Kentucky Downs Management, Inc. v. Kentucky Downs, LLC f/k/a Kentucky Racing Acquisition, LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE KENTUCKY DOWNS MANAGEMENT, INC.; KD RACING, LLC f/k/a KENTUCKY DOWNS RACING, LLC; KD PARTNERS, LLC f/k/a KENTUCKY DOWNS PARTNERS; and KYD, LLC f/k/a KENTUCKY DOWNS, LLC, Plaintiffs, v. C.A. No. 2021-0251-NAC KENTUCKY DOWNS, LLC f/k/a KENTUCKY RACING ACQUISITION, LLC; and KENTUCKY RACING HOLDCO, LLC, Defendants. POST-TRIAL MEMORANDUM OPINION Date Submitted: May 13, 2025 Date Decided: August 13, 2026 Richard P. Rollo, Travis S. Hunter, John M. O’Toole, RICHARDS, LAYTON & FINGER, P.A., Wilmington, DE; Cory J. Skolnick, FROST BROWN TODD LLP, Louisville, KY; Aaron T. Brogdon, Zackary L. Stillings, FROST BROWN TODD LLP, Columbus, OH; Attorneys for Plaintiffs. Joanna J. Cline, Christopher B. Chuff, Emily L. Wheatley, TROUTMAN PEPPER LOCKE LLP, Wilmington, DE; Michael E. Kearney, Adam J. Pernsteiner, KEARNEY PUZEY DAMONTE LTD., Las Vegas, NV; Attorneys for Defendants. COOK, V.C.  This case involves the sale of the Kentucky Downs horse racing and gaming facility in Franklin, Kentucky. At the time the parties were negotiating the sale, pending litigation regarding the legality of Kentucky Downs’ historical horse racing (“HHR”) terminals loomed large—threatening sudden and catastrophic harm to the value of the business. To hedge against that risk, the buyers’ lenders insisted on a $10 million holdback, payable to the sellers unless there was a “final non-appealable unfavorable ruling” in the litigation before a set date. Following the sale, and before the set date, the Kentucky Supreme Court issued an opinion, ruling that the HHR terminals were illegal under Kentucky law. The buyers scrambled in response—fielding calls from other facilities facing similar exposure and lobbying the legislature for a fix. In the meantime, despite being advised to shut down and avoid imminent lawsuits—and seeing other facilities do just that—the buyers kept Kentucky Downs’ HHR operations open to avoid defaulting on their credit agreement. The buyers’ lobbying efforts paid off, and a new bill making the HHR terminals legal passed by a slim margin. As a result, Kentucky Downs never had to shut down, the lawsuits filed alleging the illegal use of HHR terminals were dismissed, and the buyers did not incur any economic loss. Based on the Kentucky Supreme Court’s ruling, the buyers refused to pay the $10 million holdback amount, and the sellers sued to recover. This case comes down to a photo finish over the interpretation of the words “final non-appealable unfavorable ruling.” On a prior motion, former Vice Chancellor Slights found that both parties had offered reasonable interpretations, rendering the language ambiguous and sending the parties to discovery. After a one-day trial on a paper record, the case is ready for the official call. As explained below, the contract’s plain text resolves most of the interpretive dispute. The Kentucky Supreme Court’s decision was “final” under Kentucky procedural rules, and there was no basis for further appeal, making it “non- appealable.” Whether the decision was “unfavorable” is a closer call. Sellers argue the decision was not unfavorable because Kentucky Downs did not suffer any resulting injury, as the parties intended. The buyers argue that the actual impact of the decision is irrelevant, and the parties bargained for a straight holdback based on the outcome of a specified risk event. A review of the sparse, but telling, extrinsic evidence reveals the buyers’ reading as the clear winner. The original agreement was structured to require actual loss—consistent with the sellers’ interpretation. But the parties amended the agreement to remove that requirement. The sellers’ interpretation would rewrite the contract to revert this bargained-for amendment. Judgment is entered for the buyers. I. FACTUAL BACKGROUND A. The Parties Plaintiff Kentucky Downs Management, Inc. is a Kentucky corporation with its principal offices located in Tennessee. 1 Plaintiffs KD Racing, LLC, KD Partners, LLC, and KYD, LLC (together with Kentucky Downs Management, “Sellers”) are 1 Dkt. 97, Pretrial Stipulation and Order (“PTO”) ¶ 1. The parties’ joint exhibits are cited as “JX### at .” 2 Kentucky limited liability companies with their principal offices located in Tennessee. 2 Ray Reid is President of KD Partners and Kentucky Downs Management. 