ALJDEC - Licensing

23A-016-RAC · Division of Racing · 2023-11-21

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

In the Matter of

AZ Downs LLC Live Racing Permit,

Appellant.

No. 23A-016-RAC

ADMINISTRATIVE LAW JUDGE DECISION

HEARING: November 2, 2023

APPEARANCES: Patrick Irvine, Esq. represented the Arizona Department of Gaming. Kory Langhofer, Esq. represented Arizona Downs, LLC. David Auther appeared as a witness.

ADMINISTRATIVE LAW JUDGE: Sondra J. Vanella

FINDINGS OF FACT

On August 3, 2023, the Arizona Department of Gaming, Division of Racing (“Department”), issued a Notice of Hearing setting the above-captioned matter for hearing on November 2, 2023, before the Office of Administrative Hearings in Phoenix, Arizona. The Notice of Hearing set forth the following to be addressed at hearing:

The Notice of Intent to Revoke AZ Downs’ Commercial Live-Racing Permit issued May 4, 2023, wherein the Department of Gaming issued notice of its intent to revoke J&J Equine Enterprise, LLC dba AZ Downs’ Commercial Live-Racing Permit for failing to run a live race meeting in calendar year 2023 due to revenue shortfalls, pursuant to A.R.S. §§ 5-108 and 5-108.02.

Arizona Downs, LLC (“Arizona Downs”) is a horseracing track located in Prescott Valley, Arizona. The current owners and operators of the track purchased it out of bankruptcy in 2018. David Auther is a twenty-five percent owner of Arizona Downs.

On June 9, 2022, the Department issued Arizona Downs a Commercial Permit to Conduct a Horse Race Meet ("Permit”). The Permit detailed specific allowed race dates in 2022. The Permit specified that for years 2023 and 2024, race dates were to be determined ("TBD") and required Commission approval. The Permit further specified that, “the Commission may revoke the commercial permit to hold a racing meeting for any reason which would be grounds to refuse to issue, approve or renew a permit under the provisions of A.R.S. § 5-108(4).” The Permit also required a performance bond in the amount of $300,000 and a Horsemen's bookkeeper bond in the amount of $100,000 as follows:

Performance Bonds: ARS § 5-107(D) requires the Permittee to deposit a bond in the amount of three hundred thousand dollars ($300,000.00) with the Division, made payable to the State for the benefit of the State and any person covered by this statute. The bond shall be effective for the period of the racing permit granted by the Commission.

Horsemen's Bookkeeper: Pursuant to Arizona Administrative Code ("A.A.C.") R19-2-103, R19-2-121(A)(1) and (O)(3), the Permittee shall employ a horsemen's bookkeeper who shall be bonded in an amount set by the Director, guaranteeing the faithful performance of their duties pursuant to A.A.C. R19-2-121(O). The bond shall be effective for the period of the racing permit granted by the Commission.

By letter dated February 9, 2023, the Department requested financial information and intended race dates from Arizona Downs for 2023. The letter advised Arizona Downs that the information requested was due to the Department beginning “its due diligence process to determine AZ Downs financial viability.”

In a February 15, 2023 email from the Department’s Deputy Director, Rudy Casillas, Arizona Downs was notified that one of its representatives had stated publicly that “AZ Downs is not in a financial position to run a meet this summer." The email requested verification of whether the information was factual and asked for confirmation. It also stated: "If you intend to seek alternative financial support for a 2023 summer race meet, please provide details."

On March 9, 2023, the Arizona Racing Commission ("Commission") discussed Arizona Downs’ permit at its meeting and directed the Department to issue a notice of intent to revoke the permit if the requested information was not provided.

In a letter dated March 31, 2023, Arizona Downs provided some financial information and also stated: "[a]s you know, we do not intend to run during the summer of 2023." The letter instead listed dates in May, June and July of 2024 as Arizona Downs' intended racing dates.

