or the gaming system. Id. at § 2 (emphasis added). We believe this significant in that the legislature expressly disclaimed alteration of the definition of pari-mutuel wagering. We find support in the statutory reference to “combination or French pools” which was explicitly defined in Kentucky Jockey Club as “[i]n French pool the operator of the machine does not bet at all. He merely conducts a game, which is played by the use of a certain machine, the effect of which is that all who buy pools on a given race bet as among themselves; the wagers of all constituting a pool going to the winner or winners.” 238 Ky. at 747, 38 S.W.2d at 991 (emphasis added). 14 COUNSEL FOR APPELLANT:

Stanton L. Cave The Law Office of Stan Cave

COUNSEL FOR APPELLEE, THE KENTUCKY HORSE RACE COMMISSION:

Benjamin Adam Long Office of Legal Services

Jacob Clark Walbourn Public Protection Cabinet

Jennifer Marie Wolsing Kentucky Horse Racing Commission

COUNSEL FOR APPELLEE, THE KENTUCKY DEPARTMENT OF REVENUE:

Richard W. Bertelson III Office of Legal Services for Revenue

COUNSEL FOR APPELLEES, KEENELAND ASSOCIATION, INC.; TURFWAY PARK, LLC; PLAYERS BLUEGRASS DOWNS, INC. AND APPALACHIAN RACING, LLC:

Samuel D. Hinkle IV William M. Lear, Jr. Shannon Bishop Arvin Brad Keeton Stoll Kennon Ogden PLLC

COUNSEL FOR APPELLEES, KENTUCKY DOWNS, LLC; ELLIS PARK RACE COURSE, INC.; AND LEXINGTON TROTS BREEDERS ASSOCIATION, LLC:

15 William A. Hoskins III Jay Edward Ingle Christopher Flynn Hoskins Jackson Kelly PLLC

COUNSEL FOR APPELEE, CHURCHILL DOWNS INCORPORATED:

Sheryl G. Snyder Jason Patrick Renzelmann Frost Brown Todd, LLC