3 Defendant Kentucky Downs, LLC f/k/a Kentucky Racing Association, LLC (“KRA”) is a Kentucky limited liability company with its principal offices located in Nevada. 4 Defendant Kentucky Racing Holdco, LLC (together with KRA, “Buyers”) is a Delaware limited liability company with its principal offices located in Nevada. 5 Buyers are managed by a board of managers, including Ronald Winchell and Marc Falcone. 6 B. HHR at Kentucky Downs In July 2010, the Kentucky Horse Racing Commission (“Commission”) promulgated regulations to facilitate the introduction of HHR terminals at racetracks in Kentucky. 7 HHR is a wagering system that shows replays of horse races that have 2 PTO ¶¶ 2–4. 3 JX010 at 6. 4 PTO ¶ 5. 5 PTO ¶ 6. 6 JX012 (“Winchell Dep.”) at 5:14–23; JX013 (“Falcone Dep.”) at 5:19–6:4; JX006 at 2; JX019 at 4. 7 PTO ¶ 7. 3 been run at approved racing facilities. The system presents these races by video display on an electronic device, where individual bettors place wagers. 8 From 2007 to 2018, Plaintiff KYD, LLC owned and operated the Kentucky Downs racetrack and gaming facility at the center of this dispute. Following the Commission’s 2010 regulations, Kentucky Downs offered HHR wagering through several hundred HHR machines, in addition to live turf racing. 9 Kentucky Downs exclusively used “Exacta” HHR machines. 10 Exacta is an HHR systems provider that receives a share of the revenue stream derived from its systems at gaming venues, such as Kentucky Downs. 11 Although two other HHR systems providers existed (PariMax and Ainsworth), they did not provide viable alternatives for Kentucky Downs. Kentucky Downs was in trade secrets litigation 8 PTO ¶ 8. See Appalachian Racing, LLC v. Family Tr. Found. of Ky., Inc., 423 S.W.3d 726, 730 (Ky. 2014) (“Historical horse races are horse races that have been run sometime in the past at an approved racing facility and are then currently presented in the form of a video display on an electronic device, or terminal, at which individual wagerers may place bets. One such device, similar in appearance to a slot-machine, is a patented product marketed under the name ‘Instant Racing.’ 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 better 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.”). 9 PTO ¶ 9. 10 Falcone Dep. at 15:9–11. 11 JX015 (“Aronson Dep.”) at 11:5–15. 4 against PariMax. 12 And Ainsworth worked exclusively with another racetrack and gaming facility in Kentucky. 13 During its early years at Kentucky Downs, HHR showed immense market potential. After HHR was first introduced at Kentucky Downs in September 2011, “the total amount of betting at Kentucky Downs on HHR alone for that final quarter was 29 million[.]” 14 “And the numbers from there on out were extraordinary.” 15 The amount of betting on HHR machines increased to $190 million in 2012 and to $350 million in 2018. 16 By 2023, “the amount of money bet on HHR in the United States for the first time exceeded the total amount bet on live horse racing[.]” 17 According to Sellers’ broker, Tom Aronson, “it’s fair to say that in many places HHR saved horse racing and breeding.” 18 C. The Family Foundation Case In July 2010, the Commission, the Kentucky Department of Revenue, Plaintiff KYD, LLC, and several horse racing associations (“Petitioners”) commenced an 12 Falcone Dep. at 15:9–19; Winchell Dep. at 30:18–31:2. 13 Falcone Dep. at 15:9–19; Winchell Dep. at 31:3-25. 14 Aronson Dep. at 29:1-3. 15 Aronson Dep. at 29:9-10. 16 Aronson Dep. at 29:13-16. 17 Aronson Dep. at 30:12-14. 18 Aronson Dep. at 31:8-9. Aronson is the President of Racing Resource Group, Inc., a consultancy in the racing and gaming business. Aronson Dep. at 4:10-12. 5 “agreed case” in the Franklin County Circuit Court in Kentucky (the “Family Foundation Case”). 19 Petitioners sought a declaration that the Commission’s HHR regulations were valid, and that bets placed on the Exacta system were a permissible form of “pari-mutuel wagering” under Kentucky law. 20 Pari-mutuel wagering requires patrons to wager on the same horse races among themselves. 21 At the time, Kentucky mandated by statute that wagering systems be pari-mutuel. 22 The Franklin Circuit Court permitted a Kentucky non-profit, the Family Trust Foundation of Kentucky (“Family Foundation”), to intervene. The Family Foundation opposed Petitioners’ requests and challenged the validity of the Commission’s newly enacted regulations. 23 The case “struck right at the heart of what Kentucky Downs was doing with [HHR] . . . and the importance . . . [it was] developing around the future of Kentucky horse racing.” 