The letter further noted:

Based upon our forecast, a 30-day meet beginning in May 2024 will still require additional funding. We anticipate this funding will be available through the legislature. The total allocation to the race track has not yet been finalized. However, by May 2024, we will have a clear indication of how much money will be available through State of Arizona funding which we can add to the revenue stream generated through OTB income. To the extent the revenue stream is insufficient to run a 30-day meet, then Arizona Downs will meet with the horsemen and the Director to modify the proposed schedule.

The letter further noted its proposal to run during 2024 "will also depend on whether Stronach buys Arizona Downs this year."

In a letter dated April 10, 2023, Arizona Downs informed the Commission that Arizona Downs was under contract to sell, and also discussed various scenarios associated with a possible sale of Turf Paradise, a separate horse racing track that is located in Phoenix.

The April 10, 2023 letter also stated:

Had Arizona Downs applied for race dates this summer, a review of our financials would have resulted in denial of a meet. Furthermore, even if we were able to race, it is possible that the sale of the track would occur in mid-meet thus forcing a shutdown of the meet for lack of a Permittee/Owner. Our application, therefore, is for next summer when we will be financially able (if our simulcast signal is not terminated) to run a successful meet.

On April 20, 2023, the Commission discussed Arizona Downs’ permit and directed the Department of issue a Notice of Intent to Revoke Arizona Downs’ Live-Racing Permit.

On May 4, 2023, the Department issued the Notice of Intent to Revoke Commercial Live-Racing Permit to Arizona Downs. Arizona Downs requested an administrative hearing and the matter was referred to the Office of Administrative Hearings, an independent State agency.

Records of the Yavapai County Treasurer's Office regarding property taxes paid on Arizona Downs' track, parcel number 401-01-127F9 show that the 2021 and 2022 taxes were paid by Once Alpha, 115 Linda Vista, Sedona, AZ 86336, on February 14, 2023 and June 7, 2023, respectively.

The Department received notification from Platte River Insurance Company that two bonds issued to Arizona Downs in the amounts of $300,000.00 and $100,000.00 were cancelled.

David Auther testified on behalf of Arizona Downs. Mr. Auther testified regarding Arizona Downs’ primary source of revenue from Off Track Betting (“OTB”). Mr. Auther explained that OTB sites can obtain simulcast signals upon obtaining approvals from the Arizona Racing Commission and the Horsemen’s group. Arizona Downs and Turf Paradise have maintained OTB locations. Mr. Auther testified as to the importance of Arizona Downs being able to “accumulate money during the off season.”

Mr. Auther explained the way in which the two racetracks have historically divided the total amount of money wagered at OTB sites - in proportion to their respective live racing meets. Mr. Auther testified that since 2018, the Commission has required each racetrack to establish its own separate OTB network. Mr. Auther asserted that this change has resulted in financial difficulties for Arizona Downs. Arizona Downs contended that if the Commission were to resume the way in which they previously enforced A.R.S. § 5-112(C), the result would stabilize OTB revenues and thereby would significantly boost Arizona Downs’ finances and in turn, its live racing capabilities.

Arizona Downs did not legally challenge the change in the Commission’s enforcement of A.R.S. § 5-112(C). The issue of the enforcement of A.R.S. § 5-112(C) is not one over which this Tribunal has any jurisdiction and is outside the scope of the instant hearing.

Mr. Auther testified that the Commission failed to act on the application of a harness racing operator that proposed leasing Arizona Downs’ track for harness racing. Mr. Auther testified that had the Commission approved the application, it would have resulted in revenues of $100,000.00 per season, as well as reduce costs for racetrack expenses.

Mr. Auther also contended that the Commission coerced the Arizona Horsemen’s Benevolent and Protective Association (“AHBPA”) not to approve simulcast signals by citing to a statute that was inapplicable. Mr. Auther asserted that such action contributed to Arizona Downs’ current financial situation. Mr. Auther cited to a May 9, 2023 letter from counsel for AHBPA that states:

The purpose of this letter is to inform you that the AzHBPA Board has determined that an approval for the signal will not be executed by the AzHBPA on behalf of Arizona Downs.

