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In State of North Dakota, ex rel. Wayne Stenehjem v. Bala (In re Racing Services, Inc.), 2022 WL 69240, (B.A.P. 8th Cir. January 7, 2022), the Bankruptcy Appellate Panel affirmed the denial of the State of North Dakota’s statutory claim and contract claim in a case that has dragged on for over 17 years.

In this case, the State of North Dakota (the “State”) agreed to pay the Debtor $15 million for collecting unauthorized taxes from the Debtor while it provided pari-mutuel horse wagering services. Creditors filed claims to partake in the distribution of those funds.

A month after the court held a week-long evidentiary hearing on claims filed, the State filed a new proof of claim, which prompted the court to hold an evidentiary hearing. At the conclusion of the evidentiary hearing, the State orally moved to amend its claim to add a theory of breach of contract on behalf of Team Makers Club, Inc., a charity that at one time had a contractual relationship with the Debtor to provide off-track betting services. The Debtor’s president objected to the State’s claims.

The bankruptcy court concluded that the State’s statutory claim must fail because the State lacked standing to file a claim on behalf of Team Makers and the claim was barred by laches. On appeal, the BAP in a previous decision affirmed that the State lacked standing but reversed the court’s decision on laches and remanded for the bankruptcy court to determine the Team Maker’s claim and any objections thereto. In re Racing Servs., Inc., 619 B.R. 681 (B.A.P. 8th Cir. 2020). To read the Bankruptcy Bulletin’s summary on that prior BAP decision, click here.

On remand, the State filed yet another new claim in an attempt to formally include the breach of contract claim just hours before the bankruptcy court held a hearing on how to proceed with the remand. The State contended that the remand was broad enough to allow it to add the breach of contract claim and to supplement the evidentiary record. However, the bankruptcy court disagreed and denied the State’s claims in their entirety.

First, the bankruptcy court denied the State’s statutory claim. In short, the State failed to articulate any basis to support its claim that the Debtor owed it money under the North Dakota Administrative Code, North Dakota Century Code, and Constitution of North Dakota. Further, the State failed to provide any evidence of the concrete amount the Debtor owed. Lastly, the State argued that the Debtor should not retain the excess funds once all allowed creditors are paid in full. The bankruptcy court held that that would be in contravention of the priority of payment provided for under the Bankruptcy Code pursuant to 11 U.S.C. § 727. The BAP found that the bankruptcy court did not err in sustaining the objection to the State’s statutory claim.

Second, the bankruptcy court denied the State’s breach of contract claim on both procedural and substantive grounds. In denying the State’s attempt to amend its claim, the bankruptcy court relied upon its inherent authority to control its docket and prevent undue delays in the disposition of its cases, as further reflected by the public policy underlying Federal Rule of Civil Procedure 1 and the equitable powers granted by 11 U.S.C. § 105. The BAP held that the bankruptcy court did not abuse its discretion in denying the addition of the breach of contract claim.

The bankruptcy court quickly disposed of the State’s contract claim. First, the State failed to provide evidence that the contract at issue was in place at the applicable time. Second, even if that evidence existed, the State failed to prove that the Debtor breached the contract because it provided no evidence of the amounts the Debtor paid to Team Makers. Lastly, the State failed to provide the amount of damages. Thus, the BAP affirmed that the State failed to meet its burden of proof for the contract claim.

In summary, the BAP affirmed the denial of the State of North Dakota’s statutory and contract claims. In doing so, the BAP declared: “The time to reach a final adjudication on claims is long overdue.”

Co-Editors in Chief
Karl J. Johnson, Taft Stettinius & Hollister LLP
David M. Tanabe, Winthrop & Weinstine, P.A.