24 19 PTO ¶ 10; see also JX018 at 2. The parties subsequently referred to the litigation in the relevant transactional documents as the “Family Foundation Case.” PTO ¶ 11. Buyers were never named parties in the Family Foundation Case. PTO ¶ 12. 20 PTO ¶ 10; see also JX018 at 1 n.1, 4–5 & n.3. 21 See, e.g., Fam. Tr. Found. of Kentucky, Inc. v. Kentucky Horse Racing Comm'n, 620 S.W.3d 595, 601 (Ky. 2020) (“To be clear, pari-mutuel wagering requires that patrons generate the pools based on wagering on the same discrete, finite events. 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.”) (citation omitted). 22 Id. at 597–98 (citing Ky. Rev. Stat. §§ 230.215, 230.361). 23 PTO ¶ 13; JX014 (“Reid Dep.”) at 14:1–18. 24 Aronson Dep. at 39:6–13. 6  The Family Foundation Case turned into protracted litigation that involved numerous procedural twists and hurdles. 25 After eight years of litigation, the Franklin Circuit Court held a bench trial in January 2018. 26 On October 24, 2018, the circuit court determined that the Exacta system used by Kentucky Downs constituted pari-mutuel wagering under Kentucky law, and thus was statutorily valid. 27 The Family Foundation appealed to the Kentucky Court of Appeals, 28 which then transferred the appeal directly to the Kentucky Supreme Court. 29 D. Buyers Express Interest in Acquiring Kentucky Downs In the spring of 2018—while the Family Foundation Case was still pending before the Franklin Circuit Court 30—Winchell and Falcone learned that Sellers were 25 The Franklin Circuit Court initially entered judgment in favor of Petitioners. PTO ¶ 14. The Family Foundation appealed to the Kentucky Court of Appeals. PTO ¶ 15. In June 2012, the Kentucky Court of Appeals affirmed the Franklin Circuit Court’s decision that the case presented a justiciable controversy but concluded that the Family Foundation should be afforded the opportunity to conduct discovery. PTO ¶ 16. The Petitioners appealed that June 2012 ruling to the Kentucky Supreme Court. PTO ¶ 17. In February 2014, the Kentucky Supreme Court affirmed the Kentucky Court of Appeals’ June 2012 ruling as it pertained to discovery, but found that other issues could properly be decided as a matter of law. PTO ¶ 18. The Kentucky Supreme Court remanded to the trial court. PTO ¶ 19. 26 PTO ¶ 20. 27 PTO ¶ 21. 28 PTO ¶ 22. 29 PTO ¶ 23. JX018 at 4 (“On October 24, 2018, the [Franklin Circuit] Court entered its 30 See Opinion and Order setting forth its Findings of Fact and Conclusions of Law that the Exacta System was a pari-mutuel system of wagering legally permitted under Kentucky law.”). 7 trying to sell Kentucky Downs. 31 Winchell and Falcone expressed interest and were put in contact with Sellers’ representatives. This led to discussions between Winchell and Falcone, on the one hand, and Reid and Aronson, on the other. 32 The parties discussed valuation. 33 Sellers were impressed and believed that Buyers could take Kentucky Downs “to the next level[.]” 34 During due diligence, Winchell and Falcone learned about various risks associated with the business, including the Family Foundation and Trade Secrets Cases. 35 Sellers repeatedly conveyed their belief that the risks associated with the Family Foundation Case were minimal based on the history of the litigation. 36 Falcone and Winchell sought third-party financing for their impending acquisition. 37 Around fall 2018, they solicited “letters of intent on financing packages” from “a dozen or so” potential lenders, including sophisticated investing 31 JX008 ¶ 4; Winchell Dep. at 11:1–12:23; Falcone Dep. at 9:3–12, 13:14–24. 32 Reid Dep. at 7:15–10:5, 26:1–25; Winchell Dep. at 12:11–13:14; Falcone Dep. at 9:3– 12; JX019 at 18. Aronson acted as Sellers’ broker early in the deal. See Aronson Dep. at 15:13–16:4; Reid Dep. at 8:3–19. 33 Reid Dep. at 9:13–25. 34 Reid Dep. at 18:18–20. 35 SeeJX003 at 89 (defining “Trade Secret Cases” as two lawsuits pending in the United States District Court for the Western District of Kentucky). 36 Winchell Dep. at 14:9–15:23. 37 Falcone Dep. at 9:3–25. 8 institutions. 38 In connection with that process, Falcone and Winchell worked with Credit Suisse to prepare a presentation disclosing the risks associated with the acquisition, including the Family Foundation Case. 39 At the time, HHR was still relatively unknown in the capital markets as an alternative gaming opportunity. 