This decision was made after speaking with Director Casillas who advised our client that the Horsemen have no authority to approve simulcasting without a contract in place. As you know, as there currently is no live racing at Arizona Downs, no contract is in place. Therefore, adhering to the Director’s position, whether in agreement or not, our client will not be approving simulcasting for Arizona Downs.

Mr. Auther testified regarding the proposed sale of Arizona Downs to Stronach & Company, the largest owner of racetracks. Mr. Auther testified that the sale did not proceed because Stronach chose not to purchase Arizona Downs due to “regulatory issues and the climate at the Racing Commission.”

Mr. Auther testified regarding Arizona Downs’ likely sources of income for 2024 under various scenarios including if Arizona Downs only received revenue from their own OTB sites, and if they received revenue from all OTB sites. Mr. Auther acknowledged that in both scenarios, Arizona Downs is in a “shortfall.” However, Mr. Auther testified that it would be “easy” for Arizona Downs to acquire $1 million, as Arizona Downs could apply to the Legislature for an appropriation, self-finance with a bridge loan or a partnership with others, or apply for undistributed COVID relief monies. Mr. Auther further asserted that if Turf Paradise is sold, Arizona Downs would receive income from all OTBs. Mr. Auther testified that Arizona Downs could partner with Watch and Wager, a harness racing operator, to lease the track, which would provide additional financing for Arizona Downs. Arizona Downs provided a letter from Watch and Wager, dated November 1, 2023, which sets forth the following:

WatchandWager.com, LLC (WAW) operates live harness racing at the California State Exposition as well as an advance deposit wagering (ADW) platform licensed in multiple jurisdictions to serve domestic and international markets. WAW currently has multiple license applications to conduct ADW and live harness racing pending before the Arizona Racing Commission. In support of it harness racing application, WAW has executed a lease with Arizona Downs LLC for use of their racing facility through 2026. Additionally WAW is currently in negotiations with Arizona Downs to lease the property year-round in support of WAW’s application to conduct thoroughbred racing to be submitted by January 2024.

Mr. Auther testified that the bonds to which the Department referred remain on deposit with the bonding company. Because it costs $10,000.00 per year to renew the bonds and Arizona Downs decided not to race in the summer of 2023, Arizona Downs made the decision not to renew the bonds. The bonds can be reinstated upon payment of the $10,000.00 premium. Mr. Auther asserted that prior to Arizona Downs resuming live racing, it will reinstate the bonds.

Mr. Auther testified that by May 2024, Arizona Downs will have full financial resources to run a meet, and that it has never before been required to inform the Commission by the previous November whether it will run a live meet. However, when questioned by the Department’s counsel, Mr. Auther acknowledged that the January 2023 balance sheet contained in Arizona Downs’ Exhibit 3, is still accurate, that Arizona Downs continues to owe the Horsemen $180,000.00, Arizona Downs has $671,000.00 in accrued real estate taxes, and some of Arizona Downs’ tax liability has been paid by another entity. Mr. Auther explained that a private entity can purchase the tax claim and pay it, and then collect interest until it is paid. This shifts the liability from the county to a private party, and if after a certain period of time, the debt is not paid, the third party can foreclose upon the property.

Prior to the conclusion of the hearing, Mr. Auther testified that during the course of the hearing, Arizona Downs received an offer for its purchase. In the event Arizona Downs is sold, the new owner would require its own permit for live horse racing, and the issue for the instant hearing would be moot.

CONCLUSIONS OF LAW

A.R.S. § 41-1092.07(G)(2) provides that “[a]t a hearing on an agency action to suspend, revoke, terminate or modify on its own initiative material conditions of a license or permit, the agency has the burden of persuasion.”

