A recent Delaware court decision about whether a $10 million holdback is owed on the 2019 purchase of Kentucky Downs reveals some very difficult decisions were made at the time in order for the track to not only prosper, but to survive.
The story is about how a tangled intersection among track ownership, its credit facility, Kentucky regulators, the Family Foundation, courts, and legislators brought Kentucky Downs and its Historical Horse Racing business known as The Mint to the precipice—and back.
According to the 51-page opinion written by the Chancery Court of Delaware's vice chancellor, Nathan A. Cook, Kentucky Downs was sold seven years ago for $185 million, but there was a $10 million wrinkle. As things turned out, the $10 million was—at least to the buyers—a blip in comparison to what could have been.
"At the time the parties were negotiating the sale, pending litigation regarding the legality of Kentucky Downs’ historical horse racing terminals loomed large—threatening sudden and catastrophic harm to the value of the business." Cook wrote. "To hedge against that risk, the buyers’ lenders insisted on a $10 million holdback."
The money was eventually payable to the sellers so long as there was not a "final non-appealable unfavorable ruling" about HHR's legality before a set date. In other words, if the court ruled favorably to HHR, the buyers owed the $10 million holdback; and if the ruling was not favorable to HHR, the buyers did not owe the holdback.
After eight years of litigation, a trial court in Frankfort, Ky. ruled in October 2018 that HHR was legal. The Family Foundation, which stridently opposed HHR, filed an appeal in the Kentucky Court of Appeals.
In November 2018, Kentucky Racing Acquisition, a new company co-founded by Ron Winchell and Marc Falcone, announced it had entered into a definitive agreement to purchase all the assets of the track from parent company Kentucky Downs Partners, the investment group that had owned the track since 2007. The track sale closed in early 2019.
"As the deal progressed, buyers and their lenders developed a fuller understanding of the Family Foundation Case," Cook wrote, citing testimony from one of the buyers. "It became clear to them that an unfavorable ruling presented an existential risk to Kentucky Downs. The Family Foundation was backed by an 'extremely wealthy and influential person in Kentucky' (according to testimony). Buyers became convinced the Family Foundation would 'take this (case) all the way to the end.'
"Buyers came to realize that if the Kentucky Supreme Court ruled unfavorably against petitioners, then Kentucky Downs’ HHR business 'would be in big trouble,'" Cook wrote.
In June 2019, the Kentucky Court of Appeals transferred the Family Foundation Case to the Kentucky Supreme Court without making a decision. The hammer fell 15 months later. In September 2020, the Kentucky Supreme Court reversed the Franklin Circuit Court’s decision in the Family Foundation case, finding that the HHR system was in violation of Kentucky law.
One of the issues that resulted from the ruling was whether the buyers owed the $10 million holdback, but it paled in comparison to the dilemma Kentucky Downs now faced. According to Cook's opinion, Kentucky Downs' attorneys advised Kentucky Downs' owners Winchell and Falcone, to get out of the HHR business for an indefinite period.
"After the Kentucky Supreme Court issued its Family Foundation Opinion, buyers’ attorneys and industry experts advised them to shut down the Exacta HHR terminals," Cook wrote. "HHR operation risked substantial exposure under Kentucky’s Loss Recovery Act, which allows losing gamblers to reclaim money lost on illegal wagers.
Cook heard testimony that damages under Kentucky law could amount to triple the amounts of bets made if the bets were declared illegal and that other tracks did not want to take the risk. For example, he was told The Red Mile (a Standardbred track in Lexington) was concerned a billion-dollar judgment could be entered against it, and there was evidence HHR handle at Kentucky Downs/The Mint was $926 million in 2020 and $1.924 billion in 2021.
"Buyers learned that other gaming facilities were turning off their HHR machines to avoid such exposure," Cook wrote. "Nonetheless, Buyers concluded that they didn’t have the option to shut down HHR at Kentucky Downs because of the 'very tight credit agreement' with their lenders. Buyers determined that, if they did shut down HHR, they would be in default under their loan terms. Buyers thus elected to risk continuing to operate the HHR machines."
After a long lobbying effort spearheaded by Kentucky Downs, which, according to Cook's opinion, was on its own in pursuing legislative relief, the Kentucky General Assembly passed into law a statute authorizing HHR operations in early 2021. It was signed into law by Gov. Andy Beshear.
That same year, Kentucky Downs' sellers, led by Ray Reid, filed suit to collect the $10 million holdback. Even though the parties' agreement provides for no payment if there was a final ruling against HHR, the sellers pursued several legal arguments as to the timing of the finality of the ruling and the fact that Kentucky Downs did not suffer any loss of revenue.
The agreement, wrote Cook, "defines 'Unfavorable Ruling' specifically to require a 'finding...that...the Exacta HHR Terminals are not pari-mutuel horse racing games...." He held that every aspect of the wording of the agreement was met by the Kentucky Supreme Court's ruling outlawing HHR, including a requirement that the ruling be made final within a defined time frame.
The Chancery Court's decision is appealable. BloodHorse reached out to both sides of the issue and will update this story with any available comment.
In the meantime, Kentucky Downs, The Mint and several satellite facilities are still in operation, and the Kentucky Downs' annual live racing meet is scheduled to kick off August 29.