40 Buyers sought to explain how HHR worked, its legal aspects, and the potential implications of the Family Foundation Case. 41 The lenders were keen to understand the legal risks and hired counsel to assess the litigation. 42 Indeed, Winchell testified that this “was one of the biggest factors” in Buyers’ search for a lender. 43 During this time, the Franklin Circuit Court’s decision that “the Exacta System was a pari- mutuel system of wagering legally permitted under Kentucky law” was appealed to the Kentucky Court of Appeals and subsequently transferred to the Kentucky Supreme Court. 44 Only a “small group of three investors” committed to financing the deal. 45 As Reid put it: “[F]inancing a transaction that deals with gaming is difficult in itself. . . . 38 Falcone Dep. at 10:1–19. 39 Falcone Dep. at 10:20–11:12. 40 Falcone Dep. at 11:19–12:25. 41 Falcone Dep. at 11:19–12:25. 42 Falcone Dep. at 11:19–12:25; Winchell Dep. at 27:19–28:10. 43 Winchell Dep. at 28:9–10. 44 JX018 at 4. 45 Falcone Dep. at 10:1–19. 9 [T]here’s lots of banks [] that don’t want to get involved[.]” 46 Ultimately, Buyers entered a credit arrangement led by Summit Capital, a private equity fund with sophisticated long-term investors in the casino business. 47 E. The Parties Enter into the APA On November 5, 2018, while the Family Foundation Case was pending before the Kentucky Court of Appeals, the parties entered into an Asset Purchase Agreement (“APA”), which contemplated KRA’s purchase of Kentucky Downs for $185,000,000. 48 Winchell, Falcone, and Aronson were involved in negotiating the terms. 49 Reid approved the terms on Sellers’ behalf. 50 The APA included a holdback escrow amount of $20 million with respect to the Family Foundation Case and the then-pending Trade Secret Cases. 51 The parties tethered the holdback escrow to indemnifiable losses. Section 2.05 of the APA, entitled “Payment of Holdback Escrow Fund,” provided in relevant part: (a) Family Foundation Case. The Parties agree that Ten Million Dollars . . . of the Holdback Escrow Fund shall be immediately released from the 46 Reid Dep. at 29:7–18. 47 Falcone Dep. 13:18-24. 48 PTO ¶ 24; JX003 at 9–10; JX006 ¶ 8. 49 See, e.g., JX001; Reid Dep. at 7:15–8:2.Although the parties executed the APA in early November 2018, the transaction did not close then, and the terms of the parties’ agreement were the subject of further negotiations, as explained below. 50 See, e.g., JX003 at 160; JX010 at 6. 51 See JX003 § 2.05; JX019 at 22. 10  Holdback Escrow Fund to Seller Group if there is a favorable final non- appealable ruling in Franklin Circuit Court, or a subsequent favorable decision in Kentucky Court of Appeals, with respect to the Family Foundation Case[.] (b) Trade Secret Cases. The Parties further agree that Ten Million Dollars . . . of the Holdback Escrow shall be immediately released from escrow to Seller Group if there is a favorable final non-appealable ruling in US District Court with respect to both Trade Secrets Cases[.] 52 The APA defined “Family Foundation Case” to “mean[] the lawsuit in Franklin Circuit Court, Commonwealth of Kentucky, Case No. 10-CI-1154.” 53 Section 2.05(e) provided: Unfavorable Rulings. If there shall be a non-appealable Unfavorable Ruling in either the Family Foundation Case or the Trade Secret Cases prior to the second [] anniversary date of the Closing Date, Purchaser shall be entitled to payment of an amount equal to its indemnifiable Losses determined in accordance with Article XII out of the Holdback Escrow Fund, subject to the $20,000,000.00 aggregate cap on Seller's indemnification obligation set forth in Section 12.01(d) and the other limitations on Seller Group’s indemnification obligations and with respect to the calculation of Losses set forth in Article XII, but excluding the Deductible referred to in Section 12.01(c). 54 The parties worked extensively on the language in Section 2.05, which reflected a “quantification of risk” driven by Buyers’ lenders. 55 52 JX003 at 13–14. 53 JX003 at 81. 54 JX003 at 15. 55 Falcone Dep. at 13:1–13; Aronson Dep. at 21:12–22:13; see also, e.g., JX001 at 2 (proposal to delete “final non-appealable” language was not acceptable to Buyers because it “will significantly hinder our ability for financing”; “The 2 year collar is a difficult enough hurdle as it is; an already contentious item with lenders”). In December 2018, the parties also executed Amendment No. 1 to the APA. PTO ¶ 25. That amendment did not alter any 11 F. Buyers and Their Lenders Express Concern Regarding the Family Foundation Case As the deal progressed, Buyers and their lenders developed a fuller understanding of the Family Foundation Case. 56 It became clear to them that an unfavorable ruling presented an existential risk to Kentucky Downs. 