The burden of proof at an administrative hearing falls to the party asserting a claim, right, entitlement, or affirmative defense, and the standard of proof on all issues in this matter is that of a preponderance of the evidence. A preponderance of the evidence is: “[t]he greater weight of the evidence, not necessarily established by the greater number of witnesses testifying to a fact but by evidence that has the most convincing force; superior evidentiary weight that, though not sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other.”

A.R.S. § 5-107.01(A) establishes the necessity for a permit as follows: “[a] person, association or corporation shall not hold any racing meeting without having first obtained and having in full force and effect a permit that is issued by the department.”

A.R.S. § 5-107(D) sets forth the requirement for a bond as follows: “[i]n addition to the cash deposit and before the issuance of a racing meeting permit, the applicant shall deposit with the department a bond payable to the state for the benefit of the state and any person covered by this section, in such amount, but not to exceed three hundred thousand dollars in the case of horse or harness racing meeting permittees . . .”

A.R.S. § 5-108.02(A) provides that “[t]he commission may revoke the permit of any permittee upon any of the grounds upon which the commission could refuse to approve a permit in section 5-108 or who has failed to pay the department all sums required under this chapter.”

A.R.S. § 5-108(A)(2) establishes that “[t]he commission may refuse to approve or renew a permit to conduct a racing meeting . . . if there is substantial evidence to find that: (a) The applicant is not possessed of or has not demonstrated financial responsibility sufficient to meet adequately the requirements of the enterprise proposed to be authorized.”

A.R.S. § 5-108(A)(4) gives the Department the authority to “deny or refuse to renew a license or the commission may refuse to approve or renew a permit to any applicant if the applicant has failed to meet any monetary obligation in connection with any racing meeting held in this state.”

Arizona Downs has no allocated racing days in 2023, although it asserts that it will conduct races in 2024. Arizona Downs’ own financial projections demonstrate a substantial shortfall that would require additional funding. Mr. Auther provided credible testimony concerning potential sources of funds. However, those sources are speculative at best. Further, Arizona Downs has not paid its own property taxes and its bonds are canceled. The evidence of record established that presently, Arizona Downs does not have the financial ability to conduct live racing.

The substantial evidence of record established that Arizona Downs has not “demonstrated financial responsibility sufficient to meet adequately the requirements of the enterprise proposed to be authorized.” Therefore, the evidence of record established that pursuant to A.R.S. § 5-108.02(A), the Department has grounds to revoke Arizona Downs’ Permit.

ORDER

IT IS ORDERED that the Department’s Notice of Intent to Revoke Arizona Downs’ Commercial Live-Racing Permit is affirmed.

IT IS FURTHER ORDERED that Arizona Downs’ appeal is dismissed.

Pursuant to A.R.S. § 41-1092.08(I), the licensee may accept the Administrative Law Judge Decision by advising the Office of Administrative Hearings in writing not more than ten (10) days after receiving the decision. If the licensee accepts the Administrative Law Judge Decision, the decision shall be certified as the final decision by the Office of Administrative Hearings.

In the event of certification of the Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order will be forty (40) days from the date of that certification.

Done this day, November 21, 2023.

/s/ Sondra J. Vanella

Administrative Law Judge

Transmitted by either mail, e-mail, or facsimile to:

Rudy Casillas, Director

Division of Racing

ATTN: Cassie Goodwin

1110 W. Washington, Suite 450

Phoenix, AZ 85007

[email redacted]

[email redacted]

Kory Langhofer

Thomas Basile

STATECRAFT, PLLC

649 North Fourth Avenue, First Floor

Phoenix, Arizona 85003

[email redacted]

[email redacted]

Patrick Irvine, Esq.

FENNEMORE CRAIG, P.C.

2394 East Camelback Road, Suite 600

Phoenix, Arizona 85016

[email redacted]

By: OAH Staff