57 The Family Foundation was backed by an “extremely wealthy and influential person in Kentucky.” 58 Buyers became convinced the Family Foundation would “take this [case] all the way to the end.” 59 And Buyers came to realize that if the Kentucky Supreme Court ruled unfavorably against Petitioners, then Kentucky Downs’ HHR contractual language that would be pertinent here. See, e.g., JX006 at 3; Dkt. 1, Verified Complaint (“Compl.”) ¶ 31 & Ex. B; Dkt. 23 at 6 n.11. 56 Winchell Dep. at 12:11–23, 14:9–17:2, 18:7–19, 49:10–50:3. 57 See, e.g., JX008 ¶ 10 (“From [Buyers’] perspective at the time . . . an Unfavorable Ruling was viewed as an unmitigated disaster, as it meant the potential loss of the business. And, at the time, there was no way for us to know how the Family Foundation Case would turn out in the end. We also had no idea how any Unfavorable Ruling would be received[.]”); Winchell Dep. at 18:7–19 (“[A]n unfavorable ruling to us meant . . . potentially . . . sudden death[.]”); see also Aronson Dep. at 21:12–21 (“The [] case evolved into the single-most greatest threat to the sale[.]”). 58 Winchell Dep. at 14:9–15:23. 59 Winchell Dep. at 14:9–15:23. 12 business “would be in big trouble” and, given the political environment’s “religious undertone[,]” “this could be a massively big problem for the operating business.” 60 Kentucky was not known for promoting gaming. 61 Additionally, at the time the Family Foundation Case was on appeal, the state was in the midst of a gubernatorial election, and the incumbent was perceived as “anti-gaming.” 62 The governor chose the Commission’s members, so political recourse was uncertain. 63 Given that the Family Foundation Case concerned the Exacta system, and Kentucky Downs was unable to use other HHR systems, Buyers became concerned that an unfavorable ruling could impose serious risks, including bankruptcy. 64 These risks made Buyers’ lenders uncomfortable and became the lenders’ primary focus. 65 The risks took on even greater salience considering the sale 60 Winchell Dep. at 15:24–17:2. 61 JX008 ¶ 10. 62 Winchell Dep. at 28:25–29:19, 74:8–75:1; Falcone Dep. at 21:16–22:14. 63 Winchell Dep. at 74:8–75:1. 64 Falcone Dep. at 14:23–16:2 (discussing potential of having “no sources of revenue with no ability to operate the Exacta Game products” resulting in “complete wipeout of all the equity”); id. at 26:12–27:1 (discussing “different variations of risks that aren’t directly assigned to specific financial loss”); id. at 54:3–22 (“We would have never been able to gauge the magnitude and significance of [an adverse ruling].”). 65 Reid Dep. at 10:12–23; Winchell Dep. at 14:9–17:2, 25:15–28:10. 13 premium that Buyers had agreed to pay. 66 The lenders exerted pressure on Buyers to revisit the Family Foundation Case holdback language. 67 G. The Parties Negotiate and Execute the Second Amendment The parties returned to the bargaining table to negotiate an amendment to the APA’s terms. Their lawyers, the lenders, Reid, Falcone, and Winchell were all involved. 68 The lenders wanted a larger holdback amount, an expanded time period, and very specific language about how funds would be released. 69 Buyers “had to negotiate those requests down,” 70 but they succeeded in converting the Family Foundation Case holdback from an up-front $10 million payment that would be held in escrow to cover indemnifiable losses, to a straightforward $10 million conditional deferred-payment obligation, reducing the amount Buyers would need to borrow up 66 Winchell Dep. at 15:24–16:2, 54:21–55:16 (“[A]s we learned and we talked to lenders, it was a higher risk.”); Falcone Dep. at 11:19–16:22, 35:9–20 (“We paid ten times 2018 EBITDA. Market industry standards are six to eight times”). 67 Falcone Dep. at 13:14–14:22. In addition to Buyers’ lenders’ concerns, Sellers had settled the Trade Secret Cases, which provided further reason to amend the APA. Reid Dep. at 11:9–12:15, 18:1–20, 37:1–19; Winchell Dep. at 18:20–19:25, 24:10–25:12, 66:12–21; JX008 ¶ 9; JX016 at 3; JX019 at 22. 68 See, e.g., JX019 at 18; Reid Dep. at 55:19–24; Winchell Dep. at 61:16–64:6, 80:12– 81:10; Falcone Dep. at 48:13–50:12. Aronson was not involved in the negotiation of the Second Amendment. Aronson Dep. at 23:23–24:11. 69 Falcone Dep. at 13:1–14:22. 70 Falcone Dep. at 13:1–14:22. 14 front. 71 This “right-size[d]” the risk given the sale premium 72 and also provided added “visibility and certainty” to Buyers’ lenders. 73 As part of the give-and-take, Sellers required Winchell and Falcone to execute guarantees to support Buyers’ obligation to pay the holdback. 74 Buyers also had to agree to “very restrictive” language in the credit agreement on their use of funds, including their ability to draw the $10 million holdback amount in the event that it became due. 75 The parties further agreed to remove language regarding the Trade Secret Cases, which had been resolved, and the APA’s prior escrow indemnification framework. 76 The parties agreed that Sellers would receive Rollover Units, plus cash 71 JX008 at 6-7; JX009 at 3; JX016 at 3; Reid Dep. at 11:9–12:15, 18:1–20, 37:1–38:10, 40:4–42:11; Winchell Dep. at 42:13–43:13; Falcone Dep. at 35:21–36:6, 49:22–50:2. 72 Winchell Dep. at 21:20–22:10, 42:13–43:13, 54:21–55:16, 84:21–85:14. 73 Winchell Dep. at 84:21–85:14; Falcone Dep. at 49:22–53:10. 74 JX005; JX009 at 1–4; Winchell Dep. at 24:10–25:12 (“I don’t like personal guaranties. But . . . it was something we had to give to kind of get to the finish line.”), 32:24– 33:22 (“[T]hat was one of our gives . . . at the request of the seller[.]”); Falcone Dep. at 35:21– 36:6, 46:1–48:3. 75 Falcone Dep. at 13:1:–14:22 (testifying that the lenders “wanted very specific language about how funds would be released as part of a holdback provision . . ., which, . . . was very restrictive on how we could invest and how we could make payments outside of the credit to solve things such as the holdback provision”);see also id. at 50:19–51:2 (“We had to negotiate into the credit agreement that we could draw a $10 million associated with the [holdback] payment, so there was a specific clause in the credit agreement that enabled us to make that $10 million payment, and that was approved by the lenders, and that was ultimately agreed to as part of the [Second Amendment].”); JX009 at 1–3;. 76 JX009 at 1; JX016 at 3; see generally JX004. 15 consideration of $172,650,000. 77 After various revisions, the parties formalized these changes by executing Amendment No. 2 to the APA (“Second Amendment”). 78 The Second Amendment amended Section 2.05 “in its entirety,” replacing the APA’s original Section 2.05(a)–(e), with a new Section 2.05(a)–(b). 79 The Second Amendment removed any reference to escrow from Section 2.05(a). 80 As amended, Section 2.05(a) provides in relevant part: Family Foundation Holdback. The Family Foundation Holdback Amount shall be paid to Contributor Group[ 81] (i) if there is a final non- appealable ruling in favor of the defendants in the Family Foundation Case . . . or (iii) so long as on the second (2nd) anniversary of the Closing Date [i.e., March 8, 2021] there has not been a non-appealable Unfavorable Ruling prior to that date. 82 The parties also replaced the original Section 2.05(e) with a new Section 2.05(b), removing any language regarding “indemnifiable Losses” along the way. As amended, Section 2.05(b) provides: Unfavorable Rulings. If there shall be a non-appealable Unfavorable Ruling in the Family Foundation Case prior to the second [] anniversary date of the 77 See JX004 at 2; Winchell Dep. at 29:20–30:15. 78 JX004 at 1, JX010 at 10; JX019 at 22; PTO ¶¶ 26–29. 79 JX004 at 3; PTO ¶ 27. 80 JX004 at 3, 9; PTO ¶ 30. 81 “Contributor Group” is defined as Kentucky Downs Partners, LLC, Kentucky Downs, LLC, and Kentucky Downs Racing, LLC. JX004 at 1 (Preamble). This same group was defined in the APA as the “Seller Group.” JX003 at 1 (Preamble). 82 JX004 at 3 (emphasis added); PTO ¶ 30. 16  Closing Date, KRA shall have no obligation to pay the Family Foundation Holdback Amount. 83 The Second Amendment defines “Unfavorable Ruling” as: a final non-appealable unfavorable ruling in the Family Foundation Case against Contributor, finding either that (A) the Exacta HHR Terminals are not pari-mutuel horse racing games, or (B) the Commission’s treatment of HHR under its regulations are invalid. 84 The parties’ choice of a two-year holdback period reflected the understanding that they were “dealing with the legal process and an unknown[.]” 85 The Second Amendment gave Buyers’ lenders the assurance they needed to move forward with the deal and the flexibility the parties needed to close. 86 The deal closed on March 8, 2019, as the Family Foundation Case remained pending before the Kentucky Court of Appeals. 87 83 JX004 at 4; PTO ¶ 32. The parties retained language about losses in other sections not pertaining to the Family Foundation Holdback. See, e.g., JX004 at 7–9. 84 JX004 at 9; PTO ¶ 31. The Second Amendment did not amend the APA’s definition of Family Foundation Case. See JX004 at 8–9. 85 Winchell Dep. at 28:11–24; Reid Dep. at 21:6–19; see also id. at 10:12–23 (“I think there were several reasons for [the Second Amendment]. One is to help the Winchell group fund their transaction. By that, I mean he called me and expressed his concern or the concern of the potential lenders in the transaction that the risk involved in terms of the transaction [was] making them uncomfortable. And he and I had discussions related to that, and part of those discussions were reflected here. The wording of this, I assumed, mirrored what we had discussed.”). 86 Reid Dep. at 11:9–13:25, 18:1–20; Falcone Dep. at 54:1–55:17. 87 See, e.g., Winchell Dep. at 33:24–34:9. 17 H. The Kentucky Supreme Court Issues Its Opinion in the Family Foundation Case On June 13, 2019, the Kentucky Court of Appeals transferred the Family Foundation Case to the Kentucky Supreme Court. 88 On September 24, 2020, the Kentucky Supreme Court issued an Opinion reversing the Franklin Circuit Court’s October 24, 2018, decision in the Family Foundation Case (“Family Foundation Opinion”). 89 The Kentucky Supreme Court determined that “the only legal wagering is pari-mutuel as authorized by KRS Chapter 230,” and that the Exacta terminals “do[] not create a wagering pool . . . as required for pari-mutuel wagering[.]” 90 The Kentucky Supreme Court remanded “for entry of a judgment consistent with this opinion.” 91 Petitioners sought a rehearing. 92 On January 21, 2021, the Kentucky Supreme Court summarily denied Petitioners’ request. 93 That same day, the Clerk of the Supreme Court of Kentucky issued a Memorandum stating that “PURSUANT 88 Compl. ¶ 29; PTO ¶ 23. 89 PTO ¶ 35; Fam. Tr. Found., 620 S.W.3d at 596. 90 Fam. Tr. Found., 620 S.W.3d at 598–603 (wagering on Exacta machines “by no means can be considered [] pari-mutuel”). 91 Id. at 597; PTO ¶ 35. 92 PTO ¶ 36. In their Petition for Rehearing, Petitioners raised a procedural due process argument for the first time. See TT 39:21–41:18; Dkt. 22, Ex. 5 at 13. 93 PTO ¶ 37; JX011 at 2. 18 TO CIVIL RULE 76.30(2)(E), THE DECISION IN THE ABOVE CAPTIONED APPEAL HAS BECOME FINAL.” 94 The Family Foundation Opinion “shock[ed]” the HHR industry. 95 Buyers immediately began to devise a plan to deal with the situation. 96 Buyers communicated with other HHR gaming facilities and their legal representatives to assess the risk. 97 Ultimately, Buyers decided on a strategy that included keeping the HHR machines running while simultaneously lobbying the legislature to change the law. I. Buyers Risk Continued Operation of Kentucky Downs’ HHR Machines After the Kentucky Supreme Court issued its Family Foundation Opinion, Buyers’ attorneys and industry experts advised them to shut down the Exacta HHR terminals. 98 Continued HHR operation risked substantial exposure under Kentucky’s Loss Recovery Act, which allows losing gamblers to reclaim money lost on illegal wagers. 99 And if the losing gambler fails to sue within six months after the 94 JX011. 95 Winchell Dep. at 34:22–35:10. 96 Falcone Dep. at 14:23–16:2, 16:23–20:1 (“[F]irst was . . . how do we fix this? How quickly can we fix this? And how long will we have until any impact related to the Supreme Court decision would take effect? And so we immediately started to come up with ways to fix this[.]”). 97 Winchell Dep. at 35:11–37:6. 98 Winchell Dep. at 70:23–72:13; Falcone Dep. at 23:23–24:18. 99 Ky. Rev. Stat. § 372.020. 19 loss, “any other person may sue the winner and recover treble the amount or value of the money or thing lost[.]” 100 Buyers learned that other gaming facilities were turning off their HHR machines to avoid such exposure. 101 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. 102 Buyers determined that, if they did shut down HHR, they would be in default under their loan terms. 103 Buyers thus elected to risk continuing to operate the HHR machines. 104 In December 2020 and January 2021, two separate lawsuits were filed against Kentucky Downs under the Loss 100 Ky. Rev. Stat. § 372.040. See also JX006 at 4 (describing Loss Recovery Act lawsuits filed against Buyers following the Family Foundation Opinion); Winchell Dep. at 35:1137:6, 70:23–71:18 (discussing “3X every . . . dollar bet”); JX019 at 20 (“Damage[s] under the Loss Recovery Act are based upon gaming ‘handle.’ If the plaintiffs in the Loss Recovery Cases were to recover damages, the damages would be trebled under the [L]oss [R]ecovery [A]ct. The gaming handle at Kentucky Downs [] in 202[0] was $926 million and $1,924 million in 2021.”). 101 Winchell Dep. at 35:11–37:6 (“So they shut down their business for an extended period of time . . . because they didn’t want to accept the risk.”), 70:23–71:18 (“Red Mile did not want to take the risk because they were concerned the Loss Recovery [Act] . . . would have a billion-dollar judgment against them.”); Falcone Dep. at 23:23–24:18. 102 Winchell Dep. at 70:12–72:13; Falcone Dep. at 23:23–24:18. 103 Winchell Dep. at 35:11–37:6, 70:16–72:13 (“That was a very big conversation at the time . . . a huge concern . . . but since we had a lender and we owed money, if we shut down . . . we were technically in default of our loan. So we were kind of backed into a corner. We had to operate. . . . [O]ur lender could technically foreclose us.”); Falcone Dep. at 23:23– 24:18 (“[W]e had no ability to shut down or else we were in default of the loan and the assets would be foreclosed over to the lenders.”) 104 Winchell Dep. at 35:11–37:6, 70:16–72:21; Falcone Dep. at 23:23–24:18; PTO ¶ 44. Buyers instructed the technicians at Kentucky Downs to attempt to modify the HHR machines to conform to the Kentucky Supreme Court’s Family Foundation Opinion. Reid Dep. at 16:5–17:16. 20 Recovery Act. Both cases cited the Kentucky Supreme Court’s Family Foundation Opinion and alleged that Kentucky Downs had illegally operated HHR. 105 J. Buyers Successfully Lobby for a Legislative Solution Buyers believed that the only way to resolve the situation caused by the Family Foundation Opinion was to push for legislation to legalize HHR. 106 The various HHR gaming facilities did not undertake a coordinated lobbying effort. 107 Winchell and Falcone, with the help of Kentucky Downs’ lobbyists, had to solve the problem through their own efforts. 108 Winchell and Falcone spent nearly half a year campaigning across Kentucky to drum up support for the legislation. 109 They pressed pause on other opportunities for Kentucky Downs to focus on these endeavors. 110 Public reception was mixed. 111 105 Dkt. 16, Exs. E at 3 n.1 & F at 6; JX006 at 4–5; Falcone Dep. at 41:17–42:1. 106 Falcone Dep. at 17:11–18:3; Winchell Dep. at 50:24–52:2 (“[O]bviously we were trying to save our skin, if you will, save our investment, save our business.”). 107 Falcone Dep. at 22:15–23:22 (“We did not necessarily have a coordinated effort, not because we didn’t try, but at the time and even to this day, many of the different racetracks have different viewpoints as to working together versus not working together.”). 108 Winchell Dep. at 22:11–19 (“And it’s ultimately what happened was myself and Marc [Falcone] had to go solve this problem. No one else was helping us.”); id. at 50:24– 52:20; Falcone Dep. at 22:15–23:22; Reid Dep. at 50:7–16. 109 Winchell Dep. at 35:11–38:15, 39:9–41:5, 50:24–52:20; Falcone Dep. at 18:4–20:1, 46:1–15 (“[A] hundred percent of my waking hours were dedicated to resolving the financial position and outcome of the Supreme Court ruling”). 110 Winchell Dep. at 41:6–42:12; Falcone Dep. at 31:19–32:22. 111 Falcone Dep. at 19:16–20:20 (“Most people felt supporting something of this nature was a black eye in their churches and their local communities.”); Winchell Dep. at 37:7–38:15. 21 Buyers eventually convinced sufficient legislators to bring a bill (Senate Bill 120) to the floor that would revise the definition of pari-mutuel wagering to include HHR. On the day of the vote, Buyers were still down a handful of votes for the bill’s passage. They were told that the situation was grim. 112 Buyers made a last-minute concession, offering to provide a letter of commitment to evaluate a potential tax increase, 113 after which the legislature passed the bill by a slim margin. 114 On February 22, 2021, the Governor signed the bill. 115 K. The Franklin Circuit Court Enters Final Judgment in the Family Foundation Case, and the Loss Recovery Act Lawsuits Are Dismissed The Kentucky Supreme Court had remanded the Family Foundation Case to the Franklin Circuit Court for entry of judgment consistent with the Family Foundation Opinion. On March 17, 2021, following the passage of Senate Bill 120, the Franklin Circuit Court issued its final judgment. 116 The